Corporate law reform in Ukraine: 12 months of progress
June 2017 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2017 Issue
We have witnessed impressive progress in the transformation of Ukrainian corporate laws and regulations throughout the past 12 months. Although some of the legislative initiatives are still pending completion (e.g., a draft law on debt to equity swaps), a few projects have turned out to be a real success.
Highlights of the year include adoption of laws on shareholders’ agreements and on squeeze-out and sell-out. The Ukrainian legal community holds its breath for these documents to come into force, pending the president’s signature and publication.
Both documents were voted by the parliament into law on the same day – 23 March 2017. The law on shareholders’ agreements allows shareholders of limited liability companies (LLC) and joint stock companies (JSC) in Ukraine to enter into corporate shareholders’ agreements. Such agreements may provide for obligations that shareholders vote in a certain manner, seek approval for a sale or purchase of shares at the pre-agreed price or terms and refrain from selling shares. Moreover, shareholders’ agreements may regulate various issues of company management (such as appointment of directors, business strategies and investment policies, etc.).
Importantly, the parties may choose to apply various deadlock resolution procedures. The new law also allows a creditor to enter into a shareholders’ agreement with shareholders of a Ukrainian company. In this case, shareholders of a company would be obligated to execute their shareholders’ rights in compliance with such agreements, including voting instructions from the creditors.
The new law on squeeze-out and sell-out introduces numerous novelties in the regulation of JSCs. First of all, the law substantially improves the buy-out mechanism both in private and public JSCs. In particular, shareholders who directly or indirectly acquire control over 50 percent of shares in a JSC (a ‘controlling stake’) are obliged to send a public irrevocable offer to the other shareholders of the JSC to buy their shares. It further sets up identical buy-out requirements in case 75 percent of shares in a public JSC are accumulated. At the same time, the law establishes a new squeeze-out mechanism, allowing shareholders directly or indirectly holding 95 percent of shares (a ‘dominant stake’) to buy-out shares of minority shareholders. The procedure itself is well regulated and provides for closure of a buy-out without any participation of the minority shareholders.
The law requires that the purchase price be paid by the majority shareholder to an escrow account opened in a Ukrainian bank in the name of the JSC and further distributed to the minority shareholders by the JSC. By establishing procedures for opening and running escrow accounts in Ukraine, and by regulating the obligations of a bank as an escrow agent, this law is a real breakthrough in Ukrainian corporate and banking rules. Until now, the concept of escrow accounts has not been legislatively and legally supported, and involving an escrow agent in any Ukrainian corporate transaction required quite some creativity from the parties. The law provides for clear pricing mechanisms for both buy-out and sell-out procedures and in detail regulates the steps to be taken by majority and minority shareholders, and the JSC itself in both scenarios.
It is anticipated that the law on squeeze-out and sell-out would allow a great number of JSCs to clear up their shareholders registries by getting rid of so called ‘dead souls’ (unreachable and often already deceased shareholders) and prepare for transformation into LLCs.
A draft law on limited liability companies – which was presented to parliament in May 2016 and which successfully passed its first reading on 20 December 2016 – is also expected to become a landmark instrument in the near future. When adopted, it will constitute a comprehensive piece of legislation regulating the activities of LLCs, the most commonly used form of legal entities in Ukraine. The draft approved for the second reading offers numerous innovations in the regulation of LLCs and gives shareholders broad discretion in disposing of their shares – choosing the preferred method of managing the LLCs and structuring their constitutional documents. The draft significantly improves corporate governance in LLCs. In particular, shareholders of LLCs will have an option to establish a supervisory board with independent members. The draft also provides for better balance between the liberty of directors in taking management decisions and effective shareholders’ control over the activities of company directors, significantly increasing such directors’ liability.
While aiming to balance the rights of different stakeholders (the minority and majority shareholders, investors and creditors) the draft offers them a number of benefits, including: (i) better regulation of procedures for entering into, succession and exiting from a business; (ii) minimisation of risks for raider attacks (e.g., via the notarial certification of particular shareholders’ resolutions and notarial certification of signatures at ballots for absent voting); (iii) simplification of the procedure for share transfers (via cancellation of the requirement to list the shareholders in the charter and also to register amendments to the charter); (iv) limitation of the possibility to expel a shareholder from an LLC (permissible only through a court decision); (v) introduction of a debt-to-equity conversion mechanism; (vi) the possibility of automatic foreclosure on a pledged equity share in an LLC; and (vii) introduction of a concept of significant transactions requiring approval by shareholders.
The draft further simplifies registration procedures and does not put a cap on the number of shareholders in an LLC. The latter novelty is also expected to give JSCs an opportunity to convert into LLCs and significantly simplify their activities, regulations and reporting.
The draft law on LLCs also cancels a so-called ‘anti-chaining rule’ prohibiting possession of a 100 percent share in an LLC by a shareholder, which, in turn, also has a sole shareholder. This rule also prohibited a single shareholder from holding 100 percent of shares in more than one LLC. This change in law aims to simplify the internal structuring of corporate groups in Ukraine.
Ukrainian lawmakers also deserve credit for implementing many more positive developments, including cancellation of mandatory state registration of foreign investments, final abolishment of obligatory use of corporate seals, and the implementation of a number of laws and governmental regulations on corporate governance in state-owned companies. At the same time, the Ukrainian business and legal community expects further numerous changes in corporate rules, including long-awaited changes to the regulations applicable to the establishment, operation and termination of representative offices of foreign legal entities in Ukraine (aimed at eliminating a number of shortcomings in the current regulations and simplifying the applicable registration procedures).
All of the above initiatives are aimed at reducing the regulatory burden on businesses, simplifying complex registration procedures, facilitating the development of small and middle size businesses and preventing capital outflow from Ukraine. They are expected to improve the investment climate in Ukraine and harmonise corporate regulations with those in the EU.
Maria Orlyk is a partner at CMS. She can be contacted on +38 (044) 500 17 18 or by email: email@example.com.
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