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Cablegate: Ukraine: Passage of Joint Stock Company Law A

VZCZCXRO6734
PP RUEHLN RUEHVK RUEHYG
DE RUEHKV #1869/01 2631043
ZNR UUUUU ZZH
P 191043Z SEP 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 6382
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHGV/USMISSION GENEVA 0135
RUCNCIS/CIS COLLECTIVE

UNCLAS SECTION 01 OF 02 KYIV 001869

SIPDIS

STATE FOR EUR/UMB, EB/TPP/MTA, EB/TPP/BTA
STATE PLEASE PASS TO USTR FOR CKLEIN, PBURKHEAD
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK
GENEVA FOR USTR

E.O.: 12958: N/A
TAGS: ECON EAID EINV PGOV UP
SUBJECT: UKRAINE: PASSAGE OF JOINT STOCK COMPANY LAW A
MAJOR SUCCESS FOR ECONOMIC REFORM

REF: KYIV 1860

1. Summary: Ukraine's parliament passed a new Joint Stock
Company Law on September 17. The law was among the top
priorities of any list of desperately needed economic
reforms, and its passage, by a large bipartisan majority,
is a remarkable piece of good news at a time of intense
political infighting. Although the new law is not perfect,
it should be a significant improvement over current laws.
The new law will also help combat illegal corporate
hijacking (also known as "raider" attacks or illegal
stripping of assets), which is a growing problem in
Ukraine. Once signed by the President, the law will be a
real success story for Ukraine and proof that the country's
political forces can accomplish key goals when they work
together. End Summary.

Joint Stock Company Law Passes
------------------------------

2. The Verkhovna Rada (parliament) passed a long-awaited
Joint Stock Company law on September 17. The bill passed
with a wide margin of 358 votes in favor, out of a total of
450 MPs, with all parties except the pro-Presidential Our
Ukraine-People's Self-Defense (OU-PSD) supporting en masse.
(Note: Most OU-PSD MPs abstained from all votes taking
place on September 17, apparently out of protest to current
political maneuverings (reftel) rather than to the
substance of the laws themselves. End Note.) Over 541
amendments were introduced into the law after its first
reading in May 2007, and the majority were incorporated
into the final text. The bill now goes to President Victor
Yushchenko, who can either sign it into law or veto. The
President has 15 days to act on this bill. (Comment: Post
expects Yushchenko to sign the law, as he has long been a
supporter of improved corporate governance measures. Even
if the President were to veto, the Rada should be able to
muster the 300 votes needed to override. End Comment.)

A Long Labor
------------

3. Ukraine has long suffered from corporate governance
problems, particularly in areas like corporate ownership,
shareholder rights, transparency, and disclosure.
Currently-enforced laws offer scant protection for minority
shareholders against insider dealing, asset stripping,
profit skimming, and share dilution. A new Joint Stock
Company law, meant to improve the situation by introducing
sound corporate practices that meet international
standards, was first drafted back in 1998, but repeatedly
failed to move forward.

4. Reform-minded government and business leaders quickly
recognized the importance of the draft law, and both the
local American Chamber of Commerce and European Business
Association contributed to the drafting and became strong
advocates for passage. The Commercial Law Center (CLC), a
local NGO created and supported by USAID funding,
participated in the government's Joint Stock Company
Working Group and helped shape the final version of the
text. In May 2007, the Rada passed the draft law in the
first reading, but a protracted political crisis again
delayed further action at that time.

Fixing Basic Corporate Governance Problems
------------------------------------------

5. The new Joint Stock Company Law clarifies the procedures
for establishing, governing, and terminating joint stock
company activity, as well as the legal mechanisms meant to
protect the interests of shareholders. CLC experts
reported that the draft law by and large meets the
country's most important corporate governance needs. The
American Chamber of Commerce added that the law generally
complies with EU Directives in the area of corporate
governance and with OECD recommendations.

Combating Corporate Hijacking
-----------------------------

6. Ukraine has for several years been experiencing an
escalation in corporate hijacking activity, with as many as
2,500 Ukrainian enterprises being victimized. Predatory

KYIV 00001869 002 OF 002


hijackers (also known as "raiders") take advantage of
deficient legislation, corrupt courts, and a weak
regulatory system to gain control of companies at the
expense of rightful shareholders. A new Joint Stock
Company Law was long considered critical to stopping this
corporate hijacking activity, and the new law should remove
several legal loopholes often utilized by hijackers.
Specifically, the law will curb manipulation of shareholder
lists, covert acquisition of a controlling share of stock,
and groundless appeals of the decisions of a company's
general shareholder meetings.

7. The Rada passed another anti-hijacking bill on September
18 amending several current laws to ensure that only the
police, and not private security companies, can enforce
court decisions. The bill will also significantly increase
criminal punishment for the unlawful seizure of companies.

But Not Perfect
---------------

8. Like any piece of legislation, however, the new Joint
Stock Company Law will not be perfect. While the full,
final text of the new law has not yet been made available
to the public, we expect some corporate governance problems
to remain, including a shareholder quorum requirement that
is currently set at 60 percent. International experts
recommend the quorum be set at 50 percent. Furthermore,
Post expects that the law will allow for different
treatment of companies, depending on whether the firm is a
"private/closed" or "public" joint stock company.
International best practices suggest equal treatment of
shareholder rights regardless of the company type.

Comment: A Success Story for Ukraine
------------------------------------

9. The passage of the Joint Stock Company Law comes at a
trying time for Ukraine, with political disunity again
threatening to undermine work on a broad range of issues of
importance. This law's passage shows that the government
can still accomplish key goals. In addition, the law's
passage was a story of all Ukraine's principal political
forces working together -- a Party of Regions government
submitted the bill to the Rada to begin the process,
President Yushchenko helped raise the profile of the issue,
and a BYUT government saw it through to adoption. Once
signed by President Yushchenko, the Joint Stock Company Law
will enter into force in six months (with some provisions
becoming effective in two years) and give economic reforms
in Ukraine a needed boost. End comment.

TAYLOR

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