Agricultural Land Plots as Assets of the Venture Capital Fund in Ukraine, by Yosyf Ivanyuk, Managing Partner

On March 31, 2020, the Verkhovna Rada of Ukraine, in the second reading, adopted the long-awaited and socially significant Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine Regarding the Circulation of Agricultural Land” dated October 10, 2019 No. 2178-10 (hereinafter referred to as the “Law”), which enters into force on July 1, 2021.

By adopting this Law, the moratorium on the alienation of agricultural land plots was effectively lifted. However, the question of whether a venture fund (hereinafter referred to as the “VF”) may acquire ownership of such land plots remains open.

Image by Image by wirestock on Freepik

First of all, the structure of VF assets should be considered. Pursuant to Part 1 of Article 48 of the Law of Ukraine “On Joint Investment Institutions” dated July 5, 2012 No. 5080-VI (hereinafter referred to as the “Law on JII”), the assets of a joint investment institution may consist of securities, funds (including foreign currency), banking metals, and other assets provided for by law. In addition, VF assets may also include (pursuant to Parts 4 and 24 of Article 48 of the Law on JII): (1) securities issued by related parties of the asset management company, the custodian of the joint investment institution’s assets, the depository, the property valuer of the joint investment institution, and the auditor (audit firm) of such institution; (2) securities of foreign states and foreign legal entities not admitted to trading on any of the leading foreign exchanges, the list of which is determined by the National Securities and Stock Market Commission (hereinafter referred to as the “Commission”); (3) corporate bonds, mortgage bonds, and local loan bonds whose credit rating does not meet the investment grade determined by an authorized or recognized international rating agency according to the National Rating Scale, in an amount exceeding 20 percent of the value of the joint investment institution’s assets; (4) funds and banking metals placed on current and deposit accounts in banks whose credit rating does not meet the investment grade determined by an authorized or recognized international rating agency according to the National Rating Scale, in an amount exceeding 20 percent of the value of the joint investment institution’s assets; (5) bills of exchange and savings (deposit) certificates in an amount exceeding 10 percent of the value of the joint investment institution’s assets, unless otherwise established by regulations of the Commission; (6) commodity securities and mortgages; (7) certificates of real estate operation funds; (8) debt obligations that may be formalized by bills of exchange, mortgages, assignment agreements, loan agreements, or in any other manner not prohibited by law; and (9) VF assets may consist entirely of funds, real estate, corporate rights, claims, and securities not admitted to trading on a stock exchange.

In addition, the issue of VF asset structure is regulated by the Regulation on the Composition and Structure of Assets of a Joint Investment Institution, approved by Decision of the National Securities and Stock Market Commission dated September 10, 2013 No. 1753 (hereinafter referred to as the “Regulation”). Thus, pursuant to Part 1 of Section V of the Regulation, the assets of a non-diversified joint investment institution (which a VF is, in view of the definition set out in Part 10 of Article 7 of the Law on JII) may consist of all assets defined in Section II of this Regulation, taking into account the restrictions established by law for non-diversified joint investment institutions. According to Part 1 of Section II of the Regulation, the assets of a joint investment institution consist of cash (including foreign currency) on current and deposit accounts opened with banking institutions, banking metals, real estate objects, securities defined by the Law of Ukraine “On Securities and the Stock Market”, securities of foreign states and other foreign issuers, corporate rights expressed in forms other than securities, property rights and claims, as well as other assets permitted by the legislation of Ukraine, taking into account the restrictions established directly by the Law for specific types and kinds of investment funds. Part 2 of Section II of the Regulation also duplicates Part 24 of Article 48 of the Law on JII regarding the right of a VF to own the above types of assets listed in the previous paragraph.

Thus, it is logical to conclude that neither the legislator nor the regulator has established any restrictions for VFs regarding the ownership of agricultural land plots.

Given that these restrictions were not established in special regulations concerning VFs, they may be contained in other legislative norms. Therefore, the recently adopted Law that opened the market for the sale of agricultural land should be examined.

The text of the Law does not mention joint investment institutions as a separate category of persons who may or may not acquire land ownership. Accordingly, the scope of legal capacity must be narrowed to legal entities, since the Law provides for them as subjects of ownership rights. Pursuant to the provisions of the Law on JII, a VF may be established in the form of a corporate fund or a unit fund. A corporate fund (hereinafter referred to as the “CF”) has full legal personality in matters of acquiring ownership of agricultural land, since, pursuant to Part 1 of Article 8 of the Law on JII, it is a legal entity established in the form of a joint-stock company that carries out exclusively joint investment activities. With regard to unit funds (hereinafter referred to as the “UF”), it should be noted that they do not have the status of a legal entity pursuant to Part 3 of Article 41 of the Law, but they constitute a set of assets belonging to the participants of such a fund on the basis of common partial ownership, are managed by an asset management company, and are accounted for by it separately from the results of its own economic activities (Part 1 of Article 41 of the Law on JII). Thus, the possibility of acquiring ownership of agricultural land plots is also open to UFs, since the asset management company will act on their behalf, in particular at the stage of concluding a land plot purchase and sale agreement in which the buyer will be the asset management company acting in the interests of the relevant UF.

Regarding the possibility of exercising the right to acquire ownership of this category of land by a VF, the following provisions of the Law should be taken into account.

Pursuant to Section II of the Law, it enters into force on July 1, 2021. However, the Law also provides that until January 1, 2024, only citizens of Ukraine may acquire ownership of agricultural land plots with a total area of up to 100 hectares. That is, legal entities, including VFs, will be able to acquire ownership of land plots of this designated purpose only after January 1, 2024.

Pursuant to Part 2 of Article 130 of the Land Code of Ukraine as amended by the Law, the total area of agricultural land plots owned by a citizen or a legal entity may not exceed ten thousand hectares. At the same time, a natural person may not simultaneously own 10,000 hectares of land and be a participant in a legal entity with a number of votes proportional to 10,000 hectares of land owned by such legal entity. Thus, the legislator has limited the quantitative indicator of land that a citizen may own directly or through a legal entity – in any case, no more than 10,000 hectares.

As a result, starting from January 1, 2024, a corporate VF will be able to own agricultural land plots only if the total area of land owned by the VF and its participants in aggregate does not exceed 10,000 hectares. If the participants of the VF are foreigners, the issue of alienation of agricultural land plots to such a VF is subject to resolution by referendum (Article 130 of the Land Code of Ukraine as amended by the Law).

The imperative norms prohibiting the alienation of land plots deserve separate attention. Thus, pursuant to Part 7 of Article 130 of the Land Code of Ukraine as amended by the Law (hereinafter referred to as the “Land Code as amended by the Law”), the sale of state- and municipally-owned agricultural land plots is prohibited. In addition, as stated in Part 1 of Article 130 of the Land Code as amended by the Law, even if the sale is approved by referendum, the acquisition of ownership of agricultural land plots is prohibited by:

1) legal entities whose participants (shareholders, members) or ultimate beneficial owners are persons who are not citizens of Ukraine – in respect of state- and municipally-owned agricultural land plots, agricultural land plots allocated in kind (on the ground) to owners of land shares (plots), and land plots located within 50 kilometers of the state border of Ukraine (except for the state border of Ukraine that runs along the sea);

2) legal entities whose participants (shareholders, members) or ultimate beneficial owners are citizens of a state recognized by Ukraine as an aggressor state or an occupying state;

3) persons who belong or belonged to terrorist organizations;

4) legal entities whose participants (shareholders, members) or ultimate beneficial owners are foreign states;

5) legal entities for which it is impossible to establish the beneficial owner (controller);

6) legal entities whose beneficial owners (controllers) are registered in offshore zones included in the list of offshore zones approved by the Cabinet of Ministers of Ukraine;

7) natural and legal persons against whom special economic and other restrictive measures (sanctions) have been applied under the Law of Ukraine “On Sanctions” in the form of a prohibition on concluding transactions for the acquisition of ownership of land plots, as well as persons related to them;

8) legal entities established under the laws of Ukraine that are under the control of natural and legal persons registered in states included by the International Group on Money Laundering (FATF) in the list of states that do not cooperate in the field of countering the laundering of proceeds from crime.

Finally, if the buyer of a land plot does not have confirmation of the sources of origin of the funds or other assets used to purchase the land, the acquisition of ownership is not permitted (Part 6 of Article 130 of the Land Code as amended by the Law).

Thus, a VF may include agricultural land plots in the structure of its assets, but exclusively if it is established in the form of a corporate fund (a legal entity), only after January 1, 2024, and subject to the legislative reservations set out above in Article 130 of the Land Code as amended by the Law.

Originally publihsed in 2020 in Ukrainian as follows:

Ivanyuk, Y. I. (2020). Agricultural Land Plots as Assets of the Venture Capital Fund [in Ukrainian]. In Materials of the XIX International Student and Postgraduate Scientific Conference (April 24, 2020): Actual Problems of the Human Rights, the State, and the Legal System (p. 90). Lviv: Ivan Franko Lviv National University.

Available at https://law.lnu.edu.ua/wp-content/uploads/2020/04/Zbirnyk-2020.pdf (document page 90; PDF page 91).