Welcome to the U.S.-Ukraine Business Council

Chalas & Partners law firm, Polish Market Online, Warsaw, Poland, Wed, Sep 9, 2009

WARSAW - The international conference Baltic Business Forum Ukraine – New Opportunities, organised by the Polish-Ukrainian Chamber of Commerce, was held simultaneously in two countries – Poland and Germany - in April 2009. It was devoted to international discussion on Ukraine as a credible partner and a rapidly developing market with a large economic potential.

The aim of the conference was to stimulate economic relations between Eastern and Western Europe. Present at the conference were Polish deputy Prime
Minister and Minister of the Economy Waldemar Pawlak, Ukrainian deputy Prime Minister Hryhoriy Nemyria, EU Commissioner for Regional Policy Danuta Hübner and many other distinguished guests.

Lawyer Jarosław Chałas of the Chałas and Partners law firm took part in two sessions – on Business Environment and Business Security. He talked about the importance of law changes in facilitating trade between Europe and Ukraine. During the panel discussion on Business Environment, he exchanged views with Ukrainian deputy Minister of Justice Leonid Yefimenko and other participants.

The following text by Oleh Krykavskyy, an expert from the Kyiv branch of Chałas and Partners, is a result of these debates. He writes about the implications
of changes in the legal situation of companies in Ukraine for foreign business.

The long awaited law regulating the operation of joint stock companies in Ukraine came into force several months ago. It had been adopted by the Ukrainian parliament – the Supreme Council of Ukraine – on September 17, 2008. It is called anti-raid law in Ukraine – in reference to corporate raid, a type of hostile takeover in business, one which may even involve excluding the majority shareholder.

The objective of the law is to increase the transparency of provisions regulating corporate governance and the operation of joint stock companies. Additionally, one of its most important effects is to offer better protection for minority shareholders, something which Jarosław Chałas stressed during the Baltic Business Forum Ukraine – New Opportunities conference.

In particular, the law is supposed to eradicate the problem of corporate raiding, which has plagued Ukrainian business for a long time now. Before the new law was adopted, contradictions and drawbacks in Ukrainian legislation had led to the emergence of corporate raiding, a negative phenomenon in which interested parties were able to take control over corporations by exploiting legal loopholes and imprecise regulations.

To discuss the amendments, let us begin with the most visible, though cosmetic, ones. Under the new regulations, existing open and closed companies are to be transformed into public and private companies respectively. These changes will probably be understandable to foreign investors but may lead to some misunderstanding because of the terms used in Ukraine’s Civil Code, which speaks of legal persons acting as “legal persons of public law” or “legal persons of private law.”

The change in question is terminological in nature. But it is worth remembering that companies operating under Ukrainian law have two years to introduce appropriate changes to their statutes.

The amended law also introduces more important changes, including the provisions which limit the possibility of selling shares in private companies to external entities without offering the shares to other interested parties.

The law which was in force until recently allowed both the closed, or private, sale of shares in joint stock companies and open, or public, subscription for shares. The new provisions represent an important anti-raiding instrument introduced in order to prevent third parties from interfering in companies.

The amended law also regulates the duties of the majority shareholder towards minority shareholders. Prospective buyers interested in taking over a 50% interest in a company should offer to buy shares from the other shareholders. If they want to buy more than 10% of the shares they should make a public announcement about the planned deal within 30 days.

However, when amending the law, the Ukrainian legislator failed to reduce the quorum at the general meeting of shareholders from the present 60% to 50%. The reason was probably the fact that earlier efforts to adopt such a provision had resulted in a 12-year delay in the law coming into force. At the same time, the new law clearly states that general meetings of shareholders may only be held on the company’s premises.

The new law also places greater control over the most important contracts signed by companies. Article 70 of the law has introduced the notion of “significant contracts,” that is contracts whose value exceeds 10% of the value of the company’s assets as reported in its latest annual financial report.

Additionally, any contract worth between 10% and 25% of the assets has to be approved by the supervisory board or by a general meeting of shareholders if the board fails to give its approval. Contracts worth between 25% and 50% of the company’s assets are approved by a general meeting of shareholders with a simple majority of those present at the meeting. An absolute majority of two thirds is required to approve contracts whose value is higher than 50% of the company’s assets.

The amendments discussed above will probably complicate to some extent the decision-making process in Ukrainian joint stock companies but they offer a chance to enhance their transparency.

The new Ukrainian provisions regulating the operation of joint stock companies should not be regarded as a cure-all for the ills associated with the development of companies in Ukraine - in many cases this development is hindered by the fundamental problems associated with the development of the country.

Some of the legally important elements of corporate governance, like giving out information about the company’s current situation to shareholders and responsibility of the company’s authorities, are still treated exclusively in terms of the company’s goodwill and are not reflected in law. However, new efforts to harmonise legislation are well visible and investors should appreciate them.

LINK:  http://www.polishmarket.com.pl/document/:21005?p=%2FEconomic+Monitor%2F
LINK:  http://www.chup.pl