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Redistribution of Property is Anticipated in Ukraine. How to Protect Your Assets?

Date of publication: 27 June 2014

Roman Marchenko, Attorney at Law, Senior Partner

Source: Liga

Why splash of raiding is inevitable and what we must do today to be protected tomorrow

In the near future a splash of hostile takeovers and redistribution of property will start in Ukraine. The main reason is actual absence of an established state power. Previous government built a rigid vertical. Indeed, corrupt, indeed, wrong, but it worked effectively in the interests of the ruling elite and their immediate circle. Now this system has been destroyed, and the country is living in a state of “Makhno movement”.

Obviously, in this chaos and relative anarchy many people are tempted to improve their welfare. In the times of the previous government only a few were allowed to commit corporate raids: property changed hands only in the interests of a limited group of persons. Now a wider range of people concerned have the opportunity to benefit from it.

Firstly, local authorities due to lack of “a strong hand” of Kyiv may well pay attention to the local attractive assets. Secondly, some members of the new ruling coalition and their immediate circle believe that they have a moral right to convert in cash their participation in the regime change. Thirdly, professional raiders, who were involved in hostile takeovers already in the ninetieth, have become more active. The so-called state raiding, when privatization tenders of the recent years are revised, is also possible. In view of actual or alleged violations of the conditions of privatization tenders their results may be canceled and enterprises may be returned to the state and then again put up for auction.

However, the aggressors will be interested in the enterprises, which were deemed unworthy under Yanukovych, e.g. small regional plants. In my estimation, not so few companies appear in the risk group. Particular risks face the companies having internal conflicts between founders or shareholders, even if the “offended” party is a minority stakeholder. Vulnerable to raiders are also the companies, where a conflict change of leadership has occurred recently. They may primarily be target objects.
Further, the aggressors may be interested in stably-profitable enterprises, companies that own attractive assets (plots of land, real estate, manufacturing facilities).

Raiders will return to the proven “range” of tools used in the 2000s. Prosecutor’s office, police and other government agencies will be used to put pressure on the owners. The main thing for the invaders is to secure loyalty of the courts approving the “right” decisions. It shall be noted that the past practice of centralized pressure, when taxmen imposed multimillion fines and actually forced businessmen to transfer enterprises to third parties is now outdated. Primarily, due to the collapse of the said vertical of power and complexity for an “ordinary” raider to settle the falsified tax liability.

Defense tactics

Unlike past years, when the attacks were carried out under the auspices of the people close to the “Family” and defense was complicated, because all branches of government were tightly controlled, the situation is different now. Among the protective measures, the following may be mentioned.

Firstly, the company must do business as transparently as possible. For regulatory authorities and courts it has always, and especially in the current situation, been more difficult to make decisions on the basis of fabricated evidence.

Secondly, it is worth trying to do business without conflict. The strength of the raider is in the weakness and internal problems of the object of attack.

Thirdly, it is necessary to perform regular due diligence of an enterprise, identify vulnerabilities, form a team that is ready to adequately respond to attempts of seizure. Accurately kept documents of the enterprise greatly reduce the possibilities of attack, and the team of specialists, who know strengths and weaknesses of the company, allows prompt response.

Fourthly, the need to comply with one of the fundamental rules of any business: asset shall not be registered on the same person, who is engaged in operating activities. The company – owner of an asset leases, e.g. the production department to another legal entity, and the latter concludes contracts with counterparties – tenants, suppliers, customers. In case of complaints of partners or controlling bodies a company with no assets will be “in the first line of defense”. The assets, if possible, shall be burdened by friendly liens.

Clearly, these are general rules, and they do not guarantee complete security. The main risk during hostile takeovers lies outside legal environment: e.g. a corrupt judge can make a decision without any legal grounds. However, the established system of legal security will much complicate attack on the enterprise and increase the budget of raider war dramatically.