Corporate Governance of Joint Stock Companies Sounds More Majority-Like
Vasil Kisil & Partners, Kyiv, Ukraine,
Wed, June, 14, 2017
Law of Ukraine No. 1983-VIII On Amendments to Certain Legislative Acts of Ukraine regarding the Improvement of Corporate Governance of Joint Stock Companies (the “Law”) came into force on 4 June after its signing by the President and official publication. In pursuance of the EU-Ukraine Association Agreement, the Law implements into the Ukrainian legislation so-called “squeeze-out" and "sell-out” mechanisms, which are set out in Directive 2004/25/EC of the European Parliament and the Council on takeover bids. Please find below a brief description of the key novelties introduced by the Law.
Majority Shareholdings and Disclosure of their Acquisition
A definition of two new majority shareholdings is added to the Law on Joint Stock Companies in addition to the notion of “controlling shareholding” (more than 50% of shares):
- Significant Controlling Shareholding means the holding of 75 and more percent of ordinary shares in a public joint stock company; and
- Dominant Controlling Shareholding means the holding of 95 and more percent of ordinary shares in a joint stock company (either public or private).
From now on, joint stock companies are obligated to publicly disclose persons who acquired:
- controlling shareholding (50% and more of shares);
- significant controlling shareholding (75% and more of shares), for public joint stock companies only; and
- dominant controlling shareholding (95% and more of shares).
Consequences of Acquiring the Majority Shareholdings
A majority shareholder who acquired, either directly or indirectly:
is obligated to offer to all of minority shareholders to sell their shares in the relevant company, which are free and clear of any encumbrances, by sending to the company an irrevocable public offer addressed to all shareholders.
- controlling shareholding (50% and more of shares) in a private joint stock company; or
- controlling shareholding (50% and more of shares) or significant controlling shareholding (75% and more of shares) in a public joint stock company,
Majority Shareholder’s Right to Buy out the Minority Shareholders’ Shares (Squeeze-Out)
The Law has introduced a procedure (squeeze-out), under which a holder of the dominant controlling shareholding (95% and more of shares) in the company is entitled to buy all shares of the remaining (minority) shareholders by sending to the joint stock company the relevant irrevocable demand. This enables the majority shareholder to become a single shareholder of the company and accordingly significantly simplify the corporate governance of the company. Besides that, reduction of shareholders number allows, if appropriate, to reorganize a joint stock company into a limited liability company, which is a more simpler and a less regulated company type.
Shareholders who, as on 4 June 2017, already hold 95% and more of shares in the company may, within two years, make use of the squeeze-out procedure, provided that they comply with the terms and conditions set out in the Law.
Minority Shareholders’ Right to Sell Their Shares to the Majority Shareholder (Sell-Out)
Minority shareholders who hold in aggregate less than 5% of shares are, in return, entitled to demand the majority shareholder who acquired the dominant shareholding (95% and more of shares) in the company to buy out their shares, which are free and clear of any encumbrance, by using the sell-out procedure.
Setting a Price of Minority Shareholders’ Shares
Shares held by minority shareholders are sold and bought out at the highest of the following prices:
- price at which the majority shareholder acquired the shares in this company within 12 months preceding acquisition of the relevant controlling shareholding;
- price at which the majority shareholder indirectly acquired the title to the shares in the company by purchasing shares (participatory interest) in another legal entity, who holds directly or indirectly shares in such joint stock company, within 12 months preceding acquisition of the relevant controlling shareholding, provided that the price of the shares held by such legal entity and set forth in its latest annual financial statements is no less than 90% of the total asset value of such legal entity; or
- a market value of the shares to be determined by a professional evaluator.
A new type of bank account – an "escrow account" – is introduced in Ukraine. An escrow account agreement contemplates settlements under obligations with the involvement of an independent intermediary, such as, escrow agent (bank).
An escrow agreement is obligatorily, if, for example, settlements with minority shareholders are made under the squeeze-out procedure. If so, the bank accepts cash deposited by the escrow account holder (majority shareholder) and, once the conditions stipulated in the escrow agreement have fulfilled, pays deposited cash to the beneficiary (minority shareholder).