New legislation to clear up rules for investors
Despite the political bedlam of recent weeks, Ukraine’s parliament has managed to pass several laws that drew praise from the country’s business community. Specifically, two laws introduced significant improvements to corporate governance and shareholder right protection, and make life tougher for corporate raiders, who have been the country’s bane.
On Sept. 17 the Verkhovna Rada overwhelmingly approved the Law on Joint Stock Companies that has been in the works for nearly a decade. The law, still to be signed by the president, replaces the 1991 Law on Business Associations.
According to the American Chamber of Commerce (ACC) in Ukraine, the bill complies with European principles of corporate governance. “The current version of the law is not perfect but, at this point, it is the most comprehensive and well-thought through piece of legislation in the sphere of corporate governance in Ukraine,” said Jorge Zukoski, ACC president.
The law was supported by all parliamentary factions, except for the president’s own Our Ukraine – Peoples’ Self Defense bloc. The reasons for that were political rather than economic, pro-presidential deputies said.
“The law is good. We worked on it and would have voted for the law if it was not passed under a political pretext. The Law on Joint Stock Companies and other laws were passed that day without any discussion, some of which are designed to ruin the system of government,” said Ksenia Liapina, an Our Ukraine parliament member.
The Law on Joint Stock Companies contains provisions addressing two problematic areas that have been unregulated so far and have caused many domestic and international scandals. These are the clauses that protect minority shareholder rights and prevent the blocking of shareholder meetings.
Essentially, the new law should prevent schemes when a company’s minority shareholders take its majority shareholders to court, stall meetings, and exploit other loopholes in legislation to either blackmail the majority shareholder, or disrupt the work of the company to achieve their goal. One of the most publicized cases was that of Bunge, an American agricultural giant which claimed that corporate raiders had tried to paralyze its Ukrainian sunflower oil production facility in Dnipropetrovsk.
The law “removes commonly-used mechanisms to an illegal raider attack by restricting the manipulation of the shareholder list and covert acquisition of controlling stock by a raider. It also restricts groundless appeals of decisions made at general shareholder meetings, making illegal takeovers more difficult to execute,” Zukoski said.
The law will come into force six months from the moment it is published, but companies have a two-year grace period to fully comply.
On Sept. 18 parliament approved changes to the Law on Police and the Criminal Code that stipulates court decisions can only be enforced by Interior Ministry personnel, or the militia. The changes to the Criminal Code define the “illegal seizure of companies” as a crime, punishable by up to 10 years in prison. The changes make it illegal to use private security guards to enforce court decisions – the preferred technique of corporate raiders operating in Ukraine.
Again, one of the most publicized cases was at Ozerka open-air market in Dnipropetrovsk in 2006, when dozens of private guards attempted to take over an administrative building as a result of a long-lasting ownership dispute and a series of court rulings.
There is a debate whether Ukraine’s president, Victor Yushchenko, is going to sign these laws into effect in the 15 days allowed to him by law. Yushchenko has twice vetoed previous versions of the law on Joint Stock Companies. The formal reason was that previous versions of this law reduced quorum requirements for shareholder meetings from 60 to 50 percent.
Experts said the requirement would strip Privat, one of Ukraine’s biggest business groups, of control over the country’s top oil producer, Ukrnafta. The government owns a hairline majority stake with 50 percent plus one share, while Privat has a 42 percent stake in the prized and publicly-listed company.
Yet Privat controls management and has stalled shareholder meetings, fearing the government will take back control of the company.
The current version of the Law on Joint Stock Companies is a compromise because it keeps the quorum requirement for shareholder meetings at 60 percent. If the new version of the Joint Stock Companies law comes into effect, the current status-quo at Ukrnafta will be preserved, and the state will be unable to initiate shareholder meetings.
The same holds true for other majority shareholders in Ukrainian companies such as Norway’s Telenor, which has a majority stake in leading mobile company Kyivstar, but short of 60 percent. Telenor will not be able to succeed in its long battle to hold a Kyivstar shareholder meeting if Russia’s Alfa Group that owns some 43 percent will continue resisting.
Both of Kyivstar’s shareholders have been locked in a bitter power struggle for years and have not been able to hold a shareholder meeting due to blocking by the Alfa Group.
