Ukraine to introduce FDI screening mechanism in strategic sectors


On 3 February 2021, the Draft Law of Ukraine No. 5011 “On Foreign Investment in Legal Entities of Strategic Importance for National Security of Ukraine” (the “Draft Law”) was registered in the Ukrainian Parliament upon the submission by the Ukrainian Government.

The Draft Law aims to introduce the industry-specific screening and control mechanics for foreign investments in strategic sectors and protect domestic security interests in such sectors. According to the Draft Law, the list of activities of strategic importance (the “Strategic Sectors”) includes certain activities in military and defence, aviation and aerospace, use of nuclear power and nuclear waste, geological studies of subsoil, the business of monopolies in telecom and ports, and the business of natural monopolies (with certain exceptions), among other sectors.

The introduction of the screening and control mechanisms contemplated by the Draft Law follows the European trend towards enhanced FDI screening for strategic assets, which was implemented (in turn) based on the new EU FDI legal framework.

A foreign investment into a company that has been operating in any Strategic Sector in the last three years (an “Investee Company”) will be subject to mandatory screening and control requirements, as proposed by the Draft Law, as follows:

1. Each qualifying foreign investment in an Investee Company (an “FDI Transaction”) will be subject to screening by the Ministry for Development of Economy, Trade and Agriculture of Ukraine (the “Ministry”). The Draft Law sets out different thresholds that will trigger the screening requirement, depending on the investment type, including those, for example:

  • resulting in the foreign investor’s ability to manage more than 25% of total voting shares or the acquisition of 10% and more shares in the Investee Company;
  • allowing the appointment of the Investee Company’s management (i.e. Investee Company’s sole manager and/or more than 25% of the Investee Company’s collegial executive body, and/or more than 25% of the Investee Company’s supervisory board or other management bodies) and/or the blocking of decisions of Investee Company’s management bodies;
  • resulting in the ownership or use of the Investee Company’s fixed assets, which value is equal to 25% or more of total fixed assets value of the Investee Company; and
  • establishing the foreign investor’s intent to acquire/reach 10%, 25%, 50%, 75% or more of total voting shares of the Investee Company or acquire ability to exercise decisive influence over such Investee Company (irrespective of the formal shareholding).

2. A foreign investor will be required to submit a request for approval of a FDI Transaction to the Ministry and all supporting documents (including audited financial statements for the last reporting period, an ownership structure, official data on its income and taxes paid in the last two years and a draft agreement for the FDI Transaction).

3. The Ministry will review the documents within ten business days and notify the foreign investor of its decision within five business days as to whether a further impact assessment is required and, if yes, will pass the documentation to the Interagency Commission on Impact Assessment of Foreign Investments (a new controlling body to be created by the Ukrainian Government pursuant to the Draft Law) (the “Commission”).

4. The Commission will then carry out its impact assessment of the FDI Transaction according to criteria to be approved by the Ukrainian Government. If the Commission approves the FDI Transaction, the foreign investor will be able to proceed with it, and vice versa. Notably, the foreign investor will have an opportunity to challenge the Commission’s decision in court.

5. Currently, the Draft Law does not set an overall timeline for screening an FDI Transaction, except for the privatisation procedure, where the term should not exceed 45 calendar days from the day when the Ministry received the investor’s request. In any event, a foreign investor should refrain from any actions regarding an FDI Transaction prior to receipt of the Commission’s approval (with certain exceptions in the course of a privatisation procedure).

6. If the FDI Transaction is also subject to a merger clearance, the Antimonopoly Committee of Ukraine will only be able to issue its clearance if the Commission has previously approved such FDI Transaction.

The Draft Law has not yet passed the first reading in the Ukrainian Parliament. CMS will continue to closely monitor the status of the Draft Law and produce further updates in due course.

For more information, please contact your usual CMS representative or one of our local CMS experts: Tetyana Dovgan, Maria Orlyk.

Source: the Draft Law of Ukraine No. 5011 dated 3 February 2021 “On Foreign Investment in Legal Entities of Strategic Importance for National Security of Ukraine”