OECD Third Eurasian Roundtable on Corporate GovernanceKyiv, Ukraine April 17-18, 2002

CORPRORATE GOVERNANCE IN UKRAINE:

WHY UKRAINE NEEDS A NEW JOINT STOCK COMPANY LAW

ByMs. Motria Onyschuk-Morozov

International Finance Corporation

OECD Third Eurasian Roundtable on Corporate GovernanceKyiv, Ukraine April 17-18, 2002

Current situation in Ukraine

• 35,000 JSCs and 18 million shareholders• Current law inadequate for shareholder

protection and proper regulation of company procedures

• Numerous shareholder violations

• Deters investment - only $US 4.1 billion invested in Ukraine as of July 2001

OECD Third Eurasian Roundtable on Corporate GovernanceKyiv, Ukraine April 17-18, 2002

Typical shareholder violations

• Inability to participate in corporate governance & shareholder meetings

• Non-disclosure of information

• Transactions at less than market value

• Dilution of capital

• Asset stripping

• Related party transactions

OECD Third Eurasian Roundtable on Corporate GovernanceKyiv, Ukraine April 17-18, 2002

Problems with current laws

• Minority shareholders not represented on Boards and rights not protected

• Directors and officers not restricted from acting to the detriment of the company

• Decision-making powers not allocated appropriately between governing bodies

• Common international safeguards absent

OECD Third Eurasian Roundtable on Corporate GovernanceKyiv, Ukraine April 17-18, 2002

What can be done?

• Adopt a New Joint Stock Company Law

• Adopt clear rules for procedures requiring more detailed regulation

• Improve enforcement of laws & regulations

• Increase corporate governance education

• Introduce voluntary principles of best practice (a Corporate Governance Code)

OECD Third Eurasian Roundtable on Corporate GovernanceKyiv, Ukraine April 17-18, 2002

WHAT IS NEEDED IN A NEW JSC LAW ?

OECD Third Eurasian Roundtable on Corporate GovernanceKyiv, Ukraine April 17-18, 2002

Minority shareholder protections

• Cumulative voting

• Tag-along rights in changes of control

• Right to redeem shares if vote against major transactions

• Clear mechanism for right of first refusal in additional share issuances

• Timely and complete information disclosure

OECD Third Eurasian Roundtable on Corporate GovernanceKyiv, Ukraine April 17-18, 2002

Shareholder meeting procedures

• Specify record date for shareholder list

• Reduce quorum for adjourned meetings

• Improve procedure for certification of proxies

• Require ballot voting on key decisions

• Enforce notification procedures

OECD Third Eurasian Roundtable on Corporate GovernanceKyiv, Ukraine April 17-18, 2002

Responsible directors & managers

• Introduce concept of fiduciary duty:– Duty to act in best interests of company– Duty to act honestly and in good faith– Duty to disclose conflicts of interest– Duty not to usurp corporate opportunities

• Impose appropriate penalties for non-compliance that are enforced

OECD Third Eurasian Roundtable on Corporate GovernanceKyiv, Ukraine April 17-18, 2002

Proper allocation of powers

• Clearly allocate responsibility between Supervisory Board and Management Board

• Decisions exclusive to shareholders should include: – Sale of substantially all the assets– Approval of major transactions– Election and removal of members of the

Supervisory Board

OECD Third Eurasian Roundtable on Corporate GovernanceKyiv, Ukraine April 17-18, 2002

Introduce key concepts

• Cumulative voting• Fair market value (independent appraisal)• Conflict of interests• Related party transactions• Insider trading• Major transactions• Sale of substantially all assets• Class actions

OECD Third Eurasian Roundtable on Corporate GovernanceKyiv, Ukraine April 17-18, 2002

On the right track

• Presidential Decree on The Development of Corporate Governance, March 2002

• Securities Commission interested in work on Corporate Governance Code

• Increased awareness that improving corporate governance will increase investment