Preventive Actions Against Attempts at Hostile Takeover

In 2019 Ukraine was ranked 64th out of 160 countries in the Doing Business rating of favourable business conditions. Progress has been achieved over the past 5 years. In 2015 Ukraine sat in 84th place, but it’s not as fast as we would like it. Progress has been slowed down, in particularly by the insufficient level of protection of companies from illegal takeover, or so-called “raiding”. Until foreign investors are sure that the state will be able to guarantee the protection of their investments such investors will, most likely, choose other jurisdictions for investment.

Indeed, hostile takeover attempts or raider attacks remain one of the key external threats to doing business in Ukraine. Moreover, not all companies are equally sensitive to attacks by aggressors. But, with a series of correct preventive actions, business owners can protect their companies from such attempts. It should be noted that defence techniques will not provide a guarantee of the inviolability of business, but may significantly reduce the likelihood of the success of hostile takeovers.

First of all, any discrepancy of a company’s activities within the legislation can be used by interested parties as a formal reason for hostile actions through the involvement of relevant government agencies. Special attention should be paid to legal due diligence of all concluded agreements and constituent documents of the company in order to identify all its weak points.

One of the most popular and effective ways to protect a company from attacks by “raiders” is to enlist a strong foreign partner into the business through equity participation or debt finance. Such partners may even be international financial institutions. For example, the European Bank for Reconstruction and Development, private equity funds and even sophisticated international banks.

By attracting debt finance from a foreign partner, it is also possible to refinance a company’s existing debt to Ukrainian banks. This will remove any existing burdens from a number of company’s assets. Moreover, a company’s assets can be transferred to ensure debt finance provided by the foreign partner. In the event of equity participation of such a partner, the property can be transferred to secure intragroup debt.

Another effective preventive measure aimed at protecting a company is restructuring. As a result of the latter, a vertical ownership structure can be created headed by a holding company in a foreign jurisdiction. The advantage is ensuring safer ownership of the shares/stakes of foreign holding companies as well as the clarity of such corporate structure; understandable and attractive for foreign investors.

Hostile takeover attempts are often carried out by a ’raider purchase’ of the rights to claim the monetary obligations of the company, initiating a controlled bankruptcy procedure. To minimize this described risk the business needs to be divided into more than two legal entities. For instance, one of which will carry out operational activities and accumulate all the obligations of the business and the rest will possess the property of the company.

For greater protection, so as to prevent the unauthorized alienation of participatory interests (or shares), one also may transfer such participatory interests (shares) in Ukrainian legal entities as collateral in favour of related parties to secure any obligations to such related parties. Thus, the alienation of participatory interests (shares) will be possible by agreement of the corresponding pledge holder and may also be completely prohibited if this is provided for by the pledge agreement.

It is necessary to realize that, in practice, such an encumbrance creates solely legal obstacles and unlawful ’physical alienation’ — in violation of the provisions of the agreement — remains possible. In the event of such alienation, it will entail only the violation of contractual obligations.

Sometimes there are situations when representatives of a company’s Supervisory Board are involved in a hostile takeover attempt. In order to reduce the risk of the unauthorized transfer of the company’s property, business owners should spell out the decision-making procedures in the company, e. g. in its Articles of Association.

When creating a company to own property in the form of an LLC, one should ensure that the holding company also remains free from any monetary obligations to third parties.

Also, the property of the company — that will possess the key property — can be protected by encumbering it with collateral to secure obligations of such company for obligations to related parties, e. g. to the holding company.

In addition, the commercial agreements of the company that will carry out operational activities and accumulate obligations should entail the following:

i. prohibition against the transfer of the rights to claim without the prior consent of the debtor, i. e. the operating company;

ii. the right to terminate the agreement by the debtor in the event of change of ownership of the company that lends; and

iii. the establishment of a sufficiently long period for the fulfilment of monetary obligations after claiming for debt repayment.

Summing up the above, one must note that over the past years, the Ukrainian Parliament has adopted several promising laws aimed at strengthening the fight against ’raiding’ activities. These laws can reduce the risks of the possibility of illegal registration of new — fake — business owners based on falsified documents.