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.

Background

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.

New amendments

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.

Conclusion

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.

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.