As of 1 May 2016 certain aspects of corporate law will be amended to increase the protection of minority shareholders in Ukrainian joint stock companies (“акціонерні товариства”). The changes, which include the re-introduction of a derivative action possibility and more detailed rules on related-party transactions, are made by the Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine on Protection of Investors’ Rights” dated 7 April 2015 (the “Minority Rights Law”).
A shareholder with 10% or more of all shares of a Ukrainian joint stock company (a “JSC”), or a number of shareholders holding in aggregate 10% or more of all shares, will have the right to bring an action on behalf of the JSC against one or more officers of the JSC for damages where the JSC suffered loss due to acts of such officers. In Ukraine, not only directors but also members of various boards – e.g., the supervisory board (the “SB”) or the audit committee – are considered to be officers of the company.
The Minority Rights Law provides a non-exhaustive list of circumstances which entitle a shareholder to bring a derivative action. For example, an officer of a JSC can be liable for damages where that JSC suffered loss as a result of any of the following:
- acting in excess of their powers;
- anything done with respect to a matter in violation of specific requirements applicable to that matter pursuant to the JSC’s constitutional documents (i.e., its charter);
- anything done on a matter in compliance with the JSC’s charter where that officer obtained prior approval or other authorisation (as applicable) because they presented inaccurate information on the matter;
- inaction when they were required to take certain actions in accordance with their duties; and
- other intentional (as opposed to negligent) acts of that officer.
The Minority Rights Law also provides that an officer who is a respondent in a derivative action, may not represent the company in the proceedings, or themselves appoint an attorney to represent the company in the proceedings.
A public JSC (a “PJSC”) and any JSC in which 50% or more of all shares are state-owned, will be required to have no less than two non-executive members on its SB (the so called independent directors). In a PJSC the number of SB members must be five or more. As previously, the SB members of a PJSC will be elected through cumulative (i.e., proportional) voting. That is, on a resolution to appoint SB members a shareholder will have one vote per each share held, multiplied by the number of SB members to be elected. Generally, the proportion of votes required to appoint a SB member equals 1/x, where x is the number of SB members to be elected.
Another new development is that the appointing shareholder(s) and their SB member may now be held jointly and severally liable for loss to the company caused by that SB member.
In order to serve as an independent director of a company, an individual must meet the criteria set out in the Minority Rights Law. In particular, the nominee must not:
- in the preceding five years, have been an affiliate of the shareholders, the company or a subsidiary of the company, or an officer of the company or its subsidiary;
- have ever received any significant, additional remuneration from the company or its subsidiary, other than any fees for serving as an independent director;
- in the preceding year, have had any significant business relations with the company or its subsidiary;
- in the preceding three years, have been an employee of the current/previous independent auditor of the company or its subsidiary; and
- have ever been a director in an affiliated company.
An independent director who ceases to meet the independence criteria must resign. Whilst previously SB members of a PJSC had to be re-elected every three years, the law will now require their re-election at each Annual General Meeting (the “AGM”) and, where an AGM will not have been held by 30 April, they will be required to step down.
A PJSC and any JSC in which 50% or more of all shares are state-owned, will also be required to establish an audit committee, a remuneration committee, and an appointments committee of the SB, each composed principally of independent directors and, chaired by an independent director. Decisions of those committees are binding for the SB.
Related party transactions
As a general rule, all related party transactions of a JSC with a value of more than 100 times the then applicable statutory minimum wages (i.e., in 2016 – UAH 137,800 or approximately EUR 5,000) will each require prior approval of the SB. A lower monetary threshold and/or additional requirements can be set in the charter of a JSC.
An arm’s length basis review of a related party transaction of a PJSC is to be done by an independent auditor, or other certified professional.
Preliminary shareholder approval of so called significant transactions of a PJSC (i.e., transactions with a value equivalent to 10% or more of that PJSC’s assets as per the last annual accounts) remains an option, but will no longer be allowed for those significant transactions which are also related party transactions.
A related party transaction with a value equivalent to more than 10% of that JSC’s assets as per the last annual accounts must be approved by the shareholders (rather than the SB). Whilst previously being interested in a related party transaction disqualified a SB member from voting on the resolution to approve that transaction, the same principle will now apply to the shareholders. That is, a related party transaction will have to be approved by a majority vote of those shareholders present and voting at the shareholders meeting, but which are not interested parties in that related party transaction.
Public to private
The Minority Rights Law removes the restriction on the maximum number of shareholders in a private JSC (a “PrJSC”). Accordingly, after 1 May 2016, a PrJSC can have more than 100 shareholders. The abolition of this restriction will enable PJSCs to go private. As before, a resolution to change the type of a JSC from public to private or vice versa, requires a 75% + 1 vote approval of the shareholders present and voting at the shareholders meeting, and triggers the mandatory tender offer process for those shareholders who voted against such change of the company type.
This novelty in the law can be useful for PJSCs which are, in essence quasi-public, but have been historically required to remain public (e.g., PJSCs created during privatisation). Going private can relieve such PJSCs from the administrative burden of complying with additional requirements applicable to public companies.
Whilst a PrJSC will be allowed to have more than 100 shareholders, the PrJSC’s charter cannot provide for a pre-emptive right process on a sale to a third party if at the time when the charter is approved, the number of shareholders will be more than 100.
The Minority Rights Law also deals with payment of dividends. After 1 May 2016, a JSC will be allowed to pay dividends directly to the shareholders (rather than only through the depositary system).
All PJSCs will be required to have their shares included in a stock register (“біржовий реєстр”) with at least one stock exchange in Ukraine.
For shares to be listed on a stock exchange and included in a stock register, an issuer and its shares have to meet certain statutory requirements. These are, in particular, part of the new listing requirements effective from 1 January 2016. The new listing requirements generally are more stringent and in their present form may be difficult to comply with for many PJSCs.