On 2 March 2011, the Law of Ukraine on improving the regulation of joint stock companies, dated 3 February 2011 No.2994-VI (the "New Law") was officially published and became effective (except for certain provisions which shall enter into force as of 1 January 2012). It makes significant amendments to the Law of Ukraine on joint stock companies (the "JSC Law") and is ultimately aimed at further developing existing legislative provisions on joint stock companies, enhancing protection of rights and interests of shareholders, creating new impediments to raider attacks, and solving problems and curing irregularities arising in the corporate governance area upon implementation of the JSC Law.
Since enactment of the JSC Law, some of its controversial rules were open to considerable debate due to their ambiguity or alleged irrelevance. They include, inter alia, mandatory listing of public companies' shares, procedure for approval of significant transactions, the private company's pre-emptive right to buy the shares sold to third parties by shareholders, tough requirements on notifications to shareholders etc. In addition, a number of legislative provisions apparently needed correction and refinement to make their implementation more adaptive and smoother.
The new Law is anticipated to cure these omissions insofar as possible.
The most significant changes introduced by the new Law and having practical implications for the joint stock companies and shareholders encompass the following: public companies no longer need to comply with the listing requirements of a stock exchange for entering their shares to the register of exchange-listed securities: their shares may be traded as non-listed securities on a stock exchange and moreover, may be freely transacted over-the-counter; a private company itself will no longer have the pre-emptive right to buy shares sold by a shareholder to a third person (this change will become effective as of 1 January 2012); this will help avoid abuse by majority shareholders controlling the company through its management; a substantial transaction, the value of which is 50% of the company's asset value or more, can be approved by simple majority (more than 50%) of the shareholders' votes (instead of supermajority (75% of votes), as before); if a resolution of the general meeting of the shareholders (the "GMS") should be taken by more than 75% of votes, such supermajority shall be calculated based on the number of shareholders who have registered for participation in this particular GMS and own the voting shares (not of the total number of shareholders, as was formerly the case); the new Law reduces formal requirements for notifications sent to the shareholders: the particular method of their forwarding (i.e. whether to be sent by ordinary or registered mail, with or without list of enclosures and return receipt) will be determined solely by the company's charter; only written form of such notification is mandatory; any company (irrespective of number of its shareholders) should publish 30-days prior notification on holding the GMS in the official media (i.e. the official press of the State Securities and Stock Market Commission); in addition, a public company should notify the relevant stock exchange and place information on its Web-site; a joint stock company that issued preference shares must have the reserve fund of not less than 15% of the charter capital; for the issuer of solely ordinary shares, its availability is an option; legal entities may again be elected as the members of the supervisory council of a company.
Equally important, the new Law extended the term for dematerialization of shares for six additional months. The previous 2-year transition period lapsed on 29 October 2010. According to official statistics, only 10-15% of the joint stock companies which issued documented shares completed the dematerialization process by this date. Under the new Law, the extended term will lapse on 29 April 2011, concurrently with completion of the transition period for bringing activities of the joint stock companies in line with the JSC Law. The updated Final provisions of the JSC Law contain a detailed scenario of actions to be performed by companies for shares dematerialization. In general, the procedure for bringing activities of joint stock companies into accordance with the JSC Law was reformulated in more detail.
In addition, the new Law improved certain statutory provisions (e.g. on election of corporate bodies by cumulative voting), supplemented the powers of the GMS and the supervisory council and introduced some other changes. Requirements related to acquisition of substantial (10% of shares and more) and controlling (more than 50% of shares) interests in the company shall not apply to shareholders already holding the relevant stock.
Anticipated benefits and challenges
The new Law will undoubtedly facilitate the life of joint stock companies in some vital aspects (e.g., notifying shareholders, passing special resolutions, making transactions with public compa-nies' shares etc.) and make certain provisions of the JSC Law more clear and operative (in particular, those concerning cumulative voting, acquisition of shares exceeding established thresholds etc.).
However, some legislative novelties raise inevitable doubts of their soundness due to apparent non-compliance with European standards of corporate governance. In particular, under the new Law a shareholder can no longer file derivative action to challenge a related party transaction with a company wholly-owned by such party, which was effected in breach of the JSC Law. The new Law eliminated the correlation between the minimum number of members of the supervisory council and the number of shareholders; as a result, the minority shareholders lose an important defense against manipulation by majority shareholders and may be unable to elect their representative to such corporate body even by cumulative voting. It is also argued that the possibility to elect legal entities to the supervisory council may give a "green light" to abuse and corrupt practices by the representatives.
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