Recent Developments

With effect from January 2015Ukraine has introduced (i) a simplified procedure to increase the capital of,or reorganize, a bank that does not meet the capital adequacy requirements and(ii) a detailed procedure for the emergency government bailout of such a bank.

The measures came into being whenon 28 December 2014 the Ukrainian Parliament adopted the Law of Ukraine"On the Measures to Facilitate the Capitalization and Restructuring ofBanks" (the "Capitalization Law")

Implications for banks

The need for additionalcapitalization results from an audit carried out at the request of the NationalBank of Ukraine (the "NBU") by an audit firm approved by theNBU.  Under the Capitalization Law a bank that did not pass an audit mustpropose a plan for additional capitalization and/or restructuring to achievethe minimal capital adequacy level set by the Capitalization Law and this planmust be approved by the NBU. If the NBU approves the plan, an undercapitalizedbank must conduct capitalization/restructuring within the period specified bythe NBU. If the bank fails to submit a capitalization/restructuring plan or theshareholders of the bank are unable to provide the desired level ofcapitalization the NBU can, among other things, propose state involvement inthe bank to the Cabinet of Ministers of Ukraine or recognize the bankinsolvent.

What the Law says

I. Expedited procedure for the capitalizationof banks

The Capitalization Law provides an expedited procedure forcapitalization and/or restructuring of Ukrainian banks. In comparison to thegeneral banking and corporate legislation, it sets shortened periods, interalia, for:

• announcement of a general meeting of a bank'sshareholders (not less than five business days before a general meeting);

• conclusion of agreements on purchase of additionallyissued shares (not more than two business days after the general meeting);

• transfer of funds for the purchased shares (not more thanfive business days after conclusion of an agreement);

In addition, the Capitalization Law suspends the application ofcertain provisions of Ukrainian legislation. These, inter alia, include:

• a requirement to notify all creditors of a bank about thedecision of a general meeting on reduction of the share capital of the bank ordissolution of the bank by the way of reorganization;

• restriction on the minimum par value of a share;

• requirement to liquidate a bank if the bank's sharecapital is less than a minimum amount determined by the law;

• mandatory share buy-backs at the demand of a bank'sshareholder;

• requirements for the quorum of a general meeting ofshareholders. The Capitalization Law stipulates that decisions of a generalmeeting concerning capitalization and re-organization of a bank and approval ofplacement of shares are taken by a simple majority of votes.

II. Participation of the state in thecapitalization of banks

The Capitalization Law specifies the methods and conditions forstate participation in the capitalization of banks. It stipulates that thestate can participate by:

• the acquisition of shares of an additional issue inexchange for sovereign bonds; or

• provision of loans in the form of sovereign bonds on theterms of subordinated debt secured by pledge of shares of a bank ensuring theright of the state to use and dispose of not less than 75 percent of the bank'sshares.

III. Moratorium

The Capitalization Law establishes a moratorium on sharebuy-backs and distribution of dividends by banks requiring additionalcapitalization.

IV. Expanded authority of the National Bankof Ukraine

The Capitalization Law amends the Law of Ukraine "On Banksand Banking Activity". The amendments expand the authority of the NBU andempower it to establish temporary measures for regulation and supervision ofbanks when there are signs of danger to the banking system of Ukraine. These,inter alia, include the authority:

• to establish measures supporting the liquidity of banks;

• to restrict or prohibit withdrawal of funds from currentand deposit bank accounts of legal entities and natural persons;

• to restrict or temporarily prohibit foreign currencytransactions in Ukraine, including transfer of foreign currency out of Ukraine.

Conclusion

The Capitalization Law was adopted in response to the ongoing crisisin order to ensure economic security and protect the banking system of Ukrainefrom collapse. It affects banks requiring additional capitalization andprovides an expedited procedure for capitalization/restructuring of banks. Inaddition the Capitalization Law empowers the NBU to establish temporarymeasures for regulation and supervision of banks.

Additional notes

ThisLEGAL ALERT is issued to inform Baker & McKenzie clients and otherinterested parties of legal developments that may affect or otherwise be ofinterest to them. The comments above do not constitute legal or other adviceand should not be regarded as a substitute for specific advice in individualcases.