March 13, 2018

New law on privatization. Ukrainians get the right to turn to European courts

The new law “On privatization of state property” adopted by the Verkhovna Rada on 18 January this year simplifies privatization of municipal property and providers better definition of privatization goals. Yet the main change concerns the option to take privatization disputes to foreign courts, under foreign legislation. The norm will enter into force after the President signs the law and will remain in effect until 1 January 2021, that is, until the end of the judiciary reform in Ukraine, according to the article of ILF legal consultant Irina Selivanova for the GORDON.

International arbitration for all types of privatization

Before the adoption of the Law “On privatization of state property”, relations that occurred in Ukraine among its citizens were regulated exclusively by Ukrainian legislation, and any arising disputes were examined by Ukrainian courts. Only when a dispute contained a foreign component (for instance, contracts with non-residents, contracts signed in another country, property located abroad, etc.), parties were able to choose both the legislation to adhere to and the court to handle their disputes.

Now even those Ukrainian residents who privatize state or municipal property in Ukraine (a deal without a foreign component) may turn to international commercial arbitration in case of disputes.

For this, the parties must put an appropriate provision in the privatization contract. The parties must also select and indicate in the contract a specific foreign court they trust to handle their disputes.

If the court is not specified, then according to the law on privatization, it will be the Arbitration Institute of the Stockholm Chamber of Commerce, as one with the most experience in such issues, as per part 12, Art. 26 of the Law.

Disputes on large-scale privatization – under English law

For objects of large-scale privatization (with assets worth over 250 million UAH), the Law also allows subjecting privatization contracts to English law. Should the investor express such wish, the privatization body is obligated to comply and indicate this in the contract.

The only thing the parties cannot make subject to foreign law in this situation is the norms on transfer of ownership rights. Thus, the procedure, deadlines and other regulations based on which the property becomes private instead of state-owned will still strictly adhere to Ukrainian law.

In world practice, English law is often the regulator of choice for high-profile foreign business deals. The laws and regulations of the English judicial system are regarded as the most suitable for defining the essence of various legal relations. In addition, English case law is based on the adversarial system where the party that provides more evidence wins. This allows business to defend its rights in a civilized manner, without relying on bribing the judges.

Such unusual norms for Ukraine reveal a radical change in the government’s approach to protecting the rights of investors.

The state changes its mind for the sake of investment

In the past few years large Ukrainian business has been using every opportunity (with a foreign component present) to make its deals subject to English law instead of Ukrainian. Disputes were entrusted to impartial international arbitration. Considering the quality of our judicial system, the attitude of businessmen is understandable.

Under English law, they can expect maximum parity between parties, and admissible evidence there is not nearly as limited as in Ukraine. For instance, our courts do not accept correspondence in messenger applications, while in English law it is considered no less significant than a stamped document.

The government, however, was actively opposing this, especially in the field of corporate relations (relations between a legal entity and its members: founders, shareholders and other persons involved in the incorporation, dissolution and management).

In particular, the Supreme Court clearly stated in its Decree “On the practice of examination of corporate disputes in court” in 2008: “if foreign shareholders conclude an agreement (transaction) that any disputes between them as well as those between them and the joint-stock company will be subject to foreign law, such transactions are to be considered void”. As a reminder: a void transaction is a transaction that is invalid from the moment of its conclusion, which puts it completely beyond the legal plane.

Even before that, the Supreme Court stated: if business entities are registered in Ukraine, their shareholders (even if they are all foreign nationals) may not make their disputes subject to international arbitration.

The law on privatization is a complete 180. The government has finally admitted: our legislative and judicial systems are imperfect. They have obviously realized that until we recognize this fact, attracting foreign and domestic capital will be difficult.

Rules of municipal property privatization have been developed

The bill’s initial version didn’t mention municipal property at all, which naturally generated questions as to the procedure for its privatization.

The law now states that it is done under the same rules as with the state property, but by privatization bodies of territorial communities instead of the State Property Fund. In addition, the rights and obligations of local self-government bodies in this process have now been clearly determined.

While it was possible to privatize municipal property in Ukraine before, it was as complicated as with that owned by the state. Now the simplified procedure (4 important changes benefiting investors – in the bill’s previous analysis) will also affect privatization of objects that belong to territorial communities.

The state share will decrease

These groundbreaking changes were absent during the first reading (bill of 9 November 2017). There were also no clearly defined goals of privatization. Long ago, in 1992, when privatization was only beginning, legislators were also unable to formulate its purpose. In the subsequent versions of the bill, this purpose was defined as stimulation of socio-economic development and attraction of funds to the economy.

Now the law defines the goals of privatization as follows:

  1. stimulation of economic growth;
  2. attraction of foreign and domestic capital;
  3. and, all the more important due to being finally properly enunciated – reduction of the share of state and municipal property in Ukraine’s economy.

Legislators mean to reach these goals “by selling objects intended for privatization to efficient private owners”. The law gives no definition of efficiency though.