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Corporate Governance: Recent Developments and Prospects

Corporate Governance: Recent Developments and Prospects

Ukraine
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Ukraine confidently declared its intention to bring its legislation into line with EU standards by signing the Ukraine-European Union Association Agreement in 2014, which obliges Ukraine to implement a number of EU Directives, including those regulating various aspects of corporate governance.

To that end, on June 4, 2017, the Law of Ukraine on Amending Certain Laws of Ukraine With a View to Raising the Level of Corporate Governance in Joint Stock Companies, which changes the principles of corporate governance, entered into force. 

Squeeze-out and Sell-out

Among other things, the new law introduced the long-awaited right of shareholders who have accumulated 95% or more of shares in a Ukrainian joint stock company (either acting alone or in a group) to force the minority shareholders sell their shares to them.

In parallel, the minority shareholders are granted a sell-out right and are now able to ask shareholders who have accumulated more than 95% of shares in the company to purchase their minority shares.

Although the squeeze-out mechanism is usually associated with takeover bids, the law provides for a special two-year transition period during which existing majority shareholders may initiate squeeze-outs of minority shareholders even without a takeover.

Therefore, existing shareholders who own 95% or more of the shares of a company are able to force minority shareholders in the company sell their shares to them.

Moreover, the squeeze-out mechanism may be used even when a deceased minority shareholder’s shares were not passed on to the heirs or when such shares are under a charge, arrest, or any other encumbrance. 

The squeeze-out mechanism is of particular interest for joint stock companies created via privatization and have hundreds or even thousands of minority shareholders who are former employees of the company.

It is important to note that the new law introduces escrow accounts enabling the unconditional transfer of the purchase price for the purchased shares during the squeeze-out procedure. Escrow accounts are a new tool for Ukraine, and their use is not limited to the squeeze-out mechanism. 

Tender Offer Procedure

In addition, the new law provides for a number of modifications to the existing tender offer procedure aimed at strengthening the protection of the rights of minority shareholders, in particular, by providing clear rules of price calculation and by introducing liability of the bidding shareholder. The law provides for the following thresholds requiring different scopes of actions from the bidding shareholders and the company: 10%, 50%, and 75%.

Shareholders’ Agreements 

Another important instrument which is about to be improved is shareholders’ agreements. On March 23, 2017, the Parliament of Ukraine adopted the Law on Amending the Laws of Ukraine Regarding Shareholders’ Agreements. This law introduces the possibility for participants of limited liability companies to enter into shareholders’ agreements, whereas until recently this option was available only to joint stock companies, and its practical utilization was very limited.

It is important to note that this law allows for the conclusion of an agreement between the company’s creditors and its participants / shareholders with a view to coordinating the management of the company in the future.

Although adopted by the Parliament, the Law has yet to be signed by the President of Ukraine.

Limited Liability Companies

The Parliament of Ukraine is considering a draft Law on Limited Liability and Additional Liability Companies.

This is a fundamental law aimed at upgrading the legal framework for limited liability companies – the most common form of company in Ukraine – and additional liability companies.

The draft law expands the list of available corporate governance tools which can be used by participants of limited liability companies to create a more favorable environment for investors.

Representative Offices of Foreign Companies

The Ministry of Economy of Ukraine is working on a draft law designed to improve the status of and the procedure for creating representative offices of foreign companies in Ukraine. 

These long-awaited improvements would bring the status of representative offices of foreign companies in line with the general structure of companies’ divisions and shorten the term for registering a representative office from the current three months to one week.

By Illya Tkachuk, Local Partner, Jeantet Ukraine

This Article was originally published in Issue 4.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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