In May, Ukraine will hold the last certificate-selling auction, which will
signify the end of paper privatization resulting in there being about 33
million (over 60% of the population) shareholders in this country.
Ukraine is today passing through an extremely complex period when brand-new
shareholders adapt to the socioeconomic structure of privatized enterprises
as well as, to a lesser degree, the performance of the securities market.
We think this phenomenon deserves detailed scrutiny.
REJECTION
The relationship between a labor collective with the director at its
head and outside shareholders is usually devoid of European polish. Highly
cost-effective businesses even display, if rarely fortunately, a kind of
aggression toward outsiders. Management tries to immediately get rid of
outsiders, with no holds barred. For example, in mid-1997, chairman of
Dnipropetrovsk's Ukrhidrospetsfundamentbud Company Kukhanovsky persistently
recommended small shareholders hand their shares over to him, naturally
at face value, justifying this by the need to reduce the authorized capital.
Then, having failed to reach his aim, he sent out-of-town shareholders
proxies (instead of a legally-stipulated share certificate or an extract
from the register) and announced in Investytsiyna hazeta (Investment
Gazette) that all 100% of shares belonged to the labor collective. The
shareholder, who knows all about taxes, will smile at this. But the majority
of small shareholders cannot boast such legal erudition.
Forcing outside shareholders out leads in practice to an unlawful transformation
of publicly held companies into privately held ones. The small shareholder
is in no position to stem this tide. More often than not, he is not even
informed about general meetings.
THE LAW IS SILENT
The existing imperfect legal and normative basis creates serious problems
in organizing democratic management of joint stock companies.
The law of Ukraine On Economic Associations contains a host of serious
contradictions, sometimes even in the same article. For instance, the first
paragraph of Article 46 reads: "A joint-stock company may set up a board
(supervisory board) that controls the activities of the company's executive
body." (Does this mean it also may not?) And the last paragraph states:
"Members of the joint stock company's board (supervisory board) cannot
be members of the executive body."
Incidentally, in civilized market-economy countries, it is obligatory
to form a shareholders' board (supervisory board) in such economic entities.
What an imperfect legal basis leads to can be traced using the example
of Ukrrichflot (Ukrainian River Fleet). The board of directors did not
allow the formation of a shareholders' board (supervisory board) at the
first general shareholders meeting, although 69% of shares belonged to
natural persons (about 130,000, 80% of whom are pensioners). This injustice
was not rectified at subsequent meetings. The result was as expected. For
instance, as of January 1, 1997, the number of company shares rose from
6.7 to 10.6 million, i.e., almost by 60%, compared to early 1994 (without
commissioning additional fixed assets).
The irregularities caused by defects in normative documents may be also
observed in other companies. For example, Sevastopol's Spetsmontazh has
formed a supervisory board exclusively composed of members of the labor
collective.
A general meeting of shareholders at Kyiv's ZZhBK (Reinforced Concrete
Manufacturing Plant) No. 1, where a controlling block shares belongs to
a legal entity, has elected a supervisory board containing only representatives
of the latter (except for one labor collective member).
AND WHO IS THE
LAWMAKER FOR?
In mid-1996, the State Property Fund instructed enterprises under all
types of ownership to index their fixed assets, authorized capital, and
face value of shares. In this case, the value of a privatization property
certificate rose from 10.5 to 500 hryvnias. Then Verkhovna Rada discussed
and turned down a bill on the issue, leaving this sensitive problem in
the hands of privatized enterprises' managers. In other words, both the
small fry and big fish were released from the pond to the river. The results
of such a decision can be illustrated by the example of Horlivka-based
Stirol. The company indexed, in compliance with governmental instructions,
its fixed assets, the authorized capital, and the shares' face value back
in 1997. As a result, the shares' face value jumped from 25 kopiykas to
12 hryvnias, i.e., 48-fold, which seems pretty good. However, the law authorizes
the managers' corps to carry out a partial indexing and thus leave the
face value of shares at its previous level. The huge deficit of authorized
capital emerging in this case makes it possible to carry out another stock
emission, 48 times as large as the original one. Thus, even the small property
that the citizens are entitled to receive for their privatization certificates
would become worthless.
In a word, our Parliament has in fact authorized the possibility of
secondary sales of fixed assets of enterprises already sold for privatization
property certificates.
SHAREHOLDERS, UNITE!
It is clear that the highly cost-effective work of joint-stock enterprises
is the common strategic goal of all groups of shareholders and the state.
However, when tactical issues are being handled, such as additional emissions,
alienation of property, distribution of net profits, the size of dividends,
etc., the interests of some groups of shareholders do not necessarily coincide
and may even conflict with each other. This is why small shareholders,
although laying no claim to taking part in company management (this is,
of course, the place for professional managers), ought to be represented
on the supervisory board, a body supposed to exercise control over the
performance of the enterprise and its board of directors. The idea that
small stockholders have not reached this level is nothing but a pretext.
Recall that the Ukrainian population's educational level is very high.
What mainly hampers small shareholders is their disunity.
As a result, small shareholders are in a very unfavorable situation.
Unfortunately, as experience shows, the only time left for them to unite
is the period allotted for registration during the meeting itself...
COMMENTARY
In this country, minor shareholders in most cases do not have either
the experience or real opportunity to effectively manage their shares.
And someone tries to use this situation for HIS OWN BENEFIT. Hence the
author is quite right when saying that shareholders need protection. In
Germany, for example, this protection was entrusted to the Deutsche Bank,
and the shareholders feel as safe as if they were behind a stone wall.
But we lack such a mechanism. However, nobody prevents us from creating
one. Thus, the last meeting of Ukrnafta shareholders adopted an amendment
to the company charter stipulating the right of cumulative voting. This
means that a shareholder does not have to vote for all members of the Supervisory
Board, instead, he can give all preserved votes to one candidate, and,
thus, minor shareholders can push through their representatives to managerial
bodies.
Naturally, shareholders need to increase the level of their legal literacy,
and to get a lawyer's advice before taking major decisions. The idea of
consolidation of forces is very productive. Our Association for the Protection
of Shareholders' Rights has been working precisely in this field.
Yakov HOLDENBERH, President, Association for the Protection of Shareholders'
Rights
