Novelties in corporate governance legislation
Asters, Kyiv, Ukraine,
Thu, April 6, 2017
To harmonize corporate governance system in Ukrainian joint stock companies (the "JSC") with respective European Union standards, on 23 March 2017 the Parliament of Ukraine adopted the Law "On Amendments to Certain Legislative Acts of Ukraine regarding Improvement of Corporate Governance in Joint Stock Companies" No. 2302а-д (the "Law"), which will become effective in case of and after its signing by the President and official publication thereof.
The Law introduces the following progressive instruments into the national legal framework:
mandatory sale (the "Squeeze-out") and mandatory purchase (the "Sell-out") of ordinary shares in JSC, which are owned by the JSC's minority shareholders (the "Minority Shareholders");
agreement of conditional deposit account (escrow) (the "Escrow Agreement").
Below are brief highlights of the abovementioned novelties.
Squeeze-out and Sell-out of the shares
The Squeeze-out procedure establishes the right of a shareholder (the "Dominant Shareholder"), who holds a prevailing controlling stake of 95 percent and more of the JSC ordinary shares (the "Dominant Stake"), to purchase from the Minority Shareholders all their ordinary shares, subject to sending to the JSC a respective public irrevocable request and a number of other documents.
On the other hand, the corresponding Sell-out procedure vests in the Minority Shareholders a right to request purchase of their shares by the Dominant Shareholder, by sending respective written request to the JSC.
Under both procedures, the shares purchase price to be paid by the Dominant Shareholder to the Minority Shareholders is determined on the basis of the highest of (i) the price that was paid by the Dominant Shareholder, its affiliated persons, or third parties acting jointly with the Dominant Shareholder, for the direct or indirect acquisition of the JSC shares during the last 12 months before the date when the Dominant Stake was acquired, or (ii) market share price as determined by a licensed appraiser.
Failure of the Dominant Shareholder to follow the above rules entails negative implications: his voting rights at shareholders meetings may be limited by the Dominant Stake shares less one share, until his respective obligations are duly performed.
The Escrow Agreement establishes an effective mechanism to carry out monetary settlements under certain obligations and involves an escrow agent as an independent intermediary. Under the Escrow Agreement, a bank acting as an escrow agent has the right to credit monetary funds received from the escrow account owner and/or third parties, and pay them to beneficiaries on the grounds/under the circumstances stipulated by the Escrow Agreement. For example, the Escrow Agreement will be used in the Squeeze-out procedure to carry out monetary settlements with the Minority Shareholders.
It is expected that the abovementioned legal amendments will enable the majority shareholders to acquire complete control over the JSCs in a lawful and unimpeded manner. On the other hand, minority shareholders, who de facto may not decide on the JSC business activities, will have the chance to receive a fair price for their shares. Furthermore, the discussed novelties will help to resolve the long-standing problem of "sleeping shareholders", and generally improve the Ukrainian investment climate and the M&A market situation.