We set out below most recent changes in Ukrainian corporate law:

  • legislation on reorganization of legal entities was modified;
  • Ukrainian SEC explained the standard of compliance with the duty of public companies to have their shares admitted to listing on a stock exchange;
  • Ukrainian SEC provided more details on the functioning of joint stock companies; and
  • On-line access to the Unified State Register of Legal Entities and Individual Entrepreneurs was launched following the Order of the Ministry of Justice of Ukraine.

Secondary Liability for Predecessor's Debts to Attach to Reorganized Legal Entities

Starting from 16 October 2011 new rules apply to liability for obligations of legal entities reorganized by way of merger, acquisition, division, spin-off, or conversion. On this day amendments to the Civil Code of Ukraine entered into force in accordance with the Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine as to Regulation of Relationship between Creditors and Consumers of Financial Services", dated 22 September 2011.

The amendments are as follows:

  • obligations of a divided legal entity that were transferred to one of its successors are secured by secondary liability of other successors created by division (split). Secondary liability renders a secondary debtor liable for a claim when a primary debtor defaults;
  • spun-off legal entity bears secondary liability for obligations that have not been transferred to it as a result of such spin-off and remain on the balance sheet of the "parent" legal entity, and vice versa;
  • when several legal entities bear secondary liability for obligations of a reorganized legal entity, such liability is allocated among them on a joint and several basis. Joint and several liability means that a creditor may claim a full amount of the debt from any of the joint and several debtors; and
  • while previously creditors of legal entities that were to be ceased by reorganization could request termination or early performance of all obligations of such legal entities, now only unsecured obligations of a reorganized legal entity may at the creditor's request be terminated, early performed, or secured.

These novelties strip benefits from using a structure when all of the rights are transferred to one legal entity and all of the liabilities stick with another legal entity as a result of a spin-off or a division (split).

The abovementioned provisions were previously set out for joint stock companies only, and now they are applicable to all legal entities, which, in our opinion, will improve creditor protection in the process of reorganizations.

Ukrainian SEC Interprets Listing Requirements for Public Companies

The requirement for public joint stock companies ("public companies") to be admitted to trading at a stock exchange became harder to be complied with. On 8 September 2011, the State Commission on Securities and the Stock Market ("Ukrainian SEC") approved Interpretation No.12 "On the Application of Paragraph Two of Part One of Article 24 of the Law of Ukraine "On Joint Stock Companies" as to Accomplishment by Public Joint Stock Companies of the Procedure for Admission of Their Shares to Trading on at Least One Stock Exchange" ("Interpretation"), which sets forth the Ukrainian SEC's view on the standard of compliance with the mentioned rule of the Law of Ukraine "On Joint Stock Companies", dated 17 September 2008 ("Law").

Accordingly, public companies must have their shares admitted to trading on at least one stock exchange and included into a special list of that stock exchange ("List"). The Ukrainian SEC resolved that shares of public companies must not only be admitted to trading on a stock exchange and included into the List, but also be kept admitted to trading and stay on the List from that moment on. If shares stay on the List without being traded for 60 calendar days, such shares must be excluded from the List. This requirement does not apply to the public companies where a sole shareholder owns 100% shares.

Hence, taking into account the conservative manner of the Interpretation, we recommend that all Ukrainian public companies should initiate the admission of their shares to trading on at least one stock exchange and their inclusion into the List, as well as should ensure that their shares are admitted to trading on a permanent basis. To this end, every two months no less than one transaction for the sale of at least one share of such public companies must be effected on the stock exchange.

Ukrainian SEC Specified Regulation of Joint Stock Companies' Activities

On 29 September 2011, the Ukrainian SEC specified certain aspects of functioning of joint stock companies by approving Decision No.1376 "On the Approval of the Procedure for Formation and Application of a Special Fund for Payment of Dividends under Preferred Shares" ("Procedure") and Decision No.1377 "On the Approval of Requirements Applicable to Information on Nominees for the Membership in Bodies of Joint Stock Companies" ("Requirements"), which the Ukrainian SEC was required to do in accordance with the Law of Ukraine "On Joint Stock Companies", dated 17 September 2008. Both documents apply starting from 4 November 2011.

Pursuant to the Procedure, dividends under preferred shares may be paid out of net profits or undistributed profits earned in previous years, and, when insufficient, such dividends may be paid out of reserve capital or a special fund for payment of dividends under preferred shares. If formation of such fund is envisaged in a company's charter, it must be established by resolution of a general shareholders' meeting, which must also specify the amount of monies to be allocated to such fund annually from net profit or undistributed profits earned in previous years.

The Requirements approved by the Ukrainian SEC determine which information about nominees for the membership in corporate bodies of joint stock companies (an executive body, supervisory board, or audit committee) must be reflected in ballots when such members are elected by cumulative voting. Cumulative voting is applied to election of members of a company's corporate bodies when it is required by its charter or by law (e.g., appointment of an audit committee of a joint stock company, appointment of a supervisory board of a public joint stock company). Cumulative voting contemplates that overall number of a shareholder's votes is multiplied by the number of members of a corporate body to be appointed, and the shareholder may allocate all of its votes calculated in such manner for a single nominee or may distribute them between several nominees.

On-line Version of State Register Is Operational

A web-site giving access to the data of the Unified State Register of Legal Entities and Individual Entrepreneurs ("State Register") has recently become functional as required by the Order of the Ministry of Justice of Ukraine "On Organization of Access to the Data of the Unified State Register of Legal Entities and Individual Entrepreneurs", dated 19 August 2011. The address of the web-site of the State Register is: http://irc.gov.ua/ua/Poshuk-v-YeDR.html.

The State Register is searchable on-line by the legal entity's identification code or name, as well as by the individual entrepreneur's name. The web-site makes it possible to verify whether an economic entity is registered with the State Register, and receive basic information on it.

However, test searches carried out by attorneys of Avellum Partners revealed that currently the system is imperfect, and the data displayed may not always be true and correct. Hence, we recommend using on-line access only when other means of receiving information from the State Register are either unavailable or inexpedient. In any case, it is advisable to request counterparties to present hard-copies of excerpt or extract (vypyska or vytiah) from the State Register when the transaction is material.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.