Expert Opinion (#10 October 2017)

Law-Making Things Happen

by Taras Dumych

The involvement of law practitioners in the lawmaking process has proven to be essential for the outcome of such activity to best serve the needs of individuals and businesses as well as the needs of countries and nations, enabling the latter  to play leading global roles in the history of mankind. Examples of such success experience may include the Roman Empire in ancient times, and countries like the United States and the United Kingdom in the modern era.

Countries like the US and the UK, as common law countries, are to a certain extent fortunate because the body of law affecting private relations is largely formed by judges. However, even in common law countries the role of statutory law and the influence exercised by law practitioners on the development of statutory law cannot be underestimated.

The author has been particularly impressed and inspired by the history of the elaboration and putting into law of the Uniform Commercial Code (UCC) in the US.
The UCC is a product of law practitioners working on it under the auspices of the National Conferences of Commissioners on Uniform State Laws and the American Law Institute. The undoubted reputation and professionalism of law practitioners and these two non-government organizations enabled legislators to enact the UCC into law for all states of the US without additional major amendments to the draft developed by non-government lawyers and organizations.

When it comes to Ukraine and the history of the Ukrainian lawmaking process, it has also experienced certain involvement of law practitioners in the development of various laws. Though, in the author’s view, the role of legal academics in this process has probably been more influential, at least until recent times, though not always entirely efficient. Good examples of such roles are the Civil Code and the Commercial Code adopted in 2003, each of which was subject to the influence of different legal academic schools and sometimes different legal concepts. As a result, the conflicts and inconsistencies between the Civil Code and the Commercial Code still require law practitioners and businesses to be extra vigilant with the way lawyering and business transactions are done.

However, the purpose of this article is not to criticize different approaches towards lawmaking, but rather to outline practical examples of how the particular draft laws developed by private practitioners were going through the lawmaking process in the Verkhovna Rada, the Ukrainian Parliament, to look at the outcome of the process and experience-based conclusions.  

 

Pre-History

In late 2014 a group of companies representing private equity, venture capital, investment advisory, banking and legal industries came together and founded the Ukrainian Venture Capital and Private Equity Association (UVCA). One of the goals of the UVCA was to influence necessary changes in the Ukrainian legal framework, and for these changes to be positive not just for venture capital and private equity industries, but to have a broader effect on the overall business environment in Ukraine.

For this purpose, close dialog and brainstorming discussions were launched involving both industry representatives and lawyers. Such discussions were focused on practical things like setting goals, detailing the process of achieving such goals, and thinking through how industry representatives and law practitioners could combine their efforts to make things happen.

In particular, the focus of the discussion was also to determine long and short-term goals, the smaller and bigger steps to be taken as well as how the circles at the level of the Government and Parliament could be reached so that lawmaking efforts actually bear fruit.

Among the many ideas that were discussed at UVCA were the ideas to improve and actually de-regulate the foreign investment Ukrainian law regime, and to introduce changes to Ukrainian law so that debt to equity conversion transactions with respect to Ukrainian limited liability companies (LLC) could be fully legitimate and reasonably straightforward, as they are in many other countries. Wolf Theiss lawyers promoted these two ideas as such that could be viewed as smaller scale and non-complicated though highly important steps, and so the chance of completing them successfully was estimated as reasonably high.
The ideas were supported by UVCA members, and Wolf Theiss lawyers took the lead in preparing the drafts in question.

 

Rationale behind the drafts

The goal of the first Draft On Introduction of Amendments to Various Laws of Ukraine with respect to Termination of the Obligatory Requirement for Registration of Foreign Investments (Draft No. 2763) is very much outlined in its somewhat lengthy title.

According to statutory law effective at the time, in particular according to the Foreign Investment Regime Act of 1996, for foreign investment to enjoy protection under Ukrainian law, such foreign investment had to be registered with the appropriate local registration authorities. Despite the fact that Ukraine’s international agreements, such as Bilateral Investment Treaties (BIT) did not require foreign investment to be registered, there was a risk that regardless of the provisions of international treaties, foreign investors would have difficulties enforcing their rights with respect to their investment. In practice, such difficulties were often caused by unprofessional and sometimes bad faith excessive bureaucracy.

In addition, unless registered, foreign investors could not enjoy specific customs duty exemptions on in-kind capital contributions. Finally, some types of foreign investments, despite qualifying as foreign investments under both Ukrainian law and Ukraine’s BITs, could not be registered simply because these types of investments were not among those that could be registered in accordance with the by-laws of procedural registration. For example, they included contractual rights of foreign investors.

While the requirement for registration of foreign investment in fact resulted in no effective value for both investors and the state, the mere existence of such a requirement was an unnecessary country risk factor for investors. With the help of Draft No. 2763 being passed into law, this risk could be removed.

The other Draft Law On Introduction of Amendments to Certain Laws with respect to Ensuring the Implementation of the Right to Convert Monetary Claims to a Company into Capital Contribution of the Company (Draft No.2764), was aimed at introducing the possibility to conduct debt to equity conversion transactions for LLCs.

It may sound surprising, but the type of transaction available in most leading countries is not yet available in Ukraine. In our practice we have seen transactions which were structured with the purpose of achieving the result of the debt to equity conversion transaction. However, structuring and implementing such a transaction was unnecessarily complicated and not straightforward, and thus created additional legal risks for the parties to a transaction.

The possibility to conduct debt to equity conversion transactions in Ukraine would help to boost private equity and venture capital investments in Ukraine and would enable investors to have them structured in Ukraine directly rather than through different additional layers of foreign jurisdictions. Such possibility would be beneficial for both foreign and Ukrainian investors and businesses, enabling them to have a larger scope of investment instruments.

 

Work in progress and results

At the initial stage, the plan was to submit both drafts via the Government of Ukraine, the Cabinet of Ministers of Ukraine, as the formal initiator of drafts. Based on the initial meetings with the Ministry of Economic Development of Ukraine, this course of action did not appear unrealistic. However, it pretty soon became clear that breaking through all internal Government approvals and procedures for the drafts to be submitted as Government drafts would probably be a more challenging procedure than the process of consideration of the drafts by Parliament itself.

Therefore, it was discussed that the drafts would be submitted via a Member of Parliament (MP) with whom UVCA managed to develop good working relations during the short time of its existence. At a later stage, we learned that due to the same bureaucratic hurdles it is not unusual even for the Government itself to submit its drafts via MPs acting to formally front the drafts.

The MP we cooperated closely with for Draft No. 2763 and Draft No. 2764 was
Mr. Roman Semenukha of the Samopomich Party. With the help of MP Roman Semenukha and his staff both drafts were submitted and registered with Parliament in April 2015. The Parliamentary Committee for Industrial Policy and Entrepreneurship (Committee) was appointed as responsible for the drafts.

Though each of the two drafts followed its own path during consideration by Parliament, and our further involvement with each of them was somewhat different, our experience from the professional standpoint was nonetheless valuable.

It took a year for both drafts to be considered and voted on by Parliament at the first (initial) reading. Until that time the drafts had been considered internally by the Committee and the Parliamentary legal and expert departments. At that stage the drafts received all the necessary positive opinions from the departments.
The amendments to the drafts proposed by other MPs, who have a statutory right to propose their amendments to any draft during its consideration in Parliament, were not too critical to the substance of the drafts. We appreciated that the Committee actually cared to learn our comments to the amendments proposed by other MPs, and whenever possible and reasonable, our comments were actually taken into account. For this purpose we had a chance to participate in the hearings of the Committee, listen to the questions and comments of MPs, and present them with our position and feedback to their comments.

Soon after the drafts were voted on in the first reading, Draft Law No. 2763, which addresses foreign investment registration issues, was finally favorably put to the vote by the Parliament of Ukraine.
The final vote by Parliament took place on 31 May 2016, and we were delighted to learn that there was not a single vote against this draft. On 22 June 2016 Draft No. 2763 was signed into law by Ukrainian President Petro Poroshenko and came into effect.

It took about a year and a half for Draft No. 2763 to finally become law from the time we drafted it, and slightly more than a year from the time it was submitted to Parliament.

Turning to Draft No. 2764, the draft introducing the debt to equity conversion framework, once it was voted on favorably by Parliament in its first reading, the Committee informed us that there were concerns from the banking industry regarding the substance of the draft. That required us to address these concerns, and for this purpose to hold a meeting with the Independent Association of Ukrainian Banks (IAUB).

We certainly respected the fact that the bank members of the IAUB may have certain concerns with respect to Draft No. 2764, and we were ready and willing to address them. Our experience of interaction with the IAUB proved to be positive, and we should acknowledge the reasonable position of the IAUB towards the draft itself and towards discussing their concerns.
As a result of our discussions, we addressed their concerns, and the IAUB saw no other obstacles from its side for Draft No. 2764 to be further considered by the Ukrainian Parliament. 

Parliament held the second and final readings of Draft No. 2764 on 8 September 2016, and the draft was short of two votes in order to be favorably voted for, with just  a few votes opposing it. The situation was really unfortunate. The only positive development was that Draft No. 2764 was not rejected, as often happens with the drafts that did not get voted for, but rather sent back to the Committee for a repeated second reading.

Since that time, our involvement with Draft No. 2764 has been to present our position again and to address new comments by MPs, other Parliamentary Committees and the National Bank of Ukraine that they had with respect to the draft.
At the time of writing this article it is unclear what will happen next with Draft No. 2764 and when it will be proposed for another second and final vote by Parliament. Considering that it took over a year between the first and initial second hearing of the draft, such a time gap is most likely not unusual in parliamentary practice. 

 

Conclusions

Despite the fact that only one of the two drafts drafted by us has so far come into law, we view our lawmaking experience as positive and worth the effort. Our actions have already resulted in improving the legal framework for foreign investments in Ukraine. As to the debt to equity conversion draft, though not voted yet on, the draft itself and the idea that the debt to equity conversions in LLCs should become possible now appears to be undisputed and may only be up to the mechanics of how it will eventually be introduced into law.

We consider our experience of cooperation with MP Roman Semenukha and his staff and assistants to be positive. In fact, preparing a draft law is only part of the lawmaking job, while handling all the procedures and bureaucracy within Parliament is vital for the draft to move ahead. That part of the job was done perfectly by MP Semenukha and his staff.

What really surprised us was the amount of time Parliament needed to consider the drafts. As mentioned above, it took over a year for Draft No. 2763 to finally be passed into law, and we do not believe that it should take so long for a straightforward draft like Draft No. 2763 to become law. Certainly, Ukraine as a country does not have the privilege of taking its time while improving national legislation if we want our country to be competitive for foreign investments vis-a-vis other countries.

Finally, the example of the lawmaking process in other leading countries, including those mentioned at the beginning of this article, should make the state authorities in Ukraine, including the President and Parliament, rely on and trust professional and reputable organizations and businesses that put their time and effort into improving the Ukrainian legal landscape. This applies to the drafts discussed in this article as well as to other drafts presently considered by Parliament, such as the Limited Liability Companies Draft developed by our colleagues from other law firms under the auspices of other reputable and professional organizations. Trusting the skills and reputation of professionals is in the country’s interests and will enable the right things to happen.

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