On 25 February 2011, the President of Ukraine signed the Law of Ukraine No. 2994-VI "On Introduction of Amendments to the Law of Ukraine "On Joint Stock Companies" regarding Improvement of the Mechanism of Joint Stock Companies Operation" (the "Law"), which came into force on 2 March 2011 after its official publication in the printed media of the Ukrainian Parliament.

The Law is aimed at removing inconsistencies in the regulation of joint stock companies ("JSC") and streamlining their corporate governance. Although the Law relates to both public and private JSCs, the amendments in relation to public JSCs are more significant.

Previously the relatively recent Law of Ukraine No. 514-VI "On Joint Stock Companies" (the "JSC Law") introduced a requirement that public JSCs to undergo a listing and remain listed on at least one stock exchange.  Many JSCs were not able to meet the listing requirements and, thus, failed to comply with the JSC Law. This issue, among others created by the JSC Law, forced many public JSCs to start searching for alternative solutions, e.g., reducing the number of shareholders (to 100 or less) to become a private JSC or to even transform into a limited liability company. The new Law abolishes the obligatory listing requirements for public JSCs, while maintaining the requirement that their shares are admitted to trading on a stock exchange.

The JSC Law also required that all transactions with shares of a Public JSC be effected on a stock exchange. The prospects of practical realisation of such requirement were unclear. The new Law repeals this requirement thus, making possible private (off-exchange) sales.

In addition, the JSC Law required that JSCs convert (dematerialize) their documentary shares into electronic form by 30 October 2011. Under the new Law, that deadline has been extended to 30 April 2011. At the same time the Law left unchanged the deadline for bringing the constituent documents of existing JSCs into compliance with the requirements JSC Law– all JSCs have until 30 April 2011 to bring their constituent documents into compliance.

A 30-day public notice requirement to shareholders about a general meeting had been introduced by the JSC Law for Public JSCs only. The new Law now extends that public notice requirement to all JSCs. Compliance with the public notice requirement is important as failure to provide a proper notice to shareholders is traditionally viewed by Ukrainian courts as a ground for invalidating a meeting held with improper notice.
Further important changes introduced by the new Law include:

  • It is now possible to have not only civil law agreements, but also labor agreements (contracts) concluded with members of a supervisory board of a JSC;
  • A legal entity that is a shareholders of a JSC can now be elected into the supervisory board of a JSC (previously, only physical persons could be elected). Such legal entities can act through individual representative(s);
  • The definition of a supermajority vote for a general meeting of shareholders has changed. Now a supermajority must constitute more than 75% of the votes of shareholders registered at the meeting and entitled to vote on a respective matter. Previously, asupermajority constituted 75% of the votes of the aggregate number of the JSC's shareholders (regardless of whether they were present at the meeting);
  • A Private JSC was deprived of a possibility to have a right of first refusal ("RoFR") with respect to shares of such JSC offered for sale by a shareholder if the other shareholders refuse to exercise their RoFR. In the earlier version of the JSC Law, a Private JSC had such a RoFR if provided for in the company's charter;
  • The scope of a RoFR in a Private JSCs was expanded to include not only a sale of shares but also other types of disposals (e.g., a gift), however, leaving it to the shareholders of the Private JSC to decide whether the RoFR should be provided for in the company charter at all and which types of disposal should be covered;
  • The procedures of creating a JSC by one participant and decision making in such solely-owned JSC were streamlined;
  • Creation of a reserve capital account becomes optional except for a JSC that issued preferred shares;
  • Rules on mandatory notice to the JSC to be made buy a buyer of a material shareholding (10% or more) and on mandatory offer to be made by a buyer of a controlling shareholding (exceeding 50%) to the rest of the shareholders of a JSC were further detailed; and
  • The rules on cumulative voting for election of the JSC's governing bodies became clearer.

Overall, the Law improves corporate governance rules for JSCs as well as removes some defects in legal regulation of JSCs. The amendments are expected to improve the legal base necessary for the development of the domestic capital market in Ukraine and facilitate investments. However, further amendments to the JSC Law are anticipated to make the regulatory framework for JSCs more efficient and investments in JSCs' securities more secure and attractive for investors.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 23/03/2011.