On June 4, 2017, the Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine regarding improvement of corporate governance in joint stock companies” (hereinafter referred to as the “Law”) came into effect. This law was adopted within the framework of the process of harmonizing Ukrainian legislation with European Union law. This law implements Directive 2004/25/EC in relation to acquisitions conducted within the framework of the Association Agreement between Ukraine and the European Union. The EU Directive ensures minority shareholders’ rights to require that a shareholder holding 95 percent of the company’s shares must purchase shares held by minority shareholders (through a sell-out) at a fair price, as well as providing for the right of shareholders owning a 95 percent stake in the company to require that minority shareholders mandatorily sell those shares belonging to them (through a squeeze-out). The Law introduces amendments to relevant Ukrainian legislation in order to regulate mechanisms regarding the company’s stock purchase for acquiring shares to become a majority, significant or dominant shareholder, as detailed below.
Defining some new terms
It should be noted that, in addition to the existing concept of a “controlling stake”, the Law introduces such new concepts as a “significant majority stake” and a “dominant majority stake”. A significant majority stake is defined as a package of 75 percent or more of the company’s ordinary shares, and the dominant majority stake is defined as 95 percent or more of the company’s ordinary shares.
The Law also introduces the concept of an “escrow account” or “conditional storage account” in the Civil Code of Ukraine. This namely refers to a contract for a conditional storage account (escrow), whereby the bank agrees to accept and credit payments made by the account holder and/or by third parties to the account of the conditional storage (escrow) opened for the client (the account holder) and to transfer such funds to the person(s) specified by the account holder (the beneficiary or beneficiaries) or to return the funds to the account holder given the existence of the grounds provided for in their contract for a conditional storage account (escrow).
Changes regarding disclosure
Certain obligations have been established regarding the timely disclosure of information about the contract, the results of which will either directly or indirectly impact on the acquisition of a controlling stake in the company. The list of information that must be made public has also been expanded in relation to shareholders. In particular, it is necessary to disclose any change regarding the ownership of stocks valued at more than 5 percent of ordinary shares in a public joint stock company, a person’s acquisition of a 50 percent or greater stake, or 75 percent or more, or 95 or more percent of the company’s shares, as well as information about the respective shareholder.
Irrevocable offer to purchase minority shareholders’ shares when acquiring a controlling interest or a significant majority stake
The Law changed the procedure for making an irrevocable offer to purchase shares from minority shareholders as a result of acquiring a controlling interest or a significant majority stake in the company, including the definition of the “fair value” of such a purchase. According to the Law, within two working days of receiving information on the purchase price, the owner of the controlling stake or a significant majority stake in the company is required to offer to acquire ordinary shares in the company from all shareholders. The price of purchasing shares by the owner of a controlling stake or a substantial controlling stake in the company shall be determined by the company’s Supervisory Board, according to the highest price from among the following:
- the market value, as determined by appraisers as of the date prior to the day that information about the acquisition contract being is registered in the public information database, the result of which being that the relevant person (directly or indirectly) is the company’s controlling shareholder;
- the highest price at which a person has acquired indirect ownership of shares in the company by acquiring a stake (stocks, shares) in another legal entity during the 12 months preceding the date that such shares were acquired, including the date of receipt by the person holding the controlling stake in the company;
- the highest price at which a person has acquired a stake (stocks, shares) in another legal entity that, directly or indirectly, owns shares in this company during the 12 months preceding the day that this person gained a controlling stake in the company, including the day of receipt, provided that the value of the company’s shares directly or indirectly owned by this person, according to its most recent annual financial statements, are not less than 90 percent of the total assets of this entity.
Minority shareholders’ obligation to sell their shares to the dominant shareholder (squeeze-out)
The law provides the person owning the dominant majority stake in the company the right to send the company an irrevocable notice regarding the acquisition of shares from all company shareholders. In the case that the company receives public irrevocable claims, all shareholders in the joint stock company, except for persons acting in concert with such a person and its affiliates, and the company itself are obliged to sell their shares in this company to the claimant. The purchase price of the shares is determined according to a similar procedure, as outlined above. The claimant shall pay shareholders the share price by transferring sums of money from the banking institutions in which the claimant has opened conditional storage (escrow), the beneficiaries of which are the shareholders, in which the shares are acquired (their heirs or assigned representatives, or any other person entitled to for funds under the law).
The person holding the dominant controlling stake may utilize a so-called ‘squeeze-out right’ only after following the procedure entailed in an irrevocable offer to purchase shares from minority shareholders as a result of acquiring a controlling interest or significant majority stake in the joint stock company. If this person fails to make an irrevocable offer to purchase shares from minority shareholders within a certain statutory period, the sales price per minority shareholders’ share in the squeeze-out procedure is defined as being double that of the calculation described above.
Compulsory acquisition of shares by the dominant controlling shareholder in the company at the shareholders’ request (sell-out)
Once information about a person acquiring the dominant controlling stake has been registered, the Law gives each company shareholder owning ordinary shares in the company the right to demand the implementation of the compulsory acquisition of his shares by the person holding the dominant controlling stake in the company. The acquisition price of the shares is then determined accurately and fairly in a way similar to that described above.
Concluding transactions with an interested party
The Law establishes the requirement for the joint stock company to make a prior decision to provide its consent for a transaction, for which there are interested shareholders. Such a decision shall be taken by the company’s relevant body in the case that the market value of the property or services, or the amount of funds that are the subject of related party transactions, exceeds 1 percent of the value of the assets according to the company’s most recent annual financial statements. During the vote on granting consent for the transaction with interested shareholders, those interested in the transaction do not have the right to vote, and the decision on the matter is adopted by a majority vote of those disinterested shareholders registered to participate in the General Meeting and who own voting shares in regards to this issue.
As for a private joint-stock company, its articles of association may stipulate that the requirements of the Law on the irrevocable offer to purchase the shares of minority shareholders during the acquisition of a controlling interest or a significant majority stake or in squeeze-out and sell-out procedures, as well as the prior approval of transactions with interest, shall not apply to such a company or that they are subject to exceptions or specific particularities that must be determined by the company’s charter.
Specifics of the transition period for implementing provisions of the Law
The Law stipulates that, until January 1, 2018, public joint-stock companies are required to go through the whole procedure of including shares on the stock list and also remain listed on at least one stock exchange. Within two years from the date the Law enters into effect, a person (or persons acting jointly) who, as of the date the Law took effect, either directly or indirectly owned the dominant controlling stake in the company, has the right, during the term mentioned above, to apply the order the selling ordinary shares by shareholders at the request of the dominant majority shareholder.
According to EBS lawyers, the adoption of the Law is welcome and will certainly have a positive impact on the corporate governance of joint stock companies. Embodying the best European corporate practices, the Law would protect the rights of minority shareholders in the process of being acquired by joint-stock companies, while also allowing investors to take advantage of more opportunities with respect to investment management in joint stock companies.
From a practical point of view, in implementing so-called acquisition or M&A agreements, corporate lawyers and managers of joint stock companies should be careful when planning and structuring such transactions, despite the rather short period of time prescribed by law to implement the various communications, disclose information, conduct a valuation of shares, and undertake procedures for the implementation of irrevocable proposals for purchasing shares. All these issues should be addressed before signing a contract for the acquisition of a controlling stake or larger package of shares in a Ukrainian company. As noted above, the Law also applies to the indirect acquisition of control over stocks, so its provisions also apply to transactions with a foreign element, part of which can be shares in a Ukrainian joint stock company.
Author: Alexander Larchenko