Reportedly, the Servant of the People faction of the Ukrainian Parliament is working on a draft law regarding nationalizing the troubled Motor Sich JSC (“Motor Sich“), which is one of the world’s largest manufacturers of engines for helicopters and planes, as well as gas turbine power plants (here in Ukrainian). This draft law is intended to implement the earlier decision of the National Security and Defense Council (NSDC) dated 11 March 2021 regarding the transfer of Motor Sich to the ownership of the state (here in Ukrainian), which was enacted on 23 March 2021 by the president of Ukraine (here in Ukrainian). This appears to be part of ongoing events that started in 2016 when a group of foreign investors acquired shares in this entity. The respective series of transactions attracted the attention of the Ukrainian law enforcement authorities because, in their view, Motor Sich was a strategically important enterprise and the sale of its shares could lead to its extinction. Security concerns like these seem to be typical for a state to raise and many jurisdictions have special foreign investment review legislation designed to address them. Unfortunately, Ukraine did not have a similar regime at the time. It is envisaged that the regime will be adopted now (please see our earlier blog post concerning this legislative initiative here), but it may not help to resolve this past matter.
In 2016, a major shareholding in Motor Sich was sold to a group of foreign investors from various offshore jurisdictions with the exception of one individual investor — a citizen of the People’s Republic of China. These shares were seized by a Ukrainian court pursuant to the request of the Ukrainian intelligence service in the course of the criminal proceedings relating to the alleged sabotage, i.e., weakening of the state by way of carrying out actions vis-à-vis an entity critical for the economy or state defense (here and here in Ukrainian). It is curious though that the Ukrainian government excluded this entity from the list of strategically important ones in 2015 (here in Ukrainian).
Reportedly, at some point, investors found a solution and allegedly planned to share their investment with the Ukrainian state defense company Ukroboronprom. The parties filed for the approval of the transaction with the Anti-Monopoly Committee of Ukraine (AMCU). However, as of the beginning of 2020, this filing was still under review (here in Russian). It appears that this filing was later recalled and investors filed anew with the new business partner (here in Ukrainian). However, the AMCU refused to consider it (here in Russian). Finally, on 28 January 2021, the Ukrainian president implemented the NSDC’s decision to impose special economic sanctions on a number of the respective investors restricting their capacity to deal with their assets in Ukraine (here in Ukrainian).
Upcoming international investment arbitration
As a result, foreign investors in Motor Sich are currently seeking to recover their losses in an international investment arbitration court (here in Ukrainian). Apparently, they seem to rely on the China-Ukraine bilateral investment treaty (here in Ukrainian). The future, however, does not seem clear for the claimant because a company named Skyrizon domiciled in the Virgin Islands apparently filed the claim. To be able to rely on the above bilateral investment treaty, it would need to be qualified as a “Chinese” investor. In addition, “investment” is defined under the treaty as all types of values (including shares) acquired in accordance with the legislation of the respective party. The claimant may have an issue with this because a 2017 court order, referred to above, indicates that shares acquisitions could be carried out in breach of Ukrainian antitrust legislation.
While the story is unfolding, there are some key takeaways for stakeholders. National competent authorities should plan more carefully before embarking on such a laborious journey as chasing a foreign investor and, if they decided to do so, use a more appropriate legal framework. Foreign investors should not disregard compliance with small, inconvenient local requirements to be able to protect their rights in case the need arises in the future. Moreover, careful investment planning is recommended to be able to rely on the appropriate investment treaty.