As part of the ongoing corporate reform, the Parliament of Ukraine has recently adopted (at the first reading) draft law No. 2302a-d (the “Draft Law”) dealing with various aspects of the functioning of joint stock companies in Ukraine. The Draft Law envisages the possibility for shareholders which directly or indirectly (including by way of acting in concert with other persons) hold 95% or more shares (a “dominating shareholder”) to forcibly buy out the shares of the remaining minority shareholders (“squeeze-out”). In turn, the Draft Law introduces a corresponding right of such minority shareholders to demand a buy out of their shares from the dominating shareholder (“sell-out”).
The dominating shareholder will have a right to decide whether it wishes to exercise its squeeze-out right within 90 days from the day of acquisition of the dominating shareholding in a Ukrainian joint stock company (the “Company”). The dominating shareholder will have to submit an irrevocable squeeze-out proposal whereby it requires the Company’s minority shareholders and the Company (to the extent it owns any shares) (“minority shareholders”) to sell their shares at a price determined as the price being the higher of: a) the highest price for which the dominating shareholder has acquired any of the Company’s shares within the last 12 months; or b) the highest price for which the dominating shareholder has acquired any of the Company’s shares indirectly by acquiring shares in another holding company owning the shares in the Company, provided that the price of such Company’s shares shall constitute at least 90% of the total assets of the holding company; or c) the market value of the Company’s shares determined in accordance with the Law of Ukraine “On Joint Stock Companies”.
Settlement for the shares of the minority shareholders will be done through an escrow account in the Company’s name. In addition, such shares will be blocked in the depository system to prevent their unlawful disposal by the minority shareholders.
The Draft Law establishes a transition period of 2 years during which existing dominating shareholders will be able to exercise their squeeze-out rights and forcibly buy out the shares of minority shareholders in their respective Companies.
In turn, the Company’s minority shareholders will be granted a sell-out right which is not limited in time and may be exercised at any time after the dominating shareholder has acquired a dominating shareholding. A minority shareholder will have to submit a written demand of mandatory buy-out to the Company requiring the dominating shareholder to acquire its shares at a price determined by the Company in the same way as for the squeeze-out within 25 business days after receipt of a written demand from a minority shareholder.
The dominating shareholder will then be required to transfer the purchase price for the shares of such minority shareholder within 20 business days after the purchase price has been duly determined by the Company.
Under the Draft Law, the National Securities and Stock Market Commission of Ukraine will be entitled to control the fulfilment of the rules on squeeze-out and sell-out. If the dominating shareholder fails to observe the requirements of the Draft Law and the to-be-amended Law of Ukraine “On Joint Stock Companies” in relation to squeeze-outs and sell-outs, then such dominating shareholder will be prohibited from voting at the Company’s general meetings of shareholders with the shares which acquisition resulted in the Company’s shareholder becoming a dominating shareholder, and managing the Company in any other way. Also, such shares will not be taken into account for the purpose of determining a quorum of the Company’s general meetings of shareholders.
Status of the Draft Law
The Draft Law has been adopted at the first reading and has to pass two more readings in the Parliament before it comes into effect. However, it is clear that if the provisions set out by the Draft Law are finally enacted, this will increase flexibility for dominating shareholders and at the same time improve protection of minority shareholders by granting them an option to exit the Company after the change of a dominating shareholder. Such changes will (if and when the Draft Law finally comes into force) bring Ukrainian corporate legislation closer into line with EU law, and should also have a positive effect in terms of the investment attractiveness of Ukraine generally.