Practice Areas Review: Privatization




Managing Partner, AEQUO



Senior Associate, AEQUO

Yaroslav LEPKO

Yaroslav LEPKO

Associate, AEQUO



Vector Business Centre,
52 Bohdana Khmelnytskogo Street, Kiev, 01030
+380 44 490 9100, 233 6599
+380 44 490 9102, 233 7769

AEQUO is an advanced industry-focused Ukrainian law firm made up of highly-qualified, internationally recommended lawyers who work proactively to help their clients reach their business goals and generate commercial advantages. Backed up by solid industry expertise and a thorough understanding of business, we develop innovative strategies and provide efficient solutions to the most complex and challenging matters.

Today, AEQUO is the legal advisor of choice for many of the largest Ukrainian and multinational companies and financial institutions, including Fortune 500 entities, and leaders in their respective sectors. The list of AEQUO’s representative clients includes Agroprosperis, Alfa Bank, Allianz, Apax Partners, Apollo Global Management, AXA, ATB Market, British American Tobacco Prilucky, Bunge, BXR Partners, Citadele Banka, Discovery Networks, Dr. Reddy’s Laboratories, Dragon Capital, DuPont, Epicenter K, European Bank for Reconstruction and Development, European Commission, FESCO, Forbes, GlaxoSmithKline, Google, Groupe Danone, Inditex Group, Mosquito Mobile, MTS Ukraine, NCH Capital, Nova Poshta International, Novus Ukraine, Philips, Pioneer Hi-Bred International, Porsche Bank AG, Portigon AG, Premium Sound Solutions, Samsung Electronics, Sandvik, Sonae, Soros Fund Management, Syniverse, Synthon, Tetra Laval, Thomson Reuters, TIS, Ukrainian Redevelopment Fund, UniCredit Group, VimpelCom and Zara Ukraine.

AEQUO is recognized by international and local legal directories, such as Chambers, Legal 500, IFLR1000, World Trademark Review 1000, and Best Lawyers.

The firm is shortlisted for Chambers Europe Awards for Excellence 2016, The Lawyer European Awards 2016, Financial Times Innovative Lawyers Awards 2015 in Europe.

Areas of practice: Antitrust and Competition, Banking and Finance, Capital Markets, Corporate and Commercial, Dispute Resolution, Government Relations, Insolvency and Restructuring, Intellectual Property, International Trade, Labor and Employment, Mergers and Acquisitions, Real Estate and Construction, Tax and Customs.

Membership: International Association for the Protection of Intellectual Property (AIPPI), International Bar Association (IBA), International Trademark Association (INTA), European Business Association (EBA).


Of around 3,500 state-owned enterprises that exist in Ukraine, only a few are profitable. It is widely accepted that private-run companies are potentially more efficient than those operated by the state. There are multiple reasons for this: historically inflated headcount, excessively bureaucratic and inefficient decision-making and loopholes for corrupt officials, to name just a few.

It is hard to argue that certain sectors and enterprises should remain state-owned due to their strategic significance for Ukraine, but certainly there is no need to keep thousands of smaller, outdated enterprises on the state’s balance sheet without a good economic reason.

This Ukrainian government was not the last to realize it, and there were numerous attempts in the past to boost privatization of state-owned enterprises, including those having strategic significance for the state. However, over the latest few years the privatization process slowed down significantly, due mainly to drawbacks in applicable privatization regulations, stagnation of the investment activity and political instability — all exacerbated by the country’s permeating corruption.

Recent Ukrainian Legislation Amendments

Aimed at remedying a number of drawbacks in applicable privatization regulations and bringing them into line with current Ukrainian macroeconomic and political reality, the On Amending Certain Legislative Acts of Ukraine Regarding Improvement of Privatization Process Act of Ukraine (On Privatization Process Improvement Act) was adopted by the Ukrainian Parliament, came into effect on 6 March 2016 and provided for several noticeable changes in the privatization procedure as outlined below.

“No” to Aggressor — Ban on Investments Originating from the RF

The On Privatization Process Improvement Act bars representatives of aggressor states from partaking in privatization of the Ukrainian state-owned enterprises. The Ukrainian Parliament may declare a certain state engaged in hostile activities against Ukraine to be an “aggressor state”.

As of 2016, there is only one state on this list, namely the Russian Federation. It means that (1) Russian citizens and companies, (2) other entities controlled either directly or indirectly by Russian companies or individuals, and/or (3) their affiliates, are not allowed to act as purchasers in Ukraine’s privatization process.

National security-related reasons for such prohibitive measures are obvious and sound, but it remains to be seen whether the competent Ukrainian authorities (including the State Property Fund of Ukraine, Antimonopoly Committee of Ukraine and others involved) will have all the necessary tools to ensure in practice effective compliance with such prohibition by any potential bidders. Monitoring and ensuring such compliance might become even more complicated in view of any post-privatization transfers of respective targets/assets at a secondary market.

“No” to Pre-Privatization Sales — Preventing Oligarchs from Getting their Feet in the Door

The purchase price is not the last issue to deal with when conducting privatization of an asset. Oftentimes it is really difficult to get an objective market valuation for such an asset. For this reason, Ukrainian legislation has historically provided for mandatory sale of 5-10% of shares of a state-owned company at a local stock exchange prior to the main privatization tender.

However, such a system proved to be ineffective — primarily, due to the underdevelopment of Ukraine’s domestic stock market. As a result, such pre-privatization sales often decreased the actual purchase price instead of establishing a true market valuation and/or allowed dishonest investors (often — local oligarchs or thuggish middle men-type politicians) to get their feet in the door of any future privatization opportunities.

So the On Privatization Process Improvement Act abandoned this controversial requirement. Now the value of the asset shall be determined exclusively by independent appraisers to be appointed in each particular case. They are in turn expected to be selected and managed by independent ‘lead managers’, as described further below.

“Yes” to Lead Managers — Professional Advisors now Welcome on Sell-Side Too

The On Privatization Process Improvement Act introduces the concept of privatization lead managers — third party professionals responsible for the sale of state assets in an efficient, timely manner, acting with the aim of maximizing profit for the state.

Such lead managers are expected to be chosen for each asset to be sold, and their duties would include managing due diligence process, improving the investment attractiveness of an asset, searching for investors, contacting potential bidders that may have little knowledge of Ukraine, and supporting the Ukrainian state in preparing the tender documentation and the sale process. The idea of this amendment is to provide state authorities with an independent source of advice and support in the course of the privatization procedure. The initiative will be sponsored by the state and/or international organizations.

Large Scale Privatization Looming — 2016

The State Property Fund of Ukraine (SPF) approved the list of state-owned enterprises to be sold in the course of privatization in 2016 by adopting the Order On Approval of the List of Objects of Groups B and G to be Privatized in 2016 as of 30 December 2015 No. 2064 (2016 SPF Privatization Order).

The 2016 SPF Privatization Order enlists almost 90 state-owned enterprises to be sold this year, with the state’s stake offered for sale varying from 0.004% to 100%.

No doubt, there are attractive assets inserted in the 2016 SPF Privatization Order, which would include entities in the energy and chemicals sectors, as well as port infrastructure. A few examples include regional energy generation companies in Kherson, Mykolayiv, Odessa, Dniprodzerzhynsk and electricity distribution companies in Kharkov, Khmelnytsky, Mykolayiv, Zaporizhzhya.

However, there are two noticeable leaders expected to be the most attractive for strategic investors,  namely Centrenergo and Odessa Port Plant.


Centrenergo is Ukraine’s 2nd largest thermal power generator, currently 80% owned by the state. Centrenergo’s structure consists of three thermal power plants, namely Vuglegirska TPP (Donetsk Region, close to Eastern Ukraine’s anti-terrorist operations (ATO) zone), Zmiivska TPP (Kharkov Region) and Trypilska TPP (Kiev Region) whose total design capacity reaches 7600 MW, equal to ca. 14% of the total capacity of Ukrainian power plants.

Centrenergo’s headcount is around 8,000 employees. According to the data of the Ukrainian stock exchange as of 22 February 2016, capitalization of Centrenergo was about UAH 1.66 billion. The main activities of Centrenergo are electric power production, thermal energy production, transportation of thermal energy via the main and local (distributing) thermal networks and the supply of electric power as per an unregulated tariff.

This potentially interesting privatization target is nevertheless still plagued by several risks, including those related to physical security (Vuglegirska TPP), huge upgrade capital expenditures needs and lack of ultimate clarity with tariff trends in Ukraine’s still under-reformed energy market, all of which would require an extremely solid and proactive strategic investor to become fully engaged with Ukraine’s competent authorities both at the tender and post-privatization phases to attain a successful commercial outcome.

Odessa Port Plant

The Odessa Portside Plant (OPP) is Ukraine’s major chemical company, producing 17% of ammonia nitrate and 19% of urea in the country, at the same time operating the country’s exclusive marine chemicals transshipment terminal.

OPP’s production facilities consist of two ammonia production units with a design capacity of 450,000 MT/year each, two urea production units with a design capacity of 330,000 MT/year each, an ammonia transshipment terminal with a capacity of 4,300,000 MT/year having storage facilities for 120,000 MT, urea transshipment terminal with a capacity of 5,000,000 MT/year, having storage facilities for 80,000 MT and other production, repair units. According to public information, the starting price of the Odessa Port Plant is expected to be set by the government to be at least USD 500 million.

While this is not the first attempt to privatize OPP (previous ones having failed largely for political reasons), the current privatization auction is sought to be more transparent and commercially-driven, as Ukraine remains in dire need of foreign capital and is subject to close scrutiny by the IMF and the EU in the privatization process.

Way Forward — Key Expectations

Assuming a consolidated position between the Ukrainian government and Parliament on privatization plans for 2016, key expectations from large-scale privatization would be achieved and privatization would be successful if the following conditions are met:

— the tenders are transparent, open to foreign investors with minimum prequalification criteria for potential bidders which would minimize possibilities for manipulations in the course of the privatization process;

— professional financial advisors will be actively enlisted by the SPF in the privatization procedure, so that the respective amendments are not merely declaratory;

— the tender committees are formed independently, and there will be no direct or indirect interference;

— privatization should not be motivated solely by a rapid cash inflow to the state budget, and in case any preparatory actions are required to increase the starting price of the privatization target such measures shall be taken.