The coming into force in January 2018 of Law No. 2210 “On Amendments to Certain Legislative Acts of Ukraine on Facilitation of Conducting Business and Attracting Investments by Securities Issuers” had perhaps the greatest impact on corporate law in the past year. Businesses started raising a lot of questions regarding the application of the new provisions and the need to reformat their activities, particularly with regard to corporate governance. Taking into account the numerous requests received from banking sector representatives, we suggest considering the most important corporate governance novelties for banks in more detail, taking into account legislative changes and recent trends. It will concern only those banks where the state has no share in a bank’s authorized capital.

First of all, it should be noted that the structure of corporate governance depends on an enterprise’s form of incorporation. Thus, until recently, all banks had to exist exclusively as public joint-stock companies and, accordingly, they were subject to the requirements to PJSC (taking into account the features of Law “On Banks and Banking”). Now, with Law No. 2210 having come into force, banks have the opportunity to change the type of company from public to private, but legislation still contains a number of important requirements specifically for banks, regardless of the form of their incorporation.

General Meeting

Competence

In general, a bank’s corporate governance structure looks quite conventional: a general meeting of shareholders, a board and an executive body. We suggest starting with a general meeting as a senior management body. We draw attention, first and foremost, to the question of competence –

while earlier a general meeting of a bank’s shareholders could resolve any issues regarding a company’s activity, now – also any, except for those that fall within the exclusive remit of a company’s Supervisory Board. For a meeting to be able to resolve issues that belong to a board’s competence, a separate resolution is required. Therefore, a bank’s employees must now work more carefully on the compilation of the agenda of a company’s annual meeting and check the competence of each body.

We draw further attention to the fact that, starting from May 1, 2018, the exclusive competence of the general meeting will also be expanded, and it will decide on the approval of provisions and report on the remuneration of members of the Supervisory Board, shareholders’ failure to use their pre-emptive right during an additional share issue, etc.

Convening and holding general meeting

The procedure for convening and holding a general meeting of shareholders has changed slightly. Thus, from now on, there is no need to post a notice about a meeting in an official print media, as the notice itself must contain some additional information. In particular, it is mandatory that the notice contains information about the procedure for shareholders to familiarize themselves with documents, as well as submitting proposals to draft the agenda of the meeting and procedure for voting at by proxy the meeting.

Special attention should be given to new restrictions on determining the quorum of a meeting – while keeping in mind that the shares of a legal entity controlled by a JSC shall not be taken into account when determining the quorum and have no voting rights. In view of this and to avoid any unpleasant surprises, we recommend that each company ensures in advance that it is not subject to the specified provision of the law.

Supervisory Board

Composition

As for a bank’s Supervisory Board, it should be noted that it must include independent directors (same as before), but from now on they must constitute at least 1/3 (earlier – 1/4) and at least three people. Special attention should be given to independence criteria set out in the Law “On Joint Stock Companies”. In general, these criteria are quite clear, but some of them still raise questions. For instance, one of the criteria is the lack of influence of other persons on independent director during decision-making process, while the legislation has no definition of concept of “influence”.

In addition to independence requirements, an independent director (like any other member of a Supervisory Board) must meet certain qualification requirements to business reputation and professional fitness, have higher education (no specialization requirements). At the same time, at least half of the members of bank’s board must have experience in banking and/or financial sector.

Competence

As regards board’s competence, it is worth calling attention to new powers of board on granting consent for the conduct of major transactions. Thus, effective legislation stipulates that a decision to grant consent for the conduct of major transactions shall be made by a Supervisory Board should the market value of property or services being the subject of a transaction be 10 to 25% of asset value according to the latest company’s annual financial statements. Decision to grant consent for the conduct of major transactions, the value of which exceeds 25% of asset value, must be made by general meeting of shareholders of a company.

However, as early as May 1, 2018, bank’s board will be able to make a decision to grant consent for the conduct of transactions exceeding 25% of asset value (provided that a board is formed subject to requirements of the law). Based on these innovations and to avoid possible conflict situations, it is recommended to explicitly delimit powers of a board and a general meeting on granting consent for the conduct of major transactions and specify the necessary provisions in company’s articles of association and other internal documents of a company.

Documents

A few words about the new documents regarding the activities of the Supervisory Board should also be said. Thus, from now on, a bank must also have a regulation on remuneration of members of the Supervisory Board, and the board itself must annually prepare a remuneration report and a report on its performance as part of the company’s annual report. At the same time, requirements to the content of regulation and report on remuneration of bank’s Supervisory Board members are to be determined by the NBU (National Bank of Ukraine).

Given that the regulator has not yet approved such requirements, banks may independently develop the specified documents. Taking into account the current trend of harmonization of Ukraine’s and EU legislation, it is recommended that when developing such documents you are guided by European Commission Recommendation 2004/913/EC of December 14, 2004, as well as the experience of European companies. Of course, when the requirements to these documents are finally approved by the NBU, banks will have to bring their documents in line with effective legislation.

As regards the report on performance of board members, requirements to its content are already set out in Law on JSC. Thus, the report must contain an assessment of performance of board members, including, but not limited to, an assessment of their independence, competence and efficiency.

Committees

By way of conclusion, a few words about the committees of a Supervisory Board should be stated. Effective legislation provides for mandatory establishment of three committees under a Supervisory Board of a PJSC – Audit, Assignment and Remuneration Committees (the last two can be amalgamated). Therefore, if a bank operates as a PJSC, it will not be subject to the requirements on the establishment of these committees, since  legislation has no separate requirements of a bank in this regard. However, NBU representatives have already announced that the establishment of relevant committees in the future will be mandatory for all banks, regardless of their form of incorporation.

Executive Body

Requirements

As regards the establishment of a bank’s Executive Body, Law No. 2210, in conjunction with the updated Regulation on the procedure for registering and licensing banks, opening separate units, provide for new requirements of the chairman and members of the executive board. The chairman and members of the executive board, as the bank’s managers, must meet the qualification requirements of business reputation and professional fitness, have a spotless business reputation, as well as a higher education. At the same time, from now on, legislation contains no requirements regarding the higher education specialization. Furthermore, the chairman of the bank’s executive boardmust have at least 5 years of experience in the banking and/or financial sector, in particular in managerial posts – at least 3 years, and members of an executive board – experience in banking and/or financial sector of at least 3 years in total.

Legislation provides that persons running for the positions of chairman and members of an executive board are to be agreed upon with the NBU. Moreover, it is obligatory that the chairman of the Executive Board is interviewed by the NBU, and it is mandatory that members of the Executive Board will be both interviewed and tested.

A reminder that when forming the corporate governance structure in a bank, in addition to the requirements of effective legislation, banks must be guided by Corporate Governance Principles for banks of the Basel Committee on Banking Supervision of July 8, 2015.

Disclosure of information

Law No. 2210 introduced a number of amendments to the Law on Securities and the Stock Market, providing from now for an expanded scope of disclosure of annual information, sensitive information and a new obligation for banks – the disclosure of interim (quarterly) information. Particular attention should be given to management report, the disclosure of which is required as part of a bank’s annual and interim report.

This report must contain a reliable overview of a bank’s development and its performance for the reporting period, including a description of risks and uncertainties faced by the bank in its economic activities. Requirements of the management’s annual report must be subsequently developed by the NSSMC (the National Securities and Stock Market Commission), in the meantime the Law on Securities only contains a general description of the content of such a report.

It is worth mentioning that the report on corporate governance must be an integral part of annual management report. Moreover, a bank shall, as a financial institution, prepare a report pursuant to the requirements of the Law on Securities and Law “On Financial Services and State Regulation of Financial Services Market”. Furthermore, to verify certain provisions of the corporate governance report, a bank must engage the services of an auditor. As regards the interim management report, it must contain indications of important events that took place during the reporting period and their impact on the issuer’s interim financial statements, as well as a description of the main risks and uncertainties. At the same time, it is not entirely clear which events are deemed as important and which must be included in the report.

As of now, the NSSMC has not yet prepared all the necessary regulations for implementation of new legislative requirements. Therefore, it is not clear how issuers should act in this situation. The good news is that all joint stock companies shall disclose annual information for 2017 pursuant to the requirements of old legislation – i.e., to the extent and in accordance with the procedure in force before the changes came into effect. However, interim (quarterly) information for Q1 2018 must be disclosed taking into account new legislative requirements, including the interim management report, but using old software.

Conclusion

In summary, as we can see, legislation provides for a lot of changes for joint stock companies, and, as a result, banks will have to, inter alia, amend their articles of association/regulations and develop some new internal documents. A reminder that you still have time to do this by the end of the year. However, in any case, if a bank wants to increase its authorized capital, obtain a new license or other permits, or obtain proof of title to property, it will be able to perform the corresponding actions only after it has brought its articles of association and other internal documents into line with the Law on “On Joint Stock Companies”.

In general, the proposed changes should help to increase the level of transparency of corporate governance in PJSC as a whole and in banks belonging, in particular, to enterprises of public interest. Namely, such enterprises must disclose information on their activities, financial indicators and the state of corporate governance to the maximum extent possible. It will reduce risks for existing and potential investors and minimize any possible abusive practices by owners or company officers.

Sergiy Benedysiuk, Head of corporate and M&A

Anna Kremnova, senior associate, corporate and M&A

exclusively for  “Jurist & zakon” №13, 06.04.2018 – 12.04.2018