Ukraine: Challenging Rules for Private Placement of Shares
→ Artem Sokurov
→ Mariya Sukhan
New rules on share issuance and private placement of shares have unified certain procedures and brought clarity in interpretation of the law by the regulator. But the registration procedure is excessively regulated and has become more document intensive. Many of the changes are questionable, especially the requirement to file an extensive prospectus even for private placements of shares with existing shareholders.
The Law On Joint-Stock Companies (the Law), in force since April 2009, met the expectations of market players and improved corporate governance rules, but there were still many gaps and uncertainties. In the last three years, the Law has been amended significantly. Remaining gaps were further addressed by clarifications of the regulator, the National Securities and Stock Market Commission.
One of the hottest topics insufficiently regulated by the Law was share capital increases and private placement of shares, a very popular tax-neutral way to inject funds into a joint stock company. Updated regulations on the share capital increase were adopted only in summer 2011, and additional share issuance was detailed by the new regulations in September 2012.
Private placement procedure
In brief, the private placement procedure is as follows. The shareholders’ meeting decides to increase the share capital by issuing additional shares to be distributed between existing shareholders. A set of documents is filed with the regulator to register the fact of the share issuance. Shareholders may then use their pre-emptive right to acquire additionally issued shares pro rata to their current shareholding. At this stage, the main concern for the joint stock companies with foreign shareholding is currency control issues due to exchange rate fluctuations and negotiations with local bankers, who often lack experience in this regard and lag behind in applying the changing requirements.
Upon completing other formalities, the shares not placed during the pre-emptive right phase are sold. The approved report on results of private placement is filed for registration. Finally, the shareholders acquire legal title over the newly issued shares upon their registration in a depositary system. The procedure takes at least three months and timelines are very strict.
In 2011 the Parliament surprised the market by extending the requirement to file the share issue prospectus with the regulator to private placements. As the amount of the information to be disclosed for private placement in prospectus was not established by the Law, the regulator insisted on the same scope of information applicable to public placements. In September 2012 the regulator narrowed the scope in its new regulations on shares issue registration. However, the scope of disclosure remains significant and lacks common sense. For example, an issuer must disclose its market strategy, credit history and business plans.
Another arguably positive clarification concerns fixing the purchase price of the placed shares. According to the Law, the price of placement should not be lower than their market price, but in no case lower than their par value. The market price must be defined by a licensed evaluator and approved by a supervisory board. The date at which the market price of the shares must be evaluated is a day before the date of publicising notification of the shareholders’ meeting that decides whether to issue additional shares. As an exception, the Law permits convening the meeting in 15 days without publicising special notification, which, under standard procedure must be at least 30 days before the meeting. The Law is silent on how to determine the date for evaluation of shares in case of convocation of the meeting in 15 days, so the regulator clarified that this is a day before the date on which individual notifications of the shareholders were made regarding the meeting. This adds difficulties in calculating and predicting milestones for the share issue procedure.
Long-awaited regulations require more amendments to liberalise the registration process. The requirement to file a shares issue prospectus for private placement should be abolished. In the meantime, joint-stock companies should pay close attention to the format and content of documents to be filed and strictly adhere to terms in the registration process. Otherwise, the regulator can reject the registration. Considering that additional capital is often needed to comply with the regulatory requirements or improve solvency, rejection by the regulator may significantly harm the financial health of the company.