How to spot an M&A deal behind your back
Sometimes parties to an M&A deal in Ukraine try to conceal the fact of the deal, for instance, due to matters of general confidentiality, antitrust regulation, competitors’ attention or other. They may be particularly successful in such intentions as to Ukrainian companies given the particularities of Ukrainian business structuring.
It is a normal practice in Ukraine that ownership of large Ukrainian business ventures is structured through offshore jurisdictions and tax havens, like Belize, the British Virgin Islands, the Cayman Islands, the Seychelles, as well as Cyprus, UK, the Netherlands, etc. Due to favorable tax implications, adherence to ownership confidentiality, developed corporate and commercial legal framework, holding structure is favored in case a beneficial owner wants to sell the business. Therefore, private takeover transactions in relation to Ukrainian business often occur through transfer of control at offshore level of a holding structure.
At the same time, often a third party stakeholder, which is not involved in the M&A process directly, would be interested in getting confirmation of whether the deal has been actually closed. Where direct evidence of the deal closure would be impossible or at least cumbersome to obtain, interested parties may only rely on circumstantial and/or indirect evidence. Indeed, there is a list of steps, as circumstantial evidence, that are usually taken at the Ukrainian subsidiary’s level as a part of offshore takeover completion.
The list of steps taken at the Ukrainian level normally includes:
- change of management of a Ukrainian subsidiary;
- confirmation of title to shareholders’ structure within the Ukrainian company;
- confirmation of title to material assets of the Ukrainian subsidiary;
- confirmation of financial status of the Ukrainian subsidiary;
- obtaining all necessary regulatory approvals for completion of the transaction;
- amendment of corporate documents of the Ukrainian subsidiary for corporate governance structuring and/or compliance reasons;
Even though each of these actions may be viewed as non-related, all of them taking place at once will most likely imply change of control over a Ukrainian business. Any third party may eagerly spot at least three of them: replacement of management, amendment of corporate documents and replacement of custodian.
Replacement of management
The broad powers of an executive body and the supervisory board in Ukrainian entities make it highly advisable to replace the management and members of the supervisory board at the completion in a takeover transaction. And the decision on who will be in place of the management normally is in hands of a private individual, as the vast majority of Ukrainian businesses is privately held.
Given that self-dealing, appropriation of corporate opportunity is an inherent country risk for Ukraine, ultimate beneficiary owners, as a rule, carefully select candidates for such appointments from individuals who have proved loyalty rather than professional ability. Such loyalty relations of an individual with a particular private business investor may be tracked by considering former employment. Particularly indicative of such loyalty are situations when a manager occupied highest positions within the same group of companies beneficially owned by the purchaser.
Replacement of members of the executive body at the time close to completion of the takeover transaction is also motivated by provisions of the employee-oriented employment law of Ukraine. In particular, due to limited number of statutory grounds for dismissal and risk of high termination compensations (like golden parachutes), the acquiring business group may experience significant loss in time and money upon deciding to dismiss disloyal member of the management body after completion. Therefore, it is a usual condition to completion in Ukraine that former members of the management body resign.
Also by matter of practice, in Ukraine the one-member structure of the executive body is convenient for private join-stock companies with only one controlling beneficial owner. In contrast, in terms of shareholders’ rights protection multiple-member bodies are more convenient for companies where more than one beneficial owner exists. Hence, where in the context of a takeover transaction (including through an offshore jurisdiction) the multiple-member executive body and supervisory body of a private joint-stock company are replaced with one-member bodies, it is highly likely that the ultimate beneficial control over such company has been transferred from several sellers (ultimate beneficial owners) to one purchaser – ultimate controlling beneficial owner.
Amendment of corporate documents
Amendment of corporate documents of a Ukrainian company is a common step as a part of completion during takeover transactions in case where the purchaser seeks (i) to adjust corporate governance structure of a joint-stock company and/or (ii) to cure the discrepancies discovered during due diligence process.
Alternation of corporate governance structure, as a rule, implies alternation of the scope of powers and number of permitted members of the executive body and the supervisory board of the private joint-stock company. Accordingly, the alternation is effected by amendment of the charter of the private joint-stock company and some other internal regulations.
Replacement of custodian
Under applicable law, all shares in a Ukrainian private joint-stock company shall exist in non-documentary form and kept on electronic accounts with a custodian – a legal person duly licensed to keep track of the ownership rights to such shares. In Ukraine, it is important that a custodian was respectful and trustful company due to its necessary role in the system of securities circulation. For instance, under Ukrainian law purchaser obtains ownership title to non-documentary shares in a private joint-stock company only from the moment the shares have been accepted at his electronic securities account with the custodian. Accordingly, custodians register and track title to the non-documentary shares of a private joint-stock company. They ensure opening/closing of shares electronic accounts, transfer of shares from one account to another, imposition of encumbrances on the shares etc.
A shareholder normally chooses a well-known bank in Ukraine to be a custodian for shares owned by such shareholder in a Ukrainian private joint-stock company. Alternatively, beneficial owners of Ukrainian private joint-stock companies entrust the custodian function to duly licensed companies that are, as a rule, under ultimate beneficial control of such owners and their related persons (“Related Custodian”) (for instance, relatives, co-owners of joint ventures or trusted employees in other controlled companies).
A shareholder shall also appoint a securities account manager – a physical person whose decision shall be mandatory for the custodian with respect to shares owned by the shareholder. Normally, the shareholder’s head of the executive body performs functions of such securities account manager. Alternatively, a shareholder may appoint any other physical person to this duty on the basis of the power of attorney. As a rule, such other physical person is the ultimate beneficial owner of a Ukrainian subsidiary or his/her trusted person. But even if the securities account manager would be other person than head of the executive body, the ultimate beneficial owner or his/her trusted person, the Related Custodian would anyway be expected to warn the ultimate beneficial owner of any anticipated non-ordinary activities by such other securities account manager and help avoid misuse of the manager’s authority.
Thus, upon a takeover transaction the purchaser (ultimate beneficial owner) normally chooses to change from the current custodian – be it any well-known bank or other financial institution – to its Related Custodian. For the same reason, whether the custodian has been replaced or not, a purchaser in a takeover transaction normally replaces a securities account manager with a trusted person acting on the basis of a power of attorney from a shareholder of a Ukrainian subsidiary.
Based on the above circumstantial evidence an interested party may indicate that there has been a completion in the relevant M&A deal, and plan its response and actions accordingly.
Authors: Oleh Malskyy, Volodymyr Yakubovskyy, Bohdan Dmukhovskyy
