Currently, there is no general foreign investment screening procedure in Ukraine. Ukraine maintained a similar regime called “foreign investment registration,” which was introduced in 1996 under the Foreign Investment Law (available here in Ukrainian), but it was terminated in May 2016.
As we previously reported, in May 2020, the Ministry for Development of Economy, Trade and Agriculture of Ukraine (“Ministry of Economy“) commenced a public consultation regarding the draft law “On the procedure for making foreign investments in the commercial entities which are strategically important for the national security of Ukraine” (“Draft Law“). Following this consultation, on 20 January 2021, the Cabinet of Ministers of Ukraine approved the revised Draft Law (available here in Ukrainian), which is to be submitted to the Ukrainian Parliament.
General overview of the proposed Draft Law
One significant change brought by the public consultation is that the Draft Law now provides an extensive list of the business activities considered strategically important for the national security of Ukraine. Previously, only the defense and telecommunication industries were indicated as strategically important. Now, the list contains 38 various types of activities, including, among others, the following:
- telecommunication services, if provided by a business holding a monopoly in the market
- natural monopolies with certain exceptions
- encryption technologies and equipment
- space
- aviation
- nuclear energy
- radioactive waste
- production and sale of weapons and military equipment
- extraction of mineral resources
- provision of services in ports, if provided by a business holding a monopoly in the market
- production and sale of metals, alloys with special properties, raw materials and other materials used in the production of weapons and military equipment
- special use of aquatic bio-resources in fishery water bodies
- editing or publishing printed periodicals if the total circulation of the publication exceeds certain limits
- vulnerability assessment and protection of transport infrastructure
- operation of the electronic platform for public procurement
What kinds of investments trigger the jurisdiction of screening authorities?
Likewise, the Draft Law now contains an expanded list of the transactions that would trigger the screening. This list includes the following:
- transactions that envisage the acquisition by a foreign investor or its affiliates of the right to directly or indirectly dispose of more than 25% of the total number of votes that correspond to the voting shares forming the authorized (shared) capital of the entity in the strategic sphere
- transactions that involve the acquisition by a foreign investor or its affiliates of the right to appoint a sole executive body and/or more than 25% of the collective executive body of the entity in the strategic sphere, and/or the right to elect more than 25% of the directors (members of the supervisory board) or another collective governing body of such entity and/or block the decisions of the governing bodies of such entity
- transactions that imply the intent of a foreign investor and/or its affiliates to acquire participation in the entity in the strategic sphere or to increase it to directly and/or indirectly, independently or jointly with other entities own 10%, 25%, 50%, 75% and more of the authorized capital of the entity in the strategic sphere or the voting rights of the shares in the authorized capital of the entity in the strategic sphere, and/or the intent to acquire, notwithstanding the formal ownership, the right to make a significant impact on the governance or activity of the entity in the strategic sphere
- transactions involving conduct by a foreign investor or its affiliates of the management functions in relation to the entity in the strategic sphere
- sale and purchase, exchange transactions in respect of the voting shares forming not less than 10% of the authorized (shared) capital of the entity in the strategic sphere, as well as other transactions leading to the transfer of ownership to shares to a foreign investor or its affiliates
- transactions for sale and purchase, exchange, joint activity, lease, trust management, use and/or other transactions that involve the acquisition of ownership or use by a foreign investor or its affiliates of the property and/or property complexes, structural units of the entity in the strategic sphere, which relate to the fixed assets of such an entity and the value of which is 25% or more from the book value of the assets of such an entity (as reflected in the last filed financial statement)
- transactions that envisage the establishment of the right to use by a foreign investor or its affiliates of other entities directly or indirectly exercising the right to use of the entity in the strategic sphere and provide for the establishment of the right to use by a foreign investor or its affiliates of the entity in the strategic sphere
The entity in the strategic sphere is now defined as an entity that has been carrying out at least one of the strategically important activities during the last three years.
Is filing suspensory?
The revised Draft Law kept the principle that it would not be possible to proceed with the transaction until the approval of the Interagency Commission on Foreign Investments (“Commission“) would be obtained. The Draft Law now also provides an exception to this rule, whereby an investor can proceed with the execution of the sale and purchase agreements of the state-owned objects in the privatization process and the payment of funds for the privatization’s objects. The right of ownership to such privatization object is transferred to a buyer under the Law of Ukraine “On privatization of state and municipal property” and under the condition of the approval of such transaction by the Commission.
Filing procedure
The filing process was revised: an applicant will be required to submit a request (instead of a previously envisaged notification) for the approval for making an investment to the Ministry of Economy. Such request would need to be supplemented with information about the following: (i) an investor (extracts, certificates, tax and financial information); (ii) a target entity (statutory documents and financial information); and (iii) a foreign investment transaction at stake (drafts of transactional documentation). The filings have to be made in Ukrainian (in addition to any foreign language documents/information).
After gaining knowledge of the proposed transaction, the Ministry of Economy has to decide within 10 business days whether to open an impact assessment examination. If so, it would notify the investor within a further five business days and submit the filing to the Commission.
The overall term for the review of the request from the foreign investor that is a buyer of the state-owned object in the privatization process and the adoption of a decision by the Commission on the approval or refusal of approval for the execution of such transaction would not exceed 45 calendar days from the receipt of the request by the Ministry of Economy. If the Commission does not provide a decision within the established period, the transaction would be considered approved.
The Commission is empowered to assess the impact of the specific foreign investment in accordance with the criteria, which are to be established by the Cabinet of Ministers of Ukraine. Depending on the result of the Commission’s assessment, the investor may either proceed with the proposed transaction or look for alternatives. The Draft Law now establishes that the decision of the Commission can be appealed in court.
