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Minority Stake Sale Forced by 95%-Stake Holder Needs Additional Explanation of Constitutional Court

Kyiv. December 24, 2010.

The option to sell minority stakes upon the demand of 95%-stake holders needs an additional explanation of the Constitutional Court of Ukraine, believes Roman Drozhanskyi, Partner with Volkov and Partners.
Commenting to Interfax-Ukraine on the Law “On Amendments into the Law On Joint Stock Companies” providing for such option, he said: “This provision may be deemed inconsistent with the Constitution stating that the condemnation of the objects of private ownership rights may be applied only as an exception based on public need. As such, for a new provision to be justifiably applied an additional decision by the Constitutional Court might be required.”
The Partner highlighted that this novation also restricts the rights of pledgees as the existence of earlier registered pledge of shares is not a barrier to carve out shares to the benefit of a majority shareholder. “Accordingly, in prospect pledgers would  in practice loose an option to use share portfolios of less than 5% of stock as a pledge due to obvious unattractiveness of such portfolios for pledgees,” assumed Mr. Drozhanskyi.
Furthermore, according to the expert, joint stock companies were granted a delay till April 29, 2011 to fulfil the requirement as regards conversion of a joint stock company’s shares into book-entry form.
“The adopted law also delivers public joint stock companies (PJSC) from a cumbersome necessity of listing in the stock exchange,” the lawyer mentioned. According to him, such requirement to PJSC was illogical and its abolishment would lead to reasonable deregulation of joint stock companies’ activities.
Reportedly, The Verlhovna Rada has lately adopted the Law “On Amendments into the Law on Joint Stock Companies” giving the right to 95%-stake holders to force minority shareholders to sell their shares.
The related draft law “On Amendments into the Law on Joint Stock Companies” (No.6216) initiated by Yuriy Voropayev and Volodymyr Maltsev, deputies of the Party of Regions, has earlier been submitted for finalization to the related parliamentary committee.
As the Legal Department of the Verkhovna Rada odserved, a legal provision entailing possibility of forced sale of the minority’s stake to the majority shareholder violates the Constitution.
At the same time, this week, during the Verkhovna Rada’s session Mr. Voropayev emphasized that parliament lawyers refer to the Constitution provisions, which protect private property against expropriation, while the indicated law provision has no concern with the expropriation.
Meanwhile, some competitors of the country’s stock exchange consider that introduction of such regulation has been rather an early one. They believe it may trigger a massive liquidity outflow from Ukrainian stock exchange, leading to the actual destruction of exchange trade in Ukraine.
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