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President, Gramatskiy & Partners Attorneys at Law
At the Dawn of Change: Corporate Legislation Reform in Ukraine
A multi-vector update of Ukrainian legislation, business liberalization and stimulation of investment activity is currently taking place. Corporate legislation is no exception. For that reason, improving the level of efficiency of corporate governance, implementation of anti-raiding measures and establishing effective safeguards for protection of property owners and other mechanisms for this sphere of legal regulation has become a legal reality. At the same time, the growing interest of foreign businessmen and investors in Ukraine can be explained taking into account the positive dynamics of legislative reforms highly appreciated by strategic partners and international organizations.
It is worth stressing that significant attention in the Association Agreement between Ukraine and the European Union of 27 June 2014 is paid to various aspects related to company law and corporate governance. Taking into account the importance of effective legal rules and practices in the areas of law mentioned above for creating a fully-functioning market economy and for fostering trade, the first-range priorities for the Ukrainian government include protection of shareholders, creditors and other stakeholders according to EU rules in this area, introduction of relevant international standards in the field of accounting and auditing and further development of corporate governance policy in line with international standards.
In order to attain the goals defined in the Association Agreement between Ukraine and the European Union and recognizing their significance for the business community, the Verkhovna Rada of Ukraine supported Draft Law No. 2493 On Joint Stock Companies in the first reading (hereinafter — Draft Law No. 2493).
Despite the fact that Draft Law No. 2493 has not yet been adopted by the Verkhovna Rada of Ukraine (thus, it isn’t in force), there are a lot of positive aspects referring to corporate governance and protection of shareholders, which should be analyzed in detail.
Changes in Corporate Governance System
The Law of Ukraine On Joint Stock Companies (hereinafter — Law No. 514-VI) enshrines a two-tier corporate governance system in joint stock companies. In general, that means there are two separate bodies that operate independently. The executive body of the joint stock company manages the current activities of the company. At the same time, the supervisory board is entitled to protect the rights of the company’s shareholders and, within the competence defined, control and regulate the activities of the executive body.
One of the most eye-catching innovations of Draft Law No. 2493 refers to establishing a possibility for a joint stock company to choose the two-tier or one-tier management structure. The one-tier management structure in joint stock companies includes the general meeting and the board of directors. The board of directors consists of executive members (executive directors) and non-executive members (non-executive directors). At the same time, non-executive directors may be independent members of the board of directors (independent directors) or persons affiliated with the company. Consequently, a one-tier management structure provides for a combination of functions of control and management over the activities of the joint stock company in an only collegial executive body, namely the board of directors. When it comes to the process of realization of powers, it should be outlined that functions related to the management of current activities of the joint stock company are performed by executive directors. Non-executive directors perform risk management and control over the activities of executive directors and the company as a whole.
When it comes to the two-tier management structure, it should be noted that it consists of the general meeting, the supervisory board and the executive body (that can be collegial or individual). The mentioned above management structure stands for a clear division of functions for direct management of the current (operational) activities of the company and for control over the activity of the executive body and other managers. The first one is provided by the executive body, while the control powers are vested in the supervisory board. The supervisory board consists of members of the supervisory board, some of whom are independent members (independent directors).
The management structure of a joint stock company is determined by the articles of association of the joint stock company. Naturally, the issue of management structure determination belongs to the exclusive competence of the general meeting. Analysis of Draft Law No. 2493 gives grounds to sum up that a joint stock company with a two-tier management structure is entitled to decide on transition to a one-tier management structure. At the same time, a joint stock company which was established with a one-tier management structure has the right to decide on the transition to a two-tier management structure. It is crucial to underline that a one-tier management structure may not be introduced in joint stock companies which are enterprises of public interest.
The proposed innovation will provide joint stock companies with the legal opportunity to choose a management structure that will be more cost-effective and convenient for a joint stock company. Moreover, it is proposed to exclude the legal norms referring to the creation and operation of an audit commission (auditor).
Online General Meetings
The worldwide COVID-19 epidemic has created a widespread threat not only to the life and health of people, but also to corporate governance in joint stock companies in Ukraine. Unfortunately, there has never been any legal regulation related to procedure of online (remote/electronic) general meetings in joint stock companies according to Law No 514-VI.
However, on 16 April 2020 the National Securities and Stock Market Commission adopted Resolution No. 196 On Approval of the Interim Arrangements for Convening and Remote Holding of the General Meeting of Shareholders and the General Meeting of Participants of the Corporate Investment fund (hereinafter — Resolution No. 196). Resolution No. 196 established a detailed procedure for remote holding of the general meeting, including the possibility of entering into an agreement with the National Depository of Ukraine on the provision of remote general meeting services, which regulates relations on the procedure and conditions for providing related services.
According to Resolution No. 196 it was stated that agreement with the National Depository of Ukraine on the provision of services for remote holding of the general meeting may be entered into by the supervisory board of the joint stock company or by the executive body (in the event that according to the articles of association the supervisory board is not supposed to be formed).
Despite there being a lot of inaccuracies in Resolution No. 196, its role in progressive changes referring to remote holding of the general meeting of shareholders is difficult to overestimate. At the same time, Draft Law No. 2493 contains legal rules which enshrine that the general meeting in joint stock companies may be held as a face-to-face meeting or as an electronic meeting.
An electronic general meeting in joint stock companies and all the issues related are proposed to be held via an electronic system — software and hardware complex created by the National Depository of Ukraine and authorized by the National Securities and Stock Market Commission. The electronic system for a general meeting should meet specific requirements to provide identification and registration of shareholders (or their representatives) for participation in the general meeting. It is planned that the owners of securities will get the opportunity to obtain documents and other information which can be used and reviewed by shareholders during preparations for the general meeting, to vote, to participate in discussions on the agenda, to summarize the results of voting on the agenda of the general meeting via the above-mentioned electronic system.
When it comes to identification of shareholders (their representatives) to participate in the general meeting of the joint stock company, it is carried out with the help of a qualified electronic digital signature or other means of electronic identification in accordance with Law of Ukraine No. 2155-VIII On Electronic Trust Services which meet the requirements set by the National Securities and Stock Market Commission. It is worth noting that there are proposals to place the electronic form for the general meeting in the legislation of limited liability companies.
Accounting of Shares Mechanism
One of the most promising innovations in Draft Law No. 2493 refers to introduction of a mechanism for the accounting of shares in limited liability and additional liability companies via the accounting system of the National Depository of Ukraine. According to current corporate legislation the accounting of shares in limited liability and additional liability companies is carried out exclusively in the form of a record in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Associations. However, the list of entities entitled to make changes to the Register mentioned above is still large, which may prompt raiding risks.
Having decided to transfer the accounting of shares to the National Depository of Ukraine, all the information about a company’s participants is excluded from the Register in order to prevent raiding. Thus, the disclosure of information about the company’s participants will be carried out only by the National Depository of Ukraine in the way prescribed by the National Securities and Stock Market Commission.
It is worth noting that current reform of corporate legislation is one of the most promising of recent years. To our mind, it is difficult to overestimate certain significant steps such as the opportunity to choose management structure and online general meetings in joint stock companies, accounting of the shares mechanism in limited liability and additional liability companies. All the changes are likely to be sufficient for improving the level of corporate governance efficiency and anti-raiding measures.