Crux (#03 March 2017)

Legislative Update

During the last month the UJBL editorial team has monitored recently adopted legislation and new initiatives. This month we asked for comment on draft laws on Amending the Criminal Procedural Code of Ukraine, On Anti-corruption Courts, a portion of changes to corporate legislation. We have examined the Intergovernmental Agreement On tax requirements for foreign accounts (FATCA) between Ukraine and the USA, and the recently ratified Agreement on Cooperation between Ukraine and Eurojust.

Ukrainian Finance Minister Oleksandr Danyliuk and US Ambassador to Ukraine Marie Yovanovitch signed an Intergovernmental Agreement to improve the performance of tax regulations and the application of the provisions of the US Law On Foreign Account Tax Compliance Act (FATCA) between Ukraine and the US. How may the adoption of this agreement affect business conditions in Ukraine?

Larysa Antoshchuk,
Head of the Tax Dispute Resolution Group, KPMG Ukraine

Despite a summary of all the pros and cons related to the signed Intergovernmental Agreement (IGA), this document is a rather expected and logical step forward towards so-called tax transparency, even if the latter contravenes the interests of certain multinational companies.

To be frank, our country is already ahead on certain FATCA requirements implementation, such as identification of beneficial owners and their data disclosure. It made our already bureaucratic relations with financial institutions even more complicated. The document burden for business is hardly likely to become lighter with IGA implementation, but rather become more complicated.

On the contrary, oversight bodies (and not only Ukrainian ones), are getting another tool for controlling financial flows in and out of the country. It would be rather optimistic to believe that the information obtained is to be used purely for the purposes of declared combating tax evasion, but not for increasing the degree of the state control over private business and investment initiatives.

One more optimistic forecast is that the IGA would not repeat the usual story of most international agreements of such type where Ukraine is already a party to they fully work in favor of the stronger and selectively in case of weaker. Isnt it a good time to change the one-way street on international agreement into the highway both parties will succeed. Sounds utopian, doesnt it?

Parliament ratified the Agreement on Cooperation between Ukraine and Eurojust. The corresponding agreement was signed on 27 June 2016 in Brussels. How can this agreement facilitate cooperation towards fighting organized crime and terrorism?

Valentyn Gvozdiy,

Managing Partner, GOLAW

The benefits from ratification of the Agreement on Cooperation between Ukraine and Eurojust are obvious.

The central idea of the Agreement is an opportunity to exchange information, which is at the disposal of the competent authorities of members of Eurojust.

It is no secret to anyone that in numerous cases the roots of organized criminality and terrorism go far beyond a single state. Criminals use schemes involving foreign companies in order to ensure the safety of their financial resources. In addition, the tips of criminal organizations are often located outside the state in which the activity is conducted.

Thus, cooperation with jurisdictions like Cyprus, Great Britain, Netherlands and others is a great advantage for national law-enforcement authorities.

However, we should not forget that the results of ratification of the Agreement depend directly on the competence and impartiality of the person who will be appointed Liaison Prosecutor to Eurojust.

The Law of Ukraine On Access to Construction, Transport and Power Engineering Facilities for the Development of Telecommunication Network (Draft No. 4159) has been adopted by Parliament. According to the Law, state agencies determine the methodology for determining access fees to infrastructure as well as access rules and requirements for arrangement of technical means of telecommunications on infrastructure units. What impact will this Law have on the activities of telecom providers?

Borys Karas,

Associate, Gramatskiy & Partners

Ukraines telecom sector has great business potential and takes a prominent position among the most attractive segments of market. However, a complicated legal system creates many obstacles that exacerbate the development of the IT industry. In recent years, the local and international business community has been requiring the Ukrainian Parliament to take radical steps aimed at establishing uniform standards of business conduct.

On 7 February 2017, the Verkhovna Rada adopted the Law On Access to Construction, Transport and Power Engineering Facilities for the Development of the Telecommunication Network. The Law has been designed to simplify the procedure for obtaining access for operators and providers to the civil and transport infrastructure.

The key elements of the Law are as follows:

sets out the powers of state bodies with respect to establishing a model of fees calculation for access to the telecom infrastructure facilities as well as types of payment for such access;

specifies the rights and obligations of individuals and legal entities owning infrastructure facilities;

determines the essential terms of an infrastructure access agreement.

If the Law is signed by President Poroshenko and comes into force, telecom market players will not have to pay unreasonable sums to infrastructure owners. They will also enjoy other benefits provided by the Law, particularly prohibition of groundless refusal to conclude an agreement for access to infrastructure facilities. Adoption of the Law brings Ukraine closer to successful implementation of EU Directives.

Although some provisions duplicate effective legislation, players on the telecom market welcome Parliaments decision to adopt the Law.

Parliament adopted Draft Law No. 5271 On Amendments to the Civil Procedure Code of Ukraine (regarding consideration of cases with a jury). How can these changes affect judicial proceedings?

Daria Korotchenko,

Associate, Trusted Advisors

Amendments to the Civil Procedure Code regarding trials with the participation of jurors will get a chance to change the procedures related to certain categories of cases. Such amendments, caused by the necessity to bring legislation in line with the Constitution, namely, Part 1 of Article 127, which provides jury participation in cases of certain categories, such as: renewal capacity, adoption, the provision of psychiatric care via compulsory order, etc., and not as it was before, by lay judges.

Planned amendments are a forced and desperate measure and it is not surprising that the above-mentioned law will apply to the proceedings that were opened before its entry into force, as for today, the courts have no ability to examine cases relating to the restriction, renewal capacity, adoption, the provision of mental health assistance under compulsion, etc., and strike out the proceedings due to non-compliance of the court composition requirements stated in the Constitution.

However, the issue is not only to prescribe the need for jury participation in certain types of cases, but also to develop an effective mechanism for their work, because the primary function of lay judges is fundamentally different from jury service and, in my opinion, legislator did not just come to the conclusion of the advisability of replacing a popular jury.

The Resolution of the National Bank of Ukraine of 7 February 2017 No. 7, which came into force on 9 February, softened the requirements for the purchase of foreign currency by banks on the interbank foreign exchange market. How can these changes affect banking activity and the market, as such?

Dmytro Gron,

Senior Associate, N&D law firm

The National Bank of Ukraine softens restrictions on purchase of foreign currency by banks.

On 7 February 2017 the Board of the National Bank of Ukraine (the NBU) adopted Resolution No. 7 (the Resolution) amending the effective Resolution of the Board of the National Bank of Ukraine No. 410 as of 13 December 2016 (providing for numerous restrictions relating to currency purchase and transfer outside Ukraine).

The Resolution came into effect on 9 February 2017.

In particular, it provides for increasing the existing limits on purchase of foreign currency by banks a factor of five, from 0.1% to 0.5% of their regulatory capital. Such increase was made in line with a new currency regulation concept aimed at currency regulation liberalization presented by the NBU in December 2016.

As before, existing limits on the purchase of foreign currency shall not apply to swap operations, purchase of foreign currency transferred by foreign investors for increase the banks fixed capital as well as currency exchange operations with individuals.

According to the NBU, the rise in limits shall provide the banks with more extensive opportunities to manage their currency position. In addition, this will allow the market to conduct trade more actively and find a balance. The NBU considers the Resolutions adoption as a balanced decision, which shall not result in negative consequences for the countrys currency market.

On 3 February 2017 Draft Law No. 6027 On Amendments to Certain Legislative Acts of Ukraine regarding Increasing Trust between Banks and their Customers was registered in Parliament. How do you assess this initiative? How may its adoption affect lending risks?

Nickolas Likhachov,

Counsel, Head of M&A, Banking and Finance, Spenser & Kauffmann

At the beginning of February Draft Law No. 6027 was submitted to the Verkhovna Rada. MPs propose to make amendments to several legislative acts, including the Laws On Banks and Banking, On Mortgage, and the Civil Code of Ukraine.

This Draft will allow better defending of one of the most important constitutional rights, the right to property. Due to the existence of different legal loopholes, some debtors of banks use schemes to avoid repayment of loans or the relevant legal responsibility.

The Draft proposes to introduce amendments regarding the institute of bail (for example, provisions about responsibility of surety, limitation of actions, cancelation of a right of pledge), introduces mechanisms of a floating bank interest rate and methods of alternative dispute resolution, which potentially would reduce the risks of illegal alienation of property. These measures will create instruments for better protection of property rights, lowering credit value and encouraging investment.

Nonetheless, some amendments, for example, an opportunity to receive a credit card under power of attorney instead of the cardholder might be used as another instrument for machinations.

Besides, the Draft excludes provisions regarding the definition of a maximum amount of a bank interest rate from the Civil Code, while applying a floating bank interest rate, which might untie the hands of banks and would provide an opportunity to manipulate their strong position.

Generally, the Draft seems to fill some legislative gaps, but also reveals to us certain new ones.

Draft Law No. 6010 On Simplifying the Procedure for Capitalization and Reorganization of Banks, envisages a reduction in the terms of document consideration and optimizes banks capitalization and restructuring procedure by merger, and resolves issues of bank activity termination without liquidation of the legal entity. How could this impact the banking sector?

Ihor Olekhov,

Partner, Baker McKenzie

On 1 February 2017 a group of MPs from the Financial Policy and Banking Committee of the Verkhovna Rada registered new Daft Law No.6010 On Simplifying the Procedure for Capitalization and Reorganization of Banks (the Simple Reorganization Law). The purported purpose of the Simple Reorganization Law is to set up a simplified mechanism for increasing the equity capital of commercial banks, either by means of new equity contributions or by virtue of merging commercial banks. The Simple Reorganization Law also provides for the possibility for commercial banks that fail to meet the new regulatory requirements to terminate their activities without liquidizing their status as a legal entity.

The need to simplify the capital increase process for most commercial banks in Ukraine arises from the Law of Ukraine No. 1586-VII On Amending Certain Laws of Ukraine to Avoid Negative Affect on the Stability of the Banking System dated 4 July 2014. This piece of legislation was adopted with the purpose of averting the meltdown of the banking system upon a recommendation from the IMF and introduced a 10-year period for gradual increase in the capital of commercial banks in Ukraine from UAH 120 million to UAH 500 million.

In pursuance of the IMF program, the NBU implemented an ambitious program for recapitalizing commercial banks and set a deadline of January 2017 for increasing the regulatory capital of smaller banks to a minimum of UAH 300 million. Following active discussion of the recapitalization plans with smaller banks, the deadline was moved to the middle of 2017 and many smaller and mid-sized banks are now racing against time to implement their recapitalization schedules. These measures are likely to improve the viability of many smaller and mid-sized banks and to ensure their survival in case of further deterioration of market conditions.

In many respects, the measures of the National Bank of Ukraine and those set out in the Simple Reorganization Law to streamline the capitalization and reorganization of commercial banks were long overdue. The situation in the banking sector is still fairly complicated. The restrictive measures were aimed principally at improving the liquidity position of commercial banks in order to protect the interests of depositors and other creditors of commercial banks. More than 80 commercial banks were regarded as insolvent over a period of slightly more than two years, and there are potentially a number of smaller and mid-sized commercial banks that may still be in the pipeline for insolvency.

The cleaning up of the banking sector had been expected for some time and the critical economic situation in Ukraine in 2014-2015 triggered mass insolvencies of commercial banks. In fact, the NBU has no choice but to implement aggressive steps to restructure and recapitalize commercial banks to save the Ukrainian banking sector from complete meltdown.

The banking community should welcome the Simple Reorganization Law because an expedited capital increase or a merger with another bank remains the most reliable means to increase the reliability of commercial banks at a time of scarcity of Tier I capital for Ukrainian banks. Such simplification and acceleration of the capitalization and mergers of commercial banks could restore the credibility in the Ukrainian banking sector and should incentivize investors and depositors of Ukrainian banks.

At the same time, the method chosen by the MPs for simplifying and accelerating the capitalization and mergers of commercial banks in the Simple Reorganization Law appears to have a significant number of legal deficiencies. The expedited method does not resolve all the legal issues encountered by commercial banks during a capital increase or merger process. Such a method merely imposes shortened 3-day periods for the National Bank of Ukraine, the Antimonopoly Committee of Ukraine and the National Securities Commission to approve the relevant steps. The method repeats the same expedited procedures established by the Law of Ukraine No. 78 On Measures to Streamline Bank Capitalization and Restructuring, which was valid until 1 January 2017 and which had been shown to be problematic to implement in practice. The Simple Reorganization Law extends the same expedited method of settling the regulatory issues until 1 August 2020.

In brief, the Simple Reorganization Law attempts to extend the extraordinary situation with the capital increase or merger processes of commercial banks until 1 August 2020. The Simple Reorganization Law neither resolves the deficiencies of these procedures nor simplifies the procedures in a manner that would make doing business for commercial banks easier.

The banking and legal communities (including the author of this note) have in the past voiced several ideas to simplify the capital increase or merger process of commercial banks. If the Simple Reorganization Law were to permit commercial banks (i) to be reorganized and exist in the form of limited liability companies or any other type of company chosen by shareholders, and (ii) to have a limited banking license for corporate customers only, wealth management or similar specialized banking services, without the right to collect private deposits, most of the issues that the Simple Reorganization Law is attempting to resolve temporarily could be resolved permanently.

Draft Law No. 4470 On Amendments to Certain Legislative Acts of Ukraine concerning Corporate Contracts proposed introducing the institute of a corporate contract. How may its adoption affect relations between shareholders of the companies?

Yevgen German,

Associate, AEQUO

We would like to emphasize that current court jurisprudence with relation to shareholders agreements (SHAs) prohibits conclusion of the SHAs that defer from the provisions of Ukrainian corporate law or is governed by any foreign law.

Should Draft Law No. 4470 be adopted, Ukrainian companies would receive a number of effective instruments that may be used in corporate governance.

Hence, we do not expect many Ukrainian companies to immediately execute SHAs under Ukrainian law to enjoy their benefits.

It will still take some time to earn the trust of business that now concludes SHAs under English law at the level of foreign holding companies.

Under the Draft, shareholders will be able to regulate corporate governance issues at their own discretion in the SHA in particular, ownership and voting rights of the shares in the company, restrictions on transferring shares, pre-emption rights and rights of first refusal in relation to any shares, tag-along and drag-along rights, minority protection provisions, provisions for the resolution of any future disputes between shareholders, including deadlock provisions.

The Draft Law introduces controlling mechanisms ensuring proper performance of the SHA by its parties.

The Draft Law proposes to provide additional support with non-revocable powers of attorney, right to challenging any agreement entered by any shareholder breaching SHA provisions.

Draft Law No. 2302a-d On Amendments to Some Legislative Acts of Ukraine on Improving Corporate Governance in Joint Stock Companies proposed introducing a mechanism that require the sale (squeeze-out) and purchase (sell-out) of shares, which constitute 5% or less of the companys shares. How should corporate governance display adoption of these rules in joint stock companies?

Oles Kvyat,

Counsel, Asters

Adoption of Draft law No.2302a-d in the version that passed the first reading of the Parliament should no doubt become a breakthrough in the sphere of joint stock companies (JSCs) corporate governance.

It is obvious that in JSCs where 95% or more shares are held by one shareholder (or several shareholders acting jointly), the shares of minority shareholders become de facto non-voting. Of course, in most cases such minority shareholders are aware of that and, therefore, they prefer becoming permanent foot voters not participating in corporate life of the company. Moreover, in many cases such minority shareholdings are used to impede JSCs activities. For example, by greenmailing or frivolously challenging corporate actions/decisions.

That said, the introduction of the squeeze-out mechanism should inter alia help to reduce risks of raider attacks and various frivolous actions by unscrupulous minority shareholders who do not participate in JSCs governance, ensure more effective corporate governance and reduce costs associated therewith. On the other hand, there is a corresponding minority shareholders right of sell-out. Sell-out will provide 5% or less shareholders, who do not support the way of the companys doing business as set by a dominant majority shareholder or who otherwise no longer wish to stay with the company, with an opportunity to leave the company and receive fair compensation for doing so.

It should also be noted that the squeeze-out mechanism, in addition to its main purpose, may indirectly help JSCs to get rid of sleeping shareholders which became a real problem that still remains to be unsolved by many JSCs. Draft Law No. 5419 on Amendments to Certain Legislative Acts of Ukraine regarding Publicity and Preventing Abuses in the Registration and Circulation of Trademarks for Goods and Services, as well as Protection and Creation Conditions for the Realization of their Respective Owners Rights gained broad publicity in professional discussions. What are your views on the Draft? How may this initiative affect the protection of trademark owners rights?

Oleksandr Doroshenko,

Deputy Director for Forensics Examination of the Intellectual Property Research Institute of the National Academy of Law Sciences of Ukraine, Forensic Expert

In our view, Draft Law of Ukraine No.5419 conflicts with the interests of citizens of Ukraine and its adoption would cause significant economic losses to the state and worsen the investment climate in the country because of the following.

Among other things, sub-clause 9 of the Draft Law introduces the following changes to paragraph 4 clause 6 Article 16 of the Law: use of a mark for a product introduced under this mark into civil circulation in Ukraine by the owner of rights to a mark for products and services or with its consent, provided that the said owner has no reasonable grounds to prohibit such use in view of subsequent distribution of products, particularly in the event of changes or deterioration of a product after its introduction into civil circulation, except as otherwise provided by the law. In other words changes proposed establish the so-called national principle of exhaustion of rights rather than an international one, which is actually provided by current legislation. The Association Agreement between Ukraine and the EU does not require introduction of any such changes to the legislation of Ukraine on protection of rights to marks for products and services. Moreover, Article 160 of the Association Agreement sets out the principle of free establishing of own exhaustion of intellectual property rights regime, including the international one, by taking into account provisions of the Agreement on trade-related aspects of intellectual property rights.

Currently, based on the wording of the said paragraph in the current Law, the applicability of the principle of exhaustion of rights to a mark in Ukraine does not depend on the fact in which country the first introduction of a product into civil circulation took place. The right to a mark is considered as exhausted by reason of introduction of marked products in circulation in any country of the world by the owner (or with its consent). The international principle of exhaustion of rights promotes international trade if it is carried out without infringement of intellectual property rights to trademarks (namely, if products are not counterfeit).

Given the fact that the change in approach to the principle of exhaustion of rights to marks will directly affect access of original products to the Ukrainian market and opportunities of citizens of Ukraine to buy these products at competitive prices, introduction of such a change should be carefully weighed and, therefore, requires appropriate social and economic substantiation. Introduction of the principle of national exhaustion of rights shall especially severely affect those market segments where imported products amount to a majority of turnover, for example, the auto parts market.

At the same time, the government submitted to Parliament Draft Law No.5699 On Amendments to Some Legislative Acts of Ukraine concerning Improvement of Legal Protection of Intellectual (Industrial) Property, dated 23 January 2017, which provides a comprehensive approach to improving protection of rights to trademarks on the basis of requirements of the Association Agreement between Ukraine and the EU, relevant acts of EU law and proposals to the EU Twinning Project Improvement of legal availability and protection of intellectual property rights in Ukraine.

Draft Law No.5490 On Amendments to the Criminal Procedural Code of Ukraine (regarding improvement of mechanisms to secure the tasks of a criminal proceeding) has been registered in Parliament. Its main aim is to improve the provisions of current legislation, which now enable criminal liability to be avoided by persons that have committed very serious crimes in organized groups and criminal organizations. How would you comment on this initiative?

Kateryna Gupalo,

Partner, Arzinger

The explanatory note to Draft Law No. 5490 dated 6 December makes us believe that the current Criminal Procedural Code of Ukraine (the CPCU) fails to ensure the inevitability of punishment for an offence, violates the right of the parties to a trial to a fair hearing. Let us examine whether the Draft actually eliminates the flaws above.

Among the novelties, the following provisions of the Draft shall focus on:

Increased length of a pre-trial investigation from 12 to 18 months for criminal proceedings where a person is charged with a particularly serious crime, or involving a person under a special pre-trial investigation.

Possibility of detention for up to 18 months. This option shall become available for criminal proceedings regarding particularly serious crimes committed by an organized group or a criminal organization or regarding particularly complex criminal proceedings.

At the same time, the authors of this Draft have not specified the criteria to classify a criminal proceeding as particularly complex. Therefore, it remains exclusively at the discretion of the defense party or the investigative judge.

A warrant to take into custody for bringing a person to court becomes practically unlimited in time. Thus, the Drafts authors have proposed to replace the current 6-month validity of the respective order with the fact of voluntarily appearance of a suspect/accused.

There are many other novelties in the Draft Law. Still, even the above provisions are enough to weaken the position of a suspect/accused compared with the CPCUs current version.

The Verkhovna Rada Draft Law No. 4999 On Amendments to the Criminal Code of Ukraine (regarding introduction of liability for provocation of crime) has been registered in Parliament. What changes should be expected with the adoption of this Draft Law?

Vyacheslav Krahlevych,

Partner, FCLEX

This Draft Law proposes to amend Article 31 of the Criminal Code of Ukraine, namely, not to recognize as voluntary refusal of the organizer or enticer the prevention of crime or timely notice given by them to the appropriate public authorities of a crime being prepared or committed, if in doing so the aforesaid persons tried to reach the provocative goal of revealing another accomplice or causing tangibles or intangible damage to them. It is also proposed to introduce liability for the provocation of a crime by a law-enforcement officer.

On the one hand, this novelty complies with the practice of the European Court of Human Rights (ECHR), which is the source of law in Ukraine. Thus, the ECHR has repeatedly emphasized that the provocation of a crime with a view to revealing it is contrary to para 1, Article 6 of the European Convention on Human Rights.

However, also according to the Courts practice, use of special methods of investigation particularly informer methods must not by itself violate the right to a fair trial. The risk of enticement by police officers, which is caused by these methods, implies that their use must be strictly regulated.

Therefore, for the purpose of effective law-enforcement, the law should clearly define the concept and the procedure for use of informer methods.

Draft Law No. 6011 On Anti-corruption Courts has been registered in Parliament. The Draft defines the system of instances of anti-corruption courts, requirements for judges and specifics of their selection, and also regulates the formation and functioning of anti-corruption courts apparatus. How would you comment on this initiative?

Elena Pertsova,

Attorney at law, Head of Dispute Resolution, Pavlenko Legal Group

Draft Law No. 6011 On Anti-corruption Courts evokes mixed feelings.

On the one hand, adoption of this law is subject to the requirements of the Law of Ukraine On the Judicial System and the Status of Judges.

On the other hand, the need for such an anti-corruption court itself still sparks debate in professional circles.

The controversial nature of this issue is supported by the text of Draft Law No. 6011. In particular, the issue here is the procedure of election and appointment of judges to the anti-corruption court. Thus, the Draft Law stipulates that the judges to the mentioned court shall be reviewed and elected by a Special Commission consisting of 9 persons. In its turn, the Commission shall include 3 persons appointed by the President, 3 persons appointed by the Verkhovna Rada, and 3 more by the Ministry of Justice.

This approach was testimony of possible initial politicizing of Commission members and, respectively, the judges, who shall be elected by such Commission for their work in the anti-corruption court. Thus, Ukraine risks gaining a new biased court that is supposed to judge those people who have created it.

The existence of the appeal chamber at the Highest Anti-Corruption Court, which, despite its name, is a court of first instance, is also surprising. As practice shows, group solidarity among judges is a common occurrence, and the judges shall hardly cancel out the judgments of their colleagues that were adopted within the same court.

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