Salans News
Corporate Law

February 2013

Implementing the Law of Ukraine “On the Depository System of Ukraine”: Potential Consequences for Ukrainian JSC’sand Their Shareholders

In this issue:
1. Establishment of the Central Depository
2. On performance by the Settlement center of cash settlement of securities transactions
3. Changing types of depository activities
4. The procedure for paying securities income
5. Miscellaneous
6. Reservation

In early December 2012 the National Securities and Stock Market Commission (hereinafter - “NSSMC”) took initial steps towards the implementation of certain provisions of the Law of Ukraine “On the Depository System of Ukraine” No. 5178-VI (hereinafter – “the Law”).
The law’s preparation and adoption was not without scandal and was negatively evaluated by many leading stock market experts. Although the Law comes into force only on 12 October 2013, some of its transitional provisions should be implemented prior to this date.
In general, the Law provides a new legal basis for the depository system of Ukraine to function, establishes the procedure for the registration and confirmation of rights to equity securities and rights within the securities depositary registration system, as well as the order of equity settlements under the securities transactions.
Due to the fact that the changes envisaged in the Law affect the interests of Ukrainian joint stock companies and their shareholders, we want to bring your attention to these innovations, so that before the effective date of the Law you will be prepared to take the appropriate steps to minimize potential negative consequences of the Law’s implementation. An overview of the main changes envisaged in the Lawis listed below.

1. Establishment of the Central Depository
The law provides for the establishment of the Central Depository and the Settlement Center on Servicing the Contracts on the Financial Markets (hereinafter - “the Settlement Center”).
Establishment of the Central Depository will be carried out based on the Public JSC “National Depository of Ukraine” (hereinafter – PJSC “NDU”). For this reason the other securities depositories shall place all global certificates in the custody of the PJSC “NDU” until the 12 October 2013. From the date of placing global certificates in its custody, PJSC “NDU” will be considered the successor of the rights and duties of other depositories in respect to contracts servicing the securities issuances, concluded between the issuers and the depositaries.
This means that customers of other depositories (which prior to adoption of the Law historically serviced most of the members of the stock market of Ukraine) shall without alternative choice switch servicing to the PJSC“NDU” and will continue such servicing with the Central Depository.

2. Performance by the Settlement center of cash settlement of securities transactions
The Law provides for the establishment of the Settlement Center, which should ensure cash settlement of securities transactions (both concluded at the stock exchange and outside the stock exchange). This being said, it is stipulated that the order of settlements and carrying out of securities transactions is to be determined by the NSSMC and the National Bank of Ukraine (hereinafter – “the NBU”).
This creates a great uncertainty concerning the final algorithm of securities transactions conduction and may result in a situation where most of the securities transactions settlements will require the mandatory involvement of the Settlement Center. Thus, a situation may arise in which the participants of the transaction on direct sale of Ukrainian securities will have to take the risks associated with compliance with the requirement of the Settlement Center and currency exchange rate fluctuations (e.g., in course of settlements in the nationalcurrency when Hryvnia devaluation is expected).

3. Changing types of depository activities
In contrast to the current legislation of Ukraine, which considers depository activities as exclusive, according to the Law various types of depository activities are established that can be carried by a depositary institution (depository activities of depository institutions, the activities on custody of the mutual investment institutions assets, the activities on custody of pension funds’ assets, etc.), carrying out each would require a separate license.
Please note that licenses to conduct the activities of the securities custodian and registrar will be effective only until 12 October 2013, as of that date such types of professional activity on the stock market as the registrar and securities custodian will cease to exist. Until that date the current securities custodians and registrars shall bring their activities into compliance with the Law and submit to the NSSMC all necessary documents for the issuance of new licenses or cease operation in accordance with the procedure established by the NSSMC. In this regard, it is important to monitor that the current custodian, where accounts in securities have been opened, is able to obtain the necessary license before that date, to eliminate the negativeconsequences connected with the inability to service accounts.

4. The procedure for paying securities income
The Law provides for a new procedure for dividends payment by a joint stock company, under which the distribution of the dividends by a company to its shareholders shall be made with the Central Depository involvement. In particular, upon approval by the shareholders meeting of a respective decision, a joint stock company is obliged to transfer the dividends amounts to the Central Depository (to the account opened with the Settlement Center) for crediting to the accounts of depository institutions, which are further required to transfer these amounts to shareholders.
Thus, the Law fundamentally changes the order of payment of dividends from a joint stock company to its shareholders. In particular, it preventsthe direct transfer of dividends from a company to its shareholders.

5. Miscellaneous
The Law provides an exhaustive list of cases regarding the disclosure of information of the depositary registration system and in addition provides for a number of amendments to the Law of Ukraine “On Joint Stock Companies” and the Law of Ukraine “On Securities and the Stock Market”, effective as of 12 October 2013.
The Law provides that before 12 April 2013 the NSSMC is obligated to develop and adopt regulations governing, in particular:
1) the order of transferring securities to the depository servicing of the Central Securities Depository;
2) the procedure and conditions for issuing the license for depository activities by a depository institution, renewal of license, issuance of its duplicate and copy;
3) the order for providing depository activities of the Central Securities Depository and depository institutions;
4) licensing conditions of professional activity on the stock market.
In addition, the Law provides for the duty of the NBU to develop and adopt regulations on ensuring the functioning of the Settlement Center prior to 12 April 2013. Thus, additional requirements and conditions for securities transactions with the Ukrainian securities may be envisaged in regulations to be approved by the NSSMC and the NBU. We aremonitoring the situation and will notify you of any significant changes.

6. Reservation
Taking into account that the Law provides an implementation of some fundamental changes in the activity of joint stock companies and in the functioning of the depository system of Ukraine (the order of payment of dividends, the sale of shares, etc.), prior to the date when provisions of the Law will enter into force, the issuers and their shareholders should consider how the implemented changes are eligible and structure participation in the equity accordingly or change the form of the company to a less arduous form of legal entity in the context of the government regulation.
Upon request we will be glad to provide additional information about the new Law and stipulated changes and to assist in providing measures to eliminate any possible negative impact of the Law on your business orinvestments.

This newsletter does not constitute legal advice with respect to any matter or set of facts and may not be relied upon for such purposes. Readers are advised to seek appropriate legal advice before entering into any transaction, making any determination or taking any action related to matters discussed herein. No part of this newsletter may be copied orquoted without the prior written consent of Salans.

For further information, please contact:
Igor Davidenko
Partner
E: IDavidenko@salans.com
Yaroslav Malomuzh
Associate
E: YMalomuzh@salans.com
Salans Kyiv
49-A, Volodymyrska Street, 2nd Floor
01001 Kyiv, Ukraine
T: +380 44 494 4774
F: +380 44 494 1991
E: kyiv@salans.com

© 2013. All rights reserved.
Salans Kyiv. February 2013