Referring to the works of Jacques Ellul, a XX-century French philosopher and sociologist, one can come across his famous quote about technological development: “Technology has become a total phenomenon for civilization, the defining force of a new social order in which efficiency is no longer an option but a necessity imposed on all human activity”. That remains true-to-life in our fast-developing and increasingly competitive world, where efficient use of innovation, technology and modern digital instruments directly affects economic success and business viability.
Although the level of technology implementation varies greatly in different states, industries and individual companies, the tendency shows that more and more companies are reshaping their traditional businesses to keep up with the times. In Ukraine, the use of technology and innovation in the corporate sphere is increasing constantly; however, the lack of a supportive legal background becomes, in most cases, an obstacle for innovative development of businesses.
A general overview of the laws of Ukraine regulating innovation, technology and digitalization in the corporate sphere reveals certain gaps and pitfalls. At the same time, Ukrainian legislation is, slowly but steadily, undergoing gradual transformation aimed at supporting innovation and efficient implementation of modern technological means in business operations.
Start-up businesses and innovative activity
Ukraine is currently experiencing a boom in “start-up” culture. Although not statutorily defined, the terms “start-up businesses” or “start-up companies” are widely used in local business circles to define a business or undertaking, which recently began its operation and builds its business model around an innovative product, service, process or a platform.
As start-up businesses often deal with innovative ideas and technologies, besides the general regulation on companies, they may fall under the legal framework of innovative activity, which implies certain specifics regarding investment, payment of customs duties and state support (e.g., interest-free financing, reimbursement of loan interest, etc.).
According to recent data of the Startup Ranking website, Ukraine occupies 39th place among more than 100 countries by number of start-up companies. Though many such companies received international recognition and substantial financial support from investors and crowd funders, they often have little access to state support and encounter difficulties related to burdensome registration procedures and lack of funds in the state budget. On top of that, the existing legislation that regulates innovative activity is rather outdated and does not specifically address the needs of “start-up businesses”.
For instance, such internationally recognized innovative structures as scientific and technological parks lack state support and legal certainty in Ukraine. The process for their establishment is quite obscure and complicated and requires, in addition to the general registration procedure as a legal entity, registration with the Ministry of Education and Science. As regards technological parks, the additional requirements for the establishment of this type of innovative structure are even more challenging. To name a few, before the commencement of an activity, each particular technological park has to be included in the text of the respective legislative act, which, in its turn, requires undergoing an extremely burdensome law-amending procedure.
Moreover, for the implementation of its projects, the technological park shall, together with other resident or non-resident persons, establish a Joint Venture with a rather hard-hitting statutory requirement regarding the authorized capital (at least USD 50,000).
A few months ago, the Government of Ukraine launched the Innovation Council, a temporary advisory body of the Cabinet of Ministers of Ukraine aimed at studying problem issues in the innovative sphere and development and implementation of innovative reforms. It is expected that the Innovation Council will become a platform for dialogue and cooperation between governmental, business and scientific circles. The Government also announced formation in 2018 of the Fund for Support on Innovation and Start-ups with a budget of approximately UAH 50 million to finance the most promising projects.
Additionally, at the end of 2017, the Ministry of Education and Science declared that it is working on a draft bill aimed at state support for start-up businesses. Inter alia, the anticipated draft is expected to provide a legal definition of “start-up” and to envisage lower tax and unified social contribution rates for such businesses. However, it is difficult to assess when the draft law will be actually presented to the public, or to assess the practical effects of the proposed legislative changes.
In any case, one should assume that this would be a decade-long process to finally develop and implement a progressive regulatory framework for start-ups in Ukraine that functions for the sake of business. At a more basic level, this complex process requires, first and foremost, Ukrainian regulators to act in a more proactive way and respond to new challenges before the battle lines are drawn. It is clear now that start-up businesses deserve better than just another one legislative act or a state fund that is declarative in nature. They need a comprehensive regulatory process that knocks down barriers to entry for small start-ups, yet keeping a close eye on ones that operate in legal gray areas and are big enough to do real damage or deal with some sensitive issues (e.g., personal privacy, data protection, etc.).
Use of technology in corporate law sphere
Technological development and digitalization also affect certain spheres of corporate relationships. For instance, current Ukrainian legislation provides for a digitalized information resource that allows any person to find information about the participants of the domestic stock market, including disclosures of shareholdings, corporate governance and other special and regular information regarding Joint-Stock Companies.
Among other things, this resource ensures protection of minority shareholders by granting around the clock 24/7 access to up-to-date information about the activities and corporate governance of Joint-Stock Companies. With access to such information, shareholders have the possibility to react in a timely and efficient manner to any adverse developments in companies’ operations.
It goes without saying that deeper use of technological means in corporate governance could be time-efficient and cost-efficient, and many companies are interested in their implementation in practice. However, until recently, the laws of Ukraine did not expressly elaborate on the use of technology in corporate governance on Ukrainian companies, including voting processes at shareholders general meetings. Due to the absence of respective regulations, it was impossible to carry out/participate in shareholders’ meeting via technical means of communications (e.g., telephone or video-conference).
However, the newly adopted Law of Ukraine On Limited and Additional Liability Companies, among other things, expressly allows the holding of general meetings of participants inLimited and Additional Liability Companies via videoconference. Current legislation does not provide Joint Stock Companies with a similar possibility.
With regard to the use of technological means at meetings of collective executive bodies of Ukrainian companies, it appears that the law does not prohibit the holding of such meetings through technological means, but does not expressly address such a possibility. At the same time, it is still necessary to ensure that all the resolutions adopted by a board are executed in paper form and are kept in the company’s files, regardless of the form of holding of such a meeting (e.g., personal attendance, telephone or videoconference, etc.).
In view of the above, further development and adoption of the laws specifically regulating the use of technology in the decision-making process of the companies would be an efficient and necessary toll for saving time and financial resources of the companies and, on a large scale, would lead to significant facilitation of corporate governance procedures in Ukraine.
Export of information services and technologies
Pursuant to the data of the IT Ukraine Association, a leading professional association on the Ukrainian IT-market, Ukraine occupies fourth place in the world by number of certified IT-specialists and is shortlisted in the Top-30 countries for outsourcing and product development. In 2017, the IT sphere became one of the three leading export industries, coming to USD 3.6 billion. With such an upcoming trend, the anticipated amount of IT services export will reach USD 8.4 billion by 2025.
The growth of the industry depends directly on a supportive legal background and business climate. For a long time, archaic regulatory restrictions, such as outdated currency control and banking and accounting limitations, restrained the export of services and technologies.
In recent years, Ukrainian legislators have taken substantial steps intended for simplification of export of the services from Ukraine and with adoption of the Law of Ukraine On Amending Certain Laws of Ukraine regarding Elimination of Administrative Barriers to Export of Services, such operations have been facilitated by introducing a number of important changes.
Now, foreign economic contracts (agreements) may be concluded in the form of electronic documents, provided, they contain all the material terms and conditions and are certified by the parties’ electronic signatures in accordance with Ukrainian legislation.
Additionally, the procedure for executing contracts for export of services has been simplified, allowing for export contracts to be concluded by way of accepting a public offer, exchanging emails and invoicing for services rendered (including in electronic form); at the same time, export contract invoices are now considered primary accounting documents.
Importantly, the export of services (except for transport and insurance services) and intellectual property rights is no longer subject to the 180-day currency control rule. Ukrainian exporters are currently not required to settle payments under export operations within the statutorily established term of 180 calendar days from the date when the services were rendered, as confirmed by the services transfer act.
The above legislative changes foster the export of services and technologies in a transparent and efficient manner, and help to develop creative businesses in Ukraine.
The efficient use of digital and technological advances requires flexible, thorough and up-to-date regulations in the law. Therefore, further development of Ukrainian economic, scientific and technologic potential depends on the pace of such legislative changes.
The legislation of many states is currently undergoing transformation in order to reflect changes induced by technological and digital advances and affecting companies and their business. For example, a number of new legal acts were adopted in the EU in the areas of digital electronic signatures and personal data protection, to name but a few. Ukraine, as a party to the Association Agreement with the European Union and its Member States, agreed to amend its legislation in order to harmonize it with that of the EU. This will hopefully help it acquire some valuable European knowledge and experience and break down some of the walls along the path of progressive legislative reforms in Ukraine.