With the credit crisis knocking on its door, Ukraine needs to encourage the inflow of foreign investment now more than ever before.
What have been the common complaints about Ukraine's legal structure? There is not enough of it, the legislation that has been enacted does not do its job, corruption is still rife and that eternal problem – ubiquitous bureaucratic delay – is rampant.
As the willingness of foreign banks to lend diminishes, the need to encourage foreign direct investment becomes increasingly pressing. How far does the Ukrainian law "On Joint Stock Companies" go to address these complaints?
The first point to make is that the Law is hardly fresh from the draftsman's pen.
It has been beset by dispute, and approval has been refused repeatedly. The bill was registered on Nov. 23, 2007, and adopted on Sept. 17, 2008. President Victor Yushchenko signed it into law on Oct. 22. The act will not come into force for another 6 months. Existing companies then have 2 years to comply with it.
Despite both the President and Parliament having more urgent concerns at the moment – such as dealing with the external financial and internal political crises – the implementation of this law ends the previous uncertainty that surrounded it.
Uncertainty is the very blight that this law seeks to cure. Current legislation contains many gaps regarding the foundation, operation, management and termination of activity of joint stock companies (JSCs), impedes the development of the Ukrainian stock market, causes numerous violations of shareholder rights and facilitates corporate fraud.
One of the chief concerns of a foreign investor is that his shareholding in a Ukrainian company will not be afforded the rights that it holds, or will suffer dilution by way of some sinister "shareholders' meeting," his invitation to which is "lost in the post." The law takes giant steps towards redressing this, regulating issues ranging from a JSC's foundation to its termination, as well as providing for management procedures, shareholders' rights and mechanisms for their realization, and guarantees for the protection of shareholders' rights.
The law balances the interests of shareholders with a controlling stake (50 percent or more), shareholders with a majority stake (10 percent or more), preference shareholders and minority shareholders. It is designed to be in line with common international principles and standards of corporate management, taking into account the peculiarities of corporate law in Ukraine. The law applies to all JSCs, including state-operated JSCs.
The law sets out the powers of the various bodies within a JSC and details the mechanisms by which they will interact. It introduces the notion of a "corporate secretary" whose main duties include ensuring the cooperation of a JSC with its shareholders, or investors.
Another main function of the corporate secretary is to give any shareholder – upon written inquiry – access to a JSC's statutory documents, minutes of general meetings and meetings of the supervisory board and audit committee, annual financial statements, and other reporting documents submitted to various state authorities. It could be argued that the law could have gone further to include accounting reports, documents regarding large transactions and transactions with interested parties.
The law seeks to combat unnecessary delays to the decision-making procedure in JSCs by transferring the responsibility from the general meeting to the supervisory board for such matters as entry into large and related-party transactions, appointment and removal of members of the executive body and approval of their contractual terms and conditions. Shortening the notice period for general meetings from 45 to 30 days and dispensing with the requirement to publish such notices for companies with less than 1,000 members contributes further in this regard.
While complexity in the operation of the supervisory board is reduced by all its members being required to be individuals, the introduction of the possibility for board members to elect representatives could be abused if it is not implemented correctly.
The potential for abuse should not be underestimated.
In Ukraine, the word "corporate raider" has a much more literal meaning. It is used to describe the activity of amassing a stake in and (or) gaining control of a company by legal or illegal means. The law attempts to regulate this activity by preventing the acquisition of shares in a JSC by way of gift. Unless a JSC is wholly owned by non-Ukrainian nationals or companies, general meetings must now be held only at the JSC's registered address, preventing so-called raiders from conducting alternative meetings in other places.
JSC shareholders with a controlling stake are protected from losing such control by a provision that the procedures for purchasing a controlling stake should be transparent to a JSC and its shareholders. To this end, a person who intends to buy a controlling stake must, 30 days prior to the purchase date, submit to the JSC a written notification about his or her intention to buy, and publish this intention via the State Commission for Securities and the Stock Market and on each stock exchange where the company is listed, as well as in the official printed media. Existing shareholders are entitled to demand from the exiting controlling shareholder that their shares be purchased at market value.
As well as general and majority shareholder protection, provision is made to protect the interests of minority shareholders. If a decision is taken at a general meeting on: termination of the activity of a JSC (save in the case of liquidation), conclusion of a large transaction, or change to the authorized capital, the shareholders who participated and registered at the meeting and voted against such decisions may demand that their shares be purchased at market value. This procedure for withdrawal for minority shareholders is a reliable way of protecting their rights. The introduction of a cumulative voting system for electing members of the supervisory board allows non-controlling shareholders to elect their representatives to the board and hence to exert a measure of control over a JSC's activities.
The new joint stock company law is, in some respects, incomplete, lacking a clear mechanism for the transformation of a private JSC into a public JSC and vice versa. The requirement of the law that all shares of a JSC must exist only in non-documentary form fails to address questions such as: 1) What happens to shares issued in documentary form if their shareholders fail to transfer them into non-documentary form? 2) What would the rights and responsibilities of such shareholders be? 3) What about minority shareholders (or individuals) who cannot afford the cost of custodian services for their dematerialized shares?
Furthermore, the law does not include provisions to make a JSC's officials liable for any damages or losses caused to its shareholders by their activities or to allow shareholders to bring legal proceedings against such officials to compensate their losses. As one of the aims of the law is to meet the standards of European legislation, it is to be hoped that these oversights will be rectified in the future. It may be that a so-called "wait and see" approach is being adopted here.
Overall, there are grounds for optimists to claim that the law has introduced a good measure of predictability, reliability and efficiency into the JSC system, and has, in effect, filled important gaps in Ukraine's insulation against the cold economic climate advancing from the West. Whether the corporate system remains too exposed will be seen in the law's implementation and enforcement.
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