Category: Ukraine

One of the most significant trends in Ukraine’s legal environment in 2017 has been the active implementation of corporate law reform and, in particular, the improvement of the corporate governance of state-owned enterprises (SOEs).

These reforms, which are on-going, result from the joint efforts of various governmental authorities, the EBRD, World Bank, the IFC, and Ukraine’s legal community in general. They aim to minimize corrupt practices and political influence within SOEs and to procure the development of SOE professional management teams, ensure the effective management of SOE assets, and increase SOE enterprise value. This process is vital for SOEs in Ukraine and could be a strong preparatory step to maximizing their value in the run-up to their expected privatization. 

Although Ukraine launched its privatization process over 25 years ago, SOEs still account for almost one-third of the country’s economy. Only half of the approximately 3,400 SOEs actually conduct a business activity. The majority of them have been loss-making for many years and have become a heavy burden for the state budget. Soviet-style management, complex decision-making and accountability structures plagued by corruption and nepotism are the main challenges facing SOEs. While the government’s long-term goal is to privatize most SOEs, in the short-term it has undertaken an effort to increase their management efficiency and transparency, which should increase their attractiveness for potential bidders. 

On June 2, 2016, the Ukrainian parliament adopted the Law On Amendments to Certain Legislative Acts of Ukraine Regarding the Management of Objects of State and Communal Property (the “Law”) followed by regulations adopted by the Cabinet of Ministers, which to a certain extent implemented OECD guidelines and became a cornerstone of Ukraine’s on-going SOE corporate governance reform. 

The backbone of the reform is the mandatory establishment of independent Supervisory Boards at the largest SOEs, which are to take over the majority of the management functions from state authorities. According to the Law, the state authority empowered to manage certain SOEs shall appoint Supervisory Board members in such companies based on competitive procedures for a three-year term. Supervisory Board members are to be chosen from among experts in finance, strategic planning, and the core business areas of the particular SOE. A minority of the Supervisory Board members shall represent the state; the majority of them shall be independent. Supervisory Boards are authorized to appoint and dismiss top management and auditors of SOEs, evaluate results of management activities, and approve transactions involving up to 10–25% of the value of the SOE’s assets under the previous year’s accounts. Currently the creation of Supervisory Boards is mandatory for the 40 largest SOEs, the cumulative assets of which represent 94% of the entire SOE portfolio. 

Following the creation of the first Supervisory Boards at Naftogaz and Ukrzaliznytsya – the two largest SOEs in Ukraine – the government remains committed to further enhancing the powers of these corporate bodies. On November 16, 2017, a Draft Law On Amendments to Certain Legislative Acts of Ukraine Regarding Improvement of Business Conduct and Attraction of Investments by Securities Issuers No. 5592-d was adopted in the first reading. This new draft law aims to improve, inter alia, the functioning of the Supervisory Boards in both state and privately-owned joint-stock companies. Among its other newly-introduced provisions, the document requires public joint-stock companies to hire independent Supervisory Board members and form mandatory committees (such as Remuneration, Appointment, and Audit Committees) within the Supervisory Boards, and it extends Supervisory Board authority.

Another Draft Law submitted to Parliament – On Amendments to Certain Legislative Acts of Ukraine Regarding Improvement of Corporate Governance of Legal Entities Where the State Is a Shareholder (Founder, Participant) No. 6428 – aims to grant Supervisory Boards the rights to approve the strategic development plans of the respective SOE and significant transactions (e.g., asset management agreements, joint-venture agreements, etc.), provided that this Supervisory Board authority is reflected in the SOE’s charter. As of now, such powers fall within the competence of the respective state authorities, which complicates the timely adoption of business decisions and prevents SOEs from attracting foreign investments and debt capital to their business.  

Kinstellar is proud to be a part of such a crucial reform process for Ukraine by serving as legal advisor to the first independent Supervisory Board of Naftogaz, the largest state-owned company in Ukraine. We also serve as a legal advisor for corporate governance reform of the national state operator Ukrposhta, supported by the EBRD and Ministry of Infrastructure of Ukraine.

By Iryna Nikolayevska, Head of Corporate/M&A, Kinstellar Ukraine 

This Article was originally published in Issue 4.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In 2017, Ukraine implemented several anti-corruption steps based on its contractual obligations per loan arrangements with the EU and the IMF¹. However, the speed of implementation is slow, which is frustrating for international financial organisations, as well as the broader business community. 

Notwithstanding, in 2017 the following anti-corruption steps were taken:

• changes to the Law “On the Prevention of Corruption” with regard to electronic wealth declarations for public officials (“E-Declarations”²); 
• adoption of the Standard anti-corruption programme for legal entities; and
• adoption of several methodological recommendations by the National Agency on Preventing Corruption (the “NAPC”³). 

However, while much discussed in 2017, an anti-corruption court⁴ has not yet established.

1. E-Declarations

The E-Declarations mechanism introduced in 2016 requires persons authorised to perform state functions and functions of the local authorities to submit to the NAPC annual online reports setting out details of their assets, income, expenditures and financial obligations. The list of such persons includes high-level political figures, such as members of parliament and government, as well as judges, public officials, officers in the prosecutor’s office and others.

In March 2017, the list of persons obliged to file E-Declarations was controversially extended by the Parliament to: 

• members of anti-corruption, non-governmental organisations;
• presidential, governmental and parliamentary candidates, as well as candidates for other state bodies specified in the Law “On the Prevention of Corruption”;
• officers of public legal entities who are members of the Supervisory Board of state-owned banks or stated-owned commercial organisations; and
• persons obtaining money or property within technical support programmes, including non-repayable financial aid or other support in the sphere of preventing corruption;
• heads of public councils or other non-commercial organisations – as well as members of the management bodies of such public councils and organisations – if they perform activity related to corruption prevention, and/or take part in the development, monitoring and assessment of anti-corruption standards and policy in Ukraine; and
• persons who regularly provide services related to the implementation and monitoring of anti-corruption policy of Ukraine if they are paid from technical support, including non-repayable financial aid or other support in the sphere of preventing corruption.

The Parliament also abolished an obligation to submit E-Declarations for certain categories of military servicemen participating in the Anti-Terrorist Operation in the East of Ukraine.

2. Adoption of the Standard Anti-Corruption Programme for Legal Entities

In March 2017, the NAPC adopted a standard anti-corruption program for legal entities (the “Programme”). This Programme is obligatory for:

• companies taking part in public procurements, if the value of procurable services or goods is equal to or exceeds UAH 20 million.; and
• legal entities more than 50% owned by a state or municipal enterprise that have more than 50 employees and a turnover for the most recent financial year exceeding UAH 70 million.

The Programme contains a list of anti-corruption measures required by the Law “On the Prevention of Corruption”. However, according to the recommendations issued by the NAPC, a company may delete provisions which are not relevant to its particular business, or make amendments to the same.

The Programme can also be voluntarily implemented, partly or completely, by any company. Adopting the Programme can help a company to conform with Ukrainian law.

3. Adoption of Methodological Recommendations by the NAPC

The NAPC adopted the following range of recommendations, the majority of which are applicable to state and local authorities:

• recommendations for persons providing anti-corruption training;
• recommendations for authorities concerning the handling of whistle-blowing reports; 
• recommendations concerning the prevention and regulation of conflicts of interest; and
• recommendations concerning the development and implementation of an anti-corruption programme for legal entities (applicable to state and local authorities, as well as for certain private companies participating in public procurement).

The private sector may use these recommendations, but is not obliged to do so. These recommendations do, however, highlight the authorities’ various approaches, and it is advisable to consider their informative and explanatory character. 

4. Anti-Corruption Court

The draft law “On a Higher Anti-Corruption Court” was registered in the Parliament on 
22 December 2017, but has not yet been adopted. It establishes the requirements for judges, the procedures to select the judges, and the jurisdiction and status of the court, as well as guarantees of the court’s independence. 

It was expected that the court would have jurisdiction over cases being investigated by the National Anti-Corruption Bureau of Ukraine (“NABU”) and the Specialised Anti-Corruption Prosecutor’s Office (“SAPO”). However, according to the draft law, the exclusive jurisdiction of the High Anti-Corruption Court does not include all investigations of NABU. Meanwhile, the scope of jurisdiction has been increased, and now includes investigations of the National Police of Ukraine and the State Bureau of Investigation.

5. Anti-Corruption Strategy for 2018-2020

On 29 September 2017, the NAPC published the new Anti-Corruption Strategy for 2018-2020, which has yet to be adopted by Parliament. The Strategy is mostly focused on the public sector. The principle strategies outlined for the next two years include the following:

• establishment of a Higher Anti-Corruption Court;
• the adoption of new legislation to control lobbying;
• clarification of the list of corruption crimes under the Criminal Code of Ukraine; and
• the creation of a register of legal entities which have committed corruption violations, with the aim to exclude same from future public tenders. 

The strategy also includes a statement that after the establishment of a Higher Anti-Corruption Court, the imposition of criminal measures on private companies should be increased. Therefore, it seems private companies should also begin to consider the establishment and implementation of anti-corruption compliance systems to prepare for the likely increase in liability risks.   

By Ario Dehghani, Counsel, Head of the Compliance Practice, and Viktoria Shevchuk, Junior Associate, Redcliffe Partners

1. IMF loan contracts, EU Macro-Financial Assistance contracts, EU Member State Building Contracts and the Visa Liberalisation Action Plan.

2. This is a contractual obligation of the State of Ukraine based on the Visa Liberalisation Action Plan of 22 November 2010.

3. The NACP was established based on the contractual obligations of the State of Ukraine according to the Visa Liberalisation Action Plan of 22 November 2010, and the Memorandum of Understanding between the European Union as a lender and Ukraine as a borrower dated 22 May 2015.

4. This is a contractual obligation of the State of Ukraine based on the Memorandum of Economic and Financial Policies dated 27 February 2015 between the IMF and Ukraine.