Denis Lysenko of Vasil Kisil & Partners -

Business is flourishing in Ukraine but it's the only CIS state that doesn't have any special legislation on joint stock companies, leaving them to operate in a legal limbo.

The basic legislation act regulating the legal status of joint stock companies is the Companies Law enacted in 1991. This law has been amended numerous times, yet currently it's outdated and inconsistent with the new Civil Code and Commercial Code of Ukraine, both of which came into force in 2004.

And there's the problem. Investors' rights can be breached in many ways, leading to the use of opaque control schemes, which in turn decreases the investment attractiveness of Ukraine and so adversely affects its economy.

The development of the draft joint stock company law started 10 years ago, and more than 10 drafts have been developed since then. Before 2007, five drafts were sent to the Verkhovna Rada, Ukraine's parliament, for consideration, but all of them were rejected during the first of three hearings, mainly due to conflicts of interest between state authorities, private shareholders and managers of the companies.

In 2007, the cabinet introduced the latest draft - the Joint Stock Company Law No. 3177 (Bill No. 3177) - which has the best chance yet of actually becoming law. The first reading of this latest version was held on May 15, 2007 and for the first time was approved.

This draft is different, as it introduces several innovations. It defines several new types of joint stock companies as well as transparent corporate governance mechanisms, new statutory guarantees for majority as well as minority shareholders, and other improvements. Despite the opinion of some specialists that particular provisions of the EU legislation are not reflected in the draft law, generally Bill No. 3177 is in compliance with the EU Parliament and EU Council Directives, and OECD Principles of Corporate Governance.

If this bill comes into force, there will be four types of operational joint stock companies governed by two different laws - new Joint Stock Companies Law and currently effective Companies Law. The draft law provides public and private types of joint stock companies, where public companies are accepted to listing as well as may perform private placement, while private companies are prohibited to offer shares to public.

According to Companies Law, there are "open" and "closed" joint stock companies, which appear to be similar to the new types provided by the Bill. According to the draft, "open" companies will exist within five years after the new Law comes into force, while "closed" companies may exist indefinitely. However, any increase of capital shall result in re-registration of such companies to the new types (ie. private or public). Therefore, it is expected that gradually old types of joint stock companies will be replaced with the new ones.

The latest bill is a big step forward. Where the bill goes from here, however, remains unclear. Currently, the Rada's deputies are revising the bill for a second reading, but due to the political crisis in 2007, there is a question mark over whether the Rada had the right to pass any legislation at the time of the vote, so it could be that the version that was passed in the first reading will be revised again before it reaches a second reading.

To mitigate this risk, the draft law (in the same wording) was resubmitted for consideration on November 23 under No. 952 (Bill No. 952). It is not clear how the amended Bill No. 3177 (or No. 952) will be introduced into the Rada and, furthermore, it is questionable whether the parliament recognizes the amendments implemented in the draft. So now the political haggling begins and it remains to be seen how much of the original bill will survive.

Denis Lysenko is Head of the Corporate/M&A Practice at Vasil Kisil & Partners in Kyiv

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