COMMENT: What will new corporate law mean for Ukraine investment?

By bne IntelliNews October 16, 2008

Michael Hatchwell of Davenport Lyons, Oleh Marchenko of Magisters Kiev -

On September 17, the Ukrainian parliament passed the long-awaited new law that governs local companies, known as the Joint-Stock Companies Law. The adoption of the JSC Law is generally considered to be a breakthrough in Ukrainian corporate legislation and a huge step forward for improving the investment climate in the country.

The JSC Law will come into effect six months after the president signs the law and the law is published in the official media. It is currently thought, however, that the president is likely to veto the JSC Law, in which case parliament could then override the veto by at least 300 votes (ie. two-thirds of the votes of the parliament). Taking into account the current political situation in Ukraine, which is gearing up for snap elections in December, it could be some time before the JSC Law is implemented.

The JSC Law codifies various pre-existing Ukrainian statutory provisions and aims to remove many of the gaps or grey areas in current legislation concerning the incorporation, operation and winding up of joint stock companies in Ukraine. The new legislation will also regulate shareholders' rights and the payment of dividends to shareholders.

One of the main aims of the new legislation, and one of the reasons for its introduction, is to protect the rights of minority shareholders whilst at the same time protecting businesses from possible abuse and attacks by minority shareholders - so called "raider attacks." Abuse of minority shareholder rights and raider attacks have been common practice in Ukraine, especially for the last five years or so.

In the past, experts have pointed out the lack of such a law governing JSCs (or rather the lack of detailed regulation of the activities of JSCs in the effective law on business associations) as the reason for the underdevelopment of Ukraine's financial market. The adoption of the JSC Law is expected to strengthen Ukraine's investment environment, improve Ukraine's global competitiveness, aid the development of the stock market and help strengthen the rule of law and protection of property rights in Ukraine.

As well as being a huge step forward for the improvement of the investment climate in Ukraine, it would appear that the JSC Law is, in general, in compliance with EU legislation on corporate governance and more generally recognised international corporate governance principles.

Key provisions of the JSC Law

• Joint Stock Companies (JSCs) may now be established as either public or private (if there are less than 100 shareholders) JSCs. Previously, JSCs were grouped into open and closed JSCs;

• Public JSCs are to be listed and registered with at least one Stock Exchange. Related to this is the requirement that sale and purchase agreements involving shares of a public JSC may be concluded only through a Stock Exchange on which it is listed;

• In public JSCs, the shares can be sold without restriction, but only through a Stock Exchange on which they are listed;

• JSCs can have one shareholder;

• The State Commission on Securities and Stock Market of Ukraine will be authorized to bring a claim for the liquidation of a JSC if registration procedures of the JSC are violated. This is a new provision permitting the government to liquidate JSCs in Ukraine;

• Private JSCs can carry out only private placement of their shares. Public placement of shares can be made only after the form of a JSC is changed from private into public;

• If at the end of the second and each following financial year of the JSC's establishment, the amount of the charter capital of a JSC is less than the statutory minimum charter capital effective as of the time of JSC's incorporation, a JSC is allowed to remedy such inconsistency within a 10-month period before a JSC is subject to liquidation. Previously, in such circumstances, a JSC was subject to liquidation;

• Ordinary shares of a JSC may not be converted into preference shares. Different classes of preference shares are allowed under the new Law;

• In private JSCs, preference rights can be given to certain shareholders, allowing those shareholders to acquire the shares of another shareholder who wishes to sell. The JSC Law details specific rules for the realisation of such preference rights;

• A General Shareholders' Meetings (GSM) must be convened at least once per year. Any JSC with more than 100 shareholders will be required to use signed ballots when voting at GSMs;

• JSCs with less than 25 shareholders may hold its GSM by absentee voting, whereby resolutions can be adopted by polling in lieu of the general meeting of shareholders;

• Where a JSC is owned by one shareholder, a GSM does not need to be convened and the decisions of the sole shareholder may be formalised by orders instead;

• The required quorum for a GSM will be 60% of all voting shares. Previously, the quorum requirement was 60% plus one share. Contrary to general expectations that the GSM quorum requirement would be reduced to 50% (in many JSCs, minority shareholders holding 40% plus shares, but less than 50%, are blocking changes of management by majority shareholders by not attending a GSM) the JSC Law has preserved the status quo on this issue;

• The requirement to appoint a Supervisory Board shall apply to JSCs with 10 or more shareholders. Previously, this requirement applied to JSCs with more than 50 shareholders;

• The Supervisory Board of public JSCs shall be elected only by cumulative voting procedures, allowing minority shareholders better representation in this body as they will have better chances to elect their own representative;

• The Supervisory Board shall appoint the Management Board. Previously this was an exclusive authority of a GSM. The Supervisory Board shall also approve transactions with related parties, as defined in the JSC Law, and any transactions for a value exceeding 10% of the value of all assets of the company. GSM approval is required for any transaction of a value higher than 25 % of the value of all assets of the company;

• JSCs' shares will only be issued in non-documentary, electronic form, allowing better protection against attacks by minority shareholders. This provision will be introduced 2 years after the JSC Law comes into effect;

• Where a 50% or greater stake in a JSC is acquired by one shareholder (except where the purchase is in the course of a privatisation), this shareholder is required to offer a buyout option (at a price not less than the market price) to the minority shareholders of the JSC no later than 20 days following the acquisition date. Additionally, if any minority shareholder disagrees with such a material transaction, there is an approval procedure, which can be followed by calling a GSM. A shareholder may request a mandatory buyout of his shares in such a case;

• A person intending to purchase 10% or more of the shares of the JSC should inform the JSC 30 days prior to such a purchase and shall make such intention public;

• A shareholder who voted at a GSM against certain issues, will be entitled to request a mandatory buyout of his shares in a JSC; and

• JSCs established before the JSC Law becomes effective must bring their activity into compliance with the JSC Law not later than 2 years from the effective date of the Law.


Although the JSC Law introduced a number of significant and long-awaited changes to the current legislation of Ukraine on JSCs, there are some issues that Ukrainian business expected to be included in the Law which, for various reasons, including strong corporate lobbying, weren't introduced. For example, reduction of the quorum for a GSM to at least a 50% wasn't introduced. The JSC Law also fails to deal with situations where a general meeting can't be convened because shareholders fail to attend it, etc.

Michael Hatchwell is a Partner and Head of Corporate at Davenport Lyons. He is based in London and can be contacted by email or at + 44 (0) 20 7468 2600. Oleh Marchenko is a partner at Magisters. He is based in Kyiv and can be contacted by email or at +380 44 492 8282

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