Crux (#09 September 2019)

Legal Digest

Mykola Voitovych, Attorney, Gramatskiy and Partners

On 20 July the Order on Calculation of the Number of Voting Shares that Belong to an Individual or Entity, according to financial instruments under part 10 of Article 641 of the Law On Joint-Stock Companies came into force. What are these changes about, and how will they influence joint-stock companies?

Legal regulations on joint-stock companies widely implement the principle of transparency in operations with shares, especially when significant or controlling stakes get bigger. The realization of that principle may be seen in the requirements for a potential buyer of a significant stake to apply and publish special information.

In the case of public joint-stock companies (PJSC), the requirements are more extensive a person (or legal entity) must apply special information when his/her stake become more, less or equal to threshold amounts (5, 10, 15, 20, 25, 30, 50, 75, 95% of voting shares). The requirement refers to a person (legal entity) who directly or indirectly acquires or sells voting shares. The emphasis here is on the part indirect acquisition.

Today, financial instruments are so diverse that a buyer may acquire shares not only directly but also indirectly. The approximate list of financial instruments that provide a right to acquire voting shares indirectly is determined by the National Securities and Stock Market Commission (the Commission). The most common are derivatives with a share as a basic asset (futures, forward contracts, options), warrants, some investment securities, and convertible bonds.

With direct ownership of shares it is rather easy to calculate the number of voting shares, but its the opposite with indirect ownership, where different approaches could have been met. The Commissions Procedures No. 207 as of 9 April 2019 are aimed at determining the unitary approach to the calculation of voting shares belonging to a holder of financial instruments. The rule that was introduced is that the calculation is done by multiplying the number of such financial instruments to the number of voting shares, which are a basic asset of such financial instruments, in a specific PJSC. Such calculation must be carried out by a holder of the financial instruments and is the subject to the Commissions supervision.

Hence, the holders of financial instruments have at their disposal the only formula for the calculation, which will help them to identify whether the obligation to provide special information upon getting the threshold is present.

Veronika Kurilko, Consultant, KPMG Law Ukraine

In July the Cabinet of Ministers of Ukraine adopted Resolution No. 496 on raising fee rates, which was considered unlawful by the State Regulatory Service. What does this Resolution actually state?

On 19 July 2019, Resolution of the Cabinet of Ministers of Ukraine that changed the fee rates related to actions associated with intellectual property (IP) rights came into force. In accordance with the Resolution, fees related to preparations for state registration of copyright and relevant contracts on an inventors copyright to a product are increased by 3-9 times. Moreover, the Resolution increased fee rates related to actions associated with IP rights to inventions, utility models, industrial designs, and integrated circuits from 5-10% to 10-40% of the established fee rate. The Resolution was not perceived positively by IP and copyright holders as well as the State Regulatory Service. At present, signing of a petition calling to revoke the Resolution posted on the Cabinet of Ministers website is in progress. The petition states that such increase in fees destroys innovation activity in Ukraine. Furthermore, it significantly impairs the competitiveness of Ukrainian businesses on the global market, as the average relative burden on Ukrainian entities is much heavier in comparison with other countries. However, the probability of getting the required number of signatures to the petition is extremely low. Moreover, the State Regulatory Service of Ukraine, which agrees with the petition in its conclusions, also stated that the procedure for the Resolutions adoption did not comply with relevant regulations. Thus, the current version of the draft Resolution was not provided to the State Regulatory Service for review and approval, which means it was adopted in breach of the Law of Ukraine On Principles of State Regulatory Policy in Business Activities. Therefore, the provisions of the Resolution are rather disputable and unfavorable for both the authors of IP objects and entities, who will seek protection of their IP rights to such IP objects. However, it is difficult to predict whether the Resolution will be revoked, as no official response of the Cabinet of Ministers of Ukraine with regard to the Resolutions disputability has appeared in public.

Daria Stadnyk, Lawyer, Pavlenko Legal Group

The National Securities and Stock Market Commission adopted the Corporate Governance Standards of Professional Stock Market Participants. What are the highlights of this act, and what does it mean for the stock market?

Modern Ukrainian legislation develops taking into consideration EU regulations and experience. And corporate governance is no exception. One of the latest updates is the Draft Corporate Governance Standards of the Professional Stock Market Participants (Standards), adopted on 30 July 2019 by the National Securities and Stock Market Commission. This document will be applied to legal entities carrying out professional activities on the Ukrainian stock market by holding a specific license. Ukrainian legislation currently provides for basic and rather general corporate governance principles. And the Draft Standards are meant to provide more details. The document contains a detailed description of the corporate governance system focusing on the supervisory board, which is a must for professional stock market participants irrespective of their organizational form either LLC, or JSC.

The Standards also describe the composition and authorities of four committees of the supervisory board on nominations, remuneration, audit and risk management. A separate section of the Standards is devoted to compliance. It requires having a compliance officer/department at the company. In addition, the document describes issues of risk management and internal audit to be also addressed by those companies engaged in professional activities on the stock market. Besides, the Standards give more details on the remuneration of a companys officials and provide for separate provisions on remuneration in the form of the companys shares.

So what does this mean for the stock market? First of all, each professional participant will be obliged to bring its internal documents into accordance with the Standards, namely to develop internal rules and procedures to prevent, minimize and/or eliminate risks associated with corporate governance. This will be achieved through the effective work of regulatory bodies (compliance officer, internal auditor, etc.) as well as the mandatory establishment of a supervisory board as the center of corporate governance. This can be definitely viewed as a step towards further development of the corporate governance system in Ukraine, aimed at making Ukrainian business more transparent and secure. However, it is still necessary to consider all concerns prior to final approval of the Standards, so that it would not be seen by business as one more formal requirement or additional burden. It is also rather important to provide for an effective monitoring and control system to verify further compliance of business with the Standards.

Kateryna Breduliak, Senior Associate, EVRIS

The NBU cancelled limit on the purchase of foreign currency on credit for business via Resolution No. 104. What is the goal of this action, and what results can be expected?

Resolution No. 104 of the NBU Board from 6 August 2019 On Amendments to Certain Regulations of the National Bank of Ukraine approves the following currency derogations. It came into force on 8 August 2019.

After simplifying the repatriation of dividends abroad and eliminating the compulsory sale of foreign currency incomings by a business, the Regulator allows business to buy foreign currency at the expense of loans in UAH without restrictions on the amount. This derogation allows businesses to manage their liquidity more efficiently and buy the necessary sums of currency to fulfill their obligations at a convenient time.

In addition, the Resolution stipulates that from the moment the NBU receives information as to a change in the servicing bank in the Customers Customs Declaration, banks are obliged to complete the supervision of export operations within 5 working days. This will avoid double-checking the clients operation.

Needless to say, the main goal of the NBU for the gradual abolition of currency restrictions is to retain free of charge capital movement without any restrictions.

As a result, lifting the NBUs restrictions on buying currency on lending may have an impact on the UAH exchange rate. In the short term, this innovation will not affect the UAH exchange rate, but in the long run this is certainly possible. If the amount of currency purchases from loan facilities is not critical, then such changes will not affect the currency rate in the country.

Therefore, the NBU should move gradually from the permit system to the information system, including loan agreements with non-residents, as the business sector can only respond positively to such changes.

It should be added that previously the NBU repeatedly changed its decisions in monetary policy if there were fluctuations on the foreign exchange market. But, in the event of currency speculation, the NBU retains the power to reverse the currency innovation.

Oleksandr Kamsha, Attorney at Law, Insolvency Receiver, Ilyashev & Partners

The Law of Ukraine On Basic Principles and Requirements for Organic Production, Circulation and Labeling of Organic Products came into force on 2 August 2019. What impact will this law have on the agricultural business?

On 2 August 2019, the Law of Ukraine that regulates the functioning of the market for organic products came into force.

Lets analyze its main provisions, which will be most interesting for representatives of agricultural business.

In accordance with Article 27 of the Law, organic production and/or circulation of organic products in Ukraine is subject to certification. Certification is not subject only to the movement, storage and sale of labeled organic products. The certificate is issued to the operator if it is established that the operator meets the requirements of legislation in the section on organic production, circulation and labeling of organic products in a particular industry. The certificate is valid for 15 months from its date of issue.

According to the provisions of the new Law, the authority to exercise state control (supervision) in the field of organic production, circulation and labeling of organic products is granted to the State Food and Consumer Service, which will inspect the activities of operators and certification bodies, as well as carry out planned and unscheduled measures to monitor organic products on the market with the aim of preventing the market entry of non-organic products which are labeled as organic.

Article 40 of the Law establishes liability for violation of legislation in the section on organic production. Thus, persons selling products labeled as organic without an appropriate certificate will be liable under this article. They will be fined the sum of five to eight minimum wages (approximately EUR 740.00 EUR 1190.00 as of 16 August 2019).

Olena Sichkovska, Associate, Asters

The President of Ukraine has signed Law No. 10357, which provides the green tariff for electricity stations. What are its main provisions, and how can it influence the electricity market?

The abolition of the green tariff rate for household ground solar power stations by the Law On Amendments to Some Laws of Ukraine on Ensuring Competitive Conditions for Production of Electricity from Alternative Energy Sources No. 2712-VIII of 25 April 2019 (the Auction Law) provoked a wave of protests. The Auction Law eliminated the green tariff rate for household solar power stations and only left it for household solar power stations (HSPSs) not exceeding 50 kW, provided that they are located on roofs and/or facades of buildings and other big structures. The logic behind this was to limit ground HSPSs construction not for ones own needs but primarily for direct sale of electricity produced from solar power to the electricity power grid.

The Law On Amendments to Article 9-1 of the Law of Ukraine On Alternative Energy Sources on Regulation of Electricity Generation by Private Households No. 2755-VIII of 11 July 2019 eliminates the green tariff rate for HSPSs not exceeding 50 kW, provided they are located on roofs and/or facades of buildings and other big structures. The Law also establishes the green tariff rate for HSPSs with the installed capacity not exceeding 30 kW no matter where it is located.

From the practical point of view, the main force pushing for amendments was that of ground HSPSs owners who lost their right to connect it at the green tariff. The Law eliminated this issue and attributed the green tariff rate to the ground HSPSs, which were put into operation before the Action Law came into force.

The Law will increase a number of HSPSs, which is positive for the Ukrainian renewable energy sphere. According to lawmakers, the key task of the Law is the protection of rights and legitimate interests of consumers who have constructed, or plan to construct, HSPSs by the end of 2019 and the Law covers this in full.

Maksym Salii, Associate, EQUITY Law Firm

Kyiv District Administrative Court refused to cancel the Resolution of the Cabinet of Ministers that puts limits on maximum tariff fees on heating supply services. What were the positions of both parties and the Court?

Kyiv District Administrative Court considered an application for an injunction to terminate the Governments decree that set threshold prices/tariffs on heating supply services for the 2019-2020 heating season.

The Umanteplokomunenerho Public Utility Company was the applicant and the Cabinet of Ministers of Ukraine the defendant.

Upon consideration of the case, the court denied the injunction.

The application gave reasons for current signs of unlawfulness in respect of Decree No. 560 of the Cabinet of Ministers of Ukraine Some Issues to Protect Rights of Utility Consumers of 26 June 2019, as the Cabinet of Ministers of Ukraine was not in the list of entities entitled to set utility tariffs/prices and, therefore, it performed regulatory activity contrary to the provisions of the Commercial Code of Ukraine, the Law of Ukraine On Prices and Pricing, as well as the Law of Ukraine On Heating Supply.

Besides, the applicant referred to a violation by the defendant of the procedure to make public a draft of the act in question.

Whilst denying the injunction the court pointed out that the applicant had not proved the circumstances that would indicate immediate danger of harming the applicants rights and interests, and that would make protection of its rights and interests impossible without taking relevant measures before any decision is made in the case.

The stance of the court necessitates the injunction with the claimant taking certain steps to enforce Decree No. 560 of the Cabinet of Ministers of Ukraine of 26 June 2019. Other references made by the applicant to violation of legislative norms may not be grounds for an injunction.

It is worth noting that denial of injunction is not dismissal of the claim, which was mistakenly stated by a number of media outlets. Moreover, at the moment when the application to the court for an injunction was made, the claim had not even been filed.

The ruling that was adopted has not changed existing legal relations. Accordingly, consumers will have to pay their utilities at the new tariffs.

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