Ukraine made an important step toward reforming the corporate sector in Ukraine by adopting the long-awaited law No. 1983-VIII dated 23 March 2017 (the “Law”), which is aimed at ensuring further protection of the rights of majority and minority shareholders in Ukrainian joint stock companies. In particular, the Law is intended to bring Ukraine into line with many other jurisdictions and provides a possibility for:
a) shareholders who 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 shares of the remaining minority shareholders (“squeeze-out”) of a Ukrainian joint stock company (the “Company”); and
b) other minority shareholders to demand a mandatory buy-out of their shares by the dominating shareholder (“sell-out”).
According to the Law, the dominating shareholder can exercise its squeeze-out rights only if it has complied with the mandatory buy-out requirements triggered by the acquisition of a controlling stake (50% or more in the case of privately-owned joint stock companies, or 75% in the case of public joint stock companies) or a significant controlling stake, which requirements are provided by the Law of Ukraine “On Joint Stock Companies” (as amended by the Law). The main steps in the squeeze-out procedure are as follows:
- upon acquisition of a dominating controlling stake (95% or more), the dominating shareholder should notify the Company and the National Securities and Stock Market Commission of Ukraine (the “Stock Market Commission”) about its dominating position (the “Initial Notice”), and the Company should then, within 25 business days after receipt of the Initial Notice, approve the market value of its shares (as determined in accordance with the Law of Ukraine “On Joint Stock Companies”) and notify such market value to the dominating shareholder;
- within 90 days after submission of the Initial Notice the dominating shareholder may decide to exercise its squeeze-out rights and submit an irrevocable buy-out demand (the “Squeeze-Out Notice”) requesting the remaining minority shareholders to sell all their shares (“Squeeze-Out Shares”);
- settlement for the Squeeze-Out Shares should be done through an escrow account which should be opened by the dominating shareholder for the benefit of the Company’s minority shareholders (“Escrow Account”); for this purpose, the Law finally introduces a concept and regulation of an Escrow Account which has not existed in Ukrainian legislation before;
- the Squeeze-Out Notice should include the purchase price for the Squeeze-Out Shares 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”.
- after receipt of the Squeeze-Out Notice, the Company should notify the Stock Market Commission, and the Central Depositary of Ukraine which should restrict disposal of the Squeeze-Out Shares and prepare a list of the Company’s shareholders;
- the next step is for the Company to circulate the Squeeze-Out Notice to all its minority shareholders and prepare a list of such shareholders whose shares should be bought out by the Company’s dominating shareholder; such list should be circulated to the dominating shareholder and the bank servicing the Escrow Account;
- the squeeze-out rights take priority over any restrictions or encumbrances (the “Liens”) over the Squeeze-Out Shares; existence of any Liens does not restrict transferability of the Squeeze-Out Shares;
- if any of the Squeeze-Out Shares are encumbered (or subject to any other Liens), then a Lien on such Squeeze-Out Shares will be replaced with a Lien on the funds which the dominating shareholder should transfer to the Escrow Account as purchase price for such Squeeze-Out Shares (“Encumbrance Swap”); such Encumbrance Swap does not require prior consent of the Lien holder;
- the acquisition of the Squeeze-Out Shares does not require involvement of a securities trader;
- after receipt of the list of shareholders to be squeezed-out, and completion of the Encumbrance Swap (to the extent applicable), the dominating shareholder should transfer the purchase price to the Escrow Account;
- each respective minority shareholder would be able to claim its portion of such funds from the bank servicing the Escrow Account, within 3 years;
- after receipt of information that the purchase price has been paid in full, the Company should notify the Central Depositary of Ukraine which should procure the release and transfer of the Squeeze-Out Shares to the dominating shareholder.
The Law establishes a transitional period of 2 years for existing dominating shareholders to exercise their squeeze-out rights and forcibly buy out the shares of minority shareholders in their respective Companies.
In contrast, as soon as the Initial Notice is made public, each minority shareholder of the Company (whose shares are not encumbered and disposal of which is not restricted) is entitled to demand the mandatory buy-out of its shares by the dominating shareholder, which right is not limited in time (“Sell-Out Shares”). The sell-out cannot be exercised by the minority shareholders after the dominating shareholder has launched the squeeze-out procedure. According to the Law, the key stages for the sell-out procedure are as follows:
- a minority shareholder should submit a written demand of mandatory buy-out to the Company (“Sell-Out Notice”);
- the Company should then, within 25 business days after receipt of the Sell-Out Notice, approve the purchase price for such Sell-Out Shares (to be determined in the same way as for the squeeze-out); and
- within 20 business days of receipt of the information on the approved purchase price from the Company, the dominating shareholder should transfer the purchase price to the bank account of the minority shareholder, who requested the mandatory buy-out, and the minority shareholder should procure the transfer of the Sell-Out Shares to the dominating shareholder.
According to the Law, if the dominating shareholder does not comply with its obligations in relation to squeeze-out or sell-out, then it can only vote with 95% of its shares in the Company minus 1 share. Also, all other shares of such a dominating shareholder in the Company may not be used for voting and taken into account for determination of a quorum.
The Law became effective on 4 June 2017. The adoption of the Law should bring increased flexibility for acquiring dominating shareholders, and should help to improve the management and efficiency of those Companies which are acquired by dominating shareholders. At the same time, the Law grants additional rights to minority shareholders, in particular a right to exit a Company and receive proper compensation for its shares after the change of a dominating shareholder. The adoption of the Law is well regarded by the Ukrainian market as it will bring Ukrainian corporate legislation closer into line with EU law, increasing the investment attractiveness of Ukraine one step further.