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IN UKRAINE MERGERS AND ACQUISITIONS
25

Mergers and Aquisitions

Sep 05, 2014

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Business

Lidiya Markova

FRISHBERG & PARTNERS (www.frishberg.com) is a law firm, based in Kiev, Ukraine since 1991. Practice areas: corporate law, due diligence, mergers and acquisitions, anti-trust, real property transactions and litigation. Experience: over 15 years of hands-on experience in Ukraine, the firm issues its annual reference guide, “Doing Business in Ukraine”. Offices: Kyiv (Ukraine). Clients: MasterCard International, GoodYear, KLM Royal Dutch Airlines, Lafarge, Tyco Electronics, Sun Microsystems, Hewlett-Packard, Fiat Auto, Philips Electronics, the Embassy of Great Britain, the Embassy of Austria, the US Embassy, the Embassy of Sweden, etc.
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Page 1: Mergers and Aquisitions

I N U K R A I N E

M E R G E R S A N D A C Q U I S I T I O N S

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Table of Contents

Acquisitions and Due Diligence

Post�Privatization InvestmentDue Diligence

Privatization

Tender for Acquiring State�Owned Joint Stock CompaniesTerms and Conditions of the Tender Participating in the TenderThe Tender ProcedureOpen AuctionsFormalizing Ownership Rights

Antimonopoly Legislation

AMC's ConsentJurisdictional ThresholdsMonopoly StatusApplication Review ProcessConclusion

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Post-Privatization Investment

Foreign investment often takes placefollowing privatization, even in caseswhen foreign investors have acquired

initial shares by officially participating in theprivatization process. In many cases, initialinvestment only serves as a prelude to a drasticincrease in capitalization followingprivatization (often causing dilution of theUkrainian shareholders' ownership in thecompany).

With reference to effectuating the directacquisition of shares in any privately-ownedstock company, a foreign investor has twoviable options: (1) to purchase stock from itsowners (including oligarchs, employees,financial intermediaries and/or commonUkrainian citizens); and/or (2) to purchase

additionally issued stock from the companywith approval of the company's generalassembly of shareholders.

In most cases, factory management insists onissuing and selling additional stock becausethey need an immediate infusion of capital,in-kind contributions/upgrades and know-how. Interested strategic investors usually agreeto increase the company's capitalization, butonly after performing the necessary duediligence (see discussion below and attachedtable of contents). The percentage of stockownership determines the degree of control theinvestor can legally exercise over his company(10+1%, 25+1%, 50+1%, etc.).

In a nutshell, the procedure for issuingadditional stock begins with a general meetingof the shareholders. At the general meeting, the

ACQUISITIONS AND DUE DILIGENCE

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shareholders officially resolve in a protocolform to issue additional stock and approve theinformation and conditions of the publicsubscription. The information is thenregistered with the State Commission forSecurities and Stock Markets (the "SCSSM")and, thereafter, it is published in one of theofficial governmental newspapers.

After such publication, an open subscriptionperiod allows foreign investors to purchase theadditionally issued stock of the joint stockcompany after existing shareholders haveexercised their rights of first refusal. Finally, theissuance results are published with the SCSSMand the general meeting of shareholders mustformally approve the results of the subscription.Note that in consideration for the issuedshares, the foreign investor can contributevirtually anything of value, including foreigncurrency, equipment and intellectual property.

Prior to acquiring any stock, it is alsoimportant to have a reliable overview of theexisting shareholders. In addition to the variousoligarchs, the most common groups ofstockholders include: (1) employees; (2) third-party investors (e.g., via trust companies); (3)Ukrainian citizens who used cash and/orregistered privatization certificates; andsometimes, (4) the State Property Fund (the"SPF"). Each group has different interests, andtherefore consideration of their respectivevoting powers becomes important.

The proportionate share of ownership amongthe stockholders differs greatly from oneenterprise to the next, depending on thebalance value of each factory and the sectorinvolved (e.g., agro-industrial complex andmilitary-conversion enterprises are governedby a special legal regime). In small to mid-sizeenterprises, relatively few shareholders willhave the "controlling block" of shares necessaryto resolve certain fundamental decisions, suchas calling for an increase in capitalization by

issuing additional stock or a decrease incapitalization by contributing (alienating) realproperty to a newly formed joint venture(subject to the consent of the enterprise'screditors).

We stress that in all cases careful, detailed duediligence (both legal and financial) isabsoultely indispensible, especially in Ukraine.

Due Diligence

Before undertaking any financial commitment,an interested investor performs due diligence.It is a long and often tedious process ofresearch and analysis, which takes place inadvance of any meaningful strategic investmentor long-term business partnership. Byreviewing all necessary documents, the investorhas an honest and accurate legal and businessoverview of the target company's status,ownership and debts/obligations. In fact,failure to make this effort can be considerednegligence.

Typically, a team of consultants visits thefactory to research the various business andlegal documentation. The resulting analysis isdocumented in a corporate profile andincludes details concerning the company'sstructure, its assets, financial records,conflicting commitments, debts and liabilities.

Based on the information contained in the duediligence report, as well as preliminaryinterviews with the Ukrainian partners, theprincipals can agree on the fundamentalbusiness conditions suited to their transaction(e.g., business form, share distribution,percentages of ownership, valuation ofrespective contributions, access to local and/orforeign markets, etc.).

In order to cover all of the aspects listed aboveand compile a legal due diligence of acompany or factory, the targeted entity is askedto provide the following:

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• The charter (by-laws) of the entity (allexisting and formerly existing versions fromthe date of the entity's creation, including allamendments and additions);

• The founding agreement of the entity (allexisting and formerly existing versions fromthe date of the entity's creation, including allamendments and additions);

• The resolutions of the meetings anddecisions of the highest authoritative bodyof the entity (i.e. the general meeting of theshareholders or participants);

• The resolutions of the meetings anddecisions of the management body of theentity;

• The composition of the supervisory council(if applicable), the executive body(management) and the controlling body ofthe entity;

• The register of shareholders (if the entity is astock company), evidencing the size andamount of each block of shares;

• Documents which confirm the ownershiprights to the buildings and structures of theentity;

• Documents which confirm the rights to useland;

• Liabilities and obligations, includingexisting employment contractual relations,long-term loans, employee benefits, etc.;

• Long-term agreements (contracts) withsuppliers and consumers, as well as anyother material agreements (contracts);

• All documents related to corporatizationand privatization (if applicable), includingSPF decisions or resolutions, the

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privatization plan, the share acquisition plan,draft share sale-purchase agreements, etc;

• All available registration certificates of theentity regarding the issuance of shares andobligations, all state registration certificates,etc.;

• Resolutions (charters, regulations, etc.) onthe basis of which structural subdivisions ofthe entity were created (representativeoffices, subsidiaries), as well as the by-lawspursuant to which such subdivisionsoperate.

The above list of documents is far fromexhaustive. Depending on the specific targetcompany's profile, a review of additionaldocuments will be necessary (includingaccounting, financial, environmental records,plans for capital investment, etc.).

In all cases we place great emphasis on thedetection of liabilities, both real andcontingent. In particular, our investigationteam looks for questionable contracts andfinancial transactions involving off-shorecompany structures, unusual rules governingthe rights of shareholders, and anyenvironmental liabilities such as aging fueltanks and waste ponds.

Over the years, we have performed extensivedue diligence exercises regarding some of theleading Ukrainian enterprises, including butnot limited to:

• Gostomel Glass Factory

• Credit Lyonnais Ukraine

• KyivOblEnergo OJSC

• RivneAzot OJSC

• "SLAVUTICH" Beer and Soft DrinkEnterprise

• Sumy Electron Microscope Factory,"SELMI"

• Zhidachiv Cellulose-Paper Mill

• Vinnytsa Vegetable Oil and Fat Plant OJSC

• Khartsisk Pipe Plant OJSC

• Lutsk Cardboard and Ruberoid FactoryOJSC

• U-Pharma

• Prista Oil-Ukraine

• Zeus Keramik

• The Ukrainian Academy of Science's GrainFarming Institute

Fields represented include: breweries, sodamanufacturing, cement production, cardboardproduction & wood processing, electricity,production of refrigerators, furniture-making,defense conversion, pharmaceuticals, steel andglass manufacture, among others.

We are pleased to enclose, as an attachment,the table of contents of our standard duediligence. If you have questions about any of itscomponents, please contact us anytime.

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Back in September of 2000, theannouncements regarding the sale ofblocks of shares in large Ukrainian

enterprises kept rolling off the State PropertyFund's ("SPF") bulletins: Zaporizhia AluminumPlant, Pivnichny Ore Enrichment Plant,Kramatorsk Steel Plant, Nikopol FerroalloyPlant, KhersonNaftoPererobka Oil Refinery,Khartron and TurboAtom Plants, to name a few.

Even one of Ukraine's crown jewels,Ukrtelecom, was up for sale in 2000, inaccordance with Law No. 1869 "OnParticularities of privatization of the Open JointStock company Ukrtelecom," dated July 13,2000, which offered investors up to 43% stock.This privatization never materialized, however,and the law was terminated on July 5, 2005. Justthree weeks later, on July 25, 2005, Ukrtelecomonce again appeared on the priority list ofenterprises slated for privatization.

In August 2005, then acting Prime MinisterYulia Tymoshenko prepared an amazinglycomprehensive list of enterprises that weresubject to privatization (and re-privatization).Eventually, some were re-privatized (Krivo-rizhstal) while others went into hiding on a listof "objects not subject to privatization"(Nikopol Ferroalloy Plant). About one third ofthe original list still remains intact, and incertain cases percentages of stock wereincreased.

In early 2006, the SPF decided to overhaul theprocess of selling stock in its joint stockcompanies. Along with the new Civil andEconomic Codes, there is a new procedure forconducting tenders, with a focus ontransparency. Below we describe the tenderprocedure for acquiring state-owned blocks ofshares in Ukrainian joint stock companies.

On January 26, 2007, President Yushchenkosigned the Law "On the introduction of amend-ments to certain legislative acts of Ukraine"approved by the Parliament on January 11,2007, making privatization in 2007 a reality.Pursuant to the approved Law, the followingenterprises are subject to privatization in 2007:Ukrtelecom, Odessa Port Plant, Electrotya-zhmash Plant, the Feodosiya Industrial Union"Morye", the hotels "Dnepro" and "Sport"(Kiev), and Azmol (Berdyansk). Needless tosay, most investors, especially Russian investors,will be attracted to Ukrtelecom and the OdessaPort Plant.

PRIVATIZATION

B

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Tender for Acquiring State —Owned Joint Stock Companies

The tender procedure for the sale of blocks ofshares of stock in joint stock companies isregulated by Order No. 1800 (hereinafter the"Order"). The Order sets forth the procedurefor the preparation, organization andconducting of tenders involving the sale ofstate-owned blocks of shares in open jointstock companies. Importantly, however, theOrder does not apply to energy companies or tocompanies listed as "not subject toprivatization", including the notorious NikopolFerroalloy Plant (re-privatization victim).

The Order defines "tender" as the method ofselling shares in open joint stock companies toa tender winner, who is defined as thecandidate who offers the highest price for suchshares and undertakes to fulfill all of the termsand conditions of the tender. The Order furtherprovides that advisors may be brought in tofacilitate the effective sale of stock during thesetenders.

The discussion below describes the procedurefor holding tenders for the sale of shares in thecontext of privatization. Importantly, thetender procedure for each open stock companymay vary, depending on which privatization listit was included into and its strategicimportance to the Ukrainian economy.Therefore, interested investors should consultan experienced legal advisor concerning aspecific investment opportunity.

Terms and Conditions of the Tender

First and foremost, one single block of shareswill be offered at a tender in accordance withthe SPF's allocation plan. In other words, theparticipants must bid for an entire packet of anoffered factory's stock, not separate shares or acertain percentage thereof.

Payment for acquired shares is carried out intwo installments in Ukrainian Hryvnias orfreely convertible foreign currency. Speci-fically, at least 50% of the stock price must bepaid within thirty (30) calendar days from thedate the sale-purchase agreement for thestock is signed, while the remaining 50% canbe paid within sixty (60) calendar days fol-lowing the signature date of the sale-purchaseagreement.

Tenders are organized by a commission, whichis created by the privatization body in charge ofprivatizing the specific joint stock company.The tender commission has several functions,including: (i) reviewing the SPF's recom-mendations regarding the terms and conditionsof the tender; (ii) submitting the initial pricefor the SPF's approval; (iii) drafting the infor-mation announcement about the tender for theSPF's approval; (iv) reviewing the offers of allparticipants; and (v) selecting the winner.

Among others, the terms and conditions of atender may include the following obligations:partial payment or restructuring of thecompany's outstanding debt with respect toloans granted by commercial banks; technicalreconstruction of the company's productionfacilities; preserving the existing workplaces orcreating new jobs; preserving the company'sproduction profile; and compliance with therequirements of antimonopoly legislation.Certain requirements must be fulfilled withinfive (5) years after the date of the sale-purchaseagreement.

The tender conditions may require theparticipants to provide a business plan or"technical-economic substantiation" forpost-privatization development, including anemployment plan and investment offer,depending on the specific activities of thecompany offered for sale. If the tender involvesthe sale of more than 50% of shares of stock,the privatization plan must also contain aso-called Development Concept, aiming to

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improve the target company's long-termeconomic, social, financial, technological andecological conditions.

Participating in a Tender

In order to participate in a tender, potentialinvestors must submit their tender offer alongwith the so-called "confirming documents,"which evidence that the prospective investorfalls within the criteria listed in the terms andconditions of the tender.

The aforementioned documents must be in theUkrainian language and must be submittedpersonally by the potential buyer, or itsauthorized representative, to the SPF'sprivatization body. Upon submission, theprivatization body will register such documentsand mark them with a registration number,including the date and time of registration. Theinvestors will receive an official receipt, whichwill specify their number, date and time ofregistration and the surname, first name andpatronymic (if applicable) of the person incharge of the registration.

The investor must simultaneously submit to theprivatization body the tender offer and theconfirming documents, which must be filed inseparate envelopes and marked accordingly.The face of the envelopes may only contain theSPF's address and the name of the tender;candidates may not write anything that wouldaid in disclosing its identity. If the aboveprotocol is breached, the tender offer and theconfirming documents will not be accepted.

The SPF will commence accepting tenderproposals and confirming documents on theday of the publication of the tenderannouncement and cease accepting proposalsand documentation seven (7) calendar daysbefore the tender. The day after the acceptanceperiod for tender offers has expired, the SPFwill open all envelopes and begin to ascertain

whether or not any required documents aremissing. Within five (5) days after theacceptance period expires, the SPF will reviewthe confirming documents to determine whichpotential buyers qualify to participate in thetender.

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Once the privatization body has reviewed alltender proposals and verified all requiredinformation, including any additionalinformation requested from potentialinvestors, it will submit a list of qualifiedcandidates and their proposals to the tendercommission.

The Tender Procedure

The investor selection begins when the tendercommission gathers to open the tender offerscontaining the proposed price for the shares ofstock and enters the respective offers into itsofficial minutes. The tender commissiondetermines the winner based on the offeredprice, and sends the minutes of their meetingto the SPF within two (2) working days.Thereafter, the SPF must approve the minutesand declare the winner within three (3)working days.

As a rule, the winner of a tender is thecandidate who offered the highest price for thepacket of shares, unless other conditions areprovided in the tender rules. If two or morecandidates submit offers with equallyadvantageous terms and conditions, the winnerwill be the candidate who submitted its offerfirst. Within ten (10) days from the date of theapproval of the winner, the SPF verifies thepresence of the Antimonopoly Committee'sconsent, signs the sale-purchase agreementand, finally, publishes the results.

If the winner of the tender did not yet receivethe permission of the AntimonopolyCommittee to acquire the block of shares, theSPF will conclude the sale-purchaseagreement with the winner, noting that theAntimonopoly Committee is reviewing thewinner's application for permission to acquirethe block of shares or stating that theAntimonopoly Committee's permission is notrequired by law.

In certain cases, the SPF has the latitude toenter into sale-purchase agreements with the

condition precedent that the winner mustreceive the Antimonopoly Committee'sconsent within fifty (50) days from the date ofthe sale-purchase agreement. In such cases,the term for fulfillment of obligations, exceptthe obligation to pay for the block of shares,will be extended for the said term.

The SPF must prepare and publish anannouncement concerning the results of thetender in the newspaper "Privatization News"within ten (10) calendar days from signing asale-purchase agreement with the winner. It isalso responsible for informing the StateCommission on Securities and the StockMarket and the Antimonopoly Committeeabout the results of the tender. Finally, the SPFmust inform all tender participants about theresults and refund their deposits. Of course, thedeposit is not returned to the winner.

Open Auctions

Since July 11, 2005, in certain cases a tendermay be conducted as an auction, with openproposals by tender participants. Investorsmust simply submit an application toparticipate, along with confirming documents,within the deadline to the SPF. After potentialinvestors receive the tender documents, eachbuyer drafts and submits its proposedamendments to the sale-purchase agreementwith clearly indicated changes and additions.

The SPF accepts and registers all proposedamendments and additions to the sale-purchase agreement and analyzes all proposals.Thereafter, the SPF will conduct negotiationswith all potential buyers and discuss theproposed amendments and additions. On thebasis of its negotiations, the SPF will produce afinal draft sale-purchase agreement and send itto the investors no later than five (5) workingdays before the day of the tender. At least three(3) days before the tender, each buyer mustreturn the draft sale-purchase agreement withan official signature on each page. Such actionconfirms that each buyer will sign the sale-

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purchase agreement if it is declared as thewinner of the auction.

Next, the SPF will approve a list of qualifiedparticipants and send it to the tendercommission for commencement of the auctionprocedure. The registration of the tenderproposals will occur ten (10) minutes beforecommencement of the auction. On the date ofthe tender (auction) commission will hold anopen hearing, where qualified potential buyersand mass media representatives mayparticipate.

The head of the auction commission will openthe offers and announce their contents, in thepresence of the auction commission, in theorder of their registration numbers. An auctionis held by an auctioneer and commences fromthe moment the auctioneer announces thehighest price proposed by the participants(initial trade price). If no participant bids ahigher price than the initial trade price afterthree announcements of such price, theauctioneer, with the bang of his hammer, willdeclare the winner.

During the auction, participants may bid byholding up their auction cards with the numberfacing the auctioneer and naming their price.An increase of the price by participants maynot be less than 1% of the initial trade price.Once the auctioneer announces the winner, theresults of the auction are set forth in the rele-vant protocol, signed by the tender commissionand the buyer, and approved by the SPF.

Formalizing Ownership Rights

The tender winner becomes a stock ownerfrom the moment of the payment of the fullvalue of the block of shares acquired at thetender. The sale-purchase agreement for theshares will include information such as thename and address of the OJSC; informationabout the parties; the price and paymentperiod; the parties' obligations; the parties'

locations and banking requisites; liability of theparties for non-fulfillment of the obligations;legal consequences resulting from the non-fulfillment of the obligations; disputeresolution procedure and force-majeurecircumstances.

The investor's right to participate in themanagement and to receive income may beexercised from the moment changes to theregister are introduced regarding the newowners of named shares. If the acquired sharesof stock were issued in electronic form (i.e.,non-documentary), then the ownership rightswill transfer from the date such shares arecredited to the owner's account with a sharecustodian.

The sale-purchase agreement will also containthe buyer's obligation to refrain from selling acertain portion of its shares before fulfilling theterms and conditions of the sale-purchaseagreement. The buyer also may notsubsequently sell the privatized object withoutassigning to the new buyer the obligationsindicated in the terms and conditions of thetender.

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In the past, Frishberg & Partners worked onbehalf of Baltic Beverages Holding AB aswell as KPN Royal Dutch Telecom and

KPN Mobile, to enter and to exit Ukraine'scompetitive market. As a result, antitrust- relat-ed work became a core part of our practice. Infact, the internationally-recognized, antitrust-oriented practice of Howrey Simon Arnold &White LLP have asked us to advise on theUkrainian component of a multi-jurisdictionalacquisition involving a travel-service giant.

More recently we assisted a Swiss company withthe acquisition of a 75% equity stake in arespected Ukrainian glass-manufacturing facili-ty. In addition to due diligence and preparation

of the share-purchase agreement, we cleared thistransaction with the Antimonopoly Committee.

As part of the executive branch of governmentwith a special status, the role of the Antimono-poly Committee of Ukraine (the "AMC") is toprotect Ukrainian business from unfair competi-tion and trade practices. As a result, the AMC'sconsent is required if a merger or acquisitioncould lead to an "economic concentration" on aspecific segment of the Ukrainian market.

Below we describe the thresholds for receivingthe AMC's consent, as well as a summary of thepractices, which the AMC considers to beunfair to competition.

ANTIMONOPOLY LEGISLATION

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AMC Consent

Generally, the AMC consent to a transaction isrequired only upon the occurrence of certaintriggering events, including mergers, the director indirect acquisition of shares of stock orassets, the acquisition of control in anymanner, the expansion of an association ofbusinesses and the creation of a business entity.For each category, Law No. 2210 and OrderNo. 33-r set forth the thresholds which requirecompanies to receive the AMC's preliminaryconsent.

In practice, the parties to a potentially"monopolistic" transaction usually include aprovision in the relevant agreement to theeffect that the closing of the transaction (i.e.,the date when the agreement comes into force)is contingent upon procurement of AMCconsent if applicable. Since the procedure forreceiving the AMC's consent is complicatedand lengthy, the parties should beginprocurement in the early stages of thetransaction. Accordingly, the closing of atransaction will be suspended until the AMCclears the transaction and puts forth its consentin writing.

In order to receive the AMC's consent, therelevant party must submit an application inaccordance with Order No. 33-r with a vastamount of information about itself in theapplication, including the applicant's foundingdocuments; the relevant agreement that couldpossibly result in a concentration on a market;registration, statistic, economic and financialinformation about the parties to thetransaction; a description of the transactionsand its targeted results; the principal activitiesof the parties; the applicant's balance sheet;information on the entities controlled by theapplicant.

On the whole, the process of gathering theabove information and properly filling out the

application itself is daunting, cumbersome,and time-consuming.

Jurisdictional Thresholds

The need for preliminary AMC consent for aspecific transaction arises when aconcentration may be reached on a particularmarket. By law, an applicant may attain aspecific market concentration with preliminaryAMC consent if the aggregate value of assets oraggregate volume of sales of the participants toa possible concentration, taking intoconsideration relations of control, over the pastfiscal year (which also includes operationsabroad) exceeds an amount equivalent to EUR 12 million, and if:

• the value (aggregate value) of the assets orthe volume (aggregate volume) of sales,including operations abroad, for at least twoparticipants to the concentration, includingthe relationship of control, exceeds anamount equivalent to EUR 1 million, and if

• the value (aggregate value) of the assets orthe volume (aggregate volume) of sales inUkraine for at least one participant to theconcentration, including the relationship ofcontrol, exceeds an amount equivalent toEUR 1 million.

Moreover, a business may attain a specificmarket concentration with AMC's preliminaryconsent, regardless of the aggregate value ofassets or aggregate volume of sales of theparticipants to a possible concentration if theshare of any participant to the saidconcentration on a certain market of goods,taking into account relations of control,exceeds 35% and the concentration will occuron that particular market or a related market ofgoods.

The relevant Ukrainian legislation defines a"concentration," conveniently delineateswhich types of transactions do not constitute a

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"concentration," and provides a list of entitiesthat are considered to be "participants in aconcentration." The AMC uses other criteriafor determining whether a certain transactionwill lead to a monopoly on a particular market.For example, "control" is defined as a decidinginfluence of one or several affiliated legaland/or physical entities on the economicactivity of a business entity or a part thereof,which influence is exercised directly orindirectly.

Further, the Economic Code of Ukraine addsthat a company, which possesses a controllingblock of shares in a daughter company orenterprise, will be deemed a "holding company,"with corresponding legal responsibilities. Forinstance, if a daughter company enters intodisadvantageous transactions or operations atthe fault of its controlling enterprise, then thecontrolling enterprise must compensate thelosses caused to the daughter company.Moreover, if a daughter company becomesinsolvent and will be adjudicated as bankrupt atthe fault of its controlling enterprise, then thecontrolling enterprise will bear secondary(vicarious) liability before the daughtercompany's creditors.

This is a far cry from the pre-January 1, 2004days when the controlling enterprise wouldsimply be liable to the extent of itscontributions into the authorized capital of adaughter company.

Monopoly Status

Applicable legislation provides that a businessentity occupies a monopoly (dominant)position if it has no competitors on a particularmarket, or at least no significant competitors,as a result of limited access by other businessentities, the existence of privileges or otherundue obstacles. A business entity is deemed tohave a monopolistic (dominant) position if itsshare on a specific product market exceeds35% and such business entity does not provethat it has significant competitors.

If an applicant cannot demonstrate theexistence of significant competition on itsparticular market, the AMC may, at its owndiscretion, determine that the applicant has amonopolistic advantage even if that appli-cant's share is less than 35%. This encouragesforeign investors and Ukrainian businessmento run their transactions by the AMC, even ifthere is only a remote possibility that thetransaction will lead to a 35% concentration

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within a particular market or economic sec-tor.

Interestingly, two or more business entities maybe considered to have a monopolistic(dominant) position on a product market ifthey do not have any competitors with respectto a specific good, or their competition isinsignificant. In such situations, the twobusinesses' activities may be measuredcollectively, and if, when calculated together,they meet the criteria for monopolisticadvantage, then the AMC may determine thatmarket concentration has been achieved.

Furthermore, several business entities may bedeemed to have a monopolistic position if (i)the joint share of no more than three businesssubjects, which have the largest share on aparticular market, exceeds 50%; or (ii) the jointshare of no more than five business subjects,which have the largest share on a particularmarket, exceeds 70%; and they cannot provethe existence of other competitors or signifi-cant competition.

Anyone interested in learning more about theexisting competition on a specific Ukrainianmarket should consult the AMC's list ofenterprises, which have a monopoly status on aspecific market. It is published in the officialUkrainian newspapers, "Uryadovy Kurier,""Golos Ukrainy," "The State PrivatizationInformational Bulletin."

Taking into account the above-describeddefinitions and thresholds, as well as theapplication and the accompanying documents,the AMC will render its consent or non-consent to a particular transaction.

Application Review Process

After the applicant submits the necessarypaperwork (see enclosed list of necessarydocuments), the AMC compares theinformation in the submitted documents withthe above-listed thresholds to determine the

market share and monopoly position of abusiness entity. The AMC's formulae areeconomic in nature and, therefore, beyond thescope of this legal analysis.

In determining the monopoly status of anapplicant, the AMC takes into considerationsuch criteria as: (i) the list of products andconsumers of such products; (ii) the timeperiod during which the applicant carries outits activity on a specific product market; (iii)the territorial and consumer limits of therelevant product market; (iv) the list ofcompetitors on a specific product market; (v)market barriers and market status; and (vi) thelist of other business entities with a monopolyor dominant position on the market. Of course,this list is not exhaustive.

Once the AMC has accepted an application, itsfinal consent to a transaction is due within 3months, provided that no grounds exist toprohibit an intended transaction (i.e., theapplicant has provided all required documentsand information, and the AMC hasdetermined that there will be no marketconcentration). If the AMC fails to adopt adecision regarding a proposed concentrationwithin 3 months, then the AMC is deemed tohave approved the transaction.

Conclusion

Acquiring factory stock through privatization,as well as on the secondary market, requirescareful due diligence. As the leading Ukrainianexperts in the field, the Frishberg & PartnersM&A team has the necessary resources andexperience to bring legal transparency to anycontemplated transaction. More, we typicallystructure the deals to minimize taxation,procure the necessary permissions from theAntimonopoly Committee, and in the end,register the company stock in the name of thenew owner. After 15 years of hands-onexperience, we can handle the Ukrainian legalcomponent of any joint venture or acquisition.Just ask some of our clients (see enclosed list).

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1.0 Ownership Rights

1.1 Historic Overview

1.2 Title Verification: Chronological Overview of the Transformation of the State Owned

Enterprise "Company X" into an Open Joint Stock Company

1.3 Chronological Overview of Privatization

1.4 Changes to the Share Allocation Plan

1.5 The Land Plots Used by the Company X

1.6 Real Property Title Registration

1.7 Fixed Assets: Plant, Equipment and Machinery

1.8 Company X's Capital Investments in Other Companies

1.9 Leasing Relations

1.10 Intellectual Property: Trademarks and Certificates

2.0 Obligations

2.1 Employee Benefits

2.2 Expenses for Maintaining Objects of Social Infrastructure and Housing

2.3 Environmental Liabilities

2.3.1 Laboratory Control

2.3.2 Water Supplies and Discharge of Industrial Water Waste

2.3.3 Industrial Waste and Compliance with Permits

2.3.4 Payments for Waste Disposal

2.4 Capital Construction and Reconstruction Plans

2.5 Long-Term Loans

2.6 Material Agreements

2.7 Ongoing Litigation

2.7.1 Bankruptcy (subsidiary)

2.7.2 Trademark Infringement

2.7.3 Work-related Injuries

2.7.4 Customs Duty Violations

TABLE OF CONTENTS OF OUR STANDARD DUE DILIGENCE

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3.0 Corporate Document Analysis: Charter (By-Laws) and Governing Bodies

3.1 Authority of the General Assembly

3.2 The Supervisory Council's Authority

3.3 Management Board and its Authority

3.4 Audit Committee and its Authority

3.5 The Charter and its Compliance with Effective Legislation

3.6 The Rights of Shareholders Owning More than 10% of the Votes

3.7 Principal Resolutions of the General Assembly in 2004-2006

4.0 Major Markets of the Company X's Products

4.1 Sales and Markets

4.2 Raw Materials and Other Resources

5.0 Accounting and Financial Records

6.0 Conclusions and Recommendations

Annexes

Page 18: Mergers and Aquisitions

17www.frishberg.com

AMCU

FIL

ING

REQU

IREM

ENTS

CH

ART

Page 19: Mergers and Aquisitions

18 M&A Handbook

1A

fili

ng

to t

he

An

tim

onop

oly

Com

mit

tee

of U

krai

ne

is r

equi

red

for

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follo

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pes

of c

once

ntr

atio

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1) m

erge

r of

eco

nom

ic e

nti

ties

or

the

addi

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of

an e

con

omic

en

tity

to

anot

her

en

tity

; (2

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quis

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f di

rect

or

indi

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con

trol

ove

r on

e or

mor

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onom

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or

over

par

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by

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enti

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clud

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join

t ve

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depe

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rfor

m e

con

omic

act

ivit

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for

a lo

ng

peri

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ith

out

resu

ltin

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th

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of

com

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beh

avio

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bet

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int

ven

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par

tner

s or

bet

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n t

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part

ner

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d th

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int

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); (

3) d

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acq

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each

or

exce

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vote

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th

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gove

rnin

g bo

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f th

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leva

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asse

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or t

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via

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ren

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men

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and

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the

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or e

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a pe

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to

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boar

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her

sup

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wh

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mor

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of t

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mem

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of

the

supe

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coun

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of

two

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re o

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by t

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sam

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2T

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n l

aw d

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con

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a d

ecid

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infl

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sev

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aff

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d/or

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sica

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econ

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act

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usin

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part

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Suc

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flue

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llow

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(1)

the

rig

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o po

sses

s or

use

all

asse

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sign

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part

the

reof

; (2)

the

rig

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en

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ce o

n t

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voti

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resu

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and

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; (3

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reem

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(co

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mak

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pos

sibl

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term

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eco

nom

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ii) t

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or

(iii)

to

fulf

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s of

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usin

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gov

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occu

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irm

an o

f th

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man

agem

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boar

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r an

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her

supe

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or e

xecu

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bod

y of

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usin

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pers

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lrea

dy o

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one

or m

ore

of t

he a

bove

pos

itio

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in o

ther

bus

ines

s en

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and

(5)

the

occu

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ore

than

hal

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the

pos

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of t

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uper

viso

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or o

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sup

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or

exec

utiv

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of a

bus

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by

pers

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who

alr

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occ

upy

one

or m

ore

of t

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bove

pos

itio

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a a

noth

er b

usin

ess

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3[A

s of

Mar

ch 1

3, 2

006,

th

e un

taxe

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inim

um w

age

was

17

Ukr

ain

ian

hry

vnia

s (a

ppro

xim

atel

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3.36

]).]

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inco

me

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ven

ue d

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ce o

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ork,

or

ren

deri

ng

of s

ervi

ces.

Page 20: Mergers and Aquisitions

19www.frishberg.com

I. The Purchaser must submit the following documents:

1. Copies of its constituent documents.

2. Copy of the certificate of state registration or an extract from the commercial (banking)register of the Purchaser's country of registration evidencing its registration.

3. An original power of attorney authorizing the Purchaser's representative to act on its behalfbefore the AMCU to obtain permission for a concentration by acquiring shares;

3.1.A copy of its balance sheet (consolidated balance sheet of the group to which the Purchaseris a party) as of the end of the most recent reporting period;

3.2.A copy of its financial results (profit and loss statement) (consolidated statement of thegroup to which Purchaser is a party).

4. Draft (purchase) agreements related to the intended acquisition of corporate rights (shares ofstock) by the Purchaser.

5. Information regarding the financial aspects of the concentration, i.e., whether the acquisitionof corporate rights is intended to be carried out at the expense of the Purchaser's own funds orat the expense of borrowed funds. If the acquisition is intended to be carried out at the expenseof borrowed funds, information describing the sources of such borrowed funds must beprovided, including the amount of such borrowed funds, the terms of such borrowing and therepayment schedule. In case of a loan (credit), the corresponding (draft) loan (credit)agreement must also be provided.

6. The Purchaser must also provide the following information about itself:

6.1.Information describing its principal business activities, the name of its products (service),volumes of production and/or sales of the entity in units and value, volume of productionand/or sales on the territory of Ukraine.

6.2.List of business entities in which the Purchaser owns or manages shares of stock (shares,participation interests) which ensures or exceeds 10% of the votes in the highest governing bodies of such entities (name of the business entity, location, address, size of theblock of shares held and the number of the votes in the highest governing body inpercentages);

6.3. List of legal entities and natural persons, which own or manage (use) shares in the authorizedcapital of the Purchaser, which ensures or exceeds 10% of the votes in the highest govern-

DOCUMENTS AND INFORMATION REQUIRED FOR FILING AN APPLICATION WITH THEANTIMONOPOLY COMMITTEE OF UKRAINE

Page 21: Mergers and Aquisitions

20 M&A Handbook

ing body of the purchaser (the name of such legal entities or natural persons, location,address, size of the block of shares held and the number of the votes in the highest govern-ing body of the Purchaser in percentages);

6.4. List of persons, which are members of the Purchaser's supervisory council, executive body,controlling body, or perform functions of CEO, deputy CEO, CFO (names, addresses, andpositions held).

7. With respect to each Ukrainian resident business entity directly or indirectly related to thePurchaser by relations of control, the following must be provided:

7.1.Information regarding the concentration participant's principal business activities andshare of the relevant market in the prior years;

7.2.Information on business entities in which a concentration participant holds or managesshares of stock which ensures or exceeds 10% of the votes in the highest governing bodies;

7.3.Information on persons, which hold or manage (use) shares in the authorized capital of aparticipant of concentration, which ensures or exceeds 10% of the votes in the highest governing body of the participant of concentration;

7.4.Lists of persons which are members of a concentration participant's supervisory council,executive body, controlling body, perform functions of CEO, deputy CEO, CFO, ChiefAccountant;

7.5.Information on business entities in which the persons, which perform the functions ofchairperson, deputy chairperson of the supervisory council, or executive or controllingbody of a participant or of concentration, hold or manage shares, which ensures or exceeds25% of the votes in the highest governing bodies of such business entities;

7.6.Information on the value of assets and sales proceeds of a participant of concentration forprior years.

7.7.Information of a concentration participant's separate structural sub-units.

8. Information to non-resident business entities directly or indirectly related to the Purchaser byrelations of control.

9. Disclosure whether the Purchaser and business entities related to the Purchaser by relations ofcontrol bought from (supplied to) the acquisition target goods (services) over the past year. Ifso, describe the goods (services) purchased (supplied), including volumes, and names ofentities which carried out purchases (supplies).

10. Document confirming payment of the fees for filing the application with the AMCU withrespect to obtaining permission for a concentration (to be paid in Ukraine by therepresentative of the applicant).

Page 22: Mergers and Aquisitions

21www.frishberg.com

II. The target company (the "Issuer") must submit the following documents:

1. Copies of decisions by the AMCU regarding the Issuer or business entities related thereto byrelations of control (if such decisions exist).

2. Properly certified copies of the following:

2.1.Constituent documents of the Issuer;

2.2.Certificate of state registration of the Issuer.

3. With respect to the Issuer and each Ukrainian resident business entity related thereto by rela-tions of control, the following must be provided:

3.1.Information regarding the concentration participant's principal business activities andshare of the market in the prior years;

3.2.Information on business entities in which a concentration participant holds or managesshares of stock, which ensures or exceeds 10% of the votes in the highest governing bodies;

3.3.Information on persons, which hold or manage (use) shares in the authorized capital of aconcentration participant, which ensures or exceeds 10% of the votes in the highest gov-erning body of the concentration participant;

3.4.Lists of persons which are members of a concentration participant's supervisory council,executive body, controlling body, perform functions of CEO, deputy CEO, CFO, ChiefAccountant;

3.5.Information on business entities in which the persons, which perform the functions ofchairperson or deputy chairperson of supervisory council, or executive or controlling bodyof a participant of concentration, hold or manage shares, which ensures or exceeds 25% ofthe votes in the highest governing bodies of such business entities;

3.6.Information on the value of assets and sales proceeds of the participant of concentration;

3.7.Information of the concentration participant's separate structural sub-units.

4. Information regarding non-resident business entities directly or indirectly related to the Issuerby relations of control.

5. The above-mentioned list of documents and information represents the minimum require-ments of the AMCU and, therefore, is not exhaustive. Please note that the AMCU reserves theright to demand any other additional information during its review of the concentration.

Page 23: Mergers and Aquisitions

22 M&A Handbook

• Advanced Logic Solutions, Inc.• AMADEUS GLOBAL TRAVEL

DISTRIBUTION, S.A.• Baltic Beverages Holding;• Bank Austria Creditanstalt• British Energy• Bruhn Internationale Transporte GmbH• BT Global Services• Chumak• Commerzbank Aktiengesellschaft• Credit Commercial de France• CTB, Inc.• Deloitte• Direct EDI Inc• DUROPACK• Emilceramica SpA• Fiat Auto• FL Smidth & Co.• Freshfields Bruckhaus Deringer• Hewlett-Packard Company• Imanto AG• INDEVCO• Jahn General Products Ukraine• Jabil Circuit, Inc.

• Quality Schools International• KLM Royal Dutch Airlines• KPN Royal Dutch Telecom• Linklaters• Notaro & Michalos• Philips Electronics• Robert Fleming & Company, Ltd.• SCL Corporate Finance SA• Sealed Air Limited• Skanska East Europe OY• Stragen Chemical SA• Sun Microsystems• Theeuwes de Jong B.V.• The Danish Investment Fund for Central

and Eastern Europe• Thornkild Kristensen Properties AS• Tyco Electronics AMP GmbH• Van Oostveen Medical B.V.• Vetropack Holding Ltd.• The Embassy of Austria• The Embassy of Sweden• The US Embassy• Vimpel Communications, among others.

THE FIRM'S CLIENTS INCLUDE:

Page 24: Mergers and Aquisitions

23www.frishberg.com

"Since 1992 we have the pleasure of being theclient of Frishberg & Partners, and recent resultsjust confirm that this was and still is a very rightchoice for KLM Royal Dutch Airlines."

Sergey Fomenko, KLM Royal Dutch Airlines

"We are very satisfied with the services of yourlaw firm and especially appreciate the quick,accurate and business- minded responses andanalysis."

Dr. Brigitte Carbonare-Hartsleben, BT Global Services

"I really appreciate the capability andprofessionalism of your lawyers and the efforts yourcompany successfully put in the defense of ours. Wethank you for your assistance and cooperation."

Flavia Smiraglio, Fiat Auto S.p.A.

"We at Sun and I am personally as legal counsel forSun operation in CIS region, are very pleased witha level of expertise and service which were and areprovided to our company in Ukraine by Frishberg& Partners. I would like to particularly mentionalso a constant effort of F&P lawyers to keep itsclients updated on the most recent developments ofUkrainian legal environment and theirresponsiveness to our needs in that country."

Dr. Andrei Zalivako, Sun Microsystems

"Frishberg & Partners' advice and services are ofexcellent quality, very timely, reliable and to thepoint, and with a good understanding of ourbusiness interests."

Christoph Zeyen, Tyco Electronics

"As always, thank you for your immediateattention to our needs. Your assistance will help

enable us to successfully complete a very largecontract and to keep a very good customer."

Lori K. Rose, CTB, Inc.

"Emilceramica appreciates Frishberg & Partners'professional collaboration in supporting the project"Joint Venture Zeus Keramik" with Ukrainianparticipation. In this regard, Emilceramica hopesto have Frishberg & Partners' assistance in future."

Dr. Efrem Montepietra, Emilceramica SpA

"Thank you and the colleagues at Frishberg &Partners for your assistance and the veryvaluable input you provided. We are all happywith the outcome of the matter that was handledwell, based on a good sense of judgment, lots ofwisdom, good decision making and good use ofpast learnings from previous experiences in thiscountry."

Elias N. Ashkar, INDEVCO Group

"You did an excellent job for Joss Chemicals BV,and you prepared an excellent report on our behalf.This was very positive for us, and it allowed us to setup our business in Ukraine. Now we are activelypursuing this business thanks to your excellentlawyers."

Jan Huijbregts, Joss Chemicals BV

"We hired Frishberg & Partners to analyzecertain issues in the Ukrainian legislation in theprocess of acquiring a company in Ukraine andwere very happy with the services we received.All your lawyers we worked with are extremelyprofessional, competent and helpful. Thank youfor a job well done."

Dmitriy Kasyanenko, Vimpel Communications

REFERENCES

Page 25: Mergers and Aquisitions

24 M&A Handbook

If you have additional questions, please contact us at:

10 Gorky Street, Suite 801004 Kiev, Ukrainetel.: +38 (044) 585-8464; 585-8465fax: +38 (044) 235-6342; [email protected]

Over the last 15 years, Frishberg & Partners hasserved as corporate counsel to multinationalcompanies and banks (see our list of clients).We have registered a multitude of joint ven-tures, subsidiaries and representative offices inUkraine. By now, the registration process iswell-established, as is liquidation.

Acquisition of controlling blocks of shares inUkrainian companies, however, is an entirelydifferent game, requiring knowledge andexperience of local corporate legal specialists.Because each target company is unique, thereis no standard approach. That is why ourlawyers provide a comprehensive analysis ofalternative corporate and tax-efficientacquisition structures in light of the client'sspecific goals.

Strategic investment is often structured aroundreal property, and sometimes land plots. Togetherwith our real estate specialists, we can set up turn-key operations on industrial greenfield sites, fromland right allocations and construction permits tothe finished enterprise, fully commissioned andready for use. Just turn the key.

After the acquisition has taken place, wecontinue to work closely with our clients toresolve the day-to-day issues, includingemployment law, capital increases or decreases,tax and customs matters.

At the corporate law firm of Frishberg &Partners, our clients truly benefit from gettingthe most complete package of corporate legalservices available on the Ukrainian legal market.