Since 2008 joint stock companies in Ukraine have functioned under a special corporate governance law (the “JSC Law”), which has improved through the course of its existence. Year after year, with the help of the SEC and the business community, Ukrainian legislators have introduced profound amendments to the law to bring corporate governance in JSCs in Ukraine closer to European standards, to attract foreign investments, and to insure adequate protection of rights of various stakeholders (minority shareholders, creditors, etc.) As a result, Ukraine has moved up in the World Bank’s Doing Business ranking, and in 2020 the country ranks 64th in the ease of doing business and 45th in the minority shareholders protection component.
At the end of 2019, a new draft law on JSCs (the “New JSC Law”) was registered in the parliament of Ukraine, and it is now being debated. In essence, this draft codifies and streamlines the changes to the JSC Law that have been made since its enactment. The New JSC Law also provides solutions for urgent problems which have been revealed during the JSC Law’s implementation consistent with the best practices of developed economies and European standards.
So, what major changes would the New JSC Law introduce?
One-Tier Governance Structure: Currently, most JSCs in Ukraine are required to have a “two-tier” structure of corporate governance, consisting of a supervisory board and an executive body (either collegial or single-person). The exception is private JSCs with fewer than ten shareholders. Under the New JSC Law, the majority of JSCs would have the option to choose between the “two-tier” structure and a “one-tier” structure (consisting of a board of directors only, to include executive and non-executive directors/officers). This one-tier approach is seen as proportionate to the size of JSCs, company social value, and type of business model.
Electronic Voting by Shareholders: Although the JSC Law provides for absentee voting (polling) by the shareholders, its implementation is practically impossible. As a result, the only way to hold a general meeting of shareholders in JSCs in Ukraine is to organize the physical presence of all shareholders in one place. The New JSC Law aims to rectify this situation by establishing an electronic voting procedure with software and technical tools to be developed by the central depository. In addition, a simplified convocation procedure for the general shareholders’ meetings will be introduced for use with electronic voting.
Enhances Liability of JSC Officers: The New JSC Law improves the mechanisms to hold company officers liable for damages they cause to the company. In particular, damages caused by a breach of fiduciary duties should be recoverable, provided a court declares the relevant transaction invalid and the company’s officers liable. The New JSC Law also establishes limitations on taking positions in JSCs and allows for the early dismissal of company officials who cause damage to a JSC.
Corporate Governance for Professional Participants of Capital Markets
Statutory corporate governance standards for professional participants of capital markets currently do not exist in Ukraine, apart from the banking segment of the financial sector. Under the New JSC Law, the corporate governance requirements of Europe’s MiFID II and Capital Requirements Directive will be applied to Ukrainian investment firms, creating a risk-oriented supervision model.
The other proposed changes relate to expanding the ability of minority shareholders of JSCs to file derivative claims, and granting such right to shareholders of LLCs. Under a derivative claim, a shareholder may file a claim in the interests of the company for damages caused to the company by actions or omissions of the company officers. The New JSC Law also introduces mechanisms related to the determination of minimum share price and squeeze-out counterbid options and simplifies statutory reorganization and liquidation provisions to bring them in line with respective EU directives. The New JSC Law would also introduce the position of corporate rights counsel and further improve the function of corporate secretaries in JSCs.
The New JSC Law has been prepared as part of the ongoing corporate governance reform aimed at harmonizing Ukrainian legislation with EU regulations. The proposed changes have also long been sought by Ukraine’s business community. Once adopted, the New JSC Law will provide for more flexible, competitive, and transparent JSC business activity in Ukraine.
By Maria Orlyk, Partner, and Oleksandra Prysiazhniuk, Senior Associate, CMS Reich-Rohrwig Hainz