Ukraine: Closed Joint Stock Companies and the Right to Sell Shares

Ukrainian commercial legislation includes several provisions which variously regulate the procedure for the sale of shares by shareholders. In an ordinary joint stock company, shares can circulate freely. However, there has previously been confusion over the conditions governing a shareholder's right to sell shares in a closed joint stock company.

Ukraine's Commercial Code confirms the terms of most closed joint stock company charters: it makes clear that when a shareholder offers shares for sale, other participants in the company have priority over other purchasers. This right is one of the main differences between the two forms of joint stock company.

Ukrainian law also makes two further provisions on the subject. First, shares may be purchased by making a contract with their owner or holder, at a price either determined between the parties or set by the stock exchange. Such a contract must be consistent with any other relevant legislation, including that covering inheritance procedures relating to natural or legal persons.

Second, shareholders must not cause damage to the environment while exercising their rights, nor may they infringe on the rights and legitimate interests of individuals, legal entities or the state.

These provisions led to a number of cases in which attempts were made to clarify the conditions surrounding such a sale. In May 2005 the Constitutional Court of Ukraine made a definitive ruling.

First, it stated that a shareholder may conclude any agreement to sell its shares, but that this right does not prohibit the inclusion of a provision in a joint stock company charter confirming the priority rights of other shareholders.

Second, it upheld the general rule that an owner of property - including shares - may sell such property on condition that the rights and interests of other persons and legal entities are not infringed. The rights thus protected include that of shareholders to buy shares before other potential purchasers.

This decision establishes that the right to sell shares is not unfettered and absolute.

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.