Squeeze-out in Ukraine: How the Mandatory Share Buyout Works

We continue our series of publications regarding Ukrainian legislation on joint-stock companies and capital markets. Today, we briefly review the “squeeze-out” procedure – the mandatory sale of shares at the demand of a person who has become the owner of over 95% of shares (a dominant controlling stake) in a joint-stock company.

Squeeze-out is a mechanism that allows a person (or a group of persons acting jointly) who has become the owner of more than 95% of shares to compel the remaining shareholders to sell their shares. This mechanism allows such a shareholder to consolidate 100% of the company’s shares and optimise further corporate governance, while enabling minority shareholders to receive a guaranteed fair market compensation for their shares.

Squeeze-out has long been the subject of thorough analysis, and court practice regarding its application is established and continues to actively develop. At the same time, this mechanism remains relevant: a significant number of joint-stock companies with a dispersed ownership structure still exist in Ukraine, where the consolidation of shareholdings remains an important task. In this regard, we decided to briefly recap the key conditions for conducting a squeeze-out procedure.

In our practice, this tool is important within the framework of M&A transactions where the target is a private joint-stock company with minority shareholders. In particular, parties occasionally agree in advance on the possibility and conditions for conducting a squeeze-out, as well as consider its impact on the formation of the purchase price.

Furthermore, the squeeze-out has strategic significance for increasing corporate governance efficiency, optimising the ownership structure, and ensuring business transparency, which are important factors for investors.

Below we have briefly summarised the key conditions and stages of the squeeze-out procedure:

1. Notification of acquisition of a dominant controlling stake

A person who has acquired more than 95% of shares (the “Applicant”) must, within one business day after acquiring the ownership right to such shares, notify the joint-stock company itself and the National Securities and Stock Market Commission (the “Commission”) of this fact. The company, in turn, publishes the received notification on its website and in the SMIDA database.

2. Valuation of shares and submission of a demand

Subsequently, the company must arrange for the valuation of shares by engaging an appraiser, and its supervisory board (or a board of directors) must approve and notify the Applicant of the market value of shares determined by the appraiser within 25 business days from the date the company received the notification of the acquisition of a dominant controlling stake.

After this (but no later than within 90 days from the date of notification), the Applicant has the right (but not the obligation) to send a public irrevocable demand for the buyout of shares (the “Demand”) to the company.

The buyout price specified in the Demand cannot be lower than the highest of the following values:

• the market value determined by the appraiser;
• the highest price at which the Applicant or its affiliates acquired (including indirectly) shares of the company during the last 12 months; or
• the highest price at which the Applicant or its affiliates during the last 12 months acquired shares/stakes of another legal entity that directly or indirectly owns shares of the company, provided that such shares constitute at least 90% of the value of the assets of this legal entity.

Together with the Demand, the Applicant must submit a copy of the agreement with a bank on opening an escrow account, the beneficiaries of such account being the minority shareholders from whom the shares are to be purchased.

3. Informing shareholders

The company sends a copy of the Demand to the Commission and the Central Depository.

The Central Depository generates a list of shareholders whose shares are subject to buyout and sends it to the company. Based on this list, the company sends a copy of the Demand to each shareholder whose shares are being purchased.

Note (!) After receiving the Demand, any minority shareholder has the right, within 20 business days, to submit a notification to the Commission and the company regarding the submission of a competing demand for the mandatory sale of shares of other shareholders in their favour. In this case, such a shareholder must offer a price that is at least 5% higher than the price specified in the Demand.

If such competing demand is submitted, the right to buyout shares, including the right to purchase the shares of the Applicant itself, passes to the relevant minority shareholder. Each submitted demand may be replaced by a subsequent competing demand of any other shareholder (including the Applicant) subject to a similar price increase.

4. Payment and transfer of shares

After the deadline for submitting competing demands has expired (provided that none were submitted), the Applicant transfers the full amount due for the purchased shares to the escrow account.

After receiving payment confirmation from the Applicant, the company informs the Central Depository. The Central Depository, in turn, within three business days from the day of receiving such information, ensures the transfer of ownership rights to the shares from the accounts of all minority shareholders to the Applicant’s account.

Minority shareholders may receive the funds due to them for the purchased shares by contacting the bank where the escrow account is opened.

AVELLUM provides comprehensive legal support services for the squeeze-out procedure. For further information on this matter, please contact managing partner Mykola Stetsenko, partner Andriy Romanchuk, and managing associate Oleksandr Volodin.