Asters Successfully Pushes for Investor-Friendly Changes in State Securities and Stock Market Commission's Documents

The main goal of the Clarifications is to iron out some drawbacks and inconsistencies in the new Law by explaining how certain key norms can be applied in practice. The business-friendly position of the Commission which underlies the Clarifications was formed under the influence and with the assistance of the Expert Council for Corporate Governance (the "Council"). Asters partner Vadym Samoilenko and associate Oles Kvyat took active part in the Council's work on draft Clarifications.

All joint-stock companies (the "JSCs"), both public and private, stand to benefit from these efforts to rationalize and simplify Ukrainian corporate law in which Asters takes active part.

Simplified Notification about General Meetings of Shareholders (the "GMS")

The Law is rather inconsistent when it comes to regulating the notification of shareholders about the GMS, its agenda and changes thereto. For instance, the Law states that shareholders must be notified by registered mail with delivery receipt. In the JSCs with a large number of shareholders this could lead to very high postal costs. Also, some post offices refused to process great volumes of such complicated mail.

The Commission clarified that way in which shareholders are notified about the GMS, its agenda and the changes to the agenda must be specified in the company's charter. This procedure established by charter must be identical for all shareholders. The notices must be sent using general mail without the need to use registered mail and to request delivery receipts.

This clarification is designed to reduce the costs associated with organization of the GMS, and simplify the notification process.

Cumulative Voting Procedure in Supervisory Board (the "Board") Elections Clarified

One of the main novel institutions introduced by the Law was cumulative voting for the Board and auditing commission of a public JSC. The cumulative voting procedure is intended to protect the interest of minority shareholders because it gives them an opportunity to have their representatives elected to the Boards and auditing commissions.

Although the Law introduced the possibility of the cumulative voting, it failed to specify the procedure and special characteristics of this voting method which is absolutely new for Ukraine.

This problem is likely to become critical when the Boards and auditing commissions are elected under the new Law. To address the problem the Commission clarified the cumulative voting procedure for the Board elections. The clarification is based on the definition of the cumulative voting in Article 2 of the Law, as well as on international practice of the cumulative voting which was first used in the United States in the 19th century.

The most important recommendations of the Commission can be summarized as follows:

The number of the Board members is approved by the GMS and can also be indicated in the JSC's charter and/or the by-laws approved by the GMS. The candidates who during the cumulative voting received the greatest number of votes compared to other candidates, are considered elected to the Board. When the cumulative voting is used, the Board will be considered elected only when the full number of its members established by the GMS, by the company's charter or its bylaws, is elected. If the Law or the charter requires the cumulative voting for the Board election and one or more Board members are terminated for any reason without resolution of the GMS, the election of a new member or members is only possible through new election of the entire Board using the cumulative voting. Should the GMS resolve on setting up the Board and on election of its members, any shareholder can introduce an unlimited number of candidates for the Board. In a public JSC the cumulative voting can only be conducted using ballot papers.

Main ideas of this clarification on the cumulative voting were also reflected in the draft law aimed at improving the regulation of the JSCs introduced by the People's Deputy Yuri Voropaev. The bill passed the first reading in the Parliament on 6 July 2010 receiving broad political support.

Replacement of the Chairman of the Board

As a general rule under the Law the election and re-election of the Chairman of the Board is part of the Board's own competence. However, the Law allows companies in their charters to grant the right to elect the Chairman of the Board to their GMS. However, the Law fails to explicitly specify that in the latter case the right to re-elect the Chairman of the Board is also vested in the GMS. This creates a situation where the practical exercise of the right of the GMS to elect the Chairman can be easily undermined in practice by the Board which would retain the right to re-elect the Chairman elected by the GMS and to appoint a new one.

This inconsistency in the Law could have potentially dangerous consequences for JSCs and their shareholders. To prevent this, the Commission clarified that the Board can re-elect its Chairman only when the company's charter does not grant the exclusive right to elect and re-elect the Chairman to the GMS.

Who Can Cancel Shares Redeemed by the JSC

Under the Law cancellation of the shares redeemed by the JSC simultaneously falls within the exclusive competence of the GMS and the Board. To address this diversity the Commission explained that the decision to annul redeemed shares can be made by either the GMS or the Board. The Commission further clarified that the GMS can make this decision independently and without Board decision. Finally, the Commission makes it clear that the shares annulment decision made by the Board has to be followed by the GMS decision to amend the company's charter.

New Developments

In 2010 the Council and our experts will continue their work on clarifications and regulations implementing the Law and on amendments to the Law. We will continue keeping you updated about the most important of these developments.

For further information please contact

Vadym Samoilenko

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