On March 23, Ukrainian Parliament has made great strides at making the corporate legal environment more effective and aligned with the best practice applied in international business practice. After successful voting in the Parliament the two long-awaited laws now await the President’s signature to become effective.
The first is the Law “On Introducing Changes to Certain Legal Acts about Corporate Agreements” (draft No. 4470). This law allows participants and shareholders of Ukrainian limited liability companies and joint-stock companies to enjoy instruments of shareholders’ agreements commonly used in international business practice.
Among such instruments there are contractual commitment to vote in a pre-agreed way, say, support candidates delegated by another shareholder to managing bodies, support decisions in certain areas of the company activity, etc.
The shareholders will also be allowed to arrange for a call and put options. These arrangements allow to agree on particular conditions and price for mandatory sale or purchase of the shareholder’s stake in the company to another shareholder.
Consequences of change of partners in the business may be addressed by so-called drag-along and tag-along provisions. The first one obliges a minor partner to join a major partner who sells its stake. The second one makes a major partner to ensure a minor partner’s right to sell its stake if the major partner exits from the company.
Experienced businessmen know how many nerves and money may so-called “dead locks” cost, when the shareholders’ disagreement on certain issue blocks the entire company’s activity. Now this situation may be effectively addressed in advance. This will also relieve courts of a part of corporate disputes.
Apart from the shareholders, creditors of the company may also act as parties to the shareholders’ agreement to secure their rights. For instance, the shareholders and the creditors may agree that in the case of the company’s default, the creditors may convert their debt to the shares in the company. The shareholders’ agreement allows to set out the procedure for such swap in advance.
Why is a shareholders’ agreement important? Firstly, it is a useful and market-proven solution to regulate the relationship between partners of a business which increases its efficiency and decreases conflicts. Secondly, it is an established tool in international business practice used in common law countries since XIX century. Unfortunately, in the absence of direct statutory provisions, courts in Ukraine were reluctant to enforce shareholders’ agreements by now. The Law No. 4470 aims to make these legal tools and flexibility available in Ukraine either.
Another long-awaited change is the Law of Ukraine “On Introducing Changes to Certain Legal Acts for Increase of Corporate Governance in Joint-Stock Companies” (draft No. 2302a-д). It opens the squeeze-out and sell-out procedures to solve the issue of powerless minor shareholders in joint-stock companies. In the result of the mass privatization, many companies have thousands of shareholders with a few shares only. Under the statistics, around a thousand joint-stock companies have minor shareholders whose aggregate stake is less than 5%. In most cases, such shareholders cannot effectively enjoy their rights in the company, including the right to dividends. On the other hand, such companies overcrowded with shareholders cannot change into a less-regulated form.
The newly adopted Law No. 2302a-д allows the shareholders with 95% stake to buy out the shares from minor shareholders. The latter, in turn, receive the right to effectively sell their shares which often have no real value for them.
The two above laws, if the President will sign them, will substantially improve Ukrainian corporate legal environment. It will become more flexible, effective, and attractive for investment, including from abroad.
Published: Kyiv Post Legal Quarterly, March 21, 2017, Vol.4, Issue 1
Author: Volodymyr Igonin