Attracting Investments for Agricultural Business

Expert Opinion (#06 June 2010);

by Marina A. Tegypko, Dmytro S. Kiselyov

Land issues

Ukraine is the largest country completely located in Europe, with a total area of 603,700 square kilometres. Its location creates possibilities for European investors in a range of industries. The country’s agricultural land provides opportunities for farming and cattle-breeding, although investors should approach this sector with care, due to complications regulating the rights to either own or use land.

An investor may be hindered by burdens and formalities such as a moratorium on alienation of agricultural land, or half-reformed land cadastres. In order to minimise the possible risks a proper and detailed due diligence of the investment object — especially if it takes the form of land plots — should be conducted.

The main objectives of such due diligence should be:

An administrative review, which shall include:
— review of the title documentation to the land;
— examination of lease contracts;
— verification of the land plot in the department for land cadastres and land recourses

Review of the history of the plot:
— initial legalisation (privatisation) of the land;
— investigation of the previous transactions with regard to the land.

Verification of the right of an individual or entity to the land: legal capacity of the landlord.

While conducting the due diligence it is advisable to visit the site, to review encumbrances and restrictions applicable to the land plot, and, if possible, to interview the landlord — or even neighbors to the land, if the sites under review are small and if the landlord gives prior permission.

During due diligence of the land plot, priority shall be given to the review of its title. According to Article 125 of the Land Code of Ukraine, the ownership title for the land plot (or the right to permanent use of the land plot) arises after a corresponding document is obtained.

Most agricultural land in Ukraine is not duly legalized, so it is necessary to confirm that the form of the title act to the land corresponds to the established form of the title act. Attention shall be paid to the following aspects:
— availability in the title act of information on the particular land plot;
— the basis upon which the title to the land plot is registered;
— presence of registration of the document, necessary signatures and seals on the document.

If the land plot is used under a lease agreement, special attention must be paid to the following aspects:
— the form of the lease agreement;
— the availability of essential terms and conditions in the lease agreement;
— state registration of the lease agreement.

The valid Land Code of Ukraine confirms state, communal and private ownership of a land plot. Land for agricultural use is usually leased from individuals who have received certificates to a land plot share on Ukraine becoming independent. In this particular case, the investor or any person intending to lease land in order to produce agricultural products shall distinguish the lease of the land plots and land shares (pai), as these terms provide for different legal relationships, rights and obligations of the parties to the lease.

Leasing of the land share is not the same as lease of the land plot. In the first case the agreement is concluded for the share, the right to which is certified by a certificate; in the second it is concluded for a particular land plot, with clear and defined borders. The owner of the land share certificate does not have the rights of the owner of the land plot, which shall be the object of the particular lease agreement. According to the valid Land Code of Ukraine (and as set out by the Land Code in its 1992 edition) the ultimate document confirming the ownership to the plot shall be state act. Therefore, the holder of the land share certificate does not have the right to dispose of the particular land plot. Moreover, the legislation regarding lease in Ukraine provides that the object of the lease shall be a specific, particularly defined object. If the object of the lease is a land plot, it should be a land plot with defined borders allocated in kind, although in the case of leasing a land share, the land plot is not allocated in kind.

On this basis we may conclude that there is no object of the lease.

There are cases in Ukraine when lease agreements for land shares have been claimed as invalid due to the previously-mentioned grounds. Although this position is understandable up to a point, we believe that each particular case should be resolved separately; we do not agree with the idea that all lease agreements for land share are de facto invalid. There are several legal acts that provide for the possibility to enter into such an agreement and we believe that until a court decides that a particular agreement is invalid, such a lease agreement for a land share may exist and be valid.

Sometimes situations arise when the owner of a land share, having entered into a lease agreement for the land share, legalises his right to the land and obtains the state act for the right of ownership to the land plot. In such a case it is disputable whether or not the lease agreement for the land share is still valid, and whether or not the lessee has the right to use the land plot. According to the model lease agreement for the land share, as approved by the Order of the State Land Recourses Committee No.5 of 17 January 2000, in the event of allocation of a land share in kind the obligations of the parties to the agreement shall be terminated.

According to such provision in the agreement the owner of the land share certificate can terminate the lease agreement at any time by means of legalising his right to the particular land plot (i.e. obtaining a state act). In such case the lessee (usually the producing company) loses his/her right to use the land plot from the time when the state act is issued.
Current laws do not provide for any method of protection of the lessee’s rights. In cases similar to those mentioned above we believe that the lessee of the land share should enjoy the preemptive right to conclude a lease agreement for the land plot allocated in kind.

Should the landlord refuse to enter into a new lease agreement the lessee shall have a right to claim conclusion of the lease agreement in court.

Due to this, the application for a land share lease agreement provides for certain legal consequences — in order to effectively regulate the relations between the parties it is recommended to legalise the ownership of the land plot and allocate it in kind, and also to enter into a lease agreement for the particularly defined plot of land.

Attracting investment through international placements by Ukrainian agricultural companies

Disruptions in the international and local capital markets have led to a reduction in available financing and Ukrainian enterprises, in particular, those in the agricultural sector, are facing significant liquidity problems due to the limited availability of domestic and foreign sources of borrowed funds and increased cost of funding. Many agricultural companies are currently looking at opportunities to raise capital through international stock market instruments, both debt and equity.

Restrictions under Ukrainian law

Direct foreign placements are not seen by most Ukrainian issuers as attractive due to a number of regulatory restrictions, in particular, those imposed by Decision No. 36 of SCSSM of Ukraine of 17 October 1997 (Regulation No. 36).
Pursuant to Regulation No.36, a licence from the SCSSM is required for circulation outside of Ukraine of securities issued by

Ukrainian issuers. As a precondition for obtaining the aforementioned licence, a number of requirements must be complied with, including, inter alia:
— the issuer’s minimum charter capital must be at least UAH 5 million;
— the issuer’s securities must have a prior listing on a Ukrainian stock exchange;
— the aggregate amount of securities of the Ukrainian issuer placed outside Ukraine may not exceed 25% of the issuer’s charter capital; and
— the price for the securities placed by Ukrainian issuers outside Ukraine may not be lower than their nominal value or than the price for such securities on the domestic stock exchange.

In addition, the SCSSM has the discretion to determine the type of placement and the foreign stock exchange on which the securities of the Ukrainian issuer are to be placed.

In order to avoid the aforementioned restrictions, Ukrainian companies usually carry out placements on the international capital markets through indirect structures which involve an intermediary foreign element.

The most common structures for the issuance and placement abroad of various types of Ukrainian securities are analysed below.


Most IPOs of Ukrainian companies have a two-tier structure, whereby Ukrainian assets are first transferred to a special purpose vehicle (SPV) usually incorporated in a tax efficient European jurisdiction (Cyprus, the Netherlands, etc.) and in a second step the SPV’s shares are offered on European stock exchanges. The two-tier structure also helps mitigate investors’ risks related to underdeveloped Ukrainian corporate governance standards. Alternatively, or in addition to the two-tier structure, depository receipt programs (GDRs, ADRs) are widely used whereby the shares of the issuer are deposited with a depositary bank, which then issues depositary receipts representing such shares.

The Ukrainian legal implications to be accounted for in the course of pre-IPO restructuring of Ukrainian companies include compliance with Ukrainian exchange control and other regulations, which are complex and require an individual NBU licence for the export of foreign currency in amounts exceeding the allowed (relatively low) threshold in the event of monetary contribution into the charter capital of the offshore SPV, an individual licence of the Ministry of Economy of Ukraine for the investment of property by Ukrainian residents outside Ukraine in the event of non-monetary contribution (e.g. corporate rights) into the charter capital of the offshore SPV, obtaining the Antimonopoly Committee’s approval in the event of change of control (i.e. where over 25% or 50% of voting shares in a Ukrainian company are acquired, subject to further qualifying conditions), as well as compliance with other corporate law requirements.


For Eurobond issues, Ukrainian companies usually apply one of the following structures:
— credit linked notes, involving an offshore limited recourse SPV as a technical issuer of Eurobonds on the international capital markets against back-to-back loan to the effective Ukrainian issuer;
— loan participation notes (LPN), involving a foreign intermediary bank as a technical issuer
of limited recourse Eurobonds on the international capital markets against back-to-back loan to the effective Ukrainian issuer;
— sub-participation structure, involving an offshore limited recourse SPV as a technical issuer of Eurobonds which sub-participates the proceeds of the issue to a foreign intermediary bank for further on-lending to the economic issuer in Ukraine.
The aspects of a non-direct Eurobond issue to which Ukrainian law requirements would be applicable include SPV incorporation (for the discussion of the relevant Ukrainian law implications, see sub-section “IPOs” above) and the lending element of the transaction.

EU regulatory framework

In the event that a Ukrainian company plans an IPO or a Eurobond issue on one of the European stock exchanges it can do so by seeking admission either to an EU-regulated market segment or to an alternative market segment regulated by the respective stock exchange (Open Market at the Frankfurt Stock Exchange, Third Market at the Vienna Stock Exchange, AIM at the London Stock Exchange, NewConnect at the Warsaw Stock Exchange, etc.).

When choosing to list on a EU-regulated market, the issuer automatically agrees to comply with higher disclosure and ongoing post-listing requirements (including, inter alia, an obligation to publish a prospectus in accordance with EU Directive 2003/71/EC of 4 November 2003 on securities prospectus and financial statements according to the International Financial Reporting Standards (IFRS) for three years), but at the same time enjoys all the advantages of a full listing, including a single European passport, which enables applications for a cross-border offering and admission to listing at organised markets within the EEA.