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Новая эра ценных бумаг…

03 07 2006

Текст доступен только в английской версии.

On April 12, 2006 the long-awaited Law of Ukraine "On Securities and Stock Market" (the "Securities Act") was published in the "Official Journal of Ukraine". In 30 days since its official publication (on May 13, 2006) the Securities Act have entered into effect and substituted the out-of-date Law "On Securities and Stock Exchange" enacted as early as 1991. As a result, the Ukrainian legislation regulating securities is subject to significant change and in the nearest future will bring material modification of the playground for the domestic stock market. The Securities Act governs the relations in the sphere of issuance and circulation of securities and performance of the professional activities at the stock market. The main principles declared by the lawmakers are transparency and effectiveness of the stock market in Ukraine.

The Securities Act covers five distinct areas, such as the securities themselves (definitions, classifications, transfer of rights derived from the securities etc.), professional activities at the stock market (their categories, issues related to stock exchange operations), the securities issuance both through public and private offerings (a step-by-step procedure, prospectus and other regulatory requirements), information disclosure requirements at the stock market (information about issuer, insiders and insider information), and fundamentals of the securities' market regulation (e.g. self-regulating organizations).


Final and transitional provisions of the Securities Act are also worth close attention. The legislative amendments necessitated by the Securities Act, aim to eliminate the ambiguous regulations and conflicting provisions of Ukrainian legislation acts currently in effect. In particular, the amendments are required to the Civil Code (with the purpose of unified use of terms), to the Commercial Code (in the part relating to depositary certificates), to the Laws of Ukraine "On state regulation of securities market in Ukraine" (in the part relating to licensing of the securities market activities by Securities and Stock Market State Commission (SSMSC), "On Advertising" (in the part relating to restrictions in using certain information on securities' profitability in advertising).


The Securities Act sets forth the securities' classifications under several new criteria: issuance and non-issuance securities (based on the issuance procedure); bearer, registered and order securities (based on the issuance form); share, promissory, mortgage, privatization, derivative and shipping securities (based on their legal nature). The latter two not only comply with the applicable requirements of the Civil Code of Ukraine, but also specify the classifications therein. Moreover, the lawmakers have taken into account the existence of certain new stock market instruments - in particular, mortgage securities (certificates of funds of operations with real estate).


The earlier approach to defining essential elements of securities has also been revised. For instance, information on the amount of registered capital of a joint stock company as of the date of issuance of its shares, the term of payment of dividends, the signature of the Chairman of the Management Board (its authorized representative) and the company's seal are not viewed as mandatory for a share certificate. In other words, lack of such information does not cause a share to become an invalid market instrument. And it also appears that finally the lawmakers have drawn a clear distinction between the share itself and the share certificate.


According to the Securities Act, all the issuance securities shall have an international identification serial number. Before the new Securities Act, the issuers were bound to obtain the ISIN code (the code of issuance of securities) with the National Depository of Ukraine according to applicable SSMSC regulations. Obviously, another name of the code will not lead to significant change of existing procedure of its obtaining.


Considering that the prevailing number of shares issued by Ukrainian joint stock companies are registered shares (approximately 95%), pursuant to the Securities Act the bearer shares are no longer allowed for issuance.


The Securities Act also makes a kind of "promotion" to such an "exotic" (certainly - in terms of Ukrainian stock market) form of shares as privileged. Privileged shares may be issued of different classes (i.e. with different scope of rights attached) that should be defined under the articles of association of the particular issuing company. A possibility of conversion of the classes of privileged shares one into another is also envisaged. Based on those provisions, the said form of shares may become much more attractive for both shareholders and issuers. However, in aggregate all the privileged shares still may not exceed 25 % of the registered capital of the issuer.


At the same time, in respect of the corporate bonds, the upper limit (linked to the amount of the registered capital of the issuing company) has been modified. According to the new rules, a company is entitled to issue the bonds to the amount which does not exceed the triple amount of its own capital.


The next notable novelty of the Securities Act is that each joint stock company may perform both public and private offering. The public offering means distribution of securities either through public announcement (including, but not limited only to press) on such distribution to indefinite number of persons or an offer to transfer the title to securities made to more than one hundred persons. The private offering, respectively, represents an offer addressed to certain persons known in advance.


No choice between said public or private offering depending on the joint stock company's type (an open or a closed one) is available. This new provision goes in line with the approach incorporated in the draft Law of Ukraine "On Joint Stock Companies" (approved as a draft bill by the Cabinet of Ministers of Ukraine on October 19, 2005) stipulating that a newly established joint stock company could be of an open type only. Having said that, any company's initial offering can be only private. In other words, the beneficiaries of the first distribution of shares can only be the company's founders that, naturally, are already known.


Upon entry of the Securities Act into effect, companies that shall decide to issue securities are obliged, inter alia, to issue and register the issue prospectus with SSMSC. Public disclosure of this document is aimed at giving the potential investors all the required and sufficient information about the issuer, its financial and commercial status and the securities to be issued. The requirement of a publicly available issue prospectus goes in line with the worldwide best practices in securities regulation and ensures that the decision of investors to buy securities will be based on the sound and valid information. With this purpose the Securities Act sets forth the obligation of SSMSC to hold the register of State Register of Securities' Issuances and to provide the participants of the stock market with free (and namely, free of charge) access to such Register.


It was already mentioned that the Securities Act devotes its significant part to regulation of the types of information that should be available to market players (so called ordinary and specific information). Compared to the currently effective securities legislation, the scope of publicly available information was widened drastically. This information is sought to be in a free-access database of SSMSC. An example of such information is data on the persons holding more than 10% of shares of the issuer (the ordinary information). The specific information that shall be disclosed covers, in particular, the company's decisions on distribution of the securities for more than 25%, redemption of its own shares (treasury stock), obtaining any loan exceeding 25% of the company's capital amount, changes of the officers, change of any owner of 10% or more of the company's shares etc.


Certainly, full and punctual implementation of the above disclosure practices with unrestricted access from the investors' side is expected to substantially increase the transparency of information at the Ukrainian stock market.


Another novelty that relates to data use policies is the regulation on insiders' information. In particular, the Securities Act now clearly defines the insiders. Each issuer or each professional participant of the stock market shall hold the insiders? register. Insiders are not allowed to use the information known to them due to such status for entering into any agreement for their own benefit or the benefit of third parties, to transfer such information (except for certain allowed cases) or to give any references to purchase or sale of any securities, in respect of which such insider has the insiders' information. The authority to define whether the information is an insiders' one as well as to set the procedure of its disclosure was reserved to SSMSC.


The new rules will not apply to certain securities if the decision on their issue was adopted before the Securities Act's entry into force. However, this provision will apply only to the issuance securities. All market participants will have a three year transitional period from entering into force of the Securities Act to bring their activities in line with its requirements.


Essentially, the Securities Act meets the expectations of the Ukrainian stock market and complies with the requirements of the current level of economical and financial development of Ukraine. Furthermore, its adoption solves a number of collisions between the applicable legislative acts in this field. And, undoubtedly, in view of its novelties which correspond to the worldwide best practices, the Securities Act ensures advance of the relations at the national securities market to a higher institutional level.

The Ukrainian Journal of Business Law, June 2006
Authors: Denis Lysenko, Anna Babych