Legal Environment for Joint-Stock Companies in Ukraine: Long-expected Renewal or Obscure Prospects?
Proper legislative control of legal order, legal status, activity and cessation of commercial companies, rights and duties of their participants are one of the most important prerequisites for efficient organization of business. Thus, adoption of the On Joint-Stock Companies Act of Ukraine of 17 September 2008 (hereinafter — the Act) was evidence of systemic reorganization of legislation about legal entities and long-expected renovation of an important segment of the legal environment. The Act affected all the main aspects of the functioning of joint-stock companies (hereinafter — JSC) — order of convocation and holding of general meeting of shareholders, methods of voting, designation of head and members of executive board, supervisory board, mechanism for striking considerable bargains of JSC, payment of dividends, etc.
New Act — for Public and Private JSC, or for All?
First of all it should be noted that since 30 April 2009 regulations of the new Act must be considered both on establishment of a new JSC and in the activity of open and closed JSC that were established and registered before the Act came into effect — for adjusting their activity into accordance with them. As it is known, legislative changes in classification of JSC were displayed in substitution of the existing types of JSC — open and closed — for lawful types: private and public. Establishment and registration of new JSC can be realized now only through their formation in the form of public and private JSC. At the same time, all positions of the Act as well as corresponding provisions of the Civil Code of Ukraine, the Commercial Code of Ukraine, existing subordinate legislations (in the part where they do not contravene the Act) will be applied to such newly incorporated legal entities at once and in full force. As for the existing CJSC and OJSC, precise examination of the question of influence of the new Act on them is not so well-defined. According to item 5 of section XVII of the Act, “Final and transitional provisions”, statutes and other internal regulations of JSC, which had been incorporated before the Act came into effect are subject to adjustment in accordance with the provisions of this Act not later than two years from the time of it coming into effect.
Acts for “Old” and “New” JSC
In order to define new regulatory bases for the activity of new types (private and public) and old types of JSC (open and closed) in current conditions, one should consider that laws of Ukraine, other regulatory legal acts that are valid in the part that does not contravene the Act (item 4 of part XVII, Final and transitional provisions, of the Act). After 30 April 2009 the issue has arisen as to the covering by provisions of the Act of existing CJSC and OJSC that were established and which operate on the basis of Articles 1–49 of the On Commercial Companies Act of Ukraine of 19 September 1991 (hereinafter — the Commercial Companies Act) that expire regarding JSC only on 1 May 2011.
At the same time, most provisions of the Commercial Companies Act refer to “joint-stock companies”, and are they applied to private or public JSC? The Act does not answer this question. In the conditions of an uncertain situation, the State Commission for Securities and Stock Market of Ukraine expressed its opinion regarding this in the Interpretation on the order of application of definite provisions of section XVII, final and transitional provisions, of the Act in connection with its coming into effect of 14 July 2009, No. 8 (hereinafter — Interpretation of the SCSSM).
It is pointed out that JSC incorporated before the Act came into effect — before bringing into line with the provisions of the Act of their constituent documents — must be governed in their activity until 30 April 2011 by the Commercial Companies Act and related subordinate regulatory legal acts. Their relations with shareholders, investors, public authorities and other persons shall be also governed by these acts of legislation. As for JSC that brought their activity into line with the Act, they should be governed respectively by the Act and subordinate legislation, but not by the Commercial Companies Act. This approach was taken in practice and is a logical consequence of the contents of both laws — the old Act about commercial companies is referred to CJSC and OJSC, and the new Act is exclusively about private and public JSC and that is why it is difficult for old JSC to use it before articles of association are altered.
Moreover, from 30 April 2009 all JSC must be guided in their activity by corresponding provisions of the Civil and Commercial Codes of Ukraine, On Securities and Stock Market Act of Ukraine of 23 February 2006, On State Regulation of Securities Market in Ukraine Act of Ukraine of 30 October 1996 and by other laws which were amended by the Act.
Bringing Activity into Line with Innovations: if “Yes”, then When?
The obligation put on open and closed JSC to adjust within the space of two years their articles of association and other internal regulations in accordance with the Act is stipulated directly in item 5 of its transitional provisions. And this is not a surprise as from 1 May 2011 JSC would not be able to apply the Commercial Companies Act in their activity without being reorganized into private or public JSC; the joint-stock company will just forfeit legislative bases of its activity, which will result in the absence of clear rules of its activity. That is why the Act sets out specifically the right of a shareholder to file a lawsuit in court about adjustment of articles of association of a JSC in accordance with the Act from 30 April 2011.
Thus, the “old” JSC decides according to the general rule, at its own discretion, when changes must be made to its statutory documents within the term set by the Act — between 30 April 2009 and 30 April 2011. It is worth paying attention again to the Interpretation of the SCSSM, which recommends a JSC to make a decision about adopting amendments to articles of association (statement of articles of association in the new edition) in 2010 on the AGM, including changes to the name of the company from OJSC (CJSC) to a public or private JSC.
While since 30 April 2009 the decision was made by a stockholder’s meeting of an OJSC or CJSC about changing the size of share capital, denomination of shares and issue of funds, such a JSC must perform all requirements of the Act and adjust its documents in accordance with the Act before registration by the SCSSM of the corresponding issue of shares otherwise the SCSSM will refuse state registration of such an issue of funds.
Necessary Amendments of Constituent Instruments
Articles of Association are brought first and foremost into line with the Act as well as the existing internal provisions adopted on its basis. As indicated in the Interpretation of the SCSSM, adjustment of the activity of OJSC and CJSC in accordance with the law requires obligatory performance of the following actions:
- Making changes to those Articles of Association that provide including for changing of the name from JSC (of closed JSC) to public or private JSC subject to the point that the number of shareholders does not exceed 100 persons for the date of making changes and performance of other requirements of the Act in the Articles of Association (regarding shares, establishment and cessation of a JSC, relations with shareholders, the convening of the general meeting, order of voting, forming and making decisions by other authorities of the JSC, etc.) through registration of such changes in the order stipulated by the On State Registration of Legal Entities and Private Entrepreneurs Act of Ukraine of 15 May 2003;
- Adjustment of internal documents in accordance with the Act and Articles of Association of a JSC (these are provisions about the general meeting, auditing committee, supervisory council and other corporative documents).
The SCSSM focuses its attention on the point that for adjustment in accordance with the Act of its Activity, a JSC must perform all the mentioned actions, and partial adjustment in accordance is not permitted.
It should also be pointed out that by adopting amendments to those Articles of Association concerning the name of the JSC legal entity form “joint-stock company” remains unchanged, as determined by item 3.2.1 of Classification of organizational-legal forms of management of DK 002:2004 of State Classifier of Ukraine (approved by the order of State Committee of Ukraine On Matters of Technical Control and Consumer Policy of 28 May 2004, No. 97). In other words, changing of types of JSC “open joint-stock company” and “closed joint-stock company” into the types — “public joint-stock company” and “private joint-stock company” is not changing the form of legal entity of a commercial company that conforms with the State Committee of Ukraine on matters of regulatory policy and business undertakings in the letter of 10 April 2009, No. 4010. At the same time, all mentioned actions on making and registering changes to the Articles of Association of a JSC are exempted from payment of registration fees.
Thus, requirements of the Act about adjustment of the activity of a JSC in accordance with its provisions demands not only adoption of formal amendments of Articles of Association but also performance of considerable work in search of optimal ways to make it correspond to the peculiarities of culture and activity of a certain JSC. Opportune adjustment of its activity (mainly of Articles of Association and local internal documents) in accordance with the provisions of the Act will allow those JSC existing up till 30 April 2009 to adapt reasonably to modern changes of Ukrainian joint-stock legislation. In turn this will enable the efficient movement of the Act to set new legal constructions and procedures for organizing a company’s management and the carrying out of successful business in Ukraine.