Many joint stock companies are struggling to convert their shares and securities in electronic form.
With Ukrainian joint stock companies facing two major deadlines to meet the terms of a major law passed in September 2008, market insiders say many firms are struggling to meet the deadline.
A failure to comply with the regulations, experts say, present legal risks and leaves Ukraine lagging in the corporate governance stakes, exactly what the law was supposed to improve.
The first deadline comes on Oct. 29, when all joint stock companies should have converted their securities and shares from paper-based form to electronic.
The second deadline, set for April 2011, requires all joint stock enterprises to rename themselves from open and closed stock companies to public and private and make the relevant legal changes.
After both dates, the old laws and regulations for joint stock companies will give way to the new law that went into effect in April 2009. From that time, companies were given two years to make all necessary changes.
Market insiders say that the vast majority of joint stock companies will fail to meet these deadlines and will not bring their documents into compliance with the new law, which was touted as a major breakthrough set to clean up Ukrainian companies’ notoriously murky corporate governance. Many of the companies hope that they’ll be given an additional two years for transition, as there are several draft laws registered in parliament to postpone the transition.
“If parliament approves the postponement [of both deadlines], reforms to improve corporate governance in the country will be slowed down,” said Dmytro Tevelyev, head of the State Commission for Securities and Stock Market.
The transition to electronic form of holding shares and public/private forms of corporate management are aimed to improve the system of share registration, ensure better protection of shareholders’ rights and more corporate transparency for public companies.
According to experts, only 15 percent of all joint stock companies use electronic stock, just two weeks ahead of the legal deadline. Only 10 percent have reclassified themselves as private or public six months before the deadline. The State Commission for Securities and Stock Market reports that there are 31,000 joint stock companies in Ukraine, out of which 9,000 are open and 22,000 are closed.
The new law on joint stock companies requires all enterprises with fewer than 100 shareholders to become private while those with more than 100 shareholders need to become public.
“In order to become public or private, joint stock companies need to change their names, make changes in charters documents and internal regulations. It is time- and resource-consuming,” said Albert Sych, senior manager and M&A law leader at Ernst & Young.
Many have become laggards. However, the insurance and banking industries are leaders in adopting the new corporate standards. “Financial market players are the most active in bringing its charters and internal regulations in compliance with the new joint stock company law,” said Artem Sokurov, a lawyer with Schoenherr law firm.
Joint stock companies that failed to meet the deadline may get a break. “There are two laws registered in the parliament that may shift the deadline,” said Andriy Snegiryov, chairman of the board of Sokrat investment bank.
The joint stock company law includes neither sanction for failure to comply with these requirements, nor incentive to those who want to comply.
“Legal risks for non-compliance are plentiful. Non-compliant joint stock companies, for instance, can be sued by their shareholders, demanding a change in company name and internal documents in line with the current legislative requirements,” said Olena Shcherbyna, counsel with Kyiv-based Sayenko Kharenko law firm.
Ukrainian businesses which became joint stock companies during the privatization process in the 1990s, and often have 1000s of minor shareholders, face a dilemma when deciding which type of joint stock company to become.
With 100 shareholders or more, they cannot transform into private joint stock companies, while the much tighter requirements for public joint stock companies under the law discourage them from considering this type either.
Companies that have a small number of shareholders (fewer than 10) prefer to become limited liability companies; those with fewer than 100 shareholders can transform into private joint stock companies; those with more than 100 shareholders have to either become public joint stock companies or – in case they find it inconvenient – consider other options, including becoming companies with additional liabilities.
“The change of name from closed/open to private/public will require companies to reissue all permit documents – licenses and patents – as well as property rights for land plots, vehicles etc., which is very time-consuming and brings additional expenses,” said Shcherbyna from Sayenko Kharenko.
“Only those closed joint stock companies that have more than 100 shareholders and plan to go public (with an initial public offering) in the future are seriously considering transforming into a public joint stock company,” Shcherbyna said.
Meanwhile, companies that don’t move to private/public status will operate with outmoded regulations.
“The activity of a company will appear outside the law, and it may cause many conflicts within enterprises, including raider’s attacks, said Sych from Ernst & Young. “This is very bad for the market overall.”
And a serious situation.
“We will address each case for violating the deadline, examine their reasons for it and give additional time, up to several months, to fix the problem,” said Tevelyev of the State Commission for Securities and Stock Market.
Kyiv Post staff writer Olga Gnativ can be reached at [email protected]
