On April 7, 2015, the Verkhovna Rada of Ukraine adopted the Law of Ukraine "On Amending Certain Legislative Acts of Ukraine on Protection of Investors' Rights", hereinafter – "the Law", the official text of which has not been published yet.

The corresponding draft law was registered under No 2259.

Major Innovations

The Law covers the following:

  • Introduction of the mechanism of a derivative complaint within the commercial proceedings (the right of a member (shareholder) who owns 5 and more percent of the charter capital (ordinary shares) of a company and/or of members (shareholders) who collectively own 5 and more percent of the company's charter capital (ordinary shares) to file a claim for the benefit of the company to recover losses inflicted to the company by its official;
  • Granting a right to a claimant to receive reimbursement from the company for his/her expenses incurred in connection with court proceedings concerning the action against the company's official with regard to recovering losses inflicted to the company within the amounts actually received by the company;
  • Granting minority members (shareholders), who collectively own(-s) 5 and more percent of the company's charter capital (ordinary shares), the right to represent the company's interests in disputes concerning recovery of losses inflicted to the company by its official;
  • Introduction of the liability of the company's officials in the event of infliction of damage to the company by their illegal actions in the extent of the inflicted damage;
  • Introduction of a concept of "independent directors" who will represent interests of the minority shareholders in public joint-stock companies;
  • Setting up a detailed regulation of related-party transactions which will take into account interests of all shareholders;
  • Extending the range of issues which should be obligatory included to the agenda of the annual general meetings of a joint-stock company;
  • Regulating the procedure for election and determination of the number and personnel of a supervisory board of a joint-stock company which may consist entirely of individuals;
  • Removing restrictions concerning the number of shareholders of a private joint-stock company, etc.

Important

The majority of the Law provisions will come into effect on January 1, 2016.

However, the provisions regarding an introduction of the mechanism of a derivative complaint within the commercial proceedings and deregulation concerning the number of shareholders of a private joint-stock company will come into effect starting from the day when the Law is published.

Conclusion

The Law, text of which is being prepared to be signed by the President of Ukraine and then to be published, aims primarily at enhancing the mechanisms of management of joint-stock companies and control over activities of companies' officials.

However, granting minority shareholders the right to file claims for the benefit of a company and to represent the company's interests in proceedings concerning appropriate actions can lead to unpredictable and negative effect for a company.

In particular, unfair members (shareholders) will have a possibility to actually block activity of such officials and, thus, activity of the bodies (of which officials are the members) by filing derivative complaints for recovery of damage by company's officials.

Information on commencement of proceeding concerning an appropriate case will obligatory be published on the official website of the Supreme Economic Court of Ukraine and that can damage business reputation of both the official and the company in general.

At the same time, it is quite possible that minority shareholders will use claims for recovery of damages not for the benefit of the company.

For instance the minority shareholders can make a majority member (shareholder) to purchase a participatory interest (share) of the company owned by minority shareholders, as according to the Law in disputes on recovery of losses inflicted to a business company by its official, abandonment of a claim, reduction of stated claims, change of the subject-matter or cause of claim, conclusion of a settlement agreement, waiver of appeal or cassational appeal are possible only subject to a written consent of all representatives of such company, and therefore of each minority member (shareholder) who will file an action and/or will wish to represent interests of the claimant (company) in connection with such claim.

We hope that in practice the provisions of the Law will justify the purpose of its adoption.

Originally published on 9 April 2015

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