As a rule, transactions with securities, including shares in joint stock companies, require the engagement of an investment firm, in particular a securities broker. At the same time, the Law of Ukraine “On Capital Markets and Organised Commodity Markets”, which entered into force on 1 July 2021, provides for several exceptions to this rule. Indeed, an investment firm engagement is not required for the transactions made outside of Ukraine.
Thus, M&A transactions between foreigners in respect of the shares of Ukrainian joint stock companies should fall under the above exemption and, therefore, may be entered into without the engagement of an investment firm if made outside of Ukraine.
However, it is common to face resistance from the share custodians, procuring the share transfers, to complete such transactions if they are made without the securities brokers. They argue that if the instructions for debiting and crediting the shares are signed and submitted by the parties’ representatives in Ukraine, then the whole transaction is deemed to be made in Ukraine. Therefore, the exemption should not apply.
In our view, the above position contradicts the basics of civil law, allowing the parties to designate the place of the transaction in the agreement. Moreover, under Ukrainian law, if the place of the transaction is not specified in the agreement, it is deemed to be made at the place of residence (for individuals) or the registered office (for legal entities) of the party offering to enter into the transaction. Additionally, the transfer of shares may not be treated as a separate transaction to the agreement itself.
We recommend clarifying the position of a particular share custodian in advance to avoid unfortunate delays in the transaction’s completion and extra costs for the engagement of an investment firm.
The requirement to engage investment firms in the transactions with securities deviates from the best practices for private (unlisted) companies in the European Union. AVELLUM call upon both the government and the parliament of Ukraine to consider removing this requirement as obsolete or at least clarify it to avoid loose and non-unified application of the law as described above.