Recent corporate governance changes and anti-raiding measures implemented in Ukraine
March 2017 | EXPERT BRIEFING | CORPORATE GOVERNANCE
Historically, Ukrainian corporate laws have denied a significant degree of flexibility. For example, shareholders in a joint stock company (JSC) may not change the quorum of a general shareholder’s meeting (GSM) or the procedure for convocation of the GSM. Limited liability company’s (LLC’s) shareholders may not set up a supervisory board within the LLC, and so on. These restrictions are just a couple of the many restrictions that apply. Fortunately, this status quo is starting to change and a new trend is arising, aiming to bring Ukrainian corporate laws closer to those of Western jurisdictions.
The Ukrainian corporate governance framework has improved significantly over the past two years. On 7 April 2015, parliament adopted Law No. 289-VIII, which introduced a number of important improvements, including a derivative claims mechanism, the institute of independent directors and more flexible mechanisms for appointment and dismissal of directors in JSCs and the enhanced regulation of directors’ and officers’ liability. The new law became effective on 1 May 2016.
Moreover, in November 2016, the National Securities and Stock Market Commission (NSSMC) adopted a new regulation making debt-to-equity conversion possible for JSCs.
There have been certain other improvements concerning LLCs. Namely, Law No. 816-VIII, dated 24 November 2015, allowed the shareholders of an LLC to change quorum of the general shareholders’ meeting, which was previously fixed at more than 60 percent, as they see fit.
Last, but not least, the statutory provisions on liability of the members of the executive body of the company have been improved. In particular, their powers may be terminated early or they may be temporarily suspended from office at any point of time upon resolution of the respective governing body. Further to that, provisions of the Labour Code of Ukraine have been finally made consistent with the Civil Code of Ukraine by stipulating that the labour agreement with the company’s officials terminates automatically upon termination of their powers.
In addition to the recent improvements, many more are underway and, hopefully, will arrive soon. Anticipated legislative developments include improvement of LLC regulations (draft Law No. 4666), provisioning a more flexible regime for LLCs (which currently is rather strict). Proposed improvements include the ability to establish a supervisory board in an LLC, provide for the enhanced fiduciary duties of management, enhanced mechanisms for share pledges and a debt-to-equity conversion mechanism. Such changes have been expected for quite some time, especially when one considers that the LLC is the most popular corporate form in Ukraine.
With regard to JSCs, the introduction of sell-out and squeeze-out mechanisms is expected. Following an era of post-Soviet privatisation, many Ukrainian JSCs have numerous minority shareholders, many of whom are inactive or cannot be reached. Majority shareholders do not have an efficient mechanism to buy out minority shareholders, resulting in additional costs and ineffective management of the JSC. The introduction of sell-out and squeeze-out mechanisms aims to resolve these problems.
The ability to contractually regulate shareholders’ relations is also lacking in Ukraine due to deficient legal regulation and unfavourable court practices. Namely, shareholders’ agreements and corresponding instruments do not properly work in Ukraine. To remedy this, the introduction of shareholders’ agreements (draft Law No. 4470) is expected. Certain instruments (such as irrevocable powers of attorney and option agreements) are mostly unavailable too. Moreover, despite the declared principle of freedom of contract, consequences of using such instruments, which are not expressly provided in the law, are unpredictable. Due to this, parties often chose foreign law (usually English) to contractually regulate their relations. At the same time, draft law No. 4470 provides for an introduction of shareholders’ agreements as an instrument, together with option agreements and irrevocable powers of attorney.
These changes in the Ukrainian corporate governance framework and anticipated proposals are only initial steps in reforming Ukrainian corporate law. Looking further into the future, we anticipate that the law will provide for express differentiation between private companies (LLCs and private JSCs) and truly public companies – those companies whose shares are listed and traded on stock exchanges. It will also offer private companies (LLCs and private JSCs) the chance to deviate from the majority of the provisions of corporate law and tailor these provisions into rules that companies and their shareholders could use to bring them closer to their goals. Finally, the changes will make it possible to use various contractual instruments, commonly used in Western M&A transactions, including warranties and indemnities, escrow accounts and so on.
Another important issue to consider is striking a balance between the deregulation or the simplification of the procedure for setting up a business, and the elimination of potential raiding opportunities by ill-intentioned individuals.
On 13 December 2015, Law No. 835-VIII entered into force. This law significantly simplified the procedure for setting up a business or registration of change of shareholders in an LLC by granting this power to notaries, specially accredited entities and municipalities. This power was previously bestowed upon one state authority – a state registrar. Moreover, the law introduced the principle of extraterritoriality. Accordingly, the state registration of a legal entity could have been carried out by any registrar (notary, municipality and so on) regardless of its location or the location of such legal entity.
Initially, this law was mostly well received and perceived as an improvement of the investment climate in Ukraine. However, such significant simplification came at a cost as it opened a number of opportunities for abuse by raiders. Consequently, a business owner, for instance, in Western Ukraine, could have one day woken up only to find out that he does not have a business anymore because raiders in the other part of Ukraine have used an accomplice notary to transfer the ownership based on forged documents. Of course, the owner of a business could have most likely successfully challenged such an action in court and, eventually, gotten his business back, but the harm usually would have been done by that time (raiders would control the company for a certain period of time and may alienate the company’s assets or funds in the company’s bank accounts).
To combat this, parliament adopted Law No. 1666-VIII, dated 6 October 2016. The aim of this law is to maintain as much of the previously introduced simplifications as possible, while closing the loopholes for raiders. Therefore, the law has partially limited the principle of extraterritoriality, now allowing a registrar to perform registration actions only within the same administrative unit as where the company is located. Furthermore, the law introduced a higher standard for certification of signature on the relevant transfer documents. Last, but not least, the law toughened the liability for violation of the above laws.
Hopefully, the introduced amendments will achieve their aims. Anti-raiding amendments, as well as changes in corporate governance (both adopted and anticipated), should significantly improve Ukrainian business-related legal frameworks.
Yuriy Nechayev is counsel and Andriy Romanchuk is an associate at AVELLUM. Mr Nechayev can be contacted on +380 44 591 33 55 or by email: email@example.com. Mr Romanchuk can be contacted on +380 44 591 33 55 or by email: firstname.lastname@example.org.
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Yuriy Nechayev and Andriy Romanchuk