UJBL March 2009
On 22 October 2008 the President of Ukraine signed the Law “On Joint Stock Companies” (the “Law”). The Law was published in the official media on 29 October 2008 and will take effect upon six months as of the date of its publication - on 30 April 2009, save for the provision related to the shares circulation in electronic form, which will become effective in 2 years.
Without exaggeration, the Law is one of the biggest achievements of corporate and takeover law in Ukraine. The said long-awaited act introduced a new regulation in a number of M&A matters related to acquisition of JSC shares. As a result, the subordinated legislation is to be subject to significant changes that will lead to material modification of playground for the Ukrainian M&A market players.
This article identifies some novelties to be faced by market players in M&A regulation since 30 April 2009. Namely, this article discusses the acquisition of martial and controlling stakes in Joint Stock Company (the “JSC”) under the new Law. Furthermore, it focuses on the material transactions and procedure of their approval. Finally, the below review summarizes the new matters related to the transactions with interested parties.
Public and Private Joint Stock Companies
The Law does not divide JSCs into two forms – closed and open JSCs, but provides for two types of JSCs – public and private. A number of shareholders in private JSC may not exceed 100 shareholders.
Public JSC shall obligatory go through the listing procedure and shall be kept with the register of at least one stock exchange. This requirement is not applicable to private JSCs, which shares may not be purchased / sold at stock exchange, save for sales through auctions at stock exchange. From the practical point of view the implementation of the provision establishing the obligatory listing is subject to its official interpretation. Also, as commented by the representatives of Securities and Stock Market State Commission (the “Commission”), it is not ruled out that the definition of “listing” under the applicable Ukrainian law may be reconsidered.
Under the Law, the public JSC may offer its shares either through public or private offering. Private JSC, in contrast, is permitted to allocate its shares solely through a private offering. If private JSC resolves to offer its shares through public offering, then its articles of association shall be amended as related to the type of such JSC. Conversion of private JSC into a public one will not be treated as transformation of a legal entity.
Shares Acquisitions
The Law introduced a number of new rules to be followed in case of acquisition of 10% and more shares in JSC. The rules are applicable regardless of JSC type (save for the preemptive right provisions established by law).
Under the Law, the stake of 10% and more common shares in the registered capital of JSC hall be treated as a material stake. According to Article 64 of the Law, an entity intending to acquire a stake in JSC that taking into account JSC shares already held by such entity or its affiliates will constitute 10% of common shares or more, shall deliver a 30 days notice to JSC prior to the expected date of acquisition. The vendor shall also submit such notice to the Commission and each stock exchange, where JSC shares are listed, as well as publish an announcement in the official printed media.
The Law specifies that the said notice shall cover the amount, type / class of JSC shares held by the potential vendor and each affiliate as well as amount of JSC shares bidden for.
The cited article states that the JSC is forbidden to implement any actions aimed at impeding the takeover of the material stake. The Law remains silent as to further qualification of such actions and the consequences if such actions were nevertheless carried out by JSC.
The Law qualifies the acquisition of 50% and more shares by one or more affiliates as the acquisition of controlling stake in JSC and establishes the follow-up obligations for the vendor. When the change of control over JSC occurred, the vendor shall offer to the remaining JSC shareholders to sell their shares (except where the said controlling stake is acquired in the course of privatization). This offer shall be done in a form of public irrevocable bid to all remaining shareholders and include the information about (1) the vendor and its affiliates; (2) the amount of shares held by them; (3) the bid price and the method of its calculation; (4) the term during which the shareholders willing to sell shall notify the vendor (within statutory established term from 30 to 60 days); and (5) the payment procedure.
In the considered situation the purchase price for shares being sold by remaining shareholders may not be lower than the market value determined according to the rules set out by JSC Law. In particular, the market value shall be established as a result of independent expert’s evaluation pursuant to the applicable law (for private JSC). The value of shares of the public JSC shall be determined under the rules established by securities and stock exchange legislation.
Finally, while entering into the above transactions the new rules of enjoying the preemptive right should be considered.
The Law provides no preemptive right of shareholders in public JSC. Preemptive right vested in shareholders of private JSC and JSC itself to purchase the shares sold by other shareholders of such JSC may be established by articles of association of private JSC, but it is not mandatory under the Law. However, if such right is provided in the articles of association, then the procedure for its exercise as laid down in Law shall be applied.
Material Transactions
The Law introduced a new concept of “material transaction”. A transaction is treated material if the market value of property or services, which are the subject matter of the transaction, equals to or exceeds 10% of the JSC assets’ value according to its annual financial statements.
Under the Law, the material transaction needs to be cleared by the JSC managing bodies. Where the transaction value varies from 10% to 25% of JSC assets’ value, the JSC supervisory board may decide whether to proceed with such transaction or not. In case the transaction value exceeds 25% of the assets value of JSC, only JSC shareholders meeting shall be entitled to make decision on the transaction. In addition, if the value of material transaction is in between 25-50% of the JSC assets’ value, the decision shall be made by simple majority of votes of shareholders attending the meeting. In the event the value exceeds 50% - by an affirmative vote of ¾ of total number of shareholders that, in fact, requires the quorum of ¾ of total number of shareholders at the shareholders meeting.
The prior consent may be granted by the shareholders with respect to several material transactions (if it is not decided yet how many of them will be executed during certain period) and shall be valid within one year. However, the Law directly prohibits dividing the subject matter of the material transaction to skip the prescribed procedure.
The JSC articles of association may establish additional requirements to the procedure of entry into the material transactions by JSC.
Finally, any shareholder is entitled to demand a buy-out of his / her shares by JSC if such shareholder as against the entry into the material transaction by JSC. In this event, the purchase price for shares that are subject to buy-out may not be lower than their market value determined as specified above. Obviously, this right may be enjoyed only by those shareholders who attended the shareholders meeting and voted against.
Transactions with interested parties
Another novelty being in line with the best European M&A practice is a notion of “transaction with interested parties”. The Law establishes that the following entity may be treated as an interested party with respect to certain transaction executed by JSC:
Any JSC officer, his/ her affiliate (affiliates), or a shareholder holding individually or jointly with its affiliates 25% or more JSC common shares, provided that such entity (each of such entities) either:
• is a party to the transaction;
• participates in the transaction acting as an agent or a representative (except for cases when the company acts through its authorized representative);
• receives consideration for entry into the transaction from JSC (JSC’s officers) or the entity being a party to the transaction;
• as a result of transaction acquires the assets or is interested in any other outcome of the transaction; or
• is an affiliates of a legal entity that complies with any of the above criteria.
A party interested in certain transaction with JSC shall notify the respective managing body on his / her interest within 3 business days since such interest occurred.
However, the JSC is not that clear about the body of which company should be notified (either of JSC or of another company, in which the interested party occupies certain position). In addition, as stated by cited provision, the determination of a very moment when the interest actually occurred (i.e. when the 3 days period shall start) gives a big discretion. Probably, the implementations of the said provision will much depend on the practice to be established by Ukrainian courts.
Within 5 days term upon the notification the JSC management shall inform the members of supervisory board (each JSC shareholder, in the event no supervisory board exists in JSC) about the transaction with interested party, in particular, (i) the subject matter of the transaction, (ii) the price of the transaction per each pies of goods / services (if any), (iii) aggregate consideration received as a result of the transaction, and (iv) the entity interested in such transaction.
The supervisory board should consider the possibility of such transaction for JSC within 5 business days. The said body is authorized either to approve the transaction, to prohibit it, or to delegate its consideration to the shareholders’ meeting. The last options shall be chosen when more than half of board members are interested parties.
Under the Law, the key test for transaction with interested parties is the potential infringement of JSC interests. Obviously, such broad definition of the ground for prohibition of the transaction with interested parties requires a well-established practice.
The Law rules that the failure to go through the above mentioned procedure makes the interested party liable for indemnification of any damages caused to JSC. Furthermore, the transaction shall be voidable provided that the parties intentionally disregarded the need to obtain the said approval.
Law implementation
The transitory provisions of the Law require all JSCs established before the Law became effective to revise their respective articles of association and by-laws in compliance with the Law’s requirements within 2 years. In case of JSC’s failure to do so, upon expiry of the said period any JSC shareholder will be entitled to file a suit for conforming the JSC articles of association and by-laws (if any) to the Law.
Moreover, if after the Law became effective the shareholders meeting of a JSC resolved on changing the amount of the registered capital, denomination of shares or securities issue, such JSC shall bring its activities in compliance with the Law and revise the articles of association accordingly. If the shareholders’ meeting failed to approve such amendments, the Commission will be entitled to refuse the state registration of the shares issue of such JSC due to the reason that the JSC articles of association has not been amended as required.
To sum it up, the above rules related to acquisition of JSC shares will certainly result in overall increase of the transparency of Ukrainian M&A market. Obviously, such transparency and the clear playground allows the better understanding of M&A processes at Ukrainian market and, thus, making it more attractive for foreign investors.
On 22 October 2008 the President of Ukraine signed the Law “On Joint Stock Companies” (the “Law”). The Law was published in the official media on 29 October 2008 and will take effect upon six months as of the date of its publication - on 30 April 2009, save for the provision related to the shares circulation in electronic form, which will become effective in 2 years.
Without exaggeration, the Law is one of the biggest achievements of corporate and takeover law in Ukraine. The said long-awaited act introduced a new regulation in a number of M&A matters related to acquisition of JSC shares. As a result, the subordinated legislation is to be subject to significant changes that will lead to material modification of playground for the Ukrainian M&A market players.
This article identifies some novelties to be faced by market players in M&A regulation since 30 April 2009. Namely, this article discusses the acquisition of martial and controlling stakes in Joint Stock Company (the “JSC”) under the new Law. Furthermore, it focuses on the material transactions and procedure of their approval. Finally, the below review summarizes the new matters related to the transactions with interested parties.
Public and Private Joint Stock Companies
The Law does not divide JSCs into two forms – closed and open JSCs, but provides for two types of JSCs – public and private. A number of shareholders in private JSC may not exceed 100 shareholders.
Public JSC shall obligatory go through the listing procedure and shall be kept with the register of at least one stock exchange. This requirement is not applicable to private JSCs, which shares may not be purchased / sold at stock exchange, save for sales through auctions at stock exchange. From the practical point of view the implementation of the provision establishing the obligatory listing is subject to its official interpretation. Also, as commented by the representatives of Securities and Stock Market State Commission (the “Commission”), it is not ruled out that the definition of “listing” under the applicable Ukrainian law may be reconsidered.
Under the Law, the public JSC may offer its shares either through public or private offering. Private JSC, in contrast, is permitted to allocate its shares solely through a private offering. If private JSC resolves to offer its shares through public offering, then its articles of association shall be amended as related to the type of such JSC. Conversion of private JSC into a public one will not be treated as transformation of a legal entity.
Shares Acquisitions
The Law introduced a number of new rules to be followed in case of acquisition of 10% and more shares in JSC. The rules are applicable regardless of JSC type (save for the preemptive right provisions established by law).
Under the Law, the stake of 10% and more common shares in the registered capital of JSC hall be treated as a material stake. According to Article 64 of the Law, an entity intending to acquire a stake in JSC that taking into account JSC shares already held by such entity or its affiliates will constitute 10% of common shares or more, shall deliver a 30 days notice to JSC prior to the expected date of acquisition. The vendor shall also submit such notice to the Commission and each stock exchange, where JSC shares are listed, as well as publish an announcement in the official printed media.
The Law specifies that the said notice shall cover the amount, type / class of JSC shares held by the potential vendor and each affiliate as well as amount of JSC shares bidden for.
The cited article states that the JSC is forbidden to implement any actions aimed at impeding the takeover of the material stake. The Law remains silent as to further qualification of such actions and the consequences if such actions were nevertheless carried out by JSC.
The Law qualifies the acquisition of 50% and more shares by one or more affiliates as the acquisition of controlling stake in JSC and establishes the follow-up obligations for the vendor. When the change of control over JSC occurred, the vendor shall offer to the remaining JSC shareholders to sell their shares (except where the said controlling stake is acquired in the course of privatization). This offer shall be done in a form of public irrevocable bid to all remaining shareholders and include the information about (1) the vendor and its affiliates; (2) the amount of shares held by them; (3) the bid price and the method of its calculation; (4) the term during which the shareholders willing to sell shall notify the vendor (within statutory established term from 30 to 60 days); and (5) the payment procedure.
In the considered situation the purchase price for shares being sold by remaining shareholders may not be lower than the market value determined according to the rules set out by JSC Law. In particular, the market value shall be established as a result of independent expert’s evaluation pursuant to the applicable law (for private JSC). The value of shares of the public JSC shall be determined under the rules established by securities and stock exchange legislation.
Finally, while entering into the above transactions the new rules of enjoying the preemptive right should be considered.
The Law provides no preemptive right of shareholders in public JSC. Preemptive right vested in shareholders of private JSC and JSC itself to purchase the shares sold by other shareholders of such JSC may be established by articles of association of private JSC, but it is not mandatory under the Law. However, if such right is provided in the articles of association, then the procedure for its exercise as laid down in Law shall be applied.
Material Transactions
The Law introduced a new concept of “material transaction”. A transaction is treated material if the market value of property or services, which are the subject matter of the transaction, equals to or exceeds 10% of the JSC assets’ value according to its annual financial statements.
Under the Law, the material transaction needs to be cleared by the JSC managing bodies. Where the transaction value varies from 10% to 25% of JSC assets’ value, the JSC supervisory board may decide whether to proceed with such transaction or not. In case the transaction value exceeds 25% of the assets value of JSC, only JSC shareholders meeting shall be entitled to make decision on the transaction. In addition, if the value of material transaction is in between 25-50% of the JSC assets’ value, the decision shall be made by simple majority of votes of shareholders attending the meeting. In the event the value exceeds 50% - by an affirmative vote of ¾ of total number of shareholders that, in fact, requires the quorum of ¾ of total number of shareholders at the shareholders meeting.
The prior consent may be granted by the shareholders with respect to several material transactions (if it is not decided yet how many of them will be executed during certain period) and shall be valid within one year. However, the Law directly prohibits dividing the subject matter of the material transaction to skip the prescribed procedure.
The JSC articles of association may establish additional requirements to the procedure of entry into the material transactions by JSC.
Finally, any shareholder is entitled to demand a buy-out of his / her shares by JSC if such shareholder as against the entry into the material transaction by JSC. In this event, the purchase price for shares that are subject to buy-out may not be lower than their market value determined as specified above. Obviously, this right may be enjoyed only by those shareholders who attended the shareholders meeting and voted against.
Transactions with interested parties
Another novelty being in line with the best European M&A practice is a notion of “transaction with interested parties”. The Law establishes that the following entity may be treated as an interested party with respect to certain transaction executed by JSC:
Any JSC officer, his/ her affiliate (affiliates), or a shareholder holding individually or jointly with its affiliates 25% or more JSC common shares, provided that such entity (each of such entities) either:
• is a party to the transaction;
• participates in the transaction acting as an agent or a representative (except for cases when the company acts through its authorized representative);
• receives consideration for entry into the transaction from JSC (JSC’s officers) or the entity being a party to the transaction;
• as a result of transaction acquires the assets or is interested in any other outcome of the transaction; or
• is an affiliates of a legal entity that complies with any of the above criteria.
A party interested in certain transaction with JSC shall notify the respective managing body on his / her interest within 3 business days since such interest occurred.
However, the JSC is not that clear about the body of which company should be notified (either of JSC or of another company, in which the interested party occupies certain position). In addition, as stated by cited provision, the determination of a very moment when the interest actually occurred (i.e. when the 3 days period shall start) gives a big discretion. Probably, the implementations of the said provision will much depend on the practice to be established by Ukrainian courts.
Within 5 days term upon the notification the JSC management shall inform the members of supervisory board (each JSC shareholder, in the event no supervisory board exists in JSC) about the transaction with interested party, in particular, (i) the subject matter of the transaction, (ii) the price of the transaction per each pies of goods / services (if any), (iii) aggregate consideration received as a result of the transaction, and (iv) the entity interested in such transaction.
The supervisory board should consider the possibility of such transaction for JSC within 5 business days. The said body is authorized either to approve the transaction, to prohibit it, or to delegate its consideration to the shareholders’ meeting. The last options shall be chosen when more than half of board members are interested parties.
Under the Law, the key test for transaction with interested parties is the potential infringement of JSC interests. Obviously, such broad definition of the ground for prohibition of the transaction with interested parties requires a well-established practice.
The Law rules that the failure to go through the above mentioned procedure makes the interested party liable for indemnification of any damages caused to JSC. Furthermore, the transaction shall be voidable provided that the parties intentionally disregarded the need to obtain the said approval.
Law implementation
The transitory provisions of the Law require all JSCs established before the Law became effective to revise their respective articles of association and by-laws in compliance with the Law’s requirements within 2 years. In case of JSC’s failure to do so, upon expiry of the said period any JSC shareholder will be entitled to file a suit for conforming the JSC articles of association and by-laws (if any) to the Law.
Moreover, if after the Law became effective the shareholders meeting of a JSC resolved on changing the amount of the registered capital, denomination of shares or securities issue, such JSC shall bring its activities in compliance with the Law and revise the articles of association accordingly. If the shareholders’ meeting failed to approve such amendments, the Commission will be entitled to refuse the state registration of the shares issue of such JSC due to the reason that the JSC articles of association has not been amended as required.
To sum it up, the above rules related to acquisition of JSC shares will certainly result in overall increase of the transparency of Ukrainian M&A market. Obviously, such transparency and the clear playground allows the better understanding of M&A processes at Ukrainian market and, thus, making it more attractive for foreign investors.