Member Article

by Igor Shevchenko and Michael Kharenko, Shevchenko Didkovskiy & Partners The need for corporate governance regulation evolved as Ukraine gained its independence and began its transformation to a market economy. Privatisation of state companies has led to their reorganisation into joint stock companies with a diverse ownership base.The past several years have evidenced further large scale privatisations and growth in the number of joint stock companies, and, in response, more effective regulation. The legal framework Corporate governance in Ukraine has developed mostly on the basis of laws, presidential decrees, and Ukrainian State Commission on Securities and Stock Market regulations and rulings.The primary sources are the Civil and Commercial Codes (2003), laws “On Business Companies” (1991),“On Securities and Stock Exchange” (1991),“On State Regulation of the Securities Market in Ukraine” (1996),“On the National Depository System and Peculiarities of Electronic Circulation of Securities in Ukraine” (1997). The Securities Commission is the primary regulator and is vested with broad rights to register securities and oversee their circulation, regulate activities of joint stock companies, protect shareholder rights and impose liability for their violation.Apart from mandatory rulings, the Securities Commission has become more involved in developing voluntary guidelines aimed at improving corporate governance practices in Ukraine. In particular, in 2002, it issued Recommendations for Corporate Governance Best Practices based on the OECD Principles. Furthermore, at the end of 2003, the Securities Commission approved the Principles of Corporate Governance. Stock exchange rules may also contain certain requirements to the listed companies and may establish reporting procedures. Presently, however, the effect of such rules is minimal, as most trades are done over-the-counter and very few companies list their shares on the existing stock exchanges. Shareholder rights Basic shareholder rights are established by law, and companies may provide for additional rights in their charters. The scope of shareholder rights may vary depending on whether the joint stock company is of an open type (where its shares have free circulation) or a closed type (where its shares are distributed among the founders and cannot be traded on stock exchanges). Participation in the general meeting of shareholders Any shareholder holding voting stock has the right to be present at the general meeting. Shareholders are entitled to one vote for each share of common stock held by the shareholder.While in the past there have been attempts by companies to establish the minimum number of shares giving the right to vote or to cap the number of votes by any one shareholder, such practices have been discontinued. The holders of preferred stock do not have the right to vote, unless this right is stipulated in the company’s charter. Preferred stock cannot exceed 25% of the company’s authorized capital. Calling a general meeting.The general meeting is called by the management board at least once a year. In addition, the management is required to call a meeting (i) at the request of shareholder(s) holding more than 10% of the voting stock, the supervisory board or audit commission, or (ii) if the interests of the company so require, upon insolvency, and in other cases specified in the charter.The meeting is organised by the management, which has full access to the lists of owners held by the share registrar. If the management refuses to call a meeting, it may be called by a court or by the shareholder(s) holding more than 10% of the voting stock, in which case the shareholder lists would have to be disclosed to the committee calling a meeting. Notification and agenda. The general meeting’s decision-making powers are limited to issues listed in the agenda. The shareholder(s) holding more than 10% of the voting stock have the right to put any issues on the agenda 30 days before the meeting, other shareholders may only make precatory proposals. Ukrainian law establishes specific rights of shareholders to be notified of the general meeting and its agenda at least 45 days prior to the meeting; any subsequent changes to the agenda must be communicated to shareholders not later than 10 days prior to the meeting. While violations of these rights are relatively common, the courts tend to grant no remedy to minority stockholders if their votes would not have been decisive. General meeting authority. The general meeting of a company has the right to adopt any decisions, including those within the authority of the management board. The Ukrainian law provides that the general meeting has exclusive authority to render the following types of decisions: • amendments to the company’s charter (including to change the authorized capital); • appointment of the company’s share registrar; • election of members of the supervisory board; • establishment (through election or appointment) and removal of the management board and other corporate bodies; • approval of the annual results of the company and its subsidiaries, reports and opinions of the internal audit commission, distribution of profits and allocation of losses; • reorganization and liquidation of the company; • creation and liquidation of subsidiaries, branches and representative offices, approval of their charters and regulations. The charter may supplement the exclusive authority of the general meeting, which usually includes authorization of share repurchases, approval of agreements for certain amounts, and imposition of liability on the company’s officers. In practice, the general meeting often delegates most of its nonexclusive powers to the supervisory board. Quorum and voting requirements. The law requires a quorum of more than 60% of the voting shares be present at the meeting. A qualified majority (3/4 of the votes) is required to amend the charter and liquidate the company. All other decisions are made by a majority vote of shareholders attending the meeting. The law currently does not provide for the possibility to use cumulative voting, or to alter the voting and quorum thresholds. In 2004, the Civil Code introduced a novel rule targeting conflict of interest transactions between the company and a shareholder. It provides that a shareholder does not have the right to vote at the general meeting on decisions regarding a transaction or dispute between the company and such shareholder. Participation in the meeting. Shareholders participate in the meetings in person or through their authorized representative by proxy. It is customary for the management of privatized companies to have a lot of influence on collection of proxies from small individual shareholders, since most of them are employees of such companies and thus dependent upon the management. It is not possible to adopt decisions without a formal meeting through written consents or otherwise. Liability of shareholders. Shareholders liability for corporate actions is generally limited to their equity investment. In 2004, the Commercial Code introduced special rules governing liability of controlling shareholders to the company and its creditors. In particular, if the company enters into a transaction on unfavourable terms through the fault of its controlling shareholder, such shareholder may be liable for the resulting losses.

 

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