Publications

"Dispute Resolution on the Securities Market in Ukraine", Ukrainian Law Firms, A Handbook for Foreign Clients 2010, Yuridicheskaya Practika), an article by Oleksandra Pavlenko, attorney-at-law, partner with Pavlenko & Poberezhnyuk Law group and Vitaliy Burdak, attorney-at-law with Pavlenko & Poberezhnyuk Law group (in English).

18.01.2010

Dispute Resolution on the Securities Market in Ukraine

By Oleksandra Pavlenko and Vitaliy Burdak

Pavlenko & Poberezhnyuk, Law Group

http://ukrainianlawfirms.com/areas.php?id=018

The securities market in Ukraine is a dynamic and fast-growing market that has an enormous development potential, thus making it very attractive for investors, businessmen and lawyers.

During 2009 a trend towards a reduction in the number of legal disputes on the securities market in Ukraine was observed. This tendency was tied with the general decrease in activity on the securities market, which was caused by the negative effect of the world economic crisis. Besides, this year many joint-stock companies began to bring their activity into compliance with the requirements of the On Joint-Stock Companies Act of Ukraine, which was passed in 2008 and took effect in April 2009. The period, when the stock companies start bringing their activity in compliance with the requirements of the On Joint-Stock Companies Act of Ukraine and taking their first steps towards conducting their activity on the basis of the new corporate rules introduced by the Act, could indirectly influence the reduction in activity on the securities market as well. Therewith, recapitalization of a number of Ukrainian commercial banks should have alerted investors, who opted for a waiting position in 2009. The combined effect of the above-mentioned factors led to a decrease in the speed of activity on the Ukrainian stock market.

The number of corporate conflicts caused by “raider attacks” on enterprises fell considerably in 2009. This was connected with the drastic fall in the value of assets of most enterprises that were “target objects”. In fact, in the ongoing world economic crisis “raiding” became an economically unfeasible way of gaining control over an enterprise.

Many experts are forecasting a rise in the sphere of dispute resolution on the securities market in the near future. This forecast is primarily connected with the innovations of the On Joint-Stock Companies Act of Ukraine, in particular with: enlargement of shareholders rights, new system of corporate management of a joint-stock company, introduction of strictly regulated procedure of exercising the senior right of share purchase, new voting procedure at a shareholders meeting, new order of convocation and holding of an annual shareholders meeting, new rules of considerable and controlling share stakes acquisition of a joint-stock company, mandatory redemption of joint-stock company shares.

In the near future lawyers who are engaged in providing legal support to resolve disputes on the securities market in Ukraine, are going to be confronted by the following difficulties:

Absence of a number of normative legal acts, which should regulate the aspects of stock companies’ activity that are not regulated by the On Joint-Stock Companies Act of Ukraine or that the Act considers as the subject of regulation of the Securities and Stock Market State Commission.

Absence of explanations regarding implementation and enforcement of some principles and norms of the On Joint-Stock Companies Act of Ukraine by the Securities and Stock Market State Commission.

Absence of litigation practice in dispute resolution, which arise on the ground of invocation of norms of the On Joint-Stock Companies Act of Ukraine.

Collision of the explanations of the Supreme Economic Court of Ukraine, the Supreme Court of Ukraine with the provisions of the On Joint-Stock Companies Act of Ukraine.

The combination of all above-mentioned difficulties will lead to a situation when every practicing lawyer engaged in providing legal support in the course of dispute resolution on the securities market in Ukraine, is either going to become, or has been forced to become a sort of “pioneer” in treatise or application of the provisions of the On Joint-Stock Companies Act of Ukraine.

A solution to the existing situation could be consolidation of the legal community (lawyers, attorneys-at-law, judges, lawyers of the Securities and Stock Market State Commission) in developing common rules and approaches in the implementation of norms of the On Joint-Stock Companies Act of Ukraine by means of holding professional educational seminars, conferences, working groups, round tables, etc.

Major litigation perspectives are going to be connected any way with shareholders meetings and decisions adopted during these meetings. Violations of the procedure of convocation and holding the meeting, especially violations of the voting procedure, will emerge on a larger scale. A reminder that one of the new voting methods at annual shareholders meetings is cumulative voting, which is regulated not clearly enough if the norms of the new Act are to be read literally. Some time should pass before this process can become clearer and not involve admission of a process or results of voting to be invalidated. Many points that are most likely going to become an object for law analysts are related to the representation of shareholders at annual shareholders meetings, as well as to the list of shareholders permitted to vote and to take part in the meeting. A reminder that in the new Act the infrastructure of the stock market and interrelations between its participants have been changed and, accordingly, registrars of ownership rights are no longer participants of these interrelations. In such a way, new concepts, including the list of shareholders permitted to vote, have been introduced. Naturally, one of the new litigation perspectives is inclusion to/exclusion out of this list and confirmation of the right to vote and to be permitted to take part in the meeting.

As to the circulation of securities, the On Joint-Stock Companies Act of Ukraine has tried to establish the order of stocks alienation of different types of stock companies and in dependence on the parties of the deal. If the Act is to be closely studied, no questions would appear, but some controversies are possible because shareholders, joint-stock companies and third parties - purchasers are used to the previous procedures, and are most likely to reject such a detailed regulation. The stock market is already used for chaotic bargaining and absence of a regulated market. But now rules of exchange, brokers, listing, informing about conducting a deal and etc., will come to light. Problems are also going to appear with preferential right, although lawyers assess the new norms of legislation to be positive and consider them to be quite successful.

Possible problems are going to be related to statute documents and their mention in some provisions, the presence of which the On Joint-Stock Companies Act of Ukraine now strictly requires to be regulated in the statute. The same applies to the preferential right. Many cases are expected due to the introduction to the Act of the ability to conclude agreements between shareholders, especially - with an applicable right of one or another state.

Overall, the recommendations of litigators remain as follows: all processes, which are taking place in joint-stock companies, all procedures prescribed in detail (including the annual shareholders meeting and alienation of shares) ought to be analyzed from the point of view of their challengeability. Violation of these procedures, for example, holding of the annual shareholders meeting, is not always going to make the accepted decisions invalid. Naturally, this is not an appeal to ignore some of the norms, because apart from the litigation perspectives of challenging decisions that are important for you, state market regulators also exist with their own sanctions and penalties.

An example of such challenges are the regulations of the new On Joint-Stock Companies Act of Ukraine regarding acquisition of the considerable and controlling holding of shares. May we remind that in accordance to the new On Joint-Stock Companies Act of Ukraine if a person is going to become a proprietor of 10 or more interests of shares, he or she is obliged to notify in written a joint-stock company not later, than 30 days prior to purchase. In this case a logical question appears: whether it is possible to acknowledge such a purchase invalid, if the order of notification is not observed. However, in order to acknowledge a transaction invalid, it is necessary in the first instance to take into consideration regulations of the Civil code of Ukraine about transactions invalidity. At the same time, it should be borne in mind that similar actions can entail penalties, foreseen in the On Government Control of Securities Market in Ukraine Act of Ukraine.