Generating Proper Ownership

15 January 2025

The article is published in Yurydychna Praktyka for TOP-50 Leading Law Firms of Ukraine 2025

“Ownership rights should be protected both out of court and in court”, says Valentyn Zasukha, Senior Partner at Hillmont Partners

– What is the current investment sentiment among Ukrainian businesses, high net worth Ukrainians and private capital?

We observe several trends, based on client requests. The first one, which is not very pleasant but expected in the current environment, is an attempt to relocate capital and business outside Ukraine. This, of course, does not cause positive emotions in terms of prospects, but there are a lot of requests related to structuring holdings in Europe. Today, many high net worth individuals, with their family fortunes, if you could call it that, relocate their capital to Europe.

The second trend is a noticeable intensification of Ukrainian venture capital, especially in war-related projects. This means dual use of technology, without going into specific details. We see a number of projects related to setting up production, developing production, creating joint projects, involving not only Ukrainian but also foreign capital. These projects are quite extensive, amounting to hundreds of millions of dollars.

The next trend is everything related to distressed assets. This trend was actually created by the state by imposing restrictions on repatriation of capital, interest and investment income. Large stock of hryvnia on the accounts of legal entities stimulated demand for distressed assets, where one could invest with an understandable risk, avoiding the prospect of losing money due to devaluation or other reasons. Even after the restrictions on outflow of capital were eased, the trend continues, and there is still enough national capital that entrepreneurs are trying to invest in distressed assets.

Perhaps the fourth trend that we see and are involved in is the creation of funds by foreigners for investment purposes, in anticipation of the end of the war. They are focused on infrastructure and similar large projects.

 In your opinion, will the investors be interested in assets nationalised under sanctions procedures and offered for privatisation?

Currently, most of these assets have effectively been withdrawn from civilian circulation. The sooner and more effectively the state implements the foreclosure mechanism and returns them to the market, to normal market activity, the more beneficial it is for the state itself. Depending on the specifics, some of these assets, for example, in the mining industry, are expected to be highly competitive. For our clients, we are monitoring these processes for a number of assets.

Looking at the market as a whole, who is more active in terms of investment activity – domestic investors or foreigners?

In my experience, foreigners are still not ready to take sovereign risks, with a few exceptions. One of the main reasons is not the war itself, but the inability to hedge the risk of total destruction due to military operations. As far as we know, foreign insurance companies are only now beginning to offer war risk insurance, and that is only for industrial enterprises, for production facilities, not for individuals.

Obviously, the state should play a proactive role here. For example, by creating, following the Israeli example, a special sovereign fund to cover the risks associated with the destruction of property due to terrorist acts or military actions by unfriendly nations. Accordingly, the military risk in the risk matrix analysed by a businessman when making an investment decision will be hedged to a certain extent. In Ukraine, this is an extremely urgent problem that needs to be addressed, because even the localisation of production to the western regions of the country, which are considered safer, is not a guarantee that something will not fly in and destroy it.

In addition to military risks, Ukraine’s traditional jurisdictional risks have not disappeared. In this context, what should be done to improve the level of investor protection in Ukraine?

The topic of judicial reform has already been devalued enough, but foreign investors are actually interested to have legal certainty. On the one hand, we have a fairly effective system of judicial selection, especially at the level of the Supreme Court and higher specialised courts. The Supreme Court has created a Grand Chamber and introduced a certain element of precedent. On the other hand, this does not greatly affect legal certainty, as it is possible to deviate from the established legal positions of the Supreme Court “subject to the circumstances of a particular case”. In such a situation, we, lawyers, cannot give an unambiguous legal opinion on the prospects of a particular case.

We need to systematise this accurately. If it is an ownership right, it must be protected by both the state and the courts.

Take, for example, negatory action and the state’s attempts to reclaim property privatised 10, 20 or 30 years ago. Where is the legal certainty here? There is none.

This should be immediately regulated by law, because the fundamental principles of inviolability of private property rights are actually violated in this way. The state, when taking away property, does not provide any fair compensation. This will never do.

Therefore, we, as Hillmont Partners, actively support the relevant legislative initiatives. In particular, one of our partners is a member of the parliamentary working group on the law that, similar to many other European countries, will regulate these issues. Otherwise, our entire country will be at risk of revisiting the privatisation processes of the 1990s.

When drafting these and other legislative changes, should the provisions of, for example, English law on investor and investment protection be implemented?

There are always approaches of international comparative law. We need to study similar cases, how they are regulated in other countries. There is no point in blindly copying. Sometimes you can take a term out of context and copy a rule, but without applying the same or similar legal mechanisms to protect the right based on this substantive or procedural rule, such a rule will be dead.

Does a trend of structuring investments in Ukraine through foreign investments, including to enhance their protection, continue?

The trend continues, however, there are two or even three very important “buts”. When choosing a jurisdiction to set up a holding structure, one should take into account global trends in counteracting tax cuts. The concept of substance, i.e. having an adequate presence in the jurisdiction, is actively used. The hypothetical advantages that such a structure provides – the possibility to apply foreign law to regulate relations between shareholders, the ability to access financing – are leveled out by the fact that you need to invest enough and actually create a management company with personnel and real functions. The second factor is, of course, the introduction of regulations on controlled foreign companies in Ukraine and the need to file relevant reports. Against this backdrop, the use of Ukrainian structuring instruments alongside foreign ones is growing – if ten years ago Cyprus was virtually the only option in 95% of cases, now the ratio is at least 50% in favour of Ukrainian structuring instruments.

What would you advise those investors who are currently considering investing in Ukraine?

First of all, do not neglect the KYC stages. Together with transaction documents properly drafted by lawyers, this will minimise the risks of encountering fraud or potentially conflict situations when you have to fight for an asset.

A new generation of businessmen has already emerged in Ukraine – decent, with impeccable business reputation and impeccable credit history. There are definitely people to do business with in Ukraine, so I wish investors to meet such people.

Valentyn Zasukha

Valentyn Zasukha was born on 8 August 1978 in Kyiv. In 2000, he graduated from the Institute of International Relations of the Taras Shevchenko National University of Kyiv with a Master’s Degree in International Law. He also holds a Bachelor’s Degree in International Relations from Taras Shevchenko National University of Kyiv.

Prior to joining Hillmont Partners in 2022, he coordinated the legal function within leading national investment companies, financial institutions and NPL funds. He has more than twenty years of experience as a legal manager and advisor, he is one of the market’s top experts in investment, M&A business structuring and private equity transactions. Valentyn focuses on corporate financings and restructurings, cross-border investments, corporate governance issues, banking and financial services regulatory.

 

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