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 
 
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STATE PLEASE PASS TO USTR FOR CKLEIN, PBURKHEAD 
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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