United States: Major Revamp of Securities Law

The end of March saw the Ukrainian parliament pass a new law "On Securities and the Capital Market" ( the "Securities Law"), intended to replace the very outdated 1991 Securities Act and meet the growing demands of the burgeoning Ukrainian securities market. The Securities Law came into effect on May 12, 2006, and provides a unifying framework for the securities laws enacted in Ukraine to date. It also seeks to regulate areas ignored by previous legislation, such as the disclosure of information on the securities markets.

The biggest impact of the Securities Law appears to be in the area of protection of rights of shareholders, and particularly minority shareholders. The Securities Law has significantly expanded the obligation of an issuer to disclose information about itself, its main shareholders and matters affecting its securities. Also, before the Securities Law was passed, Ukraine had no legally defined concept of insider information, nor was there a requirement not to use such information to the detriment of other share holders. As a result, foreign and Ukrainian investors should be better able to make informed investment decisions on Ukrainian securities. Investors have also been provided with legal remedies to protect against fraudulent practices in the securities market. An indirect effect of the Securities Law should thus be increased investment flows into Ukrainian securities from abroad. Below is a summary of the major changes introduced by the law.

The Securities Law distinguishes between issuance and nonissuance securities. Issuance securities are issued pursuant to a statutory procedure and confer equal rights on their owners. They include shares, bonds, mortgage certificates, mortgage bonds, real estate operation funds certificates, investment certificates and treasury notes of Ukraine. Nonissuance securities are created individually, and include certificates of deposit, mortgage notes, promissory notes and drafts.

The Securities Law further recognizes share securities (company shares and investment certificates), bond securities (company bonds, municipal bonds, state bonds, treasury notes, deposit certificates, promissory notes/ drafts), mortgage securities (mortgage bonds, mortgage certificates, mortgage notes, real estate operation funds certificates), privatization securities, derivative securities, and title securities (warehouse receipts, etc.). The Securities Law further classifies securities by form of issuance (in documentary and non-documentary form) and method of transfer (bearer, registered and order securities).

The Securities Law introduces the concept of a securities prospectus for disclosing information about the securities, provides for the registration of each issue of share securities or bonds and the prospectus and sets out the steps and procedures to be followed in issuing shares/bonds.

The Securities Law distinguishes between public and private placements and imposes different obligations on issuers depending on whether an issuance is private or public.

Shares are issued by joint stock companies, and only in registered form. A share must be assigned a nominal value set in Ukrainian currency. Shares may be common or preferred. Common shares accord their owners equal rights, such that no different classes of common shares can be instituted, and cannot be converted into preferred shares or other securities of the issuer. Preferred shares may be of different classes and may be convertible into common shares or preferred shares of other classes. Preferred shares cannot exceed 25% of the share capital of a company.

The Securities Law provides for several categories of bonds, including company bonds, municipal bonds and the state bonds of Ukraine. The Securities Law further permits interest bonds, discount bonds and special purpose bonds (that entitle holders to specific goods or services from the issuer). From 2008, companies will be able to issue bonds for an amount equaling either (i) three times the company's share capital or (ii) an amount guaranteed by a third party, whichever is greater. Until 2008, there (unusually) does not seem to be any limitation on the amount of the bonds issue: the new Securities Law repealed both the old Securities Law limit of 25% of the share capital of the company, and the Civil Code limitation of 100% of the share capital of the company.

Shares and bonds (except for state bonds) come into existence only after the registration of their issue by the Ukrainian Securities Commission. Prior to registration, transactions with shares and bonds are prohibited.

The Securities Law provides for the disclosure of information about the issuer of publicly placed shares and material events potentially affecting the price of shares and holders of large blocks of shares (from 10%).

Regular information concerning the finances and business of an issuer must be filed with the Ukrainian Securities Commission annually and quarterly. Annual information includes, in particular, the name and location of an issuer, its management, business and financial operations, issued securities, annual financial reports and an auditor's report.

Essentially the same information is filed on a quarterly basis, except quarterly financial reports and information on participation of an issuer in other companies also must be filed.

Special information is information about events affecting an issuer that may result in a material change in value of its shares. Such events particularly include placement by an issuer of securities in excess of 25% of its share capital, redemption by an issuer of its shares, listing or delisting of shares of an issuer on a stock exchange, an issuer obtaining loans in excess of 25% of its assets, a change in the officers of an issuer, a change of shareholders owning 10% or more of the shares, and the reduction in the share capital of an issuer.

The Securities Law defines insider information as any information not publicly disclosed about an issuer or its securities or transactions with its securities, the disclosure of which may materially affect the securities' value. Under the Securities Law, insiders include persons in possession of insider information due to the fact that they are owners of voting shares of an issuer, officers of an issuer, or persons with access to insider information in connection with their employment or contractual relations (e.g., lawyers, accountants, consultants, etc).

The Securities Law makes it illegal for an individual to use insider information to (i) enter into contracts on his or her behalf or on behalf of other persons involving the acquisition or transfer of shares subject to insider information and (ii) disclose insider information to third parties, or make recommendations on the acquisition or transfer of shares before public disclosure of such information. Securities traders and other members of the securities markets are required to report to the Securities Commission transactions suspected to be based on insider information. The Securities Law introduces criminal liability for the unauthorized disclosure of insider information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.