2018 Corporate Law Handbook

Transcription

1 June Corporate Law Handbook Revealing new opportunities for business in Ukraine

2 Introduction Ukrainian corporate law has undergone a significant transformation over the past few years. In particular, the Ukrainian parliament has adopted a number of laws that were highly anticipated by both the Ukrainian business community and foreign investors, including: Amendments to the Law on Joint Stock Companies aimed at approximation with European Union standards and implementation of EU Directive 2004/25/EC rules on takeover bids into Ukrainian legislation. The new rules changed approach to determination of whether a joint stock company is public, introduced numerous changes to the process of securities issuance, updated the scope and methods of disclosure, and improved corporate governance in joint stock companies; The new laws introducing a legal framework for agreements between the participants of Ukrainian limited liability companies and shareholders of Ukrainian joint-stock companies. The new laws established a general framework for the enforcement of shareholder agreements and introduced new legal instruments to ensure performance of obligations under shareholder agreements (including irrevocable powers of attorney and rights to terminate the contract, which is a Ukrainian analogue of an option agreement); The new law on Limited and Additional Liability Companies overhauled the legal framework for limited liability companies in Ukraine. Generally, the law aims to give more discretion to participants of a limited liability company to organise its management. In particular, the law broadens charter capital formation options, simplifies the process of transferring a participatory interest, increases liabilities and duties for the executives, and eliminates certain redundant and burdensome requirements; The new law on Privatisation of State and Municipal Property attempts to simplify the privatisation process in Ukraine and make it more transparent. The law sets out a clear privatisation procedure, allows sale and purchase agreements to be governed by English law, and disputes to be submitted for resolution by international arbitration tribunals. The above developments offer a number of opportunities for existing businesses as well as for new ventures. In this Corporate Law Handbook, you will find a brief overview of the current legal framework governing joint stock companies and limited liability companies and highlights of the recent developments in corporate law, as well as a summary of its positive impact on business. We hope that anyone who is looking to benefit from Ukraine s changing legal environment will find the information in this handbook useful. With kind regards, Sayenko Kharenko The information held in this publication is for general purposes only and does not purport to constitute legal or professional advice. The information and opinions contained in this document are not intended to be a comprehensive study, nor to provide legal advice, and should not be relied on or treated as a substitute for specific advice concerning individual situations. This document speaks as of its date and does not reflect any changes in law or practice after that date.

3 New legal framework for limited liability companies Starting from 17 June 2018, limited liability and additional liability companies in Ukraine are regulated by the new long-anticipated Law On Limited Liability and Additional Liability Companies No VIII (the LLC Law ). The LLC Law significantly decreases regulatory restrictions in terms of formation, operation and corporate governance in limited liability companies ( LLCs ). The law finally provides opportunities for business to tailor the most common corporate vehicle to its needs, fairly making the LLC not just the most widespread but also the most flexible corporate form in Ukraine. Most, if not all, of the law s provisions have a twofold purpose to make investments more secure and investing more flexible. Key changes Any joint stock company may now be transformed into an LLC The Law abandons limitations on the number of LLC participants (previously, an LLC could not have had more than 100 participants). From now on, a joint stock company may be transformed into an LLC regardless of how many shareholders it has. Simplified equity financing and new instruments for debt restructuring The LLC Law allows participants to reinvest the profit of the LLC into its charter capital without prior distribution of profit and to increase the charter capital by means of a third party contribution (subject to the partici- pants pre-emptive right to make contributions so as not to be diluted). It also expressly allows share premium contributions to the LLC s charter capital. Restrictions on debt-to-equity swap and injecting borrowed funds into the LLC s charter capital are finally repealed. Corporate governance made more flexible Participants of an LLC can now enter into shareholders' agreements and option agreements.

4 Structuring of transactions with Ukrainian LLCs is simplified The LLC Law cancels anti-chaining rules for LLCs, thus significantly simplifying the structuring of transactions involving Ukrainian LLCs. Previously, (i) an LLC was not allowed to have a single participant fully owned by a single person; and (ii) a person could be a participant of only one LLC with a single participant. In order to comply with these rules, the parties involved in a transaction or corporate restructuring were forced to introduce multiple participants on different structure levels, which burdened the structure. New rules make structuring transactions much easier. Material transactions and transactions with interest in LLCs The LLC Law introduced default rules for qualification and approval of material transactions (with value exceeding 50% of the LLC s net assets). Additional rules for qualification of material transactions and procedures for their approval may be set out in the LLC s charter. For instance, participants may determine criteria for a material transaction tailored to the specific business needs of their LLCs, delegate decisions on certain types of material transactions to the supervisory board, and reserve to participants decisions on only key high-value transactions. The law also introduces the concept of an interested party transaction, however leaves it for the participants to decide whether they need any special approval procedures for such kind of transactions. Improved enforcement procedure for participatory interest pledge Previously, there was a number of obstacles when it came to enforce the pledge of a participatory interest in an LLC. By setting up a detailed procedure for enforcement, the LLC Law provides grounds for the participatory interest pledge to become an efficient security instrument in corporate and financing transactions. Transitional period for existing LLCs The LLC Law gives existing LLCs 12 months to bring their charters into compliance with the updated legal requirements. If any amendments to the charter are made before expiry of the transitional period, the charter should be amended to comply with the LLC Law at the same time the amendments are made.

5 Participatory interest transferred easier 1. Pre-emptive right may be excluded or significantly customised Participants of an LLC enjoy a pre-emptive right to buy the company s participatory interest offered for sale to a third party. Previously, such pre-emptive right could not be forfeited even with the consent of all participants in an LLC. The LLC Law enables participants to opt out of or modify the pre-emptive right. 2. Acquirer joining becomes easier In order for a buyer to join an LLC, an approval from all other participants was previously required. A charter required an amendment with the new participant s name and its participatory interest amount, and any such amendment was impossible to execute without all participants concurring. In practice, this meant that even upon compliance with all pre-emptive rights, participants of an LLC could prevent the new participant from joining. The new LLC Law removed the requirement to list the participant names in the charter, effectively addressing this matter. 3. Acquirer can register directly with the register of companies As a final step in joining an LLC, the new participant has to be registered with the Ukrainian register of companies. Only the director of an LLC or a representative authorised by the decision of the general meeting of participants (the "GPM") was authorised to make such a filing. This again created a situation where the director or representative could block the new participant from joining an LLC. By allowing the new participant to register directly, the LLC Law removed another hurdle for acquiring participatory interest in an LLC.

6 Corporate governance enhanced Additional duties and liabilities of officers The LLC Law introduces long awaited leverage required to bring the liability of the company s officers into compliance with international standards. It introduces a requirement for the officer to act in the company s best interests and in good faith, as well as not to compete with the company and avoid conflicts of interests. The LLC Law reinforces the above, providing a liability to reimburse the company for any loss incurred due to its officer s violation of the requirement caused by intent. Supervisory board allowed Previously, the very possibility of establishing a supervisory board in an LLC was in question. LLCs that established supervisory boards had to be careful in determining its competence in order to keep it compliant with the law. In contrast, the LLC Law expressly entitles participants to create a supervisory board as a corporate body. If participants choose to form one, they can vest it with the powers they deem appropriate, except for those matters that are reserved by the Law exclusively for the GPM. Participants may also appoint independent directors to the supervisory board. If properly designed, the supervisory board in an LLC can effectively perform the roles of both a powerful watchdog overseeing the executives and a collective strategic mind that guides the company. Updated GPM procedures The LLC Law does not expressly govern a quorum required at the GPM. By default, decisions of the GPM are passed if they have the vote of more than 50% of all participants. At the same time, participants are now generally free to alter the threshold required to pass different decisions. Other thresholds stipulated by the Law are: 3/4 of all votes in an LLC are required to amend the charter, change the amount of the charter capital, pass a decision on transformation or liquidation of the LLC; and Unanimous vote of all participants is required to approve valuation of an in-kind contribution, redistribution of participatory interest among the participants, non-application of the participants pre-emptive right etc. The rule on unanimous vote is mandatory and cannot be altered by the participants. Other improvements to the procedure of holding a GPM are: Possibility to hold a GPM via videoconference or by absentee ballots; and More detailed procedure for adopting GPM resolutions by polling vote.

7 Joint stock companies: updates in regulation Is your JSC actually public now? On 6 January 2018, amendments to the Law of Ukraine "On Joint Stock Companies" (the "JSC Amendment Law") dramatically shifted the firmly established rules on distinction between public and private JSCs. After several years of efforts to bring Ukrainian public JSCs closer to the common concept of a public company, the legislator has finally overhauled the approach to defining a public JSC. A public joint stock company is now a joint stock company whose shares are publicly offered and/or listed on a stock exchange. Following this new definition, the number of "genuinely" public JSCs has drastically fallen. Those JSCs which inherited the status of public and cannot or do not wish to conform to the high requirements set by the new regulation, have no choice but to change their type to a private JSC, which might cause some complications for the company s activity. Becoming private more easily Changing the JSC type is always associated with the right of shareholders who voted against the decision to change the JSC type to require mandatory repurchase of their shares by the JSC. Compliance with all repurchase procedures is usually time-consuming, since it requires the involvement of multiple parties and a significant amount of paperwork. However, the JSC Amendment Law introduced an exception according to which a change of JSC type from public to private does not trigger mandatory repurchase rights of minority shareholders if the following conditions are met: A supervisory board was elected by way of cumulative voting; Supervisory board committees were created; At least 1/3 and no fewer than two members of the supervisory board are independent.

8 Bringing JSC charter and type into compliance Public JSCs are to bring their charters and by-laws in compliance with the JSC Amendment Law by 1 January 2019, and other JSCs are to comply by 1 January The company has to comply earlier if it needs to increase or decrease its share capital, obtain a new license or permit, or a document confirming property rights. The main legal consequences for those public JSCs that do not satisfy the new requirements for public JSCs and do not change their type to private by 1 January 2019, are: They are unable to change their share capital and will face potential problems obtaining documents confirming the company s rights to real estate; There is a risk of a fine from the regulator for failure to comply with the new legal requirements. Key distinctions between public and private JSCs Criterion Public JSC Private JSC Issue of shares May publicly offer its shares May offer its shares only to a pre-defined list of up to 150 unqualified investors Trading of shares Shares may be listed on a stock exchange Shares may be admitted to trade on a stock exchange subject to certain conditions (but not listed) Pre-emptive right of shareholders to purchase shares offered for sale No pre-emptive right of shareholders in case JSC shares are offered for sale to third party on the secondary market The charter of a private JSC with no more than 100 shareholders may offer a pre-emptive right to purchase shares offered to the third party Supervisory Board At least 1/3 and no fewer than two members of the supervisory board must be independent members Free to decide on the requirement to have independent members of the supervisory board Committees of Supervisory Board Must create audit, remuneration and nomination committees of the supervisory board Free to decide on creation of the supervisory board committees Disclosure Mandatory disclosure covers: regular annual information; regular quarterly information; and special information Mandatory disclosure covers: regular annual information (smaller scope compared to public JSC); and special information

9 Bringing takeover rules closer to EU standards Another significant set of amendments to the Law of Ukraine On Joint-Stock Companies (the JSC Law ) introduced squeeze-out and sell-out procedures and updated mandatory tender offer rules. These changes help to resolve gaps in Ukrainian corporate legislation and bring takeover procedures for JSCs closer to the EU Directive 2004/25/EC on takeover bids. Mandatory tender offer: key changes to consider Previously Now The previous edition of the JSC Law provided the same mandatory tender offer (the MTO ) procedures for private and public JSCs The JSC Law provides different procedures for private and public JSCs, e.g. different time limits for appraisal of shares, requirements for the substance of mandatory tender offer etc Only acquisition of a controlling stake of 50% plus one shares triggered obligation of the controlling shareholder to start MTO procedure Apart from controlling stake, the JSC Law introduces a new qualifying shareholding for public JSCs, acquisition of which triggers the MTO, namely a significant controlling stake of 75% plus one share The JSC Law provided only one criteria used to determine the share price for the purposes of the MTO: market value of the underlying shares determined by an independent appraiser or per stock exchange rate as may be applicable The JSC Law provides that the MTO share price is determined as the highest of: the market value of shares determined by an independent appraiser or per stock exchange rate as may be applicable; the highest price at which the controlling shareholder (whether directly or indirectly) acquired the entity holding the shares of the JSC in the last 12 months; or the highest price at which the controlling shareholder in the last 12 months acquired another entity holding shares of the JSC, provided that the value of JSC shares is at least 90% of the total book value of the holding entity s assets. This should serve as a mechanism to preserve the value of their shares for minority shareholders The minority shareholders obligation to transfer their shares to the majority shareholder was not sufficiently regulated Now, all settlements between the majority shareholder and minority shareholders must be performed under the effective legislation on the depositary system of Ukraine, i.e. either through the "delivery v. payment procedure, or without it if the parties agree so No liability or other adverse implications were prescribed for the majority shareholder for incompliance with the MTO procedures The voting rights of a majority shareholder who failed to comply with MTO procedures are restricted until it complies with all necessary MTO steps. In addition, such majority shareholder will have to pay double share price in case of squeeze-out and sell-out

10 Acquisition of 95%+ stake now triggers squeeze-out and sell-out Squeeze-out A dominant shareholder who acquires a dominant stake of 95%+ of the JSC s ordinary shares may require minority shareholders to sell their shares subject to compliance with certain other takeover rules Sell-out The minority shareholders may require the dominant shareholder to purchase their shares Procedures in brief 1. Notify about the acquisition first! Whom to notify? National Securities and Stock Market Commission (the "NSSMC") JSC The JSC approves the share price 2. The minority shareholders submit to the JSC their demand for the dominant shareholder to purchase their shares (the submission of the demand is not limited by time) The dominant shareholder opens an escrow account with a bank 3. The JSC passes the demands to the dominant shareholder The dominant shareholder submits a public irrevocable demand to the JSC 4. The JSC approves the sell-out price of the shares The JSC notifies all minority shareholders 5. The dominant shareholder transfers the share purchase price within 20 business days following approval of the appraisal by the supervisory board of the JSC The dominant shareholder transfers the relevant amount of funds into the escrow account 6. The minority shareholders procure transfer of their shares to the dominant shareholder Minority shareholders apply to the bank to receive consideration for the shares 7. The Central Securities Depositary transfers the shares to the securities account of the dominant shareholder 8.

11 Squeeze-out and sell-out: issues to consider Squeeze-out MTO first! Do not delay The dominant shareholder must go through the MTO procedure first. Incompliance with this requirement will double the share price If the dominant shareholder held the dominant stake as of 4 June 2017, they might exercise the right to squeeze out the minority shareholders until 4 June 2019 Proper valuation Valuation of shares might be quite complicated depending on many factors including whether the JSC s shares are traded on stock exchange and have an average market rate approved by the relevant stock exchanges Open escrow accounts in advance Usually, the banks KYC procedures consume much time and involve disclosure of a significant number of documents identifying potential clients Approx. 70 squeeze-outs have been commenced since June 2017

12 Sell-out Perpetuity of sell-out rights The law does not impose any time limits on the minority shareholders to demand purchase of their shares Transfer of shares The law does not provide a deadline for the minority shareholders to transfer their shares to the dominant shareholder Proper valuation The valuation of shares for sell-out is performed in accordance with the rules provided for the squeeze-out

13 Shareholder arrangements As of 18 February 2018, Ukrainian law has finally recognised shareholders agreements as an entirely functional instrument. Additionally, the new regulations introduced an irrevocable power of attorney as a means to exercise shareholders rights and an instrument similar to an option agreement. 1. Shareholders agreement What can you agree on now? The shareholders agreement (the "SHA") allows shareholders of JSCs and participants of LLCs 1 to agree on the mode of exercise of their shareholders rights, including the following matters: voting at the general shareholders meeting in a pre-agreed way; sale and purchase of shares in pre-defined cases, on pre-agreed terms and subject to procedure provided in the SHA; deadlock resolution mechanisms; detailed procedure for exercise of any pre-emptive rights or waiver of the pre-emptive rights. Shareholder-creditor SHA The law also expressly enables shareholders of JSCs to enter into an SHA with creditors of the same JSC. A shareholder-creditor SHA can oblige shareholders to vote at the general shareholders meeting in a certain way. For example, the parties can agree to require a written consent from the creditor to approve a significant transaction. A shareholder-creditor agreement is a good example of a new security instrument for protection of the creditor s rights in large financing deals. Joint venture structures can be simplified Parties willing to have an enforceable SHA in respect of their shareholdings in a Ukrainian JSC or LLC do not need to set up foreign holding companies to regulate their relations. This can help to significantly simplify joint venture structures involving Ukrainian assets and save transaction and maintenance costs for the parties. 1 the term "shareholders" further refers to shareholders of JSCs and participants of LLCs, and the term "shares" includes shares in JSCs and participatory interests in LLCs

14 Issues to consider: Regulation via SHA is different for JSCs and LLCs; the difference should be taken into consideration in the course of negotiations over the document; Choice of foreign governing law and foreign dispute resolution forum in the SHA in respect of Ukrainian companies remains an open issue; Parties should be careful while setting out additional obligations in the SHA in respect of the company, for instance, an obligation to provide debt financing to the company; Parties should consider in advance the tax implications of potential sale of their shares in Ukrainian JSCs and LLCs due to different tax treatment of such sale in Ukraine and other jurisdictions widely used for corporate structuring, e.g. Cyprus or Netherlands. 2. Irrevocable power of attorney An irrevocable PoA for corporate matters is aimed at facilitating fulfilment of the shareholder s obligations provided in the SHA. Irrevocable PoA allows the grantee of the PoA to exercise certain corporate rights of the grantor. This instrument should significantly simplify enforcement of SHAs, especially their provisions relating to exit of the shareholder from the joint venture. 3. Ukrainian-style option agreement Shareholders can also agree on an option in the SHA giving a party the right to sell/purchase the other party s shares on the terms stipulated in the option agreement. Option agreements can be widely applied by the parties to the SHA, for example, for structuring: deadlock resolution mechanisms; point and terms of exit from the business; and relations with the company s creditors. Issue to consider: Given specific regulations applicable to the option arrangements, use of option agreements outside of the shareholders relations requires careful consideration.

15 New rules for acquisition of the state-owned property On 7 March 2018, the new Law "On Privatisation of State and Municipal Property" No VIII (the "Privatisation Law") came into force. The Privatisation Law aims to unify legislation on privatisation, simplify the privatisation process, and make it more transparent. New procedures and instruments provided by the Privatisation Law aim to enhance the overall protection of investor rights. Determining targets The Privatisation Law defines that every year the Cabinet of Ministers of Ukraine and the State Property Fund of Ukraine should approve and make the list of privatisation objects publicly available. Under the Privatisation Law, potential buyers are entitled to initiate privatisation of certain state-owned objects themselves by filing an offer to the state. Although this initiation procedure is not completely clear at this time, this option is already viewed as a significant step towards attracting big strategic investors. What s new in the procedures? 2 categories of objects Large privatisation objects assets value more than UAH 250 mln Small privatisation objects all other objects Large privatisation objects are sold at conditional auctions. Conditions for privatisation are determined by the state separately for each privatisation object. The state engages a professional advisor with international experience such as a widely recognised investment bank to prepare an informational package on the privatisation object, find potential buyers, and determine a starting purchase price. Small privatisation objects are sold via electronic auctions through a trading platform. Potential buyers will have to comply only with the minimal entry requirements to participate in the auction. Substantial verification of the bidder s compliance with legislative requirements is performed after the auction. Potential buyers will be checked for compliance with legislative requirements before participating in the auction.

16 Transactional documents move closer to internationally recognised commercial practice Until 1 January 2021, potential buyers have the right to choose English law as the governing law for sale and purchase agreements (the SPA ) in respect of the privatisation object. NB: The privatisation commission considers all comments and proposals from the potential buyers, but has the final say on which law should be governing. Thus, the potential buyers should present well-reasoned comments and substantiation in respect of the choice of law to convince the commission. There is an option to choose international arbitration as a means for dispute resolution under the SPA. In case the parties agree on international arbitration but do not define the relevant forum in the SPA, arbitration will proceed according to the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce. NB: International arbitration is only applicable to disputes arising with regard to the SPA. Therefore, the disputes concerning preparation of objects for privatisation or privatisation procedures not related to the SPA are to be resolved by the Ukrainian courts. Prohibited bidders The following persons are prohibited from participation in privatisation as bidders: state bodies, state-owned companies; employees of state privatisation bodies; aggressor state, its residents, and legal entities whose ultimate beneficiaries are the aggressor state or its residents; persons and entities sanctioned under the Law of Ukraine On Sanctions and their affiliated persons; buyers registered in offshore zones with non-transparent ownership structure; legal entities which do not cooperate in countering money laundering and the financing of terrorism or legal entities owning 50 and more percent in such entities; legal entities which have not disclosed information on their UBOs according to legislative requirements; persons that have breached their privatisation obligations in the past; advisors involved in preparation of the object for privatisation. The above list should be carefully considered while structuring the bidding process and acquisition itself.

17 NewLaw and Beyond Create, Preserve, Grow Sayenko Kharenko is one of Ukraine s largest law firms offering comprehensive support in all major sectors of economy. In order to manage the rapidly evolving Ukrainian legal and business environment, we embrace innovation through new products, out-of-the-box thinking and creative solutions. The emphasis on innovation brings services that allow our clients excel in what they do. Consistent 14 Years of Leadership in Law Sayenko Kharenko has been recognized over 100 times as No. 1 law firm in key practice areas and named Best Law Firm in Ukraine more than 30 times by the most prestigious professional excellence awards. Client-centric No Two Clients Are the Same We have provided legal services to over 1200 clients from more than 60 countries around the globe and recognize that every single client has unique business needs. We tailor our services to best fit individual profile of each and every client. Experimental Neworld Lab Neworld Lab is an innovative project of Sayenko Kharenko designed to anticipate developments in the new economy and place our firm and our clients at the cutting edge of the changes shaping our collective future. We analyze global trends in science and economics and identify effective instruments to manage fast-evolving relationships and implement innovations. The ultimate goal is to create newlaw solutions which would drive our clients business forward. Business smart lawyers Top Legal Talents with Business Acumen

18 Vladimir Sayenko Oleksandr Nikolaichyk Partner Partner tel.: tel.: Muzeyny Provulok Kyiv 01001, Ukraine sk.ua