Shareholders Agreements, Takeover Rules and Simplified M&A for Banks: Ukrainian Parliament Adopted Long-Awaited Corporate Legislation
On 23 March 2017, the Parliament of Ukraine passed a number of draft laws that were highly anticipated by both Ukrainian business community and foreign investors. These laws, among other things, will allow shareholder agreements to be entered into under the Ukrainian law, introduce takeover (squeeze-out and sell-out) rules for Ukrainian joint stock companies, and temporarily establish simplified merger and transformation procedures for Ukrainian banks. The draft laws still require the President’s signature and official publication in order to take effect.
Historically, the Ukrainian corporate governance laws are rather inflexible, as it does not allow shareholders of private companies to deviate from mandatory rules prescribed by the law and contractually agree on regulation of relations amongst them. Draft law No. 4470 introduces a legal framework for agreements between shareholders of Ukrainian limited liability companies and joint stock companies.
From now on, shareholders will be able to agree on various matters related to management of the company and exit from the company, including voting arrangements, lock-in period, deadlock resolution procedures, and terms and conditions for disposal of shareholdings. State and state owned companies as shareholders will also be able to enter into shareholders agreements subject to specific approval from relevant authority. Finally, new rules will allow the company’s creditors to become a party to the shareholders agreement in order to increase the level of protection of their interests by ensuring cooperation of shareholders.
The draft law also sets out a general framework for enforcement of shareholders agreements and introduces certain legal instruments which should ensure performance of obligations under the shareholders agreements, such as an irrevocable powers of attorney and specific contractual termination rights.
Squeeze-out and sell-out
Draft law No. 2302а-д aims at implementing provisions of EU Directive 2004/25/EC on takeover bids into Ukrainian joint stock companies legislation. In accordance with the draft law, direct or indirect acquisition by a person (or persons acting in concert) of a shareholding exceeding 95 per cent of ordinary shares of a joint stock company triggers the right to squeeze out the remaining minority shareholders. In their turn, minority shareholders will have the right to sell out their shares should the majority shareholder omit to use the right of squeeze-out. Notably, during a two-year transition period following the effective date of the law, the persons owning a more than 95 per cent shareholding as of that date will also have a right to trigger a squeeze out.
The draft law also supplements the Civil Code of Ukraine with provisions regulating use of escrow accounts, which will be mandatory in the course of squeeze-out. The offeror who wishes to exercise the squeeze-out right shall pay the price of shares to an escrow account opened to the benefit of minority shareholders.
In addition, the draft law also exempts public joint stock companies that have decided to change their type into private joint stock company or to reorganise into other corporate form (such as a limited liability company) from the requirement to procure re-issue of licences, permits and other documents, which would otherwise be triggered as a result of change of official name. This is another move encouraging ‘quasi-public’ companies to transform into private ones following recent legislative amendments, which enhanced corporate governance and disclosure requirements for public companies.
Simplified merger and transformation of banks
Draft law No. 6010 aims at facilitating banks to comply with the tight capitalisation schedule established by the National Bank of Ukraine (the "NBU"). According to the NBU schedule, capitalisation of all Ukrainian banks should reach the minimum threshold of UAH 500 million by July 2024. It is expected that at least one third of Ukrainian banks will face serious difficulties in achieving this threshold. The draft law provides bank owners with two alternative options: to merge with another bank using a simplified procedure or to transform into a non-banking financial institution. Both options are introduced temporarily and will be available only until 1 August 2020.
Inspired by the NBU, the draft law was supported by other major regulators – the Antimonopoly Committee of Ukraine and the National Securities and Stock Market Commission. As a result, draft law No. 6010 significantly simplifies merger procedure by allowing banks to omit certain actions, reducing the time and paperwork necessary to obtain multiple regulatory approvals and provides instruments to resolve technical issues arising in the process. Despite overall simplification of the merger procedure, in practice each merger transaction will require enhanced preparatory work and preliminary discussions with the competent regulators.
Draft law No. 6010 does not govern commercial relations between the shareholders of merging banks, thus leaving plenty of matters, such as compensation for market value disproportion, corporate governance and management of the surviving bank, at the discretion of bank owners. However, it is expected that shareholders of merging banks will be able to benefit from the newly adopted draft law No. 4470 on shareholders agreements after it becomes effective.
Those banks whose owners are not willing to use the simplified merger option are allowed by draft law No. 6010 to leave the banking market and continue their activity as non-banking financial institutions. To benefit from this option, a bank should be solvent, in good standing, and should be re-registered as a non-banking financial institution.