2012 saw many changes in corporate and securities law, from simplified registration procedures to the complete overhaul of the securities market infrastructure.
Corporate Law Matters
Registration Formalities Simplified
One direction of changes was simplification of corporate registration formalities. After 17 December 2012|1| new companies no longer need to obtain a certificate confirming their registration with the tax authorities. From that date the extract from the Register of Legal Entities becomes the only proof of registration legal entities will normally need. From 1 January 2013 the number of occasions on which even this extract would be required by various authorities has also been dramatically reduced.|2|
It is in part due to changes like these that Ukraine managed to improve its position in the Doing Business 2013 report published by the World Bank and the International Finance Corporation. Ukraine now occupies 137 out of 185 rated economies, 15 positions up from the last year’s rank, reflecting a serious improvement recorded in ease of starting a business (66 positions up). This latter improvement was due to such changes adopted in 2011 as abolition of the minimum capital requirements for LLCs and of the requirement to have incorporation documents notarized.|3|
New System of Property Registration and its Implications
Ukraine also rose 19 places in this rating for ease of property registration. However, the fundamental changes in registration of real estate which were approved in 2012 and came into effect on 1 January 2013 created unexpected problems in corporate practice. The new system created a universal Register of Rights to Real Estate, which is supposed to include information not only on property rights but also mortgages and other encumbrances. It is supposed to bring various previously disconnected registers (register of property rights, land cadastre, register of mortgages, register of encumbrances) together creating one database.
However, in practice the new register started off empty, with no information from the old databases. The new register is supposed to be filled out only gradually, transaction by transaction: as soon as there is deal concerning a property, the registrar would transfer information from the old registers into the new one. However, this also means that in order to make a mortgage or an encumbrance visible in the new register the creditor has to proactively insert information about it into the new register. There is no obvious way for the potential buyer to search for problems a property might have. This also creates substantial difficulties for those who wish to acquire a company and seek information about its assets. The growth problems of the new system of property registration will continue to be a serious concern for those who deal with corporate due diligence and M&A in 2013.
Court Precedents – Assets of Private Companies Became Marital Property
On 19 September 2012 the Constitutional Court decided that not only capital but also all assets of the so-called “private companies” (the “PCs”) can become community property of the spouses. This means that where the shareholder of the PC is married, his or her spouse becomes the joint owner of the PC’s assets. If they divorce, these assets are subject to judicial division between the former spouses. What is more, normally any sale or other transaction with assets which are part of the community property requires the other spouse’s consent. In corporate practice this means that where any acquisition or any serious other transaction with a PC is planned, the deal must now be approved not only by the shareholders but also by their spouses.
Securities and Stock Market
New Depository System Law
The new Depository System Law (the “DSL”) was adopted on 6 July 2012. The main part of the DSL is scheduled to take effect on 12 October 2013.
Perhaps the most important change introduced by the DSL is that the National Depository of Ukraine will become the central securities depository in Ukraine for nearly all securities. It will be renamed the Central Depository. The National Bank will, at least initially, remain the depository for government and municipal bonds. The Central Depository is to initially remain state owned but the DSL envisages gradual reduction of a state share in the Central Depository to 25 percent plus one share over the next five years.
The All-Ukrainian Securities Depository, which was until this year the main Ukrainian securities depository, will lose its license and would have to transfer all securities issues handled by it to the Central Depository by 12 October 2013.
This is one of many aspects of the new DSL which is criticised by some market players. Some say that it may not be good for continuity and development of market infrastructure that the existing largest securities depositary would simply lose its license without any meaningful continuity in terms in know-how and technology between it and the Central Depository.
In another major change, the DSL creates a new organization, the Settlement Centre, which would be entrusted with clearing and processing all cash settlements for securities transactions on stock exchanges and for all securities transactions outside of stock exchanges where ‘delivery versus payment’ settlement is used.
Some commentators say that creation of the Settlement Centre might lead to unnecessary centralization of settlement activities and make it difficult to realize ‘delivery versus payment’ settlements with minimal risk. A better solution might have been to make the Central Depository process both securities settlements and cash settlements, something which the DSL does not do.
All securities custodians would have to obtain a new license after bringing their procedures in line with the new law. The new licensing procedure would have to be approved by the National Securities Commission by 12 April 2013.
The DSL seeks to complete transition to book-entry-only (the “BEO”) system for all securities issues. In particular, it provides that all shares and bonds, and all other so-called “issue” securities can only be issued in the BEO form, no documentary/certificated issues are allowed.
The new law also attempts to facilitate dematerialization (transition to BEO) of shares which were issued in the 1990s and the early 2000s by many joint-stock companies in documentary form. This process is already well under way because JSCs have been required to dematerialize their old certificated share issues and convert them to the BEO system since 2011. However, this process creates numerous problems for issuers, in particular the companies created during privatization in the 1990s which have numerous small legacy shareholders.
For such issuers the matter is simple: with certificated issues it is the issuer who takes care of keeping the shareholder register and effectively pays for keeping track of shareholders’ rights for them. Once the issue is dematerialized and converted to the BEO system the issuer is supposed to transfer this responsibility to the shareholders themselves since it is each of the shareholders who has to sign a contract with a custodian and pay for the custodian’s services. In practice, however, there is little incentive for many legacy shareholders to do so since their holdings are too small and not valuable enough to justify the trouble and expense of dealing with a custodian. That is why many of them fail to do anything to activate their securities accounts and continue to be simply a dead weight in the custodial system.
To facilitate the life of issuers the DSL provides that the owner of securities dematerialized by the issuer must sign a contract with a custodian (and start paying for the custodial services) by 12 October 2014. If he fails to do so, his shares will not be counted in determining the quorum and voting of the issuer.
New Mutual Funds Law
On 5 July 2012 the Parliament adopted the new Law on Mutual Investment Funds (the “Law”) which is to take effect on 1 January 2014. Among important changes the new Law exempts mutual funds from regulation of the Joint-Stock Companies Law and modernizes the rules on disclosure, requiring disclosure of key current information about funds on the asset manager’s website.
Securities Market: New Rules for Advertising and Acquisitions
An omnibus law of 4 July 2012 introduces numerous amendments to securities rules.|4| It went into effect on January 1, 2013.
Among many other changes, the Law contains rather extensive rules restricting advertising of securities. All securities advertising materials have to be filed with the National Securities and Stock Market Commission (the “Commission”) prior to publication. Exceptions to these rules are narrow and they need to be taken into account in all communications regarding Ukrainian securities.
In 2012 the Commission also started issuing permits to acquire a significant interest in securities brokers, asset management companies, securities custodians, and certain other ‘professional securities market participants’. The power was granted to the Commission by the Law of 2 June 2011,|5| but it was not fully implemented until 13 March 2012 when the Commission approved the procedure and actually started issuing permits. The Commission’s permit is required for acquisitions resulting in direct or indirect control over 10, 25, 50 or 75 percent of the market player’s equity. Applicants must prove to the Commission their good business reputation and disclose information about their financial standing.
New Listing Rules
On 22 November 2012 the National Securities and Stock Market Commission (the “Commission”) adopted a new Stock Exchange Regulation which came into effect on 8January 2013.|6| The Regulation significantly tightens listing requirements both with respect to the issuers and to liquidity of shares listed. To name just one requirement, in order to get the first tier listing the issuer must have net assets and market capitalization of at least UAH 100 million and second tier – UAH 50 million.
Many criticise the new rules as unrealistic and difficult to meet for many issuers in the current market conditions. The Commission counters with hope that higher standards will contribute to higher level of investor confidence in the long run.
Simplification of Admission of Foreign Issuers’ Securities to Local Market
The admission of foreign securities to the Ukrainian stock market is generally governed by Regulation No. 42 dated 20 November 1997. The regime of admission created by this regulation is prohibitive by its nature and over the last 15 years none of the foreign issuers even attempted to offer its securities in Ukraine. On 22 November 2012 the Securities Commission adopted Regulation "On Admittance of Securities of Foreign Issuers to Circulation at the Territory of Ukraine" No. 1692 (the "Foreign Issuers Regulation"), coming into effect on 22 January 2013. The Foreign Issuers Regulation noticeably simplified admission rules for a particular class of issuers, i.e. those whose assets originate from Ukraine but were originally listed on foreign first-class stock exchanges (the exhaustive list of eligible stock exchanges is yet to be approved by the Securities Commission). Eligible foreign securities may now be admitted to the Ukrainian stock markets, albeit subject to procedural requirements that still remain burdensome even after their simplification. It is unlikely that the Ukrainian businesses trading on foreign stock exchanges will rush to take advantage of the new securities regulation as cost and benefit analysis suggests that the benefits that admission to the Ukrainian stock market may offer are still not worth the effort (and cost). As an illustration, anyone willing to buy foreign securities traded on the Ukrainian stock exchanges will need to obtain an individual license from the National Bank of Ukraine, suggesting that the Commission’s initiative was not supported by other regulators. In order to boost the activities prompted by the Foreign Issuers Regulation, all regulators need to act in concert and take a much more pro-active approach.
Developments of Insider Dealing Rules
In April – May 2012, the Securities Commission abolished its two regulations governing insider dealing without enacting their replacing counterparts. The abolished regulations include: Regulation No. 1344 dated 21 November 2006, setting an exhaustive list of information which was deemed to constitute ‘inside information’, and Regulation No. 792 dated 22 July 2008, establishing procedures for its disclosure. Cancellation of regulations is a rare case where absence of regulation brings Ukraine closer to European standards than its availability. Ukrainian law makers are notorious for being too formalistic and for placing emphasis on strict rules rather than principles. The Securities Commission’s move towards principles-based regulation away from formal and exhaustive lists is much welcome.The exhaustive list of information, deemed by the Securities Commission as ‘inside information’, limited the regulator’s ability to investigate cases of insider dealing which may go beyond the pre-determined exhaustive list. Furthermore, information included in the exhaustive list was presumed to have a significant effect on the price of trading financial instruments (an essential characteristic of ‘inside information’) irrespective of whether or not it actually had such an effect in practice.