2020: Some of the Major Legal Developments to Influence Strategic Investments in Ukraine

The Ukrainian government continues to move on with its ambitious program of reforms aimed at the creation of a more business-friendly, transparent and flexible legal environment.

In this Newsletter we cover some of the major legislative developments that are expected to come into force or develop in Ukraine in 2020. These changes will significantly affect the legal framework for corporate governance, public-private partnership, employment relations and financial markets in Ukraine this year.

(For an overview of some major legal developments in Ukraine for 2019, please see our earlier Newsletter here).

  1. Amendments to the Law on Joint Stock Companies

The new draft Law of Ukraine “On Joint Stock Companies” (the “new JSC Law”), which was submitted to Parliament at the end of 2019, introduces an array of corporate changes:

  • one-tier governance structure

Currently, the JSC law allows only for a “two-tier” structure of corporate governance, consisting of a supervisory board (“nahliadova rada”) and an executive board (usually called “pravlinnia”), or a sole chief executive officer. The New JSC Law allows the majority of joint-stock companies to choose, along with the two-tier structure, a one-tier structure, appointing a sole board of directors consisting of executive and non-executive directors/officers;

  • minimal price of a share 

Since the Ukrainian stock market is almost non-existent, establishing a “fair market value” of a share proved to be a difficult matter for Ukrainian JSCs and their shareholders, causing numerous conflicts and litigations, leading to a deterioration of trust in the protection of minority shareholders in Ukrainian companies. The new JSC Law introduces a minimal price of a share, which is establishing by dividing the net value of assets of the company by the total number of shares;

  • squeeze-out counterbid option

Currently, when a shareholder accumulates 95% of a company’s stock, it gains the right to a squeeze-out, i.e. to buy out other (minority) shareholders. During the last few years, some of the majority shareholders abused this right, using the Ukrainian legal system’s loopholes to buy out other shares at prices widely considered unfair. The new JSC Law allows every minority shareholder to file a counteroffer for the mandatory sale of shares by all shareholders (including the owner of 95%). Such a counteroffer should be at least 5% higher than the price offered by the initiator of the squeeze-out.

  •  liability of the company officers for damages

The New JSC Law allows for an enhanced mechanism of holding company officers liable for the breach of fiduciary duty, for example, in the case of selling assets “below market prices”. These damages should be reimbursed should a court declare the transaction in question invalid and recognize the company’s officers as liable for the damages. This further develops Ukrainian law of recovery of damages in civil actions (see also our Newsletter for a brief note on recent court practice in this regard).

  •  more derivative claimants, also for LLCs

 The New JSC Law expands the range of persons entitled by law to file a derivative claim. A derivative claim, still a relatively new type of remedy available in Ukraine, allows a shareholder to file a claim in the interests the company for damages caused to the company by the actions or inactivity of the company’s officers. Current law allows a derivative claim for shareholders holding more than 10% of shares; the New JSC Law lowers this threshold to 5%. The New JSC Law also allows, for the first time in history, submission of derivative claims by shareholders (participants) in an LLC. This may have an enormous effect on the field of corporate litigation, as there are only about 3,500 JSCs and about 250,000 LLCs in Ukraine.

2. More Ways to Do Business With the State: Re-Launching of the Infrastructure Concession Market and Large-Scale Privatisation Opportunities

The new Law on Concessions (the “Concession Law”) took force on 20 October 2019. The Concession Law revised the 1999 Law on Concessions, which saw no concessions approved during the 20 years of its existence. The 2019 Law on Concessions simplifies rules applicable to concessions and clearly defines the roles of both private and public stakeholders. Moreover, it was already put in practice.

The new law envisages significant changes coming to the regulation of the most common form of public-private partnership. In contrast to the previous approach to concession regulation, the Concession Law will cover all spheres where the concession mechanism is applied, including the sphere of natural monopoly and highways.

Among novelties proposed by this Law, we would like to emphasize the following:

  • additional guarantees for creditors

The Law provides for a possibility to enter into a direct agreement to be executed by an investor, a state-related owner, and a concessionaire. Such an agreement may include, among others, procedure and grounds for a change of a concessionaire upon application of a creditor (the so called “step-in right”); compensation to be paid by the state if a concession agreement is terminated due to the decision of the state parties, etc.

  • dispute resolution

The parties may agree to resolve concession-related disputes through an international commercial arbitration procedure, provided that the concessionaire’s shareholder is an entity with foreign investments.

  • selection of a concessionaire

The Concession Law provides for a tighter deadline for conducting the selection of a concessionaire. Besides, there is a new option of a “competitive dialogue” procedure being a special type of the tender procedure where a concessionaire negotiates requirements for tender documentation with tender participants chosen at the pre-qualification stage. The competitive dialogue is a flexible tool available in cases where technical and/or qualitative characteristics of the concession project cannot be clearly pre-established due to its nature (for example, in case of implementation of innovative projects, large integrated infrastructure project, etc.)

  • special procedure for an existing lessee

The Concession Law envisages that the existing lessee may use a special mechanism that allows converting the lease into a concession.

  • land plots allocation

The Concession Law simplifies procedure for obtaining the right for land plots required for concession activity. The Concession Law unequivocally establishes an imperative obligation for the state or local authorities, which under the concerned concession agreement possess a particular land plot necessary for the project, to transfer land use rights of the land plot to a concessionaire. In Ukraine, allocation of land plots is a time and cost consuming endeavour so new provisions aimed at reducing regulatory barriers are much welcomed.

The Law on Concessions updated and upgraded tools for structuring business with state-owned enterprises, which has already resulted in the successful conclusion of concessions by foreign port operators of two Black Sea ports “Olviya” and “Kherson”. Another four seaports, including a part of Odesa Sea Port, are set for a concession bid in 2020.

On 10 October 2019 the Law on the List of State-Owned Property Prohibited for Privatization lost its force, which included a long list of state-owned infrastructure objects, thus unblocking greater numbers of opportunities in concessions and other forms of public-private partnership for investors. Please read our dedicated alerts on large-scale privatization here and here for more details.

3. New Financial Instruments for Investments

On December 19, 2019, the Ukrainian parliament adopted in the first reading the draft law “On Amendments to Certain Legislative Acts of Ukraine on Simplification of Investment Attraction and Introduction of New Financial Instruments” (the “new Capital Markets Law”).

The new Capital Markets Law, if passed, will transform the current Law of Ukraine “On Securities and the Stock Market”, into the new Law of Ukraine “On Capital Markets and Organized Commodity Markets”, which will determine the conditions for conducting professional activity in these markets, the issuance of securities, making and executing derivative contracts, as well as the circulation of various types of securities.

Importantly, the new Capital Markets Law implements the core Capital Markets legislation of the European Union, including MiFID II Directive, MiFIR Regulation, EMIR Regulation, Settlement Finality Directive, and the Financial Collateral Directive.

  • new types of financial instruments

 The new Capital Markets Law introduces new types of securities and derivatives that include:

  • certificate of deposit – security that confirms an amount claimable from a bank and the right of the certificate holder to claim such amount upon the expiration of the specified period of the nominal value of the certificate and interest income;
  • «green» bonds – interest-bearing bonds, which are used for financing and/or refinancing environmentally friendly projects;
  • option certificates – derivative securities, certifying the right of its owner to purchase from its issuer (option certificate of purchase) or to sell to its issuer (option certificate of sale) an underlying asset at a price, term and under the conditions specified by the prospectus (decision on the issuance of securities);
  • depositary receipts – Ukrainian depositary receipts for securities issued abroad.


  •  creation of a trade repository

According to the Draft Law, a trade repository will be a legal entity, which will carry out the centralized collection and accounting of concluded derivative contracts. This will assist the full functioning of a derivatives market, will mitigate risks of default, and will secure payment for the derivative transactions.

  •  new licenses to act on the stock market and commodity market.

Traders will be able to obtain one of seven types of licenses for operations in the capital markets and one of two types of licenses in the commodity market instead of the one type of license for work on the stock market that currently exists and the absence of a license for the commodity market. The new Capital Markets Law also introduces a differentiated approach to the licensing procedure, whereby less responsibility implies fewer requirements.

 transformation of the security broker

After the adoption of the new Capital Markets Law, the security broker will become an investment firm. Due to its status, the investment firm will be able to provide investment advice. Additionally, such firms will be able to work through affiliated brokers, who can act on behalf of, under the control of, and at the expense of the firm.

  • classification of investors as qualified and non-qualified.

Qualified investors are:

  • international financial institutions;
  • foreign states and their central banks;
  • the State of Ukraine, represented by the Ministry of Finance of Ukraine and the National Bank of Ukraine;
  • professional participants in the capital markets and organized commodity markets, banks and insurance companies;
  • foreign financial institutions that meet the criteria set by the National Securities and Exchange Commission;
  • legal entities, including those created under the law of another country, provided that they meet at least two of the following criteria: a) the balance sheet total is at least EUR 20 million; b) the annual net income for the last financial year is at least EUR 40 million; c) equity capital amounts to at least EUR 2 million;
  • Other persons, including individuals, who act through an investment firm and meet certain qualifications (such as quantity and volume of security transactions performed during the past year, capital market professional experience, amount of capital in cash and securities).

All the other investors who do not meet the above-mentioned criteria are unqualified. Only qualified investors can make certain transactions with financial instruments.

5. Splitting (and Re-Launching) of the Financial Services Market Regulator

The so-called “split” reform in the Ukrainian financial sector means the liquidation of the National Financial Services Commission and distribution of its regulatory powers between the National Bank and the National Securities and Stock Market Commission (NSSMC).

The respective Law “On Amending Certain Legislative Acts on Improvement of the Functions of the State Regulation of the Financial Services Markets” was approved by the Parliament on 12 September 2019 and takes full force on 01 July 2020.

Most of the functions of the Financial Services Commission will pass on to the National Bank that has been praised for efficient and deliberate reform and revitalization of the national banking sector. This includes insurance companies, leasing companies, pawnshops, credit unions etc. The NSSMC will regulate non-state pension funds and specialized real estate development vehicles.

The split means not merely a change in the names of regulators, but significant regulatory changes as well. It is expected that the National Bank will enact new regulations aimed at the creation of a more transparent, accountable and financially stable market. This would include, in particular, new requirements for financial and regulatory reporting, shareholder structures, corporate governance, risk management, internal controls and compliance. The work on the new version of the law governing insurance companies has already started with the forming of an expert working group under the auspices of the National Bank.

On 16 January 2020, a 102-page Strategy for the Development of the Financial Sector of Ukraine until 2025 was approved jointly by the outcoming and incoming market regulators, the Ministry of Finance of Ukraine and the Deposit Guarantee Fund of Ukraine.

5. New Labour Law

On 28 December 2019, the Draft Law on Labour Law (the “Labour Law”) was filed with the Parliament with the purpose of rebooting the labour market and finally ridding Ukraine of certain remnants of the Soviet planned economy inherited in the form of the Labour Code of 1971.

The Labour Law suggests a radical reform based on free market relations as opposed to the current version of extensively regulated and pro-employee labour legislation.

  • contracts for everybody

The basis of any employment relations will be a contract, which shall be concluded only in writing (digital signature is available). Currently, the most common type of a contract is so-called “oral form” contract that is formulated by the exchange of an employee’s application to get hired and the employer’s order on the hiring of the employee.

The new Labour Law introduces seven types of employment contracts:

1) indefinite term

2) fixed term contracts (not more than 5 years);

3) short-term contracts (up to two months);

4) seasonal contracts;

5) contracts with fixed hours;

6) a student employment contract;

7) employment contract with a household worker (household maintenance work).

  • easier termination of labour contracts by the employer

Under the current legislation, dismissal of an employee is a heavily bureaucratised and burdensome procedure, which is very difficult to conduct in full compliance with the law. These rules protected the rights of employees, but also left room for abuse of the system, in particular, by high-level company officers. The new Labour Law provides for an easier procedure for termination of a labour contract at the initiative of the employer.

  • tackling unreported employment

One of the innovations of the new Labour Law is the definition – at the legislative level – of the concept of “de-facto labour relations” and the signs of their existence, which aims at preventing employment without a contract and/or without reporting to the tax and other relevant supervisory authorities.

Signs of the labour relations:

  • regular remuneration for work performed (services provided) in the interests of another person;
  • personal performance of the work (provision of services) according to the specific qualification, profession, position on the assignment and under the control of the person in whose interests it is performed;
  • use of a workplace in compliance with labour regulations;
  • work (services) are similar in content and nature to those performed by full-time employees;
  • organization of working conditions (the provision of means, equipment, materials required for work, etc.);
  • adherence to the working schedule.

So far the text of the new Labour Law does not answer the question as to how many of the mentioned signs should amount to unrecorded employment and presumably it will take some time before labour law inspection and business agree on this number without recourse to litigation or having respective amendment at a legislative level. In either event, it is strongly advised to comply with the employment requirements.

  •  mediation as a new remedy for settling labour disputes

The Labour Law envisages that mediation can take place in the event of a labour dispute, either before the court or during the court proceedings. The parties to the employment relationship may apply for the mediation procedure to resolve the dispute at any stage of the court proceedings.

The radical approach of the draft Labour Law created a heated discussion, and was heavily criticised by the trade unions. Nevertheless, the reformist Ukrainian government sees the law as one of the key pieces of legislation aimed at improving the business climate and attracting foreign investments.

If you need legal advice or further information on the legal developments discussed above, please contact our Associate Partner Taras Tertychnyi (tertychnyi@hillmont.com.ua).