Since independence Ukraine has received foreign direct investment (FDI) totaling in excess of $17 billion (as of 1 January 2006), with the highest level -- $4.07 billion - coming in 2005. Now, some of those investments are under attack and analysts believe the nature of the attacks could lead to a drastic decline in what had been a major source of funding for development.
Hostile takeovers, in which a non-majority stockholder attempts to acquire enough stock to gain control of a corporate entity, are fairly common in the West and considered perfectly normal business practice when they are conducted with the framework of existing law. What is happening in some cases in Ukraine is clearly outside accepted international standards and is considered corporate raiding. This has involved situations in which state officials have used their power to bring foreign-owned corporations under state control. However, in most cases it is a combination of state officials and private business interests colluding to engineer the takeover of a foreign-owned corporation by local business interests.
Over a period of years there have been a considerable number of such corporate attacks in Ukraine, mostly on smaller corporations, but recently the attacks have been directed at two of the largest foreign investors. One involves Telenor, a Norwegian corporation that owns majority interest in Kyivstar, one of Ukraine's two largest mobile telephone operators and is one of the largest telecoms owners and operators in the world. The other, Bunge, is a historically Dutch corporation now headquartered in the United States that is recognized as the world's largest producer of vegetable-based oils for cooking and industrial use.
Both Telenor and Bunge are very sophisticated and well-run corporations noted for their good corporate citizenship and enlightened human resource policies. However, their responses to attack have varied greatly.
Perhaps the most immediately significant is the Telenor case, which although immensely complex seems to boil down to a question of whether or not a majority stockholder in a corporation has the rights that are generally recognized internationally, i.e. for the majority to operate the corporation according to decisions of a majority-controlled board of directors.
Under Ukrainian law, a minority stockholder in a corporate entity that owns 40 percent or more of stocks is considered to have a blocking stake, i.e. the ability to block the majority stockholder from taking any action without the approval of the minority stockholder holding the blocking stake. This law was at least theoretically designed to protect minority stockholders from abuses by the majority. In the case of the Telenor investment in Kyivstar, the minority stockholder, the corporation Storm, has for over two years refused to attend any board meetings, thereby making it impossible to take needed decisions at the board of directors level.
More importantly, Storm, now a wholly owned subsidiary of the Russian Alfa Group, brought suit that has subsequently adjudicated by Ukraine's Supreme Court after a decision unfavorable to Telenor was reached in Kyiv Economic Court. The decision on appeal to the Supreme Court, in support of the lower court decision, is still being interpreted by lawyers for both sides in the case. However, at this point the decision appears to favor the claim of Storm that minority stockholders should have equal voice in a corporate entity.
If this decision is appealed and upheld, it is expected to have a chilling effect on future investments in Ukraine, since a final decision favoring Storm would turn worldwide corporate practice literally on its head.
In spite of the difficulties caused by the court actions, Sigmund Ekhougen, Telenor's official representative in Ukraine said that Telenor considers Kyivstar a strategic investment and that Telenor has not even considered leaving the market. He added that Telenor, with huge investments in telecommunications companies around the world, had never previously experienced the kind of attack that it has undergone in Ukraine.
The court suits against Bunge, while on the surface appearing to have less merit, could be devastating if the court should rule for the plaintiff. Bunge's managing director for Ukraine, Dexter Frye, said that he believes the basis for the court challenges against Bunge are "preposterous. The plaintiff is asking to court to lift the statute of limitations in regard to an alleged failure to adequately serve notice of a shareholders meeting 12 years ago. We find it extremely hard to believe that a court could support such a claim, particularly in view of the fact that the plaintiff subsequently chaired shareholder meeting for years and raised no complaint."
Bunge has chosen to develop its local support, including very public statements by Alexander Zhurid, the long-time Ukrainian general director of DOEP, who is an avid supporter of Bunge and totally opposed to the attack on Bunge's ownership status. Bunge also continues to emphasize its very advanced human resources policies, illustrated by such innovations as cash payment to every employee when the plant is able to avoid lost-time injuries. Bunge has also promoted large numbers of Ukrainians into top positions including its finance director, a highly qualified young female from Ukraine's growing managerial elite.
There is no decision in the Bunge case, but it is possible that in an absolute worse case scenario, a court decision could result in negating the original sale, and thereby placing in jeopardy the ownership status of Bunge and its multimillion dollar investment in new plant since taking over the company.
Telenor responded to the attacks with a highly sophisticated legal defense, which included the use of law firms in the United States to help deal with its problems that in total involved legal challenges in both Russia and Ukraine. Some analysts believe that Telenor made a serious mistake in taking a part of its defense strategy into United States courts and should have concentrated its efforts instead on government and public relations efforts at the local level.
Both cases point up immense gaps in Ukrainian law and corporate practice that need to be remedied if foreign direct investments currently on the books are to be protected and new ones attracted. We spoke with a number of legal experts with long experience in Ukrainian law to gain a better understanding of just where the problems are most acute.
"Loopholes, and sometimes outright contradictions in Ukrainian corporate legislation, are a big part of the abuse. The recent attempt of the Verkhovna Rada on October 19th to amend the Law 'On Economic Associations' by lowering the quorum threshold in the general assemblies of joint stock companies from 60 percent to 50 percent is yet another example of hasty legislative changes serving the interests of certain business groups. Such unbalanced and fragmentary changes, if legitimized, would inevitably cause chaos in corporate relations, multiple shareholder rights violations and massive industrial property redistribution. Fortunately, the changes have not yet been approved by the President and, hopefully, will be vetoed. However, this approach demonstrated by the parliament, led by industrial tycoons from Eastern Ukraine, is a disturbing sign that hopefully will not become a trend," said Kirill Andrianov, a senior associate at the Frishberg and Partners law firm.
"Ukraine has a very primitive Companies Act. It was slightly improved by the Civil and Commercial Codes, but even today the rights of minority stockholders are not protected," said Margarita Karpenko, managing director of DLA Piper Ukraine law firm. "The situation with the law is so bad that it is a major obstacle to development of capital markets. We simply don't have enough mechanisms to protect added capital," she added.
The two major associations of foreign businesses in Ukraine, the American Chamber of Commerce (AmCham) and the European Business Association (EBA) have engaged in parallel but separate actions to assist their members in the cases cited above, but also to attempt to preclude such cases becoming even more burdensome and potentially destructive to foreign investments that in total amount to many billions of dollars.
In a brief shared with its members, EBA pointed out three areas where it would felt improvements would be needed to have the greatest impact on bringing justice and fairness to foreign investors.
The EBA cited:
abuse of power by government officials;
the ability of corporate raiders to take advantage of Ukraine's contradictory laws and regulations;
the situation in which members of the judiciary become in effect silent partners to corporate raiders for their own corrupt advantage.
In the current political climate in Ukraine, it is hard to see just how much impact AmCham and EBA may have on the situation. However, both continue frequent meetings with government officials and make their cases public.
The most basic problem is that those both inside and outside government are fully aware that the impartiality and basic honesty of the Ukrainian judicial system is badly flawed.
Both foreign business associations have been in contact with the offices of President Viktor Yushchenko, Prime Minister and Viktor Yanukovych and Parliament Speaker Oleksandr Moroz in their efforts to bring pressure to bear on individual cases and the situation as a whole.
Very recently, EBA sent a letter to the three top officials that included a phrase that seems to encapsulate the greatest problem of all.
The letter said in part: "There appears to be substantial evidence that some members of the judiciary have provided 'unreasonable' support to one of the parties in court proceeding, thereby abusing their legislatively defined authority. Such a biased approach explicitly impacts the dispensation of true justice in those disputes in which it occurs. We believe that the economic future of Ukraine, the ability to maintain existing investments and encourage new ones depends upon resolute legislative action to establish a clear-cut mechanism for bringing judges who engage in such practices to responsibility for such perversions of justice."
The Telenor, Bunge and other similar cases have sent shock waves throughout Ukraine's foreign business community and telegraphed a highly negative message to investors who might be currently considering new investments.
The consensus of those in the business and legal communities contacted for this story may be briefly stated as follows:
Be extremely careful in choosing your business partners in Ukraine and take necessary actions to assure that independent counsel and auditors are guarding yours interests;
If you do establish an investment in Ukraine and come under attack, you are well-advised to consider very robust and aggressive responses in the areas of public relations and government relations. In particular, the counsel you seek in both areas should be based on the advice of firms and individuals with long and deep experience dealing with the realities of Ukraine law and business practice;
More than one lawyer suggested that avoiding the court system is the first order of business in a difficult situation. They tended to agree that decisions arrived at by negotiation would almost certainly be preferable to a court decision that would be more likely based on a biased opinion or even outright bribery. The process of negotiation may be immensely frustrating, one said, but in the end you are likely to save both time and money.
Ukraine is still a country with immense opportunities at all levels. However, anyone expecting the road to business success to get easier any time soon is almost certain to be disappointed.
|
