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Corporate law issues in Ukraine are mainly regulated by the 1991 Enterprises Act, 1991 Companies Act, 1991 Ownership Act, 1991 Securities and Stock Exchange Act, and 1996 State Regulation of the Stock Market in Ukraine Act. As we can see, the majority of Acts laying down the basic concepts and principles of Ukrainian corporate law date back to 1991, when Ukraine gained its independence. Application of these Acts over the past decade has shown numerous inadequacies and gaps, calling for a considerable overhaul of the existing legal framework and replacement of these obsolete Acts with new ones. At present Ukraine is actively developing a new legislative framework in the area of corporate law. In January 2003 two fundamental laws addressing corporate issues, the Civil Code and the Commercial Code, were adopted, to come into affect as of 1 January 2004. The Parliament is also considering two competing drafts of the Joint Stock Companies Act. However, these bills have been under consideration since 2000 and there seems to be no end to this protracted consideration process. The new State Registration of Legal Entities and Private Entrepreneurs Act was passed on 15 May 2003 and will come into force on 1 July 2004. Formation of Legal Entities Establishment and operation of Ukrainian legal entities are primarily regulated by the Enterprises Act and the Companies Act. Companies (business associations) are the most commonly used type of legal entities and may be incorporated as (i) an open/closed joint stock company, (ii) a limited liability company, (iii) an additional liability company, whose participants are liable to the extent of their contributions to the charter capital and, in addition, within a certain amount agreed by them, (iv) a full liability company (general partnership), in which the participants bear joint liability for the company’s liabilities to the full extent of their property, and (v) a differentiated liability company (limited partnership), where the liability of some participants is limited to their contribution to the charter capital while the others are liable to the full extent of their property. Both Ukrainian and foreign entities/individuals may participate in the establishment of business associations (companies). Importantly, in order to comply with equity requirements, at least two founders are required for the formation of a company. Joint stock companies (JSC), limited liability companies (LLC) and additional liability companies are established and operate pursuant to a Foundation Agreement and a Charter, while full liability and differentiated liability companies operate solely pursuant to a Foundation Agreement. The Foundation Agreement is a contractual arrangement among the founders, governing their mutual rights and obligations with respect to formation and capitalization of the company. The Charter functions as a company’s bylaws (Articles of Association), setting forth its organizational structure, business activities, corporate governance, the roles of management, and so on. The law establishes a number of requirements as to the content of the foundation documents and the minimum charter capital of a company. Generally, Ukrainian companies are most frequently established in the form of an LLC or a closed JSC (CJSC). Given equal tax treatment of LLCs and CJSCs under Ukrainian law, the LLC form is recommended where a foreign company intends to establish a subsidiary without Ukrainian partner(s). In this case, a foreign founder will not be exposed to the risk of forcible expulsion from the LLC, which is allowed under Ukrainian law in certain situations. In addition, the establishment of an LLC can be completed (i) in less time, because it does not require the registration of share issuance and related procedures, as equity in an LLC is represented by participation interests rather than shares; and (ii) on a smaller budget, because of the lower minimum charter capital required for an LLC. Joint Stock Companies Legally, the difference between an open JSC (OJSC) and a CJSC is that the CJSC shares may not be (i) publicly traded and/or (ii) distributed through public subscription. The courts’ decisions have been mixed on the issue of enforceability of transfer restrictions with respect to CJSC shares (including the right of first refusal), so that this issue remains controversial. From economic and practical perspectives, the OJSC is suitable when the business intends to commit substantial capital, necessary for its business activities, through the issuance and sale of stock to the public at large. A CJSC, on the other hand, is typically financed mostly by its founding shareholders, and has a few shareholders who closely supervise day-to-day activities of the company and whose whereabouts are well known. The Companies Act has been regularly criticized for, in many respects, virtually disregarding these important distinctions between OJSCs and CJSCs. A good example is the lengthy procedure for convening the General Meeting of Shareholders (GMS), which under present law is required for both OJSCs and CJSCs. The existing legislation governing both kinds of JSCs contains many other drawbacks that create substantial inconveniences for shareholders. For example, shareholder loans are not easily convertible into company equity because, in addition to including convertibility provisions in the original loan agreement between shareholder and JSC, there must be additional corporate actions by the shareholders to authorize conversion at the time the loan is overdue. Accordingly, some of the non-lender shareholders may block the conversion. As a result of these and other obstacles, it is usually a rather complicated task to structure corporate financing and management to meet investors’ expectations and ensure profitability. Corporate Governance In early 2002 the Ukrainian President issued a Decree establishing a concept and basic guidelines for further development of corporate governance in Ukraine. The Decree provides for mandatory notification of an intention to acquire a majority shareholding, a special procedure for a company to enter into contracts that may significantly affect its financial standing, administrative liability of a company’s officers for violation of shareholder rights, and participation of shareholders in bankruptcy proceedings. Since shareholder rights violations are most frequently connected with insufficient access to corporate information by investors, the Decree specifically addresses disclosure and transparency issues. The Decree also envisages the establishment of a Coordination Council on Corporate Governance Issues in Joint Stock Companies, and the State Securities and Stock Market Commission (SSMC) is vested with the authority to develop the Corporate Governance Code. Based on the international principles of corporate governance promoted by the Organization for Economic Cooperation and Development (OECD) and well established local corporate practice, in 2002 the SSMC developed the Recommendations on the Best Corporate Governance Practice, elaborating upon currently effective legislation. In furtherance of the President’s Decree, the SSMC’s recommends incorporating the best-practice provisions into internal corporate documents.

 

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