Ongoing Reform of State-Owned Enterprises in Ukraine

Ongoing Reform of State-Owned Enterprises in Ukraine

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One of the most significant trends in Ukraine’s legal environment in 2017 has been the active implementation of corporate law reform and, in particular, the improvement of the corporate governance of state-owned enterprises (SOEs).

These reforms, which are on-going, result from the joint efforts of various governmental authorities, the EBRD, World Bank, the IFC, and Ukraine’s legal community in general. They aim to minimize corrupt practices and political influence within SOEs and to procure the development of SOE professional management teams, ensure the effective management of SOE assets, and increase SOE enterprise value. This process is vital for SOEs in Ukraine and could be a strong preparatory step to maximizing their value in the run-up to their expected privatization. 

Although Ukraine launched its privatization process over 25 years ago, SOEs still account for almost one-third of the country’s economy. Only half of the approximately 3,400 SOEs actually conduct a business activity. The majority of them have been loss-making for many years and have become a heavy burden for the state budget. Soviet-style management, complex decision-making and accountability structures plagued by corruption and nepotism are the main challenges facing SOEs. While the government’s long-term goal is to privatize most SOEs, in the short-term it has undertaken an effort to increase their management efficiency and transparency, which should increase their attractiveness for potential bidders. 

On June 2, 2016, the Ukrainian parliament adopted the Law On Amendments to Certain Legislative Acts of Ukraine Regarding the Management of Objects of State and Communal Property (the “Law”) followed by regulations adopted by the Cabinet of Ministers, which to a certain extent implemented OECD guidelines and became a cornerstone of Ukraine’s on-going SOE corporate governance reform. 

The backbone of the reform is the mandatory establishment of independent Supervisory Boards at the largest SOEs, which are to take over the majority of the management functions from state authorities. According to the Law, the state authority empowered to manage certain SOEs shall appoint Supervisory Board members in such companies based on competitive procedures for a three-year term. Supervisory Board members are to be chosen from among experts in finance, strategic planning, and the core business areas of the particular SOE. A minority of the Supervisory Board members shall represent the state; the majority of them shall be independent. Supervisory Boards are authorized to appoint and dismiss top management and auditors of SOEs, evaluate results of management activities, and approve transactions involving up to 10–25% of the value of the SOE’s assets under the previous year’s accounts. Currently the creation of Supervisory Boards is mandatory for the 40 largest SOEs, the cumulative assets of which represent 94% of the entire SOE portfolio. 

Following the creation of the first Supervisory Boards at Naftogaz and Ukrzaliznytsya – the two largest SOEs in Ukraine – the government remains committed to further enhancing the powers of these corporate bodies. On November 16, 2017, a Draft Law On Amendments to Certain Legislative Acts of Ukraine Regarding Improvement of Business Conduct and Attraction of Investments by Securities Issuers No. 5592-d was adopted in the first reading. This new draft law aims to improve, inter alia, the functioning of the Supervisory Boards in both state and privately-owned joint-stock companies. Among its other newly-introduced provisions, the document requires public joint-stock companies to hire independent Supervisory Board members and form mandatory committees (such as Remuneration, Appointment, and Audit Committees) within the Supervisory Boards, and it extends Supervisory Board authority.

Another Draft Law submitted to Parliament – On Amendments to Certain Legislative Acts of Ukraine Regarding Improvement of Corporate Governance of Legal Entities Where the State Is a Shareholder (Founder, Participant) No. 6428 – aims to grant Supervisory Boards the rights to approve the strategic development plans of the respective SOE and significant transactions (e.g., asset management agreements, joint-venture agreements, etc.), provided that this Supervisory Board authority is reflected in the SOE’s charter. As of now, such powers fall within the competence of the respective state authorities, which complicates the timely adoption of business decisions and prevents SOEs from attracting foreign investments and debt capital to their business.  

Kinstellar is proud to be a part of such a crucial reform process for Ukraine by serving as legal advisor to the first independent Supervisory Board of Naftogaz, the largest state-owned company in Ukraine. We also serve as a legal advisor for corporate governance reform of the national state operator Ukrposhta, supported by the EBRD and Ministry of Infrastructure of Ukraine.

By Iryna Nikolayevska, Head of Corporate/M&A, Kinstellar Ukraine 

This Article was originally published in Issue 4.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.