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The Draft Law “On Amendments to Certain Legislative Acts of Ukraine (Regarding Improvement of Corporate Governance in Joint Stock Companies)”

The Draft Law “On Amendments to Certain Legislative Acts of Ukraine (Regarding Improvement of Corporate Governance in Joint Stock Companies)” introduces a number of important novelties designed to protect the rights of both majority and minority shareholders.

Such novelties include, in particular:

1. Improvement of the mechanism for determining the market value of issued securities;

2. Introduction of a sell-out mechanism: an obligation of the majority shareholder (holding more than 50 percent of shares) or the shareholder holding more than 75 percent of ordinary shares in a joint stock company to offer to all of the company’s shareholders to buy ordinary shares from them; and

3. Introduction of a squeeze-out mechanism: a mandatory sale of shares by minority shareholders upon request of the shareholder holding 95 percent of shares in the company.

It is noteworthy that this draft law is primarily aimed at reducing the risk of abuse of rights of minority shareholders and at simplifying the corporate governance and making it less costly. The use of the squeeze-out tool will help avoid situations where minority shareholders can hinder the joint stock company’s operations or otherwise act in bad faith in the exercise of their rights. Besides, the joint stock company’s costs, e.g. in connection with the convocation of general shareholders’ meetings, can be reduced significantly.

It should be noted that the sell-out mechanism can only be used by the holders of 95 percent of the company’s shares (by way of comparison, this threshold in the EU Member States is typically 90 %). This standard seems to be intended for mitigating the introduction of a new institution to the Ukrainian law and, in view of the European integration objective, this threshold is rightfully expected to go down in the future.

It should also be stressed that the squeeze-out procedure may apply only provided that the sell-out mechanism has already been implemented. This mechanism consists in the fact that the majority shareholder or the shareholder holding 75 percent of ordinary shares in a JSC must make an offer to the remaining shareholders to buy out ordinary shares from them at a fair value.

While the draft law improves the mechanism for determining the market value of shares (the draft law defines it as an average market value of securities listed on a stock exchange, which has been calculated for the last three months of the securities listing prior to the date on which the market value of such securities is determined according to the procedure established by the National Securities and Stock Market Commission) and contains reservations that the market value cannot be lower than the par value of the shares and the highest price at which the company’s shares were traded, the draft law also protects the interests of minority shareholders. Such novelty prevents the depreciation of the shares held by minority shareholders and precludes the purchase of such shares at an understated value.

Generally speaking, this draft law contains positive amendments which may protect the interests of minority shareholders in case of change of the company owner on the one hand and protect majority shareholders from raider attacks on the other hand.