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A time of change

IFLR. Foreign Direct Investment. - 2011

Tamara Lukanina and Illya Onyschenko of Asters discuss a number of recent changes which will change Ukraine’s legal landscape

The Ukrainian Parliament continues its path to the implementation of European legal principles, facilitation of administrative procedures and simplifying formalities related to investments and corporate establishment issues.

During 2011, a number of laws and amendments dealing with corruption, regulatory and administrative procedures, formation of companies, procedures of establishment, state registration, financing and liquidation of Ukrainian companies were adopted.

Investment regime

Creation of a favourable investment climate in Ukraine, raising the attractiveness of the country's investment image and reducing legal investment risks continue to be the most acute issues. The perspectives of economic reforms and recovery of the domestic economy greatly depend on these profound changes.

The State's efforts in this area have resulted in active law-making processes on updating the existing legal framework. The following are the most successful examples of recent legislation in this area.

Corruption

In July 2011 the Law of Ukraine on the Basis of Preventing and Combating Corruption came into force. It is aimed at attacking corruption that, according to internal and external specialists, is one of the main factors restraining the flow of investments into Ukraine. The law introduces a procedure of anti-corruption examination of draft laws and regulations which should be conducted by the Ministry of Justice of Ukraine. Such examination should reveal all instances of granting unlawfully broad rights, illegal procedures, obstacles faced by the recipients of public services and indistinct administrative procedures negatively affecting business operations of legal entities and individuals-entrepreneurs.

If revealed, the relevant piece of legislation may be recognised as corruptiogenic – that is, contributing to or facilitating corrupt violations. Anti-corruption examination of regulations is expected to be an important preventive measure to effectively combat corruption and at the same time significantly improve the investment and business climate in the country.

Under the law, all draft laws, acts of the President, Government, ministries and other central executive bodies (almost all the basic acts regulating business and investment activities) should be subject to a mandatory anti-corruption examination. In addition to this, the law also introduces the possibility of carrying out public anti-corruption examination of draft laws and regulations if initiated by individuals or legal entities. The law also establishes that, in addition to bills, draft laws and regulations granting privileges and benefits to particular entities or delegating powers from executive bodies should made publicly available for discussion by placing them on official websites. In connection with the above, it should also be noted that the new possibility of appealing new regulations adopted as a result of corrupt actions is established by the law. Such legal acts may be repealed by the issuing authority or invalidated by a court upon the request of the concerned party, but they do not automatically become abolished by virtue of this law. At the same time, the law provides much more drastic consequences for agreements concluded under the corruption violations: they are directly recognised void.

Regulatory issues

The law on the List of Authorisation Documents for Business Activities passed on May 19 2011 establishes an exclusive list of permits and directly restricts the state authorities from requiring any other documents not specifically prescribed by the law. This law should come into force on January 1 2012 and is expected to significantly reduce the number of authorisations required for business operations, since:

according to the law, the Cabinet of Ministers of Ukraine should bring its regulations in accordance with the law and ensure that this is also done by the ministries and departments by three months following the date of publication of the law (up to September 16 2011). It is expected that a significant number of permissive documents required by various sub-legislation and by-laws will be removed resulting in a more friendly regulatory regime; and the law does not mention many other permits, therefore enabling companies not to obtain them at all.

For example, obtaining of a particular veterinary certificate for the purposes of imports of goods into Ukraine is not required under the law and, therefore, should not longer be requested by the controlling authorities.

Recent amendments to the Law of Ukraine on Permissive System in the Area of Business Activity remove some non-transparent licensing procedures and provide for an additional protection for the business, by introducing:

(i) a rule establishing that the exhaustive list of grounds for refusal to issue or reissue a duplicate of, or cancel a permit should be set only by the relevant laws. Until recently not only a refusal to issue a permit, but also to issue a duplicate, or its reissue were possible on grounds established by various by-laws, for example, in the sphere of usage of subsoil; and

(ii) responsibility of state authorities for violation of the procedures of issue of permits and groundless refusal

to issue. It is provided that such liability shall bear the officials of regulatory authorities in a form of a penalty of 20- to 70-times the non-taxable minimum income of citizens – from UAH340 to 1190 ($42 to $150) – for each violation. Such a measure can be an effective remedy to maintain an order for issuing licensing documents prescribed by the law.

Public procurement

The new Law on Public Procurement reforms the mechanisms of public procurement and, to some extent, increases the transparency of tender procedures. One of the important provisions of this law is to equalise the rights of domestic and foreign bidders and restrict any discrimination. The law enables foreign bidders to participate in public procurement on terms equal to local ones. It is anticipated that the involvement of foreign, more technologically developed participants in a truly competitive environment should create a more promising environment and help avoid existing abuses of public procurement procedures.

Simplified investing

The new Law of Ukraine on Preparation and Implementation of Investment Projects Using the Single Window Principle comes into force on January 1 2012. This law creates additional legal mechanisms simplifying the procedures for assisting investors in developing and implementing their investment projects; in particular it provides for:

governmental support of investors by introducing a so-called single investment window and delegating organisational, preparatory and investment project implementing functions to special regional investment centres; and close interaction between the state and investors for the purposes of preparation and issuing supporting documents for implementation of the investment project.

Pursuant to the Law, assistance services rendered by the authorised state body should be made on a free-of-charge basis.

Product sharing novelties

Another law of July 17 2011 introduces significant amendments to the Law on Product Sharing Arrangements.

The amendments restore protection against changes in the legal regime, thus considerably increasing the investment attractiveness of subsoil use under product sharing arrangements. It should be noted that being constantly evolved, updated, improved and coordinated with the Civil, Commercial and Tax Codes of Ukraine, the Product Sharing Law Legislation currently provides for the most favourable and preferential terms for investing in exploration and mining activities in Ukraine. These trends have enabled improvement in the regime of subsoil use under product sharing

arrangements and made them even more efficient for investment purposes.

Flaws

Analysis of legal improvements in the abovementioned areas, however, reveals some obvious flaws which may negatively affect investing into the government sector. In particular, the Law on Amendments to Certain Legislative Acts of Ukraine on Joint Activities amended on July 8 2011 creates new conditions for joint ventures with state enterprises, establishments, organizations and also state-owned entities; those conditions prevent state enterprises from being able to attract investors independently and enter into relevant joint venture arrangements.

The law restricts state enterprises to contributing to joint activities only their fixed assets that are not subject to privatisation. Such state enterprises include NAK Naftogaz Ukraine, State Enterprise Central Design Bureau Arsenal, State Enterprise Illichivsk Sea Port, NAK Energoatom, and others.

The law also significantly strengthens regulations in the sphere of joint activities with participation of state enterprises and establishes a number of restrictions, in particular:

• conclusion of joint-venture agreements is possible only in strict compliance with the procedure established by the Cabinet of Ministers of Ukraine; and

• irrespective of the investor's contribution its share in joint activities may not exceed 50%.

Taking into account that joint-venture agreements have been used for many years as the basic and traditional form of cooperation and means of encouraging investments into the public sector, the new restrictions in this area may shutdown investment inflow into this sector.

Corporate regulations

The Ukrainian Parliament continues to search for ways of facilitating administrative procedures and simplifying formalities related to having a corporate presence in Ukraine.

During the last several months, this has resulted in a series of amendments to Ukrainian laws dealing with the procedures of establishment, state registration, financing and liquidation of Ukrainian companies.

Abolition of the State Registration

Certificate

On May 7 2011 the Law of Ukraine on Amendment of Certain Legislation Acts regarding Abolishment of Certificate of State Registration came into force.

The law abolished the certificate of state registration and established that the state registration of a company should be evidenced by an Extract from the Unified Register of Legal Entities and Individuals-Entrepreneurs. Such an Extract is now issued for an unlimited validity period and should not be amended once changes to the information contained in it are introduced.

Companies are now not required to re-obtain registration certificates upon each change of their registered address or other data reflected in the certificates. However, since the Extracts should not be adjusted accordingly, their contents may not be up to date. In view of this, when contracting with a party, it is advisable to request it to provide a fresh

Extract reflecting all the latest changes before entering into any contractual arrangements.

Accordingly, where a company was earlier required to submit a copy of the registration certificate to the state authorities under a particular administrative procedure, in most cases the relevant requirements were reoriented to providing the Extract.

Business start-up facilitation changes

On June 7 2011, the Law of Ukraine on Amending Certain Legal Acts of Ukraine Concerning the Business Start-up Facilitation No 3263 came into force.

The law introduces amendments to the Commercial Code, Civil Code, Law on Business Entities, and Law on State Registration of Legal Entities and Individuals-Entrepreneurs, and implements a number of changes to the procedures connected to business start-up.

Under the new law, the charter capital of all commercial entities (save for joint-stock companies) should be formed in full within one year following state registration. Before the amendments, the participants of an LLC should have contributed at least 50% of the charter capital before state registration, which in its turn required a company first

to open a temporary account for the purposes of charter capital formation, arrange for payment of at least 50% of the contributions, and obtain the certificate from the servicing bank confirming this fact. Only once those formalities were completed could an applicant serve the state registrar with the full set of documents and proceed with the state

registration. It is expected that the cancellation of these formalities may facilitate and accelerate the procedure of establishment, for example by enabling an entity to be less dependent on foreign exchange rate fluctuations (in the case where the founders are foreign entities) and internal corporate authorisations (which are usually needed for the

founders to make their contributions). Founders now have one year to arrange for wiring of fundsm and they may do it in any instalments depending on their business needs and economic circumstances.

The said law also diversifies the names of capitals – LLCs and JSCs now have charter capital, while general partnerships and partnerships in commendam have composed capital.

The law abolishes LLCs' minimum charter capital requirement. Previously, the threshold for minimum charter capital amounted to one minimal statutory salary.

The law also introduces certain amendments addressing the consequences of failure of a particiin a LLC to make its contribution in full – earlier, the law was silent on any particular sanctions to such participant.

Under the new law, the participants of a LLC where one of the participants has failed to make its capital contribution, may resolve at a general meeting of participants to expel such participant, reduce the amount of company's charter capital, or even to liquidate.

Still, expulsion of such participant may not be sufficient to solve the problem of unpaid capital and even after such participant leaves the company the remaining participants may additionally need to resolve on further actions (making of additional contributions, for example).

On a separate note, the law clarifies the procedure of notification of creditors during capital decrease in the LLC. Now the creditors should be provided with the relevant resolution of the general meeting of participants resolving to decrease the capital by means of post service within three days following the date of such decision.

Further, the list of documents necessary for the state registration of changes in the composition of participants of a LLC has been changed again. A participant may now provide the registrar with its resolution to withdraw from the company or other document evidencing transfer of is equity interest to another entity; the previous requirements were stricter and allowed change of participants to be registered only based on a notarised agreement on transfer of equity interest. From now on, internal corporate restructurings may be made easier and faster (since no notarisation/apostille of agreements executed between two foreign entities abroad is necessary).

As already noted, requirements to submit documents in notarised originals or notarised copies thereof are now

changed to allow submission of photocopies in certain cases. This may help to save costs on notary fees.

Electronic registration

It is expected that the Law of Ukraine on Amendment of the Law on State Registration of Legal Entities and Individuals-Entrepreneurs in Connection with Electronic Registration will be in force by August 14 2011. This Law allows an applicant to file documents with the state registrar in electronic form. The relevant documents should be certified by the electronic signature of the applicant.

This procedure will apply to the incorporation procedure, while further amendments to the statutory documents

should still be submitted in paper form. Most probably, applicants willing to benefit from such electronic procedure will first need to obtain (coordinate) their electronic signatures. It is yet unclear, however, who will verify the validity of an electronic signature on a power of attorney or other document originating form a legal entity-applicant.

Model charters

On August 28 2011 another set of amendments to the abovementioned laws will be introduced, when the Law on Amending Certain Legal Acts of Ukraine Concerning the Introducing of Principle of State Registration of Legal

Entities Based on a Model Charter comes into force. This law allows legal entities to operate based on a socalled model charter, the form of which should be developed and approved by the Cabinet of Ministers of Ukraine. In practice, this means that entities may save on their legal costs by omitting to draft and adjust charters for their needs. It should also be noted that use of a model charter will allow an entity to avoid notarisation of the charter and some other technical formalities. Rather, a relevant record that a company uses model charter is made into the Companies Register.

Winding-off procedure

It is anticipated that on December 19 2011 the Law on Amending Certain Legal Acts of Ukraine Concerning the

Simplification of Procedures of Termination of Legal Entities and Entrepreneurial Activities of Individuals will come into force. The law amends the Code of Ukraine on Administrative Offences, the Commercial Code of Ukraine, the Civil Code of Ukraine, the Law of Ukraine on Business Entities, the Law of Ukraine on State Registration of Legal Entities and Individuals-Entrepreneurs, and others.

The law significantly changes the scope and terms of administrative liability for violation of the procedure of termination of legal entity or entrepreneurial activity. It is no longer required to place official publication in two forms of public media – a note in the newsletter of the state registration authority should suffice. The law also clarifies the procedures of satisfaction of creditor's demands during termination, introduces a separate procedure for settlement of liabilities of an individual-entrepreneur willing to terminate its activities, amends the mechanisms of winding-off of legal entities, introduces the principle of tacit consent in state registration of termination of legal entity or individual entrepreneur, and enacts some other amendments to that procedure.

About the author

Tamara Lukanina is a partner in Asters' banking, finance and securities practice group. She focuses on commercial, corporate and civil law, investments and use of subsoil resources, including issuance of special-purpose licenses and

execution of production sharing agreements, oil and gas, competition, customs and labour law, construction and real estate, media, intellectual property (including copyright and patents), and litigation with a particular emphasis on commercial and administrative disputes.

Lukanina has more than 20 years' legal practice experience. Before joining Asters, she worked as a lead counsel in a reputable Ukrainian law firm. Her professional experience also includes working as an adviser on various business

regulatory matters to the Ukrainian Ministry of Justice and as general counsel at large state-owned companies Electronmash and Ukrtelecom. Lukanina often advises Ukrainian ministries and governmental agencies on developing new legislation and was instrumental in drafting a number of important legislative acts, such as the Law on Product Sharing Agreements, the Law on Subsoil, the Law on Copyright and Related Rights, and the Civil Code of Ukraine (Book 4).

In addition to her extensive experience in corporate and business law, she is a seasoned litigation practitioner with a good record of winning precedent-setting cases in Ukrainian commercial and administrative courts and representation of clients in the Constitutional Court of Ukraine.

Lukanina received her law degree from the Kyiv National Taras Shevchenko University (1980). She was admitted in Ukraine in 1994 and speaks Ukrainian and Russian.

About the author

Illya is an associate at Asters. He focuses on a wide variety of issues in the areas of civil, corporate, commercial, and contractual law, advises on regulatory matters, and participates in court proceedings and other claim activities. Before joining the firm Onyschenko worked as an associate with the IP&C Consult Firm where he participated in projects involving legal matters of antitrust, corporate, contractual and commercial law and procedure, and rendered legal advice on lease and other proprietary agreements.

He has also represented clients in commercial courts and advised foreign companies on various issues of establishing and maintaining their presence in Ukraine, as well as obtaining work permits and other regulatory approvals.

Onyschenko was previously employed as an associate with Business Lawyer Advocates Firm, where he counselled on corporate law issues and antitrust regulation, and dealt with labour issues, contracts, commercial transactions, tax and land law matters.

Onyschenko received his Specialist's Degree in Law from Kyiv Academy of Municipal Administration in 2004. He is admitted in Ukraine and speaks English, Ukrainian and Russian.

Author: Tamara Lukanina and Illya Onyschenko
Source: IFLR. Foreign Direct Investment. - 2011