Crux (#5-6 May-June 2021)

Legal Digest

On 25 March Law of Ukraine No. 11-50-IX On the Bureau of Economic Security of Ukraine came into force. What are the main functions of the Bureau, and what are the possible consequences for Ukrainian business?

Bohdan Slobodian, Counsel, EQUITY

The pillar and one of the key functions of the Bureau of Economic Security is analytical activity in regards to existing and potential threats in the sphere of the states economy, which, following the law, constitutes the key factor in combating economic and financial offences.

Another key function of the Bureau of Economic Security is police operations and pre-trial investigation within the remit established by law.

Unlike the State Fiscal Service or National Police, it being, first and foremost, an analytical rather than law-enforcement body, can be referred to as one of advantages of the Bureau in this context. The investigative function of the Bureau of Economic Security is a secondary one, which results from its analytical activity.

And now about key provisions. Law No 1150-IX has introduced the notion of risk analysis defined as information and analysis activity with a view to assessing threats to economic security, degree of its vulnerability and level of negative influence on it.

Part 1 of Article 12 of the Law establishes that in its analytical activities the Bureau uses a risk-oriented approach which lies in identifying, assessing and determining the risks of criminal offences in the economic field as well as appropriate measures to manage risks in a way and scope which ensures minimization of such risks, depending on their level.

Thus, the given provisions spell out the ILP (Intelligence-Led Policing) concept previously unknown in Ukraine.

As far as prospects to create a bureau for businesses, it all depends on the results of staff selection of the leadership and employees of the Bureau of Economic Security. Taking into consideration the fact that personnel of the Bureaus central office is being planned four months after the Law came into effect, it is too early to talk about any results.

However, returning to the aforementioned ILP concept, one can expect the analytical work of the Bureau of Economic Security to become a safeguard against ungrounded pressure on businesses from law-enforcement bodies. For example, there will be no need to institute a fact of criminal proceedings to terrorize enterprises with searches solely with a view to finding out whether or not they are fictitious. Instead, the respective analytical units of the Bureau of Economic Security will check up on such facts by monitoring the current economic activities of a legal entity.

Draft Law No. 5317 on issues regarding estimating the value of land was registered in Parliament. How would you rate the proposed amendments, and how can they affect the real estate market in Ukraine?

Andrii Grebonkin, Senior Associate, Baker McKenzie Kyiv

Ukraine has a practice of so-called fractional real estate valuation, which evolved following the adoption of the Law of Ukraine On Land Valuation (2003), which recognized land valuation as a separate form of valuation. Fractional means that the value of real estate is determined by adding up the value of its components, i.e., land and land improvements (buildings, structures, etc.).

The Draft Law is aimed at eliminating this approach and introduces real estate valuation as an integral object. In particular, it abolishes expert land valuation as a separate procedure that is necessary for implementing civil law agreements in respect of land and land rights. Legislators believe that due to these changes, individuals and legal entities wont have to go through the valuation procedure twice, or separately for the building and for the land underneath it.

However, some provisions of the Draft Law will need to be further revised along with some of the regulatory mechanisms it envisaged. (The Central Scientific Experts Office of the Ukrainian Parliament has already noted that it might be necessary to merge or integrate two separate registers: the State Register of Appraisers and Appraisal Entities maintained by the State Property Fund of Ukraine, and the State Register of Appraisers on Land Expert Valuation maintained by the State Service of Ukraine for Geodesy, Cartography and Cadastre (StateGeoCadastre)).

In general terms, taking into account the above comments and subject to careful elaboration of the regulatory framework, adoption of this Draft Law would help bring the practice of real estate valuation in Ukraine into line with global valuation standards, as well as simplify the real estate valuation procedure for individuals. Moreover, it may encourage further discussion on how to implement the principle of the integral nature of real estate in the Ukrainian legal system which, incidentally, is already envisaged by the Draft Concept of Updating the Civil Code of Ukraine prepared by the Government Working Group and published in Spring 2021.

Draft Law No. 5431 and its alternative, Draft No. 5431-1, on improving the activites of the AMCU were registered in Parliament. What are the proposed amendments about?

Nazar Chuchak, Associate, Asters

The registering in Parliament of two Draft Laws, No. 5431 and No. 5431-1, is an attempt to further advance the reform process. Both drafts entail four common essential streams of amendments.

The first one relates to increasing the procedural capabilities of the competition authority (AMCU) to collect evidence and prove market collusion or abuse of dominance. Among a few new powers of the authority, the drafts introduce the right to access places of residence of individuals if proof of the existence of a cartel is required. Within this stream, draft laws also stipulate refined rules on a lenience program and introduction of a settlement mechanism.

Three other streams of amendments revolve around:

  1. The AMCUs right to dismiss the complaint and refusal to open an investigation if the subject matter of the alleged infringement do not meet the enforcement priorities defined by the AMCU;
  2. improvements in merger control, in particular, by amending the definition of economic concentration and excluding turnover of an exiting seller from the notifiability assessment (instead taking into account only the turnover generated by the business being acquired);
  3. introduction of joint and several liability of parent and affiliated companies.

Conceptually, we can agree with all these amendments. These ideas are not new and were quite effectively implemented in other countries as well as at EU level. However, in some aspects the draft laws seem rather raw and unbalanced.

Most crucially, the proposed increase in the AMCUs investigative powers is not accompanied with adjustment of the rights of the undertakings under investigation. Many subtle aspects of the AMCUs powers that are important for the observance of such rights were not addressed in the draft laws and merely left for self-regulation by the AMCU.

The AMCUs discretion to dismiss complaints that do not meet the enforcement priorities of the authority also seems controversial and could lead to entire industries being unable to protect their rights. Existing legislation prevents undertakings from seeking protection directly before the courts, as the courts are prohibited from interfering in the exclusive remit of the AMCU by identifying market boundaries, establishing a companys dominance or violations of competition rules. Although Draft Law No. 5431-1 eliminates this monopoly of the authority, effective consideration of this type of case by the courts, even in the medium term, seems rather illusionary.

Finally, the reasons behind the introduction of parental liability are quite understandable, but we should also consider the risks related to commonly controversial decisions of the AMCU against international companies. Suffice to mention the AMCUs multimillion-dollar fine, which was imposed on local affiliates of tobacco companies, which was recently overturned by the courts.

By way of conclusion, these are not the first draft bills on improving competition rules, and they may become another failed attempt in the absence of substantial improvement.

Draft Law No. 5322 On Bringing Amendments to Particular Laws of Ukraine on Avoiding Malpractice on Wholesale Energy Markets was registered in Parliament on 1 April. What is being proposed in this Draft, and how relevant are its provisions at the current time?

Ivan Bondarchuk, Counsel, Head of Energy, LCF Law Group

In 2020 there were numerous statements regarding manipulation by generating companies and power traders. For example, insider trading, concerted practices or bidding without an available volume of commodity (so-called unsecured bid). Such practices had an effect on competition and led to deformation of reasonable market pricing.

At the same time, the national regulator (NEURC) was unable to react efficiently due to its limited powers and the relatively soft sanctions defined for breach of regulatory and licensing rules by market participants.

The aim of Draft Law No. 5322 s to define the framework prohibiting abusive practices in wholesale energy markets in line with the states obligation to implement REMIT.

The Draft Law sets out definitions of wholesale energy markets and products, envisage key requirements and restrictions for the participants of markets, and also defines a list of abusive practices.

For example, the Draft Law directly prohibits unsecured bids aimed at influencing pricing on the market, concerted bidding, securing of cross-border interconnection without subsequent operations therewith, misrepresentation of data affecting market behavior, etc.

The NEURC is likely to be granted additional powers with which to control the market and investigate alleged violations. For instance, during an investigation the NEURC will be able to receive all relevant information and enlist law-enforcement agencies to get access to facilities, offices, and electronic devices, as well as to file motions to a court asking for the attachment of bank accounts.

Sanctions are also expected to be increased. Anticipated fines for abusive practices could reach UAH 102 million (around USD 3.7 million).

Following adoption of the Draft Law, the NEURC will have 6 months to set the regulations required for implementation of its requirements, including the rules for registration of participants of the wholesale market, procedure for investigation of the violations and methodology for designation of fines.

Parliament adopted Draft Law No. 4416-1 in the first reading, which puts forward amendments to the Law On Industrial Parks. What is proposed in the mentioned Draft, and how will its provisions promote the attraction of investment?

Lidiia Vatutina, Associate, EVERLEGAL

On 15 April 2021, the Ukrainian Parliament approved in its first reading Draft Law No. 4416-1 (the Law). The Laws primary goal is to improve the investment attractiveness of industrial parks by introducing a number of incentives for industrial park stakeholders, i.e., its members, managing companies and the initiators of establishment of industrial parks.

In overall terms, the purpose of the Law is to regulate the activity of industrial parks in Ukraine more precisely, since existing Ukrainian legislation on industrial parks provides rather superficial regulation. Apart from incentives for industrial park stakeholders, the Law also provides for a list of facilities that can operate within industrial parks, expands the powers of the Ministry of Economy as a regulator of all industrial parks in Ukraine and brings Law of Ukraine No. 5018-VI On Industrial Parks into line with other legislative acts in Ukraine.

In particular, the Law introduced the following incentives:

industrial park members can receive:

  • partial compensation of interest payments on loans, provided that such members export the products they manufactured in an industrial park; and
  • partial compensation of their investments in manufacturing made within the first 3 years of their business activity in an industrial park;

industrial park members and its managing company can receive partial compensation of interest payments on loans raised for equipping an industrial park; and

industrial park members, its managing company and initiator of its establishment can compensate 50% of expenses spent on grid connection made within an industrial park.

However, none of these incentives is enforceable unless there are separate legislative acts providing for a mechanism on the granting of specific incentives. Otherwise, such incentives will remain on paper, which may have a negative effect on the activities of industrial parks in Ukraine and, further, their investment attractiveness.

The Law also defines the facilities that can operate within industrial parks. These include offices of the managing company; business campuses, accelerators, funds, laboratories for innovative technologies development; marketing and advertising facilities; educational institutions; green areas; industrial and engineering buildings and structures, etc.

The Law has been well received by Ukrainian governmental bodies, existing players and potential investors. Hence, along with other legislative acts specifying the provision of various incentives to industrial park stakeholders that are yet to be drafted, the Law can boost the activities of industrial parks in Ukraine and help to increase the investment attractiveness of Ukraine.

On 15 April the Verkhovna Rada of Ukraine adopted Draft Law No. 3774 to fight raiding. What are the provisions of the Draft?

Sergiy Smirnov, Partner, Sayenko Kharenko

Zlata Simonenko, Counsel, Sayenko Kharenko

The said Draft Law was approved in the first reading, with MPs voting in favor of a simplified procedure for preparing it for the second reading stage.

The Draft amends certain laws of Ukraine regarding improvement of the anti-raiding mechanism.

As envisioned by its authors, the law is intended to eliminate several legislative gaps and omissions that prevent proper protection of ownership and corporate rights. In particular, the following gaps should be addressed:

the existing procedure for handling complaints against a state registrars decisions, acts or omissions does not provide an adequate response mechanism whereupon an illegal registration action or an affected persons filing of a complaint to the Ministry of Justice of Ukraine new registration actions are taken;

current legislation establishes onerous multiple formal requirements for the content of the complaint to be submitted to the Ministry of Justice of Ukraine.

The authors of the Draft Law propose to give the Ministry of Justice of Ukraine the right to prohibit registration actions during the period of consideration of a complaint against registration actions (decisions); such prohibition would enable any hostile takeover to be quickly stopped.

In addition, the Draft contains provisions aimed at removing artificial barriers preventing the Ministry of Justice of Ukraine from considering on merit any complaints against registration actions (decisions), as well as to streamline the procedure by which the Ministry of Justice of Ukraine handles complaints. At the same time, the Draft requires publication of decisions adopted by the Ministry of Justice of Ukraine on its official website.

It is important to note that one of the proposed changes addresses an extension of the period for appealing against registration actions from 60 calendar days to 3 months. Furthermore, it is proposed to improve the rules for signing of decisions at a legal entitys general meeting by establishing that in case of a change of the legal entitys CEO at a general meeting the minutes of such meeting must be signed by participants who voted for the decision and the number of votes must be sufficient for the approval of such a decision. Particular attention is paid to deeds on termination of land lease agreements for which a prior decision of the general meeting on approval of such deed is required.

In our opinion, the initiators of the Draft Law focused on some problems and gaps that are often used during (and after) hostile takeovers.

However, it is first necessary to wait until the final text of the law is approved by MPs. Secondly, in our opinion, issues of counteracting hostile takeovers should cover not only the procedural aspects of making and appealing against relevant decisions but also the proper (primarily criminal) liability for such actions. It is no secret that now, in the majority of cases, the perpetrators of illegal takeovers manage to avoid any liability. That is why it is critical to amend laws so that they establish an effective mechanism for prosecuting the perpetrators and for ensuring the procedural possibility of recovering the damages caused to the victim by illegal actions.

On 29 April Parliament adopted Draft Law No. 5309 in its first reading on upgrading the public procurement complaints system. What exactly does this Draft propose, and what mechanism of complaint is active at the moment?

Andriy Lytvyn, Attorney at Law, Ilyashev & Partners

As far as adoption in the first reading by the Verkhovna Rada of Ukraine on 29 April 2021 of the Draft Law of Ukraine On Making Amendments to the Law of Ukraine On Public Procurements and to Other Laws Regarding the Upgrading of the Public Procurements Complaints System under No. 5309 of 29 April 2021 (hereinafter the Draft Law) is concerned, the document in question suggests not only upgrading of the public procurements complaint system. The Draft Law suggests making amendments also regarding other issues, which pertain to the procedure of conducting public procurements. For instance, inclusion of leasing to the range of services, to which the Law applies, as well as clarification of services of financial institutions, to which the Law does not apply, etc.

As far as the complaints review procedure is concerned, currently the Permanently Acting Administrative Board of the Antimonopoly Committee of Ukraine for reviewing complaints of breaches of legislation in the sphere of public procurements (hereinafter the Board) operates at the Antimonopoly Committee of Ukraine (hereinafter the AMCU). The Boards membership includes state authorized officials of the AMCU who also perform a variety of other functions, envisaged by the law, which puts an extra load on this public executive body.

It follows from the text of the Draft Law that making amendments to the public procurements complaints procedure is being performed for the purpose of completing the reform of the complaints review body, which actually appears to be, according to the law, the AMCU itself. Considerable steps in this regard were made in February 2021. Namely, amendments were made to the Law of the AMCU, which envisage setting up a Committee for reviewing complaints regarding breaches of legislation in the sphere of public procurements (hereinafter the Committee), which would consist of a range of state authorized officials for reviewing complaints directly in the sphere of public procurements. There is a necessity to set up such a Committee and to engage such state authorized officials in order to resolve the issue of handling a considerable volume of complaints, which must be reviewed in a timely and highly professional manner. Thus, it is necessary to clearly distinguish the Board from the Committee.

Among other things, the Draft Law also imposes tighter deadlines towards the submission of complaints, enforces stricter requirements towards proving the complainants rights have been infringed and provides for stronger adverse effects in case of missing any deadlines or failures to submit information, documents and materials, requested by the Committee when reviewing the complaints.

In general, the introduction of amendments, as suggested by the Draft Law, targets bringing the procedure of filing complaints into conformity with the already launched reform of the complaints review body in the sphere of public procurements and appears, therefore, to be reasonably justified.

The Parliamentary Committee on Economic Development recommends that Parliament adopt in its first reading the refined Draft Law No. 3606 On the Institution of the Business Ombudsman in Ukraine. What are the key changes contained in the Draft?

Oleksiy Bokhan, Legal Assistant, AVER LEX Attorneys at law

A year has passed since the registration of Draft Law No. 3607 of 5 June 2020, and the revised Draft was received on 5 May 2021, so it will be useful to compare the wording.

  1. MPs are not abandoning the position of the need to adopt a special law on the institution of the Business Ombudsman, which provides for the formation of a non-governmental non-profit organization. A precedent already exists the Law of Ukraine On Chambers of Commerce and Industry in Ukraine.
  2. The institution also retains the powers of an authoritative and control-supervisory nature. Although the list of the Business Ombudsmans rights has been expanded in total, such an important tool as the right to be present during state supervision (control) activities in the field of economic activity has been removed. In addition, in the absence of supervisory powers, the question of the effectiveness of the institution will arise.
  3. The wording of the Draft dated 5 June 2020 provided for administrative liability of officials of public entities for improper cooperation with the institution; criminal liability was established for illegally influencing the Business Ombudsman in order to prevent him/her from performing official duties. However, due to the special requirements for the procedure on amending the legislation on administrative offenses and criminal liability, these provisions were excluded. Instead, similar features of the amendments to the Criminal Procedure Code of Ukraine were not taken into account, so the application of a special procedure of criminal proceedings against the Business Ombudsman remains in the new wording.

By way of conclusion, we believe that the revised Draft Law No. 3607 specifies, on the one hand, important issues on the establishment and operation of the institution of the Business Ombudsman in Ukraine but, on the other hand, it somewhat narrows the scope of guarantees and tools available to the Business Ombudsman in protecting business interests in our country.

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