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Service ‘Hostile takeover protection (Anti-raider)’


Enemy at the gate

The problem of raider attacks has become very acute in Ukraine during recently. The methods of fighting the raiders are discussed in mass media, at forums on this subject, during holding roundtables and conferences. The Cabinet of Ministers of Ukraine established the Inter-Department Committee on the Issues of Counteraction to Illegal Takeover and Seizure of Enterprises, the necessity of development of efficient measures for fighting raiders is stressed by the President and the Cabinet of Ministers of Ukraine in the program acts adopted for 2007.
However, the practice proves that nowadays if you are going to fight against the raiders you have to count mostly on your own efforts. At that, because no company is insured against the raider attacks it is necessary to be ready beforehand by taking preventive measures. And, naturally, in order to overcome an enemy you have to know it by face and be well aware of what you are going to fight against.
The expression raider attack is derived from the English word raid meaning a foray, a sudden attack or an invasion. In general, this definition is a match to the basic principle of Ukrainian practice of performing hostile takeovers.
Currently, the only regulatory definition of a raider attack in Ukraine is contained in the Resolution by the Cabinet of Ministers of Ukraine «On Approval of the Declaration of Objects and Missions of the Budget for 2008 (The Budget Declaration)». It is defined as disposal of the state–owned property and corporate rights other than following the privatization proceedings or illegal seizure of a company. Although this definition relates exclusively to the state property and state-owned companies and enterprises, it is generally reflecting the main attributes of a raider attack – change of the owner of the company or the property thereof or acquiring control over the company or its property using illegal methods (and in some cases – by force).
The draft of the law of Ukraine «On Entering Amendments and Additions into Some Legislation Acts Related to Initiation of the Criminal Prosecution for Seizure of Companies and Enterprises» is determining the raider attack in another way. The draft suggests determining a raider attack as made by order and/or organized attack on a company, organization or an institution with the purpose of its seizure that resulted in disruption of its ordinary course of business and defines execution of such an attack as that performed by an organized group. it should be noted that the approach to raider attacks as to the criminally prosecuted actions is quite well substantiated, because raider attacks in Ukraine often possess clearly manifested unlawful nature and changes in the company ownership, property and/or obtaining the control over the above is performed by means of taking unlawful actions most of which can be considered criminal acts (documents forgery, blackmailing, cheating, bribery).
However, the very physical fact of the seizure is usually just a component of the hostile takeover of the company (enterprise). It is either preceded or followed by a number of actions aimed at strengthening the raider’s position at the captured enterprise. Therefore, the above definitions of raider attacks could hardly be considered comprehensive.
If we analyze the practice of raider attacks performed in Ukraine the following main attributes and components of a raider takeover can be determined:
• It is always a hostile takeover and loss of control over the company or its property occurring beyond the will of the owner;
• Sudden manner of execution of raider attacks. Considering that the basis of the «attack» is normally formed by the documents, about the existence (construing, adoption) of which the company has no idea. The understanding of the fact that the company has become the object of a raider attack comes when the bailiffs or government officials are standing at the door, when the major shareholders are not allowed to attend the general meeting etc. Very often sudden and unexpected manner and raider attacks is also stipulated by inattentiveness of the majority shareholders to the events that occur at the enterprise, to the situation with its assets and lack of control over the activities of the management.
• Illegal character of the actions of raiders. Here we must admit that this attribute is typical for Ukraine though not always necessary because the transfer of control over the company beyond the will of its owner is also possible in compliance with the active laws. This is the so-called «white» raider attack using the legal methods of takeover like, for instance, buying-out of the shares (stakes) of the minority shareholders, re-election of the management. This practice is accepted in developed countries and it is not in contradiction with the rules of the game established in the civilized world. However, raider attacks using the illegal methods of takeover – «grey» and «black» raider attacks – are more popular in Ukraine. In the first case the raider are formally complying with the active laws acting on the basis of decisions and resolutions taken by courts or resolutions issued by government agencies, resolutions of the general meetings of shareholders, all of which, however, are taken without sufficient reasonable grounds. Correspondingly, «black» raider attacks assume achieving of the set objectives using completely illegal methods, including falsification of documents, fake signatures, threatening, forcing, violence and physical seizure of the company.
• Use of court decisions (including those of the courts of arbitration) issued without reasonable grounds. Court decisions serve as the ground for practically everything – ban on convening of the general meeting, prohibition to specific shareholders to attend the general meeting, change of management, sequester of property, confirmation of the property title and the rights for shares, debts, validity of the resolutions of the general meeting etc. Court decisions also serve as the basis for hostile takeovers through the bankruptcy proceedings and liquidation of the company. Event if the above decisions are cancelled in the future the raiders manage to strengthen their positions using other methods during the procedure of appealing. The essential role of courts in implementation of raider schemes is confirmed by the facts that recently there have been passed several bills related to establishment of the conditions for impossibility of participation of courts of arbitration in raider schemes and establishment of criminal prosecution against the judges who take the decisions exceeding the sphere of their competence.
• Support from the government agencies. Very often the fact of performing of a raider attack is preceded by numerous inspections of regulatory agencies executed without sufficient substantiation of the check-ups. The raiders use the government agencies having the necessary authorizations in order to receive information about the company while frequent inspections are used for destabilization of the company activity.
• Execution by force. Physical seizure of companies is the usual practice for raider attacks. Often it occurs during the mandatory enforcement of court decisions by the bailiff service for what purpose the law enforcement bodies and private security firms are engaged.
Thus, summarizing the above mentioned factors we can define raider attacks like an illegal takeover of the control of the company or its assets performed against the will of the owner on the basis of the resolutions of courts or government agencies and executed usually by force.

Si vis pacem, para bellum

It is necessary to start fighting against the possible raider attacks right from the incorporation of the company or from the moment of gaining control thereof. These have to be complex measures performed continuously even if there exist no clear and present threat of an attack right now. Naturally, there is no medicine against raider attacks and it is impossible to provide for complete safety of a company from appearing at its door of a bailiff having a strange decision of a district court located in a neighboring region stating that «everything has already changed». Although, the system of proper preventive measures would allow to substantially diminish the risks of raider attacks and facilitate the company’s countermeasures against raider attacks should they occur.
We would consider in more detail the measures that we think rather efficient:
• The history of establishment of the company must be irreproachable and its constituent documents have to fully comply with the active laws of Ukraine. The company can be liquidated on the basis of a court resolution only in the case when during its incorporation there occurred the breaches that cannot be eliminated. It means that even if the present owner of the company has not been its founder shareholder it is never late to have a critical look upon the constituent documents and to make the relevant amendments thereto.
• Acquisition (disposal) of the company assets needs to be performed in a strict compliance with the laws. It would be advisable to execute any and all settlements officially with indication of actual amounts of payments in the agreements. If the relevant agreement is considered null and void, the company will be entitled by the law for return of the actual value of the assets that could be financially non-profitable for the raiders.
• It is extremely important to fix the efficient mechanism of controlling the transactions envisaging disposal of the company assets executed by the managers, dispose of large amounts of cash, borrowing of large loans and loan facilities in the articles of association (charter) and internal regulation norms of the company. For example, there could be established the necessity to approve execution of the transactions, which are the most important for the company business, by the general meeting and less important – by the supervisory board. All the restraints related to performing of the transactions in the company name should be entered into the Uniform State Register of Legal Entities and Individual Entrepreneurs in order to reflect them in the relevant extracts form the Register. Subsequently, the said extracts form the Register can be used in the court for evidencing of the illegitimacy of entering into the respective agreements.
• It would be helpful for the company to develop the Regulation on Non-Disclosure of Trade Secrets and Confidential Information. This Regulation must set up the possibility of disclosure thereof to third persons only based on the resolution adopted by the general meeting (supervisory board) and to provide for the liability for the disclosure of the persons having the access to the above information. The laws of Ukraine consider confidential any and all information about the company (or its activity) except for the information included into the Resolution of the Cabinet of Ministers of Ukraine «On the List of Information Not Being a Trade Secret».
• In the cases when the legislation of Ukraine envisages the pre-emption right of the shareholder at purchasing of the company corporate rights disposed of by other shareholder the articles of association (charter) should maximally strictly determine the proceeding and the terms of realization of the above pre-emption right by the shareholders;
• Major shareholders must strive to consolidation in their ownership of the largest shareholding (stockholding) in the company. Each of the minority shareholders is considered by the raiders as a potential ‘bridge’ enabling them to get access to the information about the company thus giving them a subsequent opportunity to act enjoying the rights of a shareholder. Naturally, for most of the companies the 100%-shareholding is an utopia, however, it is worth effecting continuous work with the minority shareholders with respect of the possibility to buy-out the shares (stakes) owned by them.
• At entering into an agreement with the registrar one should carefully select major companies and banks having long record of operation at the given market sector, possessing good business name and regularly mentioned by mass media because the access to the register of holders (owners) of securities of joint-stock companies is an ace up the sleeve for the raiders. It is from this point they start to develop most of their illegal raider schemes. It is quite probable that the above companies would be reluctant to participate in such schemes both from the financial point of view and considering their business name and market reputation.
• Any and all agreements where the company is a borrowing party must contain the provision that recession of the debt under this agreement shall be provided only after the prior written approval of the debtor. This would allow to prevent an uncontrolled purchase of debts due from the company.
• It is mandatory to perform continuous monitoring of:
- assets and liabilities of the company by means of periodically obtaining the extracts from the registers of transactions, mortgages, bans on disposal of real estates, encumbrances of movables;
- resolutions of the courts with respect of the company. Currently it can be done using the developed and already operating system of registers including court decisions and resolutions on commercial, civil and criminal cases. This system is freely accessible via Internet.
• It is also advisable to have at hand the set of certified by the notary documents including constituency documents, minutes of the general meetings, resolution by management and controlling bodies of the company, sample signatures of the major shareholders and senior managers, an imprint of the seal, the documentarily confirmation of the rights for the main assets. This set of documents has to be kept in a safe place inaccessible for unauthorized persons, e.g. at the notary custody, in a banking vault etc.
• If it goes about a holding structure then it is recommended to divide the process of production and the processes of purchasing raw materials and sale of products between the controlled companies that would allow to separate the assets allotted for production from other activity that might result in appearing of amounts due from the company owning the above assets. for this purpose there are established trade houses and intermediary companies between the company and the supplier of raw materials.
• It often happens that the raiders are «scared away by the very existence of a significant number of company liabilities with the expired maturity term, availability of amounts due from company and mortgage or other burdening of the company assets. In this case the takeover of the enterprise might not seem reasonable for the raiders from the financial point of view.
• It would also be very useful to organize the safekeeping of the assets. It could be advisable to enter into agreements with security companies.

Those who are drowning should take care of helping themselves

If based on the obtained information the raider attack is still inevitable you should act quickly but thoughtfully. Naturally, individual approach is necessary in each particular case; however, some of the methods may appear suitable for any case.
Thus, if an owner got the information about commencing of buying-up of corporate rights by raiders it is possible to perform a counter buying-up. Considering that the minority shareholders are very often attracted by the price offered by the raiders; they would, therefore, agree upon more favorable terms and conditions. An additional issue of shares could also be performed (increasing of the shareholding capital, if it goes about a company limited by shares). This would substantially diminish the corporate rights package owned by the raiders.
The company assets should be legally transferred to the property of a controlled entity, which has a more robust form of legal organization in withstanding the raider attacks. It can be done by means of sale, contribution to the shareholding capital etc.
In the event of forced seizure of the enterprise of the basis of the resolution of a court it is necessary to immediately appeal this resolution in the court with filing a petition on its suspending. Major owners should apply to the court with suits related to declaring void of the decisions of the general meeting held without their participation and with respect of the decisions made by new non-competent management.
It would be also advisable to file a complaint on the fact of an attack on the enterprise to the law enforcement bodies (police, office of a public prosecutor etc.), the government authorities on fighting against the raiders as well as to publish the information about the problem in mass media.
And, of course, it is extremely desirable to have already at the stage of taking preventive measures a strong in-house lawyer team or a reliable partner represented by an outsourced law firm that would enable you to undertake quick and efficient steps to solve the problem with raiders if it happens.

Yulia Shmagina,
Vitaliy Patsyuk,
ULGroup Association
Leading Law Experts

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  United Legal Group Association (ULGroup)
office 504, 5B Dylova St. Kyiv, Ukraine, 03680
Tel./fax: +38 044 287 7803, +38 044 287 7804