Purchase and Sale of Business in Ukraine: How to Make the Deal Legally Correct
Question about the sales of business in Ukraine is difficult to describe as a legal scheme or mechanism, different aspects of the business are regulated by their specific branches of law. This difficulty may be experienced by a buyer who does not get what he wants does not get it to the extent that he has planned, or by a seller, who is unable to wrap up his business in a legally reliable shell, and therefore cannot receive a fair price for his business. There is no exact profitable way of purchase and sale. Because of that parties choose a better way for a particular business. Let us consider this issue in more details.
Method №1. Purchase and sale of securities (corporate rights)
This method is one of the most common ways of acquiring business. Its main advantage is that it retains all previously obtained permit documents (permits, licenses), all previously signed contract remain valid, working staff. This method saves for the buyer of the business a lot of money and time.
Buying a business through the purchase of corporate rights it should be understood some laws of Ukraine set specific conditions for different kinds of companies, for example, the right for priority buyout of corporate rights, etc.. It should also be understood that the actual management of a business entity belongs to the participant who owns more than 60% of corporate rights, having fewer corporate rights boycott of the of other business owners of any decision of the new owner is possible.
Upon conclusion of the transaction of purchase and sale of corporate rights the buyer needs to quickly make the appropriate changes to the charter of the acquired entity and carry out the state registration of these changes in accordance with the Law of Ukraine “On State Registration of Legal Entities and Individual Entrepreneurs”, after which it will be possible to talk about finishing of the purchase of a particular business.
Method №2. Purchase and sale of business as a single property complex
It is also common and easy way to purchase and sale the business in which the business itself is seen as a company with a single property complex. In accordance with Article 191 of the Civil Code of Ukraine, such an enterprise includes all types of property that are used for its activities, including land, buildings, equipment, inventory, raw materials, products, claims, debts, and the right to the trademark or other designation and other rights, unless something different is provided with contract or law. The same article determines that these companies or their parts can be bought and sold. So, the seller can identify as a single property some property, or any other assets, goodwill, and sell this part as a separate entity. Such a single property complex is regarded as a property (part 3 of Article 191 of the Civil Code of Ukraine).
The disadvantage of this method is that the buyer will be required to re-register again all permits and pay a large amount of tax from the sale of property which, in accordance with Article 172 of the Tax Code of Ukraine, is calculated according to the appraised value of the property.
Method №3. Purchase and sale of business ideas
Quite often people have a great idea for a business but do not have the practical ability to implement it. Or have an implemented the idea, but do not wish to continue working with in it and want to sell this idea to another interested party. In this case, the business idea is regarded as a kind of intellectual property right, and it does not matter whether it is formalized intellectual property rights (such as patents, registered trade marks, etc.) or this is a know-how.
The current legislation, namely Article 427 of the Civil Code of Ukraine, allows to transfer intellectual property rights wholly or partially to another person. Communication conditions are specified in an according contract.
This method has both, pluses and minuses. For example, for an enterprise that has some vacant manufacturing facilities the purchase of a business idea can allow load production and diversify its business. But the biggest drawback may be impossibility to assess the real economic potential of the idea, which has not been tested in the real market and because of that the idea of a business can be a “bubble.”
So, there is an idea of how to acquire the operating business. Now, if there was an offer of buyer interest, you need to understand what must be done before the purchase and sale of businesses.
Firstly, there should be an independent audit of the acquired business. This test will determine whether the purchased business replies the vendor performance, does not have any hidden problems, etc. Verification subjects are the statutory documents, licenses and permits, data about property, financial statements, checking history of the company in the courts, and other facts that may affect the value of the acquired business and the safety of its future conduct for a new owner.
If the results of the audit documents satisfy you or better even on the stage of the audit, it’s better to do the following:
1) make an independent trip of a buyer (or his representative, auditor) to the location of the property or land to check compliance with the actual registration documents;
2) to request copies of the registration documents for land and property to check in the Unified Register of prohibitions and alienation of real estate for encumbrances and arrest, verification of the legality of acquisition of land / property, determine the true purpose of land (often industrial enterprises are located on land for agricultural purposes, which can cause a complete ban on industrial production in the future).
Also, in our opinion, any advance payment or deposit should not be done before the end of a large-scale audit. The real seller who has nothing to hide can wait 1-2 months until the documents are checked. Unscrupulous seller understands the contrary, that the test results may not be in his favor and therefore wants to get some money for a very early stage.
Summarizing the written above, we can say that the choice of method of buying and selling a business requires a lot of effort, because you need to know the relevant legislation, to sign appropriate treaties to foresee the possible consequences of the contract, and it is impossible to make qualified without legal assistance. Also, it is equally important to know and understand business practice in Ukraine, with both positive and negative. Therefore, if you want to buy or sell a business in Ukraine, consult a qualified lawyer.
Author: Kydalov Igor