Stock companies: How their business rules are going to change in 2023
What the new law provides for
For several years, the legislator has been planning to make changes in the activities of joint stock companies. Thus, the law regulating the operation of companies of this ownership will come into force on January 1, 2023. However, the relevant bill was registered in the Verkhovna Rada back in 2019, and its version was adopted in the first reading two years ago. The act was finally voted on only two years later, in July 2022. Arzinger's Senior Associate Yana Babych and Associate Mykola Agarkov told Mind what changes in the operation of JSCs await their owners and what is going to change for business after this law enters into force.
The Law of Ukraine "On Joint Stock Companies" No. 2465-IX that was adopted on 27 July 2022 goes into effect on 1 January 2023 (except for certain provisions that will enter into force on 1 January 2024 due to the needed preliminary elaboration of certain suggestions).
The main goal of passing the appropriate law is to apply the best international standards and practices, particularly, to provide additional opportunities for the effective running and protection of business, and thus to increase Ukraine's investment prospects.
What are the main novelties of the law?
The option to choose between a one-level and a two-level corporate governance structure.
Until the law was adopted, it had been possible to create only a two-tier structure with a supervisory board and an executive body, the powers of which were clearly distinguished. Aside from this approach, the law now allows to choose a one-tiered structure, under which a board of directors is established, made up of both executive (performing the function of the executive body) and non-executive (performing the supervision and control function) members.
Faster decision-making, more dynamic interaction between different functions and easier management are the advantages of a single body, the board of directors; so for many businesses the transition to such a structure may have a favourable impact on the effectiveness of corporate governance.
On the other hand, such a transition is not mandatory, and companies that prefer the two-tier model will be able to continue their operations with the existing governing bodies.
Increased protection of minority shareholders' rights.
Whereas previously it was required to collect at least 10% of the shareholders' votes to request a general meeting, audit or to initiate a derivative action, the Law reduces the relevant threshold to 5%.
Furthermore, not only can a stockholder, owning independently the threshold quantity of shares, now file a derivative claim, but also several ones who own at least 5% stake cumulatively. Thus, such changes allow minority shareholders to more actively influence the operation of the company.
At the same time, the risk of abusing their rights by minority stockholders increases. Therefore, we recommend analysing possible preventive measures (in particular, restrictions in the charter, corporate agreement).
New opportunities for online voting at the general meeting of participants.
The provisions of the law significantly simplify the procedure for holding general meetings. In addition to the existing system of in-person voting, the law stipulates that the meeting may be mixed (some shareholders are present at the venue of the meeting, and some vote by electronic absentee voting), as well as held by electronic voting using an authorised electronic system.
Moreover, the polling system is updated – the changes stipulate that the polling is done as a remote filling of ballots through the depository system.
Clarified corporate executives' responsibilities.
Despite there were certain provisions on the fiduciary duties of executives (e.g., the duty to act in an honest manner and reasonably) in the legislation prior the adoption of the law, only now the relevant duties have been specified (namely, through the definition of the achieving successful results concept, collision of interests, independence, professionalism, etc.) The respective specification is important for the executives to be held accountable effectively.
In addition to the general concept of fiduciary duties, the law also introduces additional duties for officers, in particular, to control the net assets of the company.
Clarified regulation of corporate agreements.
The Law clearly stipulates that the parties to a corporate agreement may be the company itself and third parties, and also allows to apply foreign law to such agreements. Previously, the legislation did not contain relevant restrictions, but an instrument, such as corporate agreement, was not used very widely due to the ambiguous wording.
Other amendments to the law also include reduction in the minimum authorised share capital of joint stock companies (200 minimum salaries instead of 1250), clarifying the legal consequences of violations of the approval of major transactions and related-party transactions.
It should be noted that the law amends the regulation not only of stock companies, but also limited liability companies and double liability companies.
Among the mentioned changes for LLCs and DLCs are relevant changes in corporate agreements and protection of minority shareholders' rights. In addition, an important novelty related to LLCs and ALCs is the possibility of accounting for stocks in the national depository, which can be quite an effective tool against raiding.
At the moment, we recommend to analyse thoroughly the options offered by the new law (in particular, whether it is necessary for JSCs to switch to a one-tier corporate governance structure, whether it will be useful to register LLC and ALC shares in the National Depository of Ukraine system, etc.) and start implementing them in the corresponding documents (charter, corporate agreement, internal regulations).
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