shareholder rights, equitable treatment and the role of the state … · 2016-03-29 · normative...

The 3rd Meeting of the Eurasian Corporate Governance Roundtable��

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Shareholder Rights, Equitable Treatment and the Role of the State

Questionnaire – UkraineBy

Ms. Motria Onyschuk-Morozov Project Manager, Ukraine Corporate Development Project

International Finance Corporation

hosted bySecurities and Stock Market State Commission of Ukraine

State Property Fund of UkrainePFTS

with the support ofThe Government of Japan

The Global CorporateGovernance Forum

The Third Meeting of the Eurasian Corporate Governance Roundtable, Kyiv, 17-18 April 2002

NAME: Motria Onyschuk-Morozov

TITLE: Project Manager, Ukraine Corporate Development Project

ORGANIZATION: International Finance Corporation

COUTNRY: Ukraine

E-mail: [email protected]

Tel.: (38044) 253-0539 Fax: (38044) 490-5830

QUESTIONNAIRE

COUNTRY BACKGROUND INFORMATION

1. Corporate Ownership structure:

1.1 Number and aggregate annual turnover of Open Joint Stock Companies (publicly listed / traded companies):According to statistics, there was a total of 35,260 joint stock companies in Ukraine in 2000, of which 11,085 were open joint stock companies. Approximately300 open joint stock companies are listed on the official Ukrainian capital market, 30 of them actively trading in stock. By the end of 2000, the share of jointstock companies (open and closed) in the total industrial output had reached 60.4%.

1.1.1. Number of listed companies that have never had any trades

Information is unavailable

1.1.2. Number of listed companies that have had more than one trade

Information is unavailable

1.1.3. Number of companies that are regularly traded on a monthly basis:At present, 30 companies are actively traded on the capital market.1.2. Number and aggregate annual turnover of Closed Joint Stock Companies (non publicly listed/non traded companies)In 2000, the number of closed joint stock companies was 23,41 thousand.

1.3 Number and aggregate annual turnover of Joint Stock Companies with state owned stakes:



In 2001 there were 2,237 joint stock companies with state-owned stakes, including

1.3.1 Where the State owns over 50% of the company: 400 JSC

1.3.2 Where the State owns from 25 to 50% of the company: 1123 JSC

1.3.3 Where the State owns less than 25% of the company: 714 JSC

1.4 What is the aggregate market capitalization of publicly listed / traded companies as a percentage of GDP?The market capitalization of joint stock companies traded on the organized market as a percentage of GDP was 6.9% in 2000. Nominal capitalization of theUkrainian stock market in 2001 reached 25% of GDP, or UAH 46.5 million.

1.5 Major sources of corporate financing? (Bank loans? State subsidies? Securities?)Internal financing, i.e. internal assets of a company, is the principal source of corporate financing in Ukraine. Their share in the general capital structure was66.2% in January – June 2001.

External sources of corporate financing are respectively:

• bank loans and other borrowings – 3.3%;• funds of foreign investors – 3.5%;• funds of local budgets – 4.2%;• public funds – 5.1%;• funds of the State Budget – 6.3%;• other funds – 11%.

By the end of 2001, the percentage of registered stock issuances that attracted actual financing was 15% of the total amount of share issuance, including:

• the percentage of issuances by open joint stock companies was 8%;• the percentage of issuances by closed joint stock companies was 7%.

1.5.1 What is the average debt-to-equity ratio of publicly listed / traded companies?Information is unavailable

1.5.2 What is the aggregate amount of annual direct state subsidy to enterprises?Information is unavailable

1.5.3 What is the aggregate amount of direct foreign investment in the domestic economy?As of 1 July 2001, the aggregate amount of direct foreign investment in the economy of Ukraine had reached USD 4.1 billion. It is equivalent to approximatelyUSD 83 per capita and is one of the lowest among NIS/Central and Eastern Europe countries.

1.6 Total number of shareholders:



At present, owing to privatization and corporate development, 18 million Ukrainian citizens own shares and are stockholders.1.6.1 – Average number of shareholders of open joint stock companies:Information is unavailable

1.6.2 - What percentage of these shares are held by:- employees: Information is unavailable

- executive managers: Information is unavailable

- foreign shareholders or institutional investors: Information is unavailable

- the state: Information is unavailable

- domestic corporations: Information is unavailable

1.6.3 Average number of shareholders of closed joint stock companies:Information is unavailable.

1.6.4 - What percentage of these shares are held by:- employees: Information is unavailable

- executive managers: Information is unavailable

- foreign shareholders or institutional investors: Information is unavailable

- the state: Information is unavailable

- domestic corporations: Information is unavailable

1.7 Are there any cross shareholdings? If so is this a wide spread practice? Does it affect corporate control landscape?The practice of cross shareholding is quite widespread in Ukraine. Information about how cross shareholding affects corporate control landscape is unavailable.

1.8 Is there a trend towards the development of corporate groups? If so, for what reasons are corporate groups developing?There are few corporate groups in Ukraine. They are just beginning to form. More detailed information is unavailable.

1.9 Are there any special links between financial institutions and corporate groups?Information is unavailable.

2. Privatization procedures:

2.1 Percent of state commercial/production assets privatized to date:2.1.1 Number and aggregate annual turnover of enterprises privatized to date:Over nine years (as of 1 July 2001), 74,465 enterprises have been privatized, of which 27.4% are state-owned and 72.6% are communal property.

The aggregate number of state-owned enterprises privatized between 1992 and 2001 is 22,305 of which:



Group entities (small enterprises) – 9,802;

Group B, C, D entities (medium and large enterprises) – 8,667;

Group E entities (unfinished construction sites) – 2,488;

Group F entities (stocks (stakes, shares) that are held by the state in the authorized funds of joint-stock companies) – 848;

Group G entities (health care facilities, historical and cultural landmarks, press facilities, sports and physical education facilities etc.) – 500.

2.2 By what methods may state assets be privatized?2.2.1 Identify the percentage of assets privatized through each method.

In 2001, the main methods of privatization were:

• auction sale – 846 objects (51.0% of the total number of assets)• buyout – 682 entities (41.1%);• sale of shares of open joint stock companies – 79 entities (4.8%);• through lease – 29 entities (1.8%);• sale through commercial tenders – 12 entities (0.7%);• sale through non-commercial tenders – 9 entities (0.5%);• buyout under alternative plan – 1 entity (0.1%).

2.3 What are the privatization objectives and current methods used?In accordance with the State Privatization Program for 2000 – 2002, the goal of privatization is to create conditions for increasing efficiency of enterprises’operations and to enhance competitiveness, and to channel funds from privatization to the State Budget of Ukraine.

This privatization program has the following distinguishing features, making it different from the previous ones:

• enterprises are privatized exclusively for cash;• long-term and foreign investor-oriented;• pre-privatization reorganization of enterprises and debt restructuring to increase their liquidity and attractiveness;• privatization of strategically important and monopolist enterprises (utilities, metallurgic and chemical plants.

The current methods of privatization are:

• buyout;• sale through auction and tender;• sale of shares of open joint stock companies (including sale through tenders, advertised bidding, organizers of security trading etc.)

2.4 To what extent may foreign investors participate in privatization?



Foreign investors may participate in auctions, tenders and advertised bidding for privatization entities. Current restrictions on participation by foreign investors inprivatization apply only to companies registered in off-shore zones.

3. The legal and regulatory framework providing for shareholder rights

3.1 Identify the principal normative acts establishing and protecting the rights of shareholders (title of act, promulgating state body, date of adoption,identification number)?Normative acts of the Verkhovna Rada of Ukraine:

Law of Ukraine #1576-XII On Companies of 19 September 1991.Law of Ukraine #1201-XII On Securities and Stock Market of 18 June 1991.Law of Ukraine #710/97-VR On the National Depositary System and Peculiarities of Electronic Circulation of Securities in Ukraine of 10 December

1997.

Decrees of the President of Ukraine:

Presidential Decree #280/2002 On Measures for the Development of Corporate Governance in Joint Stock Companies of 21 March 2002.

Normative documents of the Securities and Stock Market State Commission of Ukraine (SSMSC):

Regulation on the Procedure for Increasing (Decreasing) the Amount of a Joint Stock Company’s Charter Capital, approved under Resolution #44 of theSSMSC of 8 April 1998 (revised under Resolution #158 of the SSMSC of 16 October 2000);Regulation on the Procedure for Registering Share Issuances During Company Reorganization, approved under Resolution #221 of the SSMSC of 30December 1998;Regulation #199 on the Procedure for Overseeing Registration of Shareholders at General Shareholder Meetings of 23 December 1998.

3.2 How recent and effective is the existing legislation?The existing legislation in Ukraine does not provide for a clear and sufficient instrument of regulating operations of joint stock companies, resulting in numerousviolations of investors’ rights and determent of investors. The Law of Ukraine On Companies was adopted in the early 1990s. It does not serve its regulatorypurpose any more. It has become common practice in Ukraine for company managers to violate rights and legitimate interests of shareholders without technicallyviolating provisions of the effective legislation.

3.3 What are in your opinion the most important areas for reform of existing normative acts or the adoption of additional normative acts?Reform is needed in the following areas of Ukrainian corporate governance legislation:

1. Address the following issues to protect shareholder rights:

• repurchase and sale by joint stock companies of their own shares;

• mandatory redemption of shares at the request of a shareholder in the event of his dissent with certain resolutions of the general shareholder meeting;

• purchase of a controlling block of shares of a joint stock company;



• making agreements by joint stock companies in which officials of the company have a vested interest.

2. Ensure equitable treatment of all shareholders and protecting minority shareholders.3. Ensure the exercise of shareholders’ right to participate in the management of the company.4. Improve the system of protecting rights and legitimate interests of investors.5. Improve the system of disclosing information and ensuring transparency of activities of a joint stock company.

3.4 Are there any significant pending laws or normative acts?In 2001, the Draft Law of Ukraine On Joint Stock Companies was twice submitted to the Verkhovna Rada for the first reading but failed to receive the number ofvotes required for adoption. The Draft Law is expected to be reviewed and re-submitted to the newly elected Parliament. The Verkhovna Rada also adopted inthe third reading the New Civil Code which will come into force next year, once it is signed by the President of Ukraine.

3.5 What procedures are required to amend the bylaws / regulations of a company?The power to approve/amend the bylaws of a company lies within the non-exclusive competence of the general shareholder meeting and may be delegated to theother governing bodies of the company. The bylaws may be approved/amended by a simple majority of votes of shareholders present at the meeting.

3.6 What procedures are required to amend the charter of a company?The power to amend the charter of a company lies within the exclusive competence of the general shareholder meeting and may not be delegated to the othergoverning bodies of the company. The resolution must be approved by a majority of ¾ of the votes of shareholders present at the meeting.

Does the corporate governance framework protect the rights of shareholders?

1. Ownership Rights

Basic shareholder rights include the right to secure methods of ownership registration and to convey or transfer shares.

1.1 Are Shareholders able to register their shares without undue difficulties? What are the steps, documents, permissions and time required to registershares? On what grounds may authorities refuse the registration of shares?Yes, they are. The effective legislation clearly defines the procedure for registering shares with the registrar and depositary accounting systems (depending on theform of share issuance).

To guarantee protection of shareholder rights, the legislation clearly specifies:

• a complete list of documents required to transfer shares. Such documents are: the transfer certificate, the original or a legalized copy of the civilagreement that certifies the transfer of securities ownership; share certificate (for documentary share issuance);• a maximum term for entering information into the accounting system;• a full list of grounds for refusal to enter information into the accounting system.

The general share registration system consists of the following series of steps:• documents are submitted to the registrar/custodian to enter information into the shareholder register;



• the registrar/custodian checks the document package accepted for the validity of the requested to perform the required action;• the registrar/custodian makes changes to the shareholder register.

The registrar makes changes to the depositary accounting system (for non-documentary share issuances) within 3 working days from the receipt of the resolutionissued by the depositor (customer) and documents that provide the grounds for transferring ownership of securities.The registrar makes changes to the register (for documentary share issuances) in the following order:

• check the documents submitted and issue a written statement to confirm the possibility of making appropriate changes to the register upon receipt ofpayment – within 3 working days;

• make changes to the register – within one working day from the receipt of payment of the service fee.

Identify the relevant section(s) of the normative act(s) governing this issueProvision on the regulation of activity related to maintaining registers of registered securities owners, approved under Resolution #60 of the SSMSC of 26 May1998, Chapter 7.Regulation on depositary activity, approved under Resolution #61 of the SSMSC of 26 May 1998, Chapter 5.

Describe any issues or problems arising in practice in connection with this matterUnder Ukrainian law, custodians and registrars are remunerated for their services on the basis of tariffs they establish at their own discretion. An upper limit tothe tariffs is to be established by the SSMSC and is subject to the approval of the Anti-Monopoly Committee of Ukraine. As of now, the SSMSC has establisheda maximum tariff of UAH 10/USD 2 only for the registrar service of transferring securities to the custodian accounting system (immobilizing securities). Noother tariffs have been established to date.

1.2 How is share registration handled in public companies? What are the steps, documents, permissions and time required to register shares? On whatgrounds may authorities refuse the registration of shares?Share registration in public companies is handled by the SSMSC and is one of the later stages of the share issuance process.A general process of share issuance consists of the following steps:a) approval of the decision to issue shares;b) registration of the share issuance prospectus with the SSMSC;c) publication of the share issuance prospectus;d) placement of shares;e) registration of the share placement report with the SSMSC;f) deciding to approve results of share placement and/or making changes to the charter;g) registration of the charter/changes to the charter with state registration authorities;h) registration of the share issuance with the SSMSC.The share issuance and the prospectus are registered within 30 calendar days from the date of receipt of the application and all documents required by theSSMSC. A report on subscription results is registered by the SSMCS within 15 calendar days.



A list of documents required for registration of share issuances has been established by the SSMSC. It is incomplete, thus additional documents may be requiredto confirm data.Registration of securities issuance or of information on securities issuance or the report on subscription results may be refused on the following grounds:

a) failure of the documents submitted to comply with applicable legal requirements;b) violation of the established procedure for conducting securities issuance;c) detection, at the time of the registration, of violations of the procedure for calling and/or holding the general shareholder meeting which decided toissue shares or to change the amount of the statutory fund (charter capital) of the joint stock company;d) violation of the preemptive right of shareholders to purchase additional issuance shares;e) failure to comply with the conditions for subscription to shares, specified in the issuance prospectus;f) failure to provide or disclose information (reports) about the issuer on a regular basis, in instances specified under applicable legislation;g) decision of the authorized representative of the registrar or of court authorities to stop circulation (placement) of securities, effective at the time of theregistration in accordance with established procedure.

The above list is complete.Identify the relevant section(s) of the normative act(s) governing this issueRegulation on the Procedure for Registering Joint Stock Companies’ Share Issuances and Company Bonds, approved under Resolution #210 of the SSMSC of 20September 1996 (revised under Resolution #18 of the SSMSC of 9 February 2001), Chapters 1, 2, 3, 4Describe any issues or problems arising in practice in connection with this matterThe existing share issuance procedure is:

• not focused on protecting investor rights (there is a wide gap in time between making the contribution and acquiring the title to paid shares);

• forcing the issuer to apply to the SSMSC three times during the issuance;

• limiting the scope for conducting closed subscriptions in a civilized fashion.

1.3 How are registers regulated?

The procedure for maintaining registers is regulated under the respective Regulation #60 of the SSMSC of 26 May 1998 which specifies:

• requirements for the procedure for maintaining registered shareholder registers;• terms of reference of the registrar, issuer and registered entities;• the procedure for accessing information contained in the register.

1.4 What rights do shareholders and/or the public have to inspect a company’s register of shareholders?Access to information in the register is limited. Only registered owners, the issuer and government agencies (within their reference) may have access to suchinformation. The issuer may receive information contained in the registry but is not allowed to disclose it.

Shareholders are able to obtain only the information about the status of their own accounts and transactions reflected in the accounts and are not allowed to haveaccess to information about the accounts of other shareholders.



Identify the relevant section(s) of the normative act(s) governing this issueProvision on the regulation of activity associated with maintaining registers of registered shareholders, approved under Resolution #60 of the SSMSC of 26 May1998, Chapter 11.

Describe any issues or problems arising in practice in connection with this matterRegistrars occasionally disclose information about shareholders to unauthorized individuals, and government officials often abuse their position with respect toaccess to the shareholder registration system.

Besides, lack of free access to the shareholder registration system is an obstacle to:

• share consolidation by minority shareholders;• providing potential investors with a complete picture of the equity structure;• circulation of a joint stock company’s shares on the secondary stock market.

1.5 Are shares freely transferable in open versus closed joint stock companies? What are the restrictions?Shares are freely transferable in open and closed joint stock companies. Shareholders may alienate their shares without prior consent of the other shareholders orthe company. The only restriction on the circulation of shares in closed joint stock companies is the ban on trading in them on a stock exchange.

Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1576-XII On Companies, Chapter 2.

Describe any issues or problems arising in practice in connection with this matterA vague wording of provisions on the circulation of shares of closed joint stock companies in the effective legislation creates too wide a scope for interpretingand applying the legal norms. Sometimes closed joint stock companies impose illegal restrictions on sales of their shares to shareholders.

1.6 What are the requirements for authorizing and issuing new capital?Additional issuance shares are registered in accordance with the procedure described in Paragraph 1.2.

Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1576-XII On Companies, Chapter 2.Regulation on the Procedure for Increasing (Decreasing) the Amount of a Joint Stock Company’s Charter Capital, approved under Resolution #44 of the SSMSCof 8 April 1998 (revised under Resolution #158 of the SSMSC of 16 October 2000), Chapters 2, 3.

Describe any issues or problems arising in practice in connection with this matter

1.7 What pre-emptive rights to the purchase of company shares do shareholders enjoy, if any?If additional shares are issued, shareholders have the preemptive right to purchase additional shares in proportion to their stakes in the company’s charter capital.

Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1576-XII On Companies, Chapter 2.



Regulation on the Procedure for Increasing (Decreasing) the Amount of a Joint Stock Company’s Charter Capital, approved under Resolution #44 of the SSMSCof 8 April 1998 (revised under Resolution #158 of the SSMSC of 16 October 2000), Chapters 2, 3.Describe any issues or problems arising in practice in connection with this matterThe effective legislation does not vest the general shareholder meeting with the power to waive the preemptive shareholder right to purchase additional issuanceshares. That, in its turn, prevents joint stock companies from conducting closed subscriptions.

2. Dividends

Basic shareholder rights include the right to share in the profits of the corporation.

2.1 How are dividends of the company set and distributed?Resolutions to establish a procedure for the distribution of profits, set the terms and a procedure for the distribution of dividends lie within the exclusivecompetence of the general shareholder meeting and are passed by a simple majority of the votes of shareholders present at the meeting. Dividends are paid once ayear, at the end of a calendar year in accordance with the procedure specified in the charter of the company from profits remaining after the payment of taxes,other budgetary payments and interest on bank loans.

Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1576-XII On Companies of 19 September 1991, Chapter 1, 2.Law of Ukraine #1201-XII On Securities and Stock Exchange of 18 June 1991, Chapter 1.Describe any issues or problems arising in practice in connection with this matter

• The form of the payment of dividends is not clearly regulated under the law. As a result, some companies pay dividends in non-liquid products producedor acquired by the company.

• Shareholders’ poor knowledge of the principles of market economy and treatment of dividends as an obligation of the company present a majorproblem. Many shareholders vote for the payment of dividends, even though reinvesting may be more profitable for the company.

• The effective legislation in Ukraine does not prohibit payment of dividends if a result of such payment may be the bankruptcy of the company.

• No provision made for payment of interim dividends.

2.2 Under what circumstances may shareholders be restricted in their ability to share in profits?There are no restrictions on the ability of shareholders to share in profits. An important condition for the payment of dividends is that the company have its ownfunds to pay them.

Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1576-XII On Companies of 19 September 1991, Chapter 1, 2.

Describe any issues or problems arising in practice in connection with this matter2.3 Can shareholders vote at general meetings on distribution of profits?



Yes, they can. Such resolutions are passed by a simple majority of the votes of shareholders present at the meeting. The issues lies in the exclusive competence ofthe general shareholder meeting.

Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1576-XII On Companies of 19 September 1991, Chapter 2.

Describe any issues or problems arising in practice in connection with this matterShareholders are very rarely provided with an opportunity to review documents which justify the need for payment or non-payment of dividends before a generalmeeting. As a result, shareholders take in the board’s report by listening and are unable to make an informed decision.

2.4 What specific recourse do shareholders have in case of delays or refusal to pay dividends?A decision to pay dividends approved by a legitimate general shareholder meeting obliges the company to pay dividends. In the event of delay or failure to paydividends, a shareholder may apply to court in accordance with a general procedure as a creditor or lodge a claim with the SSMSC.

2.5 Is the company allowed to purchase its own shares? Under what conditions?Yes. The company is allowed to repurchase its own shares under the following conditions:

• repurchased shares must be paid-up in full;• only amounts exceeding that of the charter capital may be used for the repurchase of shares;• shares may be repurchased only with a view to re-selling, distribution among the employees or cancellation;• repurchased shares must be sold or cancelled within one year.

2.6 If a company purchases its own shares (treasury shares), who, if anyone, may exercise voting rights with respect to these shares?Shares repurchased by the company remain on the company’s balance sheet, are not taken into account for determining the quorum at a general shareholdermeeting and may not be used for exercising any voting rights.


Describe any issues or problems arising in practice in connection with this matter3. Major corporate changes and shareholder meetings

Shareholders have the right to participate in decisions concerning fundamental corporate changes and should have the opportunity to participate effectively andvote in shareholder meetings.

3.1 How often do shareholder meetings have to be held?General shareholder meetings have to be called at least once a year unless otherwise specified in the company’s charter. Extraordinary shareholder meetings maybe called in the event of the company’s bankruptcy and in special situations described in the company’s charter, and in any other situation as required in theinterests of the company as a whole.




Describe any issues or problems arising in practice in connection with this matterIn practice, some companies fail to call general shareholder meetings for several years in a row, as the effective legislation does not envisage any sanctions forfailure to comply with the terms established under the law. Companies with a diluted ownership structure are often unable to conduct shareholder meetings due tolack of quorum, the effective legislation defining neither the concept nor procedure for conducting repeat shareholder meetings or providing for a means to lowerthe quorum.

3.2 What is the process and timeline for notification of shareholders? Owners of registered shares should be individually notified by means specified in the charter no later than 45 days before the date of the meeting. At the sametime, a general announcement should be made in one of the official publications of the Verkhovna Rada, Cabinet of Ministers or SSMSC and in the local printmedia.Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1576-XII On Companies of 19 September 1991, Chapter 2.

Describe any issues or problems arising in practice in connection with this matterThe major problems are:

• failure to make an official announcement or significant delays in the publication thereof, restricting shareholders in their ability to exercise their right toadd motions to the agenda;

• failure to place a notice in the national print media (due to high costs);• the existing judicial practice of dispute settlement, under which failure to notify a shareholder does not result in invalidation of the relevant resolutions

of the general shareholder meeting.

3.3 How are foreign shareholders treated regarding notification and participation? The existing legislation does not contain any special provisions regarding notification and participation of foreign shareholders. Such shareholders receivenotification on the general grounds described above.


Describe any issues or problems arising in practice in connection with this matterSee above, Paragraph 3.2.

3.4 What advance notification must shareholders receive of the agenda of shareholder meetings?The agenda is an integral part of the notification of a shareholder meeting. If the agenda contains items related to the increase/decrease of the charter capital, thenotification must contain additional information such as:

a) reasons for, means and a minimum amount of increasing/decreasing the charter capital;b) a draft of changes to be made to the charter;c) information on the number of shares that are additionally issued or removed from circulation and on the aggregate value thereof;



d) information about the new nominal value of shares;e) rights of shareholders in the case of additional issuance or removal of shares;f) the date of the beginning and end of a subscription to shares that are additionally issued or removed;g) the procedure for compensating shareholders for losses incurred as a result of changes to the charter capital.

Shareholders should have an opportunity to review documents related to the agenda of the shareholder meeting before the meeting is called.

Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1576-XII On Companies of 19 September 1991, Chapter 2.SSMSC Explanatory Memorandum #24 of 10 November 1999.

Describe any issues or problems arising in practice in connection with this matterItems on the agenda are often too general and do not provide shareholders with sufficient information about what the approval of one decision or another mayresult in. Documents related to items on the agenda are not prepared in good time and are not distributed among shareholders.

3.5 What are the restrictions regarding the location of the general meeting?General shareholder meetings are held on the territory of Ukraine, usually at the location of the joint stock company, except in cases where as of the date of thegeneral meeting 100% of the company shares are owned by foreigners, stateless persons, foreign legal entities and international organizations.


Describe any issues or problems arising in practice in connection with this matterSome companies hold the general meeting at locations other than that of the joint stock company such as in a different part of Ukraine, thus depriving minorityshareholders of the opportunity to attend the meeting.3.6 Are there any restrictions on the participation of shareholders in the general meetings of shareholders? Of representatives of shareholders that are legalentities? Of proxies?There are no restrictions. All entities that are shareholders as of the date of the general meeting have the right to participate and vote. Shareholders are notrestricted in their right to issue proxies.Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1576-XII On Companies of 19 September 1991, Chapter 2.


3.7 Are shareholders able to add items to the agenda? What is the procedure?Any shareholder has the right to add items to the agenda. To do this, he or she should submit the items to the board no later than 30 days in advance of themeeting date. A decision on whether to add the items to the agenda is made by the board. Motions proposed by shareholders owning more than 10% of votes arerequired to be added to the agenda. Shareholders should be notified of a decision to make changes to the agenda no later than 10 days before the meeting inaccordance with a procedure described in the charter.



Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1576-XII On Companies of 19 September 1991, Chapter 2.SSMSC Explanatory Memorandum #24 of 10 November 1999.

Describe any issues or problems arising in practice in connection with this matter3.8 Are all shareholders able to vote at general meetings? What are the majorities required for the following issues?Yes, all holders of common shares are able to vote. Holders of preferred shares are able to vote unless otherwise specified in the company charter.

3.8.1 – on appointment and removal of directors?Appointment and removal of members of the supervisory board and of the management board do not lie within the exclusive competence of the generalshareholder meeting. Relevant decisions are approved by a simple majority of the votes of shareholders present at the meeting.


Describe any issues or problems arising in practice in connection with this matterThe existing legislation does not provide for electing members of the supervisory board by cumulative voting.

3.8.2 – on appointment and removal of external auditors?Under current Ukrainian law, the issue lies neither within the competence of the general meeting nor of the other governing bodies of the company. However, itmay be delegated to the competence of the general shareholder meeting by the company charter.


Describe any issues or problems arising in practice in connection with this matter3.8.3 – on issuing share capital?

A decision to issue share capital is approved by the company founders at the time of the foundation of the company.


Describe any issues or problems arising in practice in connection with this matter3.8.4 –on the issuance of additional shares?

Normally, a decision to issue additional shares is approved by the general meeting. However, an increase of no more than 1/3 of the charter capital may beapproved by decision of the management board unless otherwise provided under the company charter. The issuance of additional shares involves makingappropriate changes to the company charter, which is within the exclusive competence of the general shareholder meeting.




Describe any issues or problems arising in practice in connection with this matter3.8.5 –on major corporate transactions (i.e. acquisitions, disposal, mergers, take-overs, etc.)

The approval of transactions in excess of the amount specified in the company charter lies within the non-exclusive competence of the general meeting and maybe passed by a simple majority of shareholders present at the meeting. Suspension of the company’s operations (liquidation), including suspension throughreorganization, lies within the exclusive competence of the general meeting and should be approved by a majority of ¾ of votes of the shareholders present at themeeting.


Describe any issues or problems arising in practice in connection with this matter3.8.6 – on transactions with related parties?

The existing legislation does not provide for approving decisions on transactions with related parties. However, the issue may be delegated to the competence ofany managerial body of the company by the company charter.


Describe any issues or problems arising in practice in connection with this matter3.8.7 – on changes to company business, strategy or objectives?

Identifying priorities of company business lies within the non-exclusive competence of the general shareholder meeting and is subject to a simple majority ofvotes in order to be approved. At the same time, the adoption of changes to the subject and objectives of company business involves making appropriate changesto the company charter, which lies within the exclusive competence of the general shareholder meeting and requires a qualified majority of the shareholder votes.


Describe any issues or problems arising in practice in connection with this matter3.8.8 – on amendments to the statutes, articles or similar documents governing the company?

A decision to make amendments to the company charter lies within the exclusive competence of the general shareholder meeting and is passed by a majority of ¾of the votes of shareholders present at the meeting.


Describe any issues or problems arising in practice in connection with this matter3.8.9 – on any other relevant issue requiring a majority of votes?



Issues such as the foundation, reorganization and liquidation of affiliates, subsidiaries and representative offices also lie within the exclusive competence of thegeneral shareholder meeting and must be passed by a qualified majority of the shareholder votes

3.9 Are shareholders permitted to vote other than in person? By what means (by proxy, absentee, postal vote, telephone or electronically)?Shareholders are able to vote either in person or through a representative. To appoint a representative, the shareholder should issue a proxy legalized by a publicnotary, the management board or a registrar. The shareholder or its representative should attend the general meeting in person. Voting by post, telephone orelectronically is not allowed under current Ukrainian law.


Describe any issues or problems arising in practice in connection with this matter1. The list of individuals and entities that are allowed to legalize proxies is too limited. A shareholder residing in another part of Ukraine or abroad is notable to have a proxy legalized other than by a public notary, which may be costly.

2. Lack of a clearly defined procedure for proxy legalization by the management board results in numerous violations. As a result, such proxies may bedeclared invalid after the general meeting, affecting the meeting quorum and result in the cancellation of resolutions passed at the meeting.

3.10 Do meeting notices clearly explain the procedures for voting? and appointment of proxies?No, they do not. Pursuant to the current legislation, meeting notices are required to contain only information about the time/date/location and agenda of themeeting. In practice, companies also include additional information about the time and place of the registration of shareholders for participation in the meeting inthe meeting notice. The voting procedures are usually described in the charter or other company bylaws (e.g. Regulation on the general meeting). The procedurefor appointing proxies is regulated in part by the general legislation and sometimes specified in the company articles..

Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1576-XII On Companies of 19 September 1991, Chapter 2.The Civil Code of Ukraine of 18 July 1963, Chapter 4.

Describe any issues or problems arising in practice in connection with this matter3.11 Are shareholders able to convene extraordinary meetings? Under what conditions?Shareholders that own an aggregate of more than 10% of votes are able to convene extraordinary meetings at any time and for any reason. Failure of themanagement board to comply with the specified requirement within 20 days gives them the right to convene the meeting in accordance with a general procedureestablished under applicable legislation.


Describe any issues or problems arising in practice in connection with this matterThe existing legislation does not specify time limits within which the management board must convene the meeting at the request of shareholders. In practice,some companies convene extraordinary meetings three or four months later when it is no longer necessary. Also, shareholders convening a meeting must bear allcosts associated with it. In this respect, the current legislation contains no provisions obliging the company to offset such costs if a relevant resolution is passedby the convened meeting.



3.12 What is the effect of shareholder resolutions on the company?Resolutions adopted by a legitimate general meeting are legally binding for the company, shareholders and the company officials.Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1576-XII On Companies of 19 September 1991, Chapter 2.

Describe any issues or problems arising in practice in connection with this matter4. Equitable treatment

The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders.

4.1 Does the corporate governance framework provide for different classes of shareholders (i.e. with varying voting rights or other special rights)? How arethe existing classes defined?The existing legal framework provides for only two classes of shares: common (voting) and preferred shares (non-voting). Preferred shares do not grant a votingright unless otherwise specified in the company charter. The legal framework lays down the principle of one vote per share. Thus, neither shares with differentvoting rights nor shares with other special rights may exist under Ukrainian law.

Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1201-XII On Securities and Stock Exchange, Chapter 2.

Describe any issues or problems arising in practice in connection with this matter4.2 Within a class, do shareholders have the same voting rights?Yes, they do.

Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1201-XII On Securities and Stock Exchange, Chapter 2.Law of Ukraine #1723-III On The State Privatization Program of 18 May 2000, Chapter XIV.

Describe any issues or problems arising in practice in connection with this matter4.3 Are shareholders informed about their voting rights? Before they purchase?Shareholders have the right to information. Thus, they may receive information about their voting rights from the company governing bodies. Also, shareholdersand investors may obtain such information from the issuance prospectus that should be published in the official publication of the Verkhovna Rada, Cabinet ofMinisters and the official publication of the SSMSC no later than 10 days before the beginning of subscription.

Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1576-XII On Companies of 19 September 1991, Chapter 1.Regulation on the Procedure for Registering the Issuances of Joint Stock Company Shares and Company Bonds, approved by the SSMSC Resolution #210 of 20September 1996 (revised under Resolution #18 of 9 February 2001), Chapter 2.



Describe any issues or problems arising in practice in connection with this matterIf someone who is not a shareholder wishes to purchase shares on the secondary market and the issuance prospectus is unavailable, it is virtually impossible toobtain any information on voting rights before the purchase.

4.4 Are changes in voting rights required to be subject to shareholder vote in general meeting? Under what conditions?Although, as described in Paragraph 4.1., common shares differing in the scope of voting rights are not allowed under the existing legislation, the question maystill be answered with a yes. Because the company charter must contain information on the classes of shares issued by the company (including voting rights),their nominal value and the stake of every share class in the charter capital, any resolution that changes such information will be subject to shareholder vote onthe appropriate changes to the charter. Voting on changes to the charter lies within the exclusive competence of the general meeting and is subject to a qualifiedmajority of votes of the shareholders present at the meeting.

Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1201-XII On Securities and Stock Exchange, Chapter 2.

Law of Ukraine #1576-XII On Companies of 19 September 1991, Chapter 1.

Describe any issues or problems arising in practice in connection with this matter4.5 Are beneficial owners of shares able to exercise their voting rights, even if shares are held by custodians, nominees? What rights to information andnotice do beneficial owners have?Beneficial owners of shares have the right to exercise their voting rights regardless of whether the shares are held by custodians or nominees. If abeneficial owner issues a proxy, he or she may cancel it at any time and vote in person. After the general shareholder meeting, owners of registeredshares should be notified in person by a method specified in the charter.Identify the relevant section(s) of the normative act(s) governing this issueThe Civil Code of Ukraine of 18 July 1963, Chapter 1.Law of Ukraine #1576-XII On Companies of 19 September 1991, Chapter 2.

Describe any issues or problems arising in practice in connection with this matter4.6 How many joint stock companies have floated securities on foreign capital markets? How do the holders of these securities exercise their corporategovernance rights?Information is unavailable. All is known is that 14 Ukrainian issuers have begun ADR/GDR programs.

4.7 What are the restrictions provided by the legal or regulatory framework over who can become a shareholder? For example, do foreign shareholders havea limit access to ‘strategic’ companies?Pursuant to Article 3 of the Law of Ukraine On Companies, foreign nationals, stateless persons, foreign legal entities and international organizations are equal toUkrainian nationals and legal entities in their right to become founders of and participants in joint stock companies except in instances specified under regulatoryand legal acts of Ukraine. Such instances, to the best of our knowledge, are: the prohibition of the foundation and operation of television and radio broadcastingorganizations with more than 30% of foreign investment in the charter capital and restrictions on the purchase of shares by companies registered in off-shorezones.



Describe any issues or problems arising in practice in connection with this matter4.8 Are there special provisions in the legal or regulatory framework relating to certain categories of shareholders (such as employees, foreigners, and thestate)? Please describe these provisions.There are no special provisions relating to certain categories of shareholders. The only exception to this may be the bankruptcy legislation which provides thatcontributions to the charter capital by employee shareholders (if any) should be returned in the order of priority over contributions of the other shareholders.Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #2343 On Renewal of Debtor’s Solvency and Declaration of Bankruptcy of 14 May 1992.

Describe any issues or problems arising in practice in connection with this matter4.9 Does the company have discretion over who can become a shareholder? Please specify.Joint stock companies do not have discretion over who may become a shareholder. Shareholders have discretion to alienate their own shares without priorconsent of the company and the other shareholders. However, it should be noted that in closed joint stock companies initial issuance shares are distributed onlyamong the founders. All subsequent transactions are beyond the control of company.

Is this specified by the company law or other related laws?Law of Ukraine #1576-XII On Companies of 19 September 1991, Chapter 2.


5. The State as a shareholder

5.1 Are the functions of the state as a regulator and the state as a shareholder clearly distinguished?There is no clear distinction between the functions of the state as a regulator and the sate as a shareholder. Also, the state has no special rights or privileges as ashareholder, even though it has discretion to issue relevant normative acts for its own benefit.

Identify the relevant section(s) of the normative act(s) governing this issueDescribe any issues or problems arising in practice in connection with this matter5.2 Who has authority to exercise the state’s right as a shareholder (government ministry, privatization agency, other)?The state corporate rights are managed by the Sate Property Fund and other bodies of the executive power vested with authority to manage blocks of sharesowned by the state under relevant resolutions of the Cabinet of Ministers of Ukraine.

As of the end of 2001, state corporate rights in joint stock companies were managed by:

• privatization agencies – 1,202;• central and local bodies of the executive power – 798;• authorized representatives – 9.

Identify the relevant section(s) of the normative act(s) governing this issueResolution #791 of the Cabinet of Ministers of Ukraine On Managing State Corporate Rights of 15 May 2000.



Describe any issues or problems arising in practice in connection with this matterDiscord between the Cabinet of Ministers of Ukraine and the Verkhovna Rada of Ukraine in defining a legal framework of the management of state-ownedentities.

5.3 Does the state maintain a publicly available register listing the stakes of the state in joint stock companies?The state maintains a register of state corporate rights but it is not publicly available.

Identify the relevant section(s) of the normative act(s) governing this issue


5.4 Has the state become a minority shareholder, as part of a process of privatizing formerly state owned enterprises?The state remains a minority shareholder in companies that are not traded on the capital market. To address the issue of selling non-liquid shares, the StatePrivatization Program provides for having such shares sold on privileged terms or the charter capital decreased and the shares cancelled.

As of early 2001, there were 1,524 joint stock companies with the percentage of state-owned stakes between 0.01 and 30% in Ukraine.

5.5 Have bankrupt companies been re-nationalized? What was the procedure? Please provide examples.The state has not nationalized formerly privatized companies. At present, one of the state’s objectives is to effectively apply solvency renewal and bankruptcyprocedures in order to resolve the issues of debt burden and financial rehabilitation of enterprises. In essence, it implies the ability to institute bankruptcy actionsagainst the largest tax debtors in order to conduct rehabilitation, renew their solvency or to liquidate non-profitable state owned enterprises in a civilized fashion.

5.6 Under what circumstances do state representatives have a seat on the board? What qualification must such persons have? Are they civil servants?The state forms a supervisory board consisting of representatives of the state privatization agency, local state administrations, company employees, relevantministry and the Anti-Monopoly Committee (for privatization of monopolist enterprises) to serve until the first general shareholder meeting.

Also, the state may influence the election of the supervisory board in companies in which it owns 25% or more than 50% of the charter capital. Thus, if the stateowns 50% plus one share, an authorized representative managing the controlling block of shares is elected head of the supervisory board of the company.

The following officials may be elected authorized representatives:

• deputy heads of bodies of the executive power;• heads of directorates, directors of departments, deputy directors of departments of bodies of the executive power;• heads of divisions, deputy heads of divisions and chief specialists of bodies of the executive power.

An authorized representative must have a university/college degree, no less than 3 years of experience as a civil servant and appropriate qualifications in the areaof corporate governance.Identify the relevant section(s) of the normative act(s) governing this issueRegulation on the Representative of an Agency Authorized to Manage Applicable State Corporate Rights in Governing Bodies of Companies, approved underResolution #791 of the Cabinet of Ministers of Ukraine of 15 May 2000.



Regulation on the Supervisory Board, approved under Resolution #556 of the Cabinet of Ministers of Ukraine of 19 July 1993.

A Standard Statute of An Open Joint Stock Company, approved under Order # 787 of the State Property Fund of Ukraine of 12 December 1994 and Order #177of the Ministry of Economy of Ukraine of 13 December 1994.

Describe any issues or problems arising in practice in connection with this matterThe problems are primarily due to the state’s incompliance with provisions of the effective legislation under which only shareholders (natural persons and legalentities) may have a seat on the supervisory board. In practice, civil servants that are not shareholders are elected to the supervisory board.

5.7 Do state representatives participate in shareholder meetings?Under Ukrainian law, participation in shareholder meetings is a right, not obligation, of any shareholder, including the state. For this reason, the state exercisesthis right by different methods.

At the same time, effective normative acts that regulate activities of authorized state representatives provide that the state representatives must:

• exercise shareholder rights at every general shareholder meeting and protect the interests of the state as a shareholder;• vote at shareholder meetings within their terms of reference;• prior to every shareholder meeting, receive written instructions in order to be able to vote on items included in the meeting agenda;• within 5 days after the meeting, submit copies of the minutes and other documents approved by the meeting to the agency authorized to manage the

relevant state corporate rights.

Identify the relevant section(s) of the normative act(s) governing this issueProcedure for managing state-owned shares (stakes) of joint stock companies founded in partnership with the State Property Fund of Ukraine, approved byResolution #518 of the Cabinet of Ministers of Ukraine of 16 May 2001.

A Standard Agreement of Proxy for Managing State-Owned Blocks of Shares, approved under Order #1065 of the State Property Fund of Ukraine of 24 May2000.


5.8 Does the state have the same rights as other shareholders? If not, does it have more rights or fewer? Please specify.Under current Ukrainian law, the state has the same rights as other shareholders.

5.9 Do state shares have a special status (in regard to voting rights, share in profit, over major strategic company decisions)?Despite the fact that the Law of Ukraine On Joint Stock Companies provides that the terms and procedure for the payment of dividends are subject to shareholdervote, the Ministry of Finance of Ukraine is trying to put the state in a more beneficial shareholder position in order to collect dividends on shares.

5.10 Does the legal framework provide for Golden shares?The existing legal framework does not provide for Golden shares.

5.11 Does the state have the power to veto decision by the majority of shareholders? Please specify.No, it does not.



5.12 What are in your opinion the concerns of the state as a shareholder (i.e. strategic, social, financial, public service)?The concerns of the state as a shareholder are:

• a large number of state-owned entities and lack of resources to manage them;• lack of an effective method of monitoring operations of joint stock and holding companies;• lack of a strategy of the development of companies in which the state has a stake and meaningful governance policy with respect to state-owned entities;• generating more budget revenues. It has been reflected in the state dividend policy which was implemented in 2000 and was directed at channeling 50%

of net profits of a joint stock company to the dividend fund. Presently, some attempts are being made to remedy the situation by taking a differentialapproach to setting the amount of the dividend fund, depending on the financial performance of the company.

5.13 Do companies in which the state has a stake benefit from better conditions or privileges not generally enjoyed by, fully privatized companies? Forexample in terms of subsidies, tax payment? Does this distort competition?Information is unavailable.5.14 Describe any significant concrete examples where the state exerted influence in corporate decision making beyond which its percentage share ownershipwould normally permit it.Information is unavailable.5.15 Describe any significant concrete examples where social or political concerns rather than a desire to maximize the long-term profitability of thecompany affected the state’s behavior as a shareholder.Information is unavailable.

6. Market integrity

Market for corporate control should be allowed to function in an efficient and transparent manner.

6.1 Does the legal or regulatory framework (e.g., stock exchange listing rules) clearly set out the procedures for mergers, acquisitions and takeovers? Arethere rules governing the substantial acquisition of shares?Almost none. The Law of Ukraine On Companies does not contain any provisions regulating issues such as mergers, acquisitions and takeovers, or thesubstantial acquisition of shares. Mergers are regulated in part by the SSMSC Regulation #221 On Procedure for Registering Share Issuances During CompanyReorganization of 30 December 198. The substantial acquisition of shares is regulated in part by the anti-monopoly legislation (if the acquisition is in compliancewith the terms described in relevant normative acts, it is necessary to apply for an Anti-Monopoly Committee permit).

Describe any issues or problems arising in practice in connection with this matter.The Law of Ukraine On Companies does not set out a procedure for the substantial acquisition of shares. Through lack of such procedure, rights of minorityshareholders are not protected in the case of change of corporate control.

6.2 Are extraordinary transactions such as mergers and the sale of substantial portions of corporate assets clearly disclosed?



Reorganization transactions (merger, acquisition, division, spin-off, transformation) are disclosed as special information. The company must, within two days ofthe shareholder vote on reorganization, forward information in respect thereof to the stock exchange and the registering agency (SSMSC) and publish theinformation in the official newspaper of the stock exchange.

The legal framework does not contain a provision on disclosing information about the substantial acquisition of shares.

Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #1201-XII On Securities and Stock Exchanges of 18 July 1991.


6.3 Describe anti-takeover devices commonly used to shield management or a group of shareholders from accountability?The existing legal framework in Ukraine does not provide for any anti-takeover devices. We are also unaware of the devices being effectively used in practice.However, some of the generally known anti-takeover devices may be used in Ukraine to lower the attractiveness of the company that is being taken over. Themost commonly used shielding methods are repurchase and redistribution of shares among the “loyal” shareholders (usually, the management). The “goldenparachutes” and sale of assets may also be used in Ukraine.

6.4 Are there further restrictions on changes of corporate control such as competition policy, government ownership provisions?Yes, there are. Agreements that have signs of economic concentration or monopolization should be made with regard to the provisions of the anti-monopolylegislation and the legislation on protection against unfair competition. Such agreements require a permit to be issued by the Anti-Monopoly Committee ofUkraine.

6.5 Do minority shareholders have the right to sell their shares to the bidder for the same or equivalent price as agreed between the bidder and thecontrolling shareholder?No, they don’t. The existing regulatory framework in Ukraine does not set out a procedure for protecting rights of minority shareholders in connection with thepurchase of the controlling block of shares.

6.6 What are the restrictions to insider trading? Have there been any cases involving insider trading? What actions have been taken?The existing legislation does not regulate issues related to the use of insider information on the capital market. These issues are to be addressed by the newversion of the Law of Ukraine On Securities and Stock Exchange.

6.7 How does domestic law define an “interested” or “related” party?The current corporate legislation does not contain definitions of the terms “interested” and “related” parties, nor does it lay down a procedure for regulatingagreements with such parties. However, the concept of “related” parties is defined by the legislation in other areas such as taxation and banking legislation.

6.7.1. Describe the procedures for approving or challenging transactions between the company and a related party

Such procedures are unavailable.

6.7.2. What civil and administrative recourse does a shareholder have to challenge or invalidate a transaction between the company and an interestedparty?



The legal framework does not provide for any specific means of recourse. If a shareholder’s rights are violated as a result of such a transaction, the shareholdermay appeal to court in accordance with standard procedure or lodge a claim with the SSMSC. Under current Ukrainian law, shareholders are unable to take legalaction against the managerial body or an official of a company. An action may be brought only against a legal entity or a natural person. However, havingcompensated the shareholder for losses, the company may bring a recourse action to the shareholder official through whose fault the losses were incurred. Alsosee Paragraph 7.

6.8. Who bears liability for losses caused to the company by harmful or exploitative related party transactions?

7. Enforcement and legal redress

All shareholders should have the opportunity to obtain effective redress for violation of their rights.

7.1 Which are the most frequent shareholder right violations?The most frequent shareholder right violations are:

• violation of the procedure for convening and holding general shareholder meetings;• refusal to disclose to shareholders information on the company’s operations and failure to provide annual statements, balance sheets, minutes of

shareholder meetings and documents related to the agenda of shareholder meetings;• failure to convene shareholder meetings at the request of shareholders that own a sufficient number of the company votes and failure to add motions

proposed by such shareholders to the agenda;• failure to inform shareholders about the time/location and agenda of a general meeting;• failure to provide shareholders with paper titles to shares (share certificates);• violations during the purchase and disposal by the company of own shares;• excess by the management board of power defined under the applicable legal framework and the company charter;• amendments to the charter without approval of the general shareholder meeting.

7.2 Have companies been sanctioned for shareholder right violation?Administrative sanctions are applied to companies and their officials for violations of capital market regulations in accordance with the Law of Ukraine On StateRegulation of the Stock Market (see Paragraph 7.4). The current legal framework does not provide for responsibility for specific shareholder right violations.

7.3 In the past five years how many cases have been pursued? What were the result?No recent research data on judicial statistics in the area of corporate governance in Ukraine are available at present. Thus, the number of legal cases is unknown.

The SSMSC conducts monitoring and maintains a database of violations on the capital market. Thus, in 2000 the SSMSC:

• received 9,010 claims from individuals and professional stock market players regarding violations of their rights ad interests on the capital market;



• conducted monitoring of the registration of shareholders for participation in general meetings of 260 joint stock companies;• conducted 729 audits of securities issuers and 337 audits of registrars.

The main indicators of legal enforcement on the stock market in 1998 – 2000. Enforcement Indicators

1998 1999 2000Total number of securities violations investigated 5588 7065 6190

Number of injunctions issued 5628 7547 7321

Number of warnings issued 1744 1201 1145

7.4 What are the sanctions provided by the legal framework?The Securities and Stock Market State Commission imposes penalties on legal entities for:

• issuance and placement of unregistered securities – up to 10,000 pretax minimum wages or up to 150 percent of benefits (profits) obtained bycommitting the violations;

• operation on the stock market without a special permit (license) – up to 5,000 pretax minimum wages;• failure to disclose information, untimely disclosure or provision of false information – up to 1,000 pretax minimum wages;• evasion from execution or untimely execution of resolutions and orders to correct violations in securities trading – up to 500 pretax minimum wages.

The Securities and Stock Market State Commission imposes penalties on individuals and officials:

• between 50 and 100 pretax minimum wages – for engaging in the issuance or placement of unregistered securities;

• between and 20 and 50 pretax minimum wages – for conducting transactions on the capital market without a special permit (license) required under theexisting legislation;

• between 50 and 100 pretax minimum wages – for failure to disclose information, untimely disclosure or provision of false information to the SSMSC ifthe provision of such information is required under the applicable legislation;

• between 20 and 50 pretax minimum wages – for evasion from execution of untimely execution of resolutions issued by the SSMSC.

Identify the relevant section(s) of the normative act(s) governing this issueLaw of Ukraine #448,96-VR On State Regulation of the Stock Market of 30 October 1996.




7.5 To which authorities can shareholders appeal in pursuit of redress, especially during changes of corporate control? What are the powers of theseauthorities? Is there any arbitration procedure?If a shareholder’s rights and legitimate interests are violated, the shareholder may appeal to the SSMSC or to court for legal redress.If the shareholders rights were violated by the joint stock company, the SMSC may:

• give caution, suspend for up to one year the placement (disposal) and circulation of an issuer’s securities, special permits (licenses) issued by theSSMSC, revoke such permits (licenses) if violations of the securities legislation or of provisions of normative acts issued by the SSMSC are detected;

• serve issuers with legally binding orders to correct violations of the securities legislation and obtain documents required in accordance with theapplicable legislation;

• impose penalties and other sanctions for failure to comply with the existing legislation.

To protect shareholder rights, the court may hand down a decision to:• recognize these rights;• restore the situation existing prior to the violation of the shareholder right and suspend activities that violate the right;• sentence to execute the obligation;• suspend or change the legal relationship;• recover damages from the violator of the right;• invalidate acts issues by government agencies and other bodies (including general meetings) that are at variance with the legal framework and violate

rights secured under the law.

7.6 What are the procedures for shareholders to seek legal redress? Is this process long? Is this process costly?Legal redress for shareholders is provided by courts of the general jurisdiction (local business courts).Standard judicial procedure related to the protection of shareholder rights by local courts consists of the following stages:

• a shareholder files a lawsuit with court;• the judge accepts the lawsuit and decides on whether to initiate proceedings on the case;• the judge prepares the case for hearing;• the judge submits the case for hearing;• the case is heard in court and a court decision is handed down;• the court decision comes into force.

The existing legislation clearly defines a timeframe for pursuing procedural actions. For instance, the total timeframe for a case being tried by a business courtmay not exceed 2 months from the receipt of the lawsuit. At the same time, in practice court authorities often fail to meet the legislative requirements, allegedlydue to heavy case logs and insufficient numbers of court staff.

A state fee should be charged for processing court lawsuits. The amount of a state fee is:

a) for lawsuits and claims lodged with local court:



• 1% of the lawsuit price, but not less than 3 and not more than 100 pretax minimum wages – for property lawsuits;• 0.5% of pretax minimum wages – for non-property lawsuits;• 0.2% of pretax minimum wages – for lawsuits against illegitimate actions of the state governance bodies and officials infringing rights of citizens.

b) for lawsuits lodged with business court:

• 1% of the lawsuit price, but not less than 3 and not more than 100 pretax minimum wages – for property lawsuits;• 5 pretax minimum wages – for non-property lawsuits, including those related to the invalidation of non-normative acts in part or in full.

State fee is not collected on lawsuits filed by individuals for recovery of damages caused by failure to return monetary and property contributions to joint stockcompanies within time limits specified in relevant agreement or the company articles.

7.7 Are class action lawsuits permitted? Have any class action lawsuits been filed?The existing legal framework does not permit any class action lawsuits.

8. Shareholder awareness

8.1 Are shareholders sufficiently informed about their rights?Every year shareholder awareness about their rights and procedure for exercising and protecting these rights increases. At the same time, the general level ofcorporate culture and shareholder awareness of the principles of corporate governance is still insufficient.8.2 To what extend do shareholders attend shareholder meetings and exercise their voting right?Minority shareholders that are not employees of the company and reside outside the area in which it is located do not effectively participate in managingcorporate affairs. For them, it is economically senseless and unprofitable, as costs of attending general meetings are much greater than the value of securities andthe amount of dividends (if any) they receive.

8.3 Have shareholder associations been created? If so, are they influential?A shareholder protection association exists in Ukraine but is not active in upholding rights of shareholders.

8.4 Do voluntary codes of corporate governance practice encourage shareholders to exercise their rights?At present, Ukraine has no code of corporate governance practice. However, Presidential Decree #280/2002 On Measures for the Development of CorporateGovernance in Joint Stock Companies provides for the drafting of such a code (national corporate governance principles).

8.5 Do shareholders pool their interests and/or votes (for example to elect board members)?Yes, they do. Occasionally shareholders pool their votes by issuing proxies or making preliminary arrangements to act together.

8.6 Are institutional investors active in the corporate governance field? If not, why? Mention some cases.Information is unavailable.8.7 What are the most frequent shareholder right violations?The most frequent shareholder right violations in Ukraine are:



• violation of the right to participate in managing the company (failure to publish general meeting notices; failure to disclose information about the agendaof the general shareholder meetings that is critical for corporate decision-making);

• asset-stripping and redistribution of cash flows for the benefit of officials or shareholders that owning substantial blocks of shares;• violation of the right to receive information about the company’s transactions;• violation of the right of shareholders during the purchase and disposal by the company of own shares and reorganization of joint stock companies.

8.8 What are from your point of view priority measures to improve shareholder rights?Under present conditions, a transparent, structured and sustainable legal framework in the field of corporate governance is needed to stimulate investment andencourage capital market development and reformatory processes in Ukraine.