Ukraine has done a lot to convince the rest of the world that the privatization process, initiated by populist moods and a desire to come to power on their wave crest, has become history. It should be noted that the investors’ community believes this. As a result, Ukraine was even placed second after Russia among the countries of Southeast Europe and the CIS in terms of direct foreign investment in 2005 (according to the UNCTAD Report). Will our country measure up?
Unfortunately, serious doubts are once again emerging. On Oct. 5 the Verkhovna Rada passed, in the first reading, Bill No. 1129 “On Changes to the Law of Ukraine ‘On Economic Associations’” (on lowering the quorum of economic associations’ general meetings). This legislative innovation means that meetings of shareholders and participants in limited liability companies can be held only in the presence of stockholders with more than 50 percent of the shares. Under the current law the quorum requires more than 60 percent of shareholders (participants).
In addition, the bill envisages that “until July 2007, this Law will affect only joint stock companies in which the government share in authorized fund exceeds 50 percent or where more than 50 percent of such companies’ shares are in authorized funds of other economic associations owned by the state. For other joint stock companies the norms of this Law will apply as of July 1, 2007.” The results of the current privatization process show that as a rule, the state owns either the controlling block (50 percent plus one share) or a package of 25 percent of the shares plus one share in the authorized fund of a given joint stock company.
According to the findings of the Chief Research and Expert Examination Directorate of the Verkhovna Rada of Ukraine, dated Sept. 15, 2006, if this bill is passed, it will infringe on minority stockholders’ rights because their opinion of issues on the meeting’s agenda will be ignored.
The Day’s experts agree. They believe that if passed, this bill may have disastrous consequences for the economy and Ukraine’s investment image, and cause the stock market to collapse. The actual purpose of the bill is to remove minority stockholders from company management. Such consequences are explained by the fact that, if this bill is passed, other stockholders, even those who own 49 percent of the shares, will not be needed for holding meetings and running a given enterprise because all decisions will be made by the government, which has a 50 percent plus one share. This, in turn, will result in the devaluation of shares and, in the end, no one will need them.
This, in turn, will provide the preconditions for exacerbating the struggle for property and mass corporate conflicts, something that ails the Ukrainian economy right now. Incidentally, during Prime Minister Yanukovych’s recent visit to Dnipropetrovsk, he mentioned this very thing in response to a question from The Day. Naturally, mass redistribution of property may suspend the development of production and positive socioeconomic processes that have once again taken shape in Ukraine, and it will aggravate social tensions.
If adopted, the law will discriminate against millions of private stockholders and at the same time will place the state in a privileged position, since other stockholders will be de facto and formally denied the right to participate in company management. It will even provide conditions for a veiled reprivatization of businesses and actual nationalization of shares owned by citizens.
Do the authors of this bill (who must have written it under the red veil of populist intentions) realize that, immediately after the enactment of the norm that they are proposing, the shares of all enterprises in which the state directly or indirectly has an interest of 50 percent plus one vote will register a sharp decline? One can also fully expect aggressive responses from minority stockholders, who will have to defend their right to take part in company management in a tougher way, as well as cynical takeovers of joint stock companies that will start right after this law takes effect. Therefore, it is possible to assume that this bill was passed without assessing and systemically analyzing its economic consequences for the stock market.
While trying to use legislation to allow an actual takeover of enterprises, the initiators of the bill fail to see that the state may also suffer. Specifically, it will finally lose control over the joint stock company Ukrnafta, where its interest is less than 50 percent, and other enterprises.
Ukrainian jurists point out that this bill is directly at variance with the Constitution of Ukraine, as well as the country’s Civil and Economic Codes. These instruments state that all holders of the right of ownership are equal before the law and ensured equal conditions in which to exercise this right, whereas the state acts in civil law relations on an equal footing with the other entities, secures equal protection for all holders of the right of ownership, and implements the right of state property in the public sector through a system of organizational and economic powers vested in the appropriate administrative bodies with regard to business entities that belong to this sector and discharge their functions on the basis of the right of economic supervision or online control (included among them are entities that act on the basis of only state property, and those where the government’s share in the authorized fund does not exceed 50 percent or comprises an amount that ensures the state the right to exert decisive influences on the economic activities of these entities).
In view of the generally known and repeatedly reaffirmed thesis that the state cannot be an effective owner and that its decisions as a stockholder do not always benefit a given business or serve to attract investments — especially considering “changes of heart” depending on the domestic political situation — such changes also entail negative consequences for the country’s long-term development.
The authors of the bill under study argue the need to enact it by referring to examples in French legislation and that of CIS countries, where the quorum ranges between 25, 30, and 50 percent. However, the proposed lowering of the quorum in Ukraine, in conditions of the evolving stock market and market relations, will not bring about the expected results or reduce the number of corporate wars. The experience of developed countries shows that their lawmakers act in a totally different manner, as they seek to provide conditions to protect minority stockholders, thus enhancing the investment attractiveness both of an individual business and the entire country.
Jurists further note that all matters of corporate property relations must be resolved not through individual changes, but by enacting a solid new law on economic associations in which the interests of minority stockholders are balanced against those of other stockholders and are adequately protected. This can be achieved by adopting a differentiated approach to the quorum and the number of votes required for making decisions on issues, depending on their importance for a given business. Therefore, it would be more expedient to work on removing the source of corporate warfare.
There is an entirely realistic option whereby a general meeting is legally effective if attended by stockholders holding more than 60 percent of the votes under the company statute, except when matters, such as distribution of revenues, and terms and procedures of dividend payments, are on the agenda. In such cases, the quorum could be set at more than 25 percent and decisions adopted if voted for by more than 50 percent plus one share. When approving the company’s annual progress report, including its affiliates, as well as reports and findings of the auditing commission, the general meeting could be recognized as legitimate with a quorum of more than 50 percent of the votes. When amending the company statute or terminating the company by liquidation or reorganization, or setting up a liquidation commission, the quorum could be set at over 75 percent. In other words, the legitimacy of the general stockholders’ meeting is determined individually, depending on the matter at issue.
In addition, the current law could be amended by a clause stating that minority stockholders, who unite in a group in order to secure their rights (for example, on the strength of an agreement) and have at their disposal more than 10 percent of the shares, receive the right to nominate members of the supervisory board, auditing commission, and collective executive body. The number of such nominees is determined pro rata the membership of a given body, but not less than one.
The law could also envisage that such a group of minority stockholders is entitled to make individual decisions on the appointment of members to these bodies within its quota, whereas the general meeting has no right to appoint members of such bodies within the quota of the minority stockholders’ group.
There is another option for protecting minority stockholders’ rights. The law may envisage that their proposals concerning the inclusion of their representatives in an administrative body within their quota must be taken into account by the general meeting. Otherwise, decisions on such matters will be invalid. Relationships within limited liability companies may be based on the same principles.
I think that the state regards the interests of minority stockholders as a higher priority than its own interests, and that it must prove this to our society by its deeds in the legislative sphere.
Rostyslav Ishchenko, an expert with the Corporate Relations Study Center, supported this point of view when he commented on the consequences of the bill under consideration. He believes that this bill “will most likely be suspended in parliament because it can result in an uncontrollable explosion of corporate conflicts, since most blocks of shares were formed by financial-industrial groups in large companies proceeding from the fact that a 40 percent interest was actually a small controlling block and actually allowed to manage the company and block any stockholders’ meetings.”
If the above-mentioned changes are introduced, Ishchenko thinks that such blocks of shares will lose their importance, and a desire to “redistribute property” will emerge. This may involve dozens, even hundreds, of enterprises,” this expert notes. Considering that financial-industrial groups have an influential political lobby, he believes that this may have an impact on the political stability of the government and on the entire country.
