The case with the purchase of the Zaporizhia enterprise showed Ukraine's weaknesses in the legislation. What needs to be done to effectively control foreign investment, protect national interests and avoid pressure on businesses and investors, on the other hand.
Verification and assessment of the impact on national interests and security of foreign investments carried out through agreements on the acquisition of strategic enterprises is a common practice in the world.

The main purpose of monitoring and controlling foreign investment is usually to avoid over-concentration of foreign capital in certain economic sectors.

It seems that Ukraine, with its geopolitical position, current security situation and remnants of industrial potential, at least in the defense sector, cannot continue to avoid legislative regulation of this issue.

Regarding Sich Motor
Another reason to bring order in this area was provided by the relatively recent situation with Motor Sich investors, which found itself at the center of a public, widely discussed and politicized situation with the protection of Ukraine's national interests in the defense sphere.

As you know, this company is a giant in the production of engines for aircraft and industrial gas turbines.

The main newsmakers, in addition to the company itself, were Chinese investors from Skyrizon, Alexander Yaroslavsky's DCH group and government agencies.

Recently, the press service of DCH Group announced the receipt of the Antimonopoly Committee's response to the application for approval of the purchase of shares of PJSC Motor Sich - a permit for concentration.

The Committee stated that it had not accepted the application on a number of technical and procedural grounds and had asked the applicants for additional information on assets in the markets that were not relevant to Motor Sich's core business.

In particular, the AMCU was interested in DCH's assets in the field of medical services and companies in the financial and securities markets.

In addition, Chinese investors recently filed a complaint with the government about an investment dispute against the state of Ukraine.

What does this mean from a legal point of view?
Let's leave aside for a while the issue of protection of the rights of foreign investors under international agreements and the political aspects of the situation and what is generally happening right around Motor Sich.

Instead, let's focus on some of the possible legal aspects of this story.

As it has already become clear, the participation of Chinese investors in the Ukrainian aircraft construction business is currently in question due to the actions of the authorities in general and the AMCU in particular.

However, it is also questionable whether the committee will have enough procedural arguments for a long time to repel potential investors and block the deal.

Another important question is whether the legislation provides mechanisms for resolving such situations, where national interests and security may really be at stake.

If the answer to the first question is still open, then the last can be answered unequivocally - no.

World experience
For similar situations in other countries, special mechanisms for verifying foreign investment have been introduced.

Relevant legislation has been introduced, for example, in the United States. These are the Law on Foreign Investment and National Security of 2007 and the Law on Modernization of the Review of Foreign Investment Risks of 2018.

The legislation of the European Union is Regulation 2019/452 of the European Parliament and of the Council of March 19, 2019, which establishes the basis for screening foreign direct investment in the EU.

Ukrainian legislative initiatives
There is no similar legislation in Ukraine today, but there are already some legislative initiatives to regulate foreign investment in strategic areas.

Currently, two bills on relevant topics have been published on the website of the Ministry of Economic Development, Trade and Agriculture of Ukraine.

The first - On the assessment of the impact of foreign investment on the national security of Ukraine. The second - On the procedure for foreign investment in economic entities of strategic importance for the national security of Ukraine. The first was published in late autumn 2019, the second - in May 2020.

The projects largely intersect. Moreover, the second project turned out to be a slightly reworked version of the first.

The main difference is that the second bill proposes to extend the relevant legislation only to investment operations in strategic areas of defense and telecommunications, while excluding from the law foreign investment in the circulation of agricultural land.

In general, the projects stipulate that foreign investments in the relevant industries will be subject to mandatory prior assessment of their impact, regardless of the amount of the investment transaction or the size of the business of the parties to the agreement. They provide for a fairly wide range of investment agreements that will fall under the proposed legislation.

This list is somewhat in line with that used by the Antimonopoly Committee in assessing concentrations, but extends it to agreements to acquire at least 10% of the company in the strategic sphere.

The assessment of the impact of foreign investment will be based on the analysis of a large package of documents provided by the investor.

Preliminary consideration of the submitted documents will be conducted by the Ministry of Economy, and further in-depth assessment will be conducted by a special interdepartmental Commission, which will have the power to decide whether this or that agreement can be allowed.

Moreover, the decision of the Commission will be a condition for obtaining the permission of the Antimonopoly Committee for concentration. In cases where such permission is required. It is expected that the described procedure will be carried out within one to two months.

What needs to be improved and why
Despite the obvious importance and need to regulate this area in view of the national interests and security of Ukraine, we can identify a number of issues that obviously need to be finalized in the projects.

First, there is no detailed definition of the defense and telecommunications sectors, as well as the agricultural land sector.

Secondly, there is no mechanism for monitoring and detecting investment transactions that were carried out without going through the prescribed procedure.

Third, there is no liability for violating the established rules.

Fourth, there is no procedure for appealing Commission decisions.

The more detailed, clear and unambiguous the regulation of these issues, the less disputes will arise.

At the same time, we should not forget about the real need of Ukraine for foreign direct investment and the corresponding need to make balanced decisions on the most transparent system and less time for investors and companies.

It is hoped that the described projects will be finalized, consolidated and adopted in the near future, and they will actually protect national interests, and not serve as an additional tool of administrative pressure on business and investors.

What awaits foreign investors in the near future
It is already clear that in the near future, future foreign investment, including M&A agreements that are in any way related, even indirectly, to the defense or telecommunications industries or, possibly, to the agricultural sector, may be under close state control.

In particular, on behalf of the state, this will be done by the Ministry of Economy, the Commission - to assess the impact of foreign investment on national security, and the AMCU - in terms of the need to conduct this assessment to grant permits for concentration.

It is the determination of the state to launch and adjust the mechanism of foreign investment screening, legislative regulation of foreign investment verification issues that will avoid drawing water from the Antimonopoly Committee's procedural sieve in situations similar to the one around Motor Sich.

The state, strategic enterprises and investors, in turn, will be able to obtain a legal and effective tool for the state and understandable to investors to respond to such situations.

Oleksandr Alekseenko, partner of Marchenko Partners, Sviatoslav Henyk, senior lawyer of Marchenko Partners

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