This content is from: Local Insights

Bank reorganization

In an attempt to further develop the Ukrainian banking system and better ensure its transparency and security for investors, the Ukrainian parliament has introduced new requirements for the organizational form of Ukrainian banks. Adopted on September 14 2006, they are effective from October 4 2006.

Under previous legislation, banks in Ukraine could be created in the form of a limited liability company (LLC), an open joint stock company (OJSC) or a closed joint stock company (CJSC). The new law requires that a bank may only operate as either an OJSC or a cooperative bank. (The concept of the cooperative bank is new and not yet developed.) Existing banks that have an organizational form that does not comply with the new law have three years to reorganize into either an OJSC or a cooperative bank.

In the past, some banks were founded as LLCs or CJSCs to benefit from certain advantages, such as less burdensome reporting requirements and a smaller risk of hostile takeover. After reorganizing as OJSCs or cooperative banks, these banks will have to file and publish supplemental financial reports aimed at better protecting investors. It is intended that this greater transparency will benefit the banking sector as a whole.

Shareholders of certain banks might now want to reconsider their approach to protecting their interests against takeovers because, unlike LLCs and CJSCs, shareholders of OJSCs have pre-emptive rights only for additional share issuances, and not for all share sales by other shareholders. Protections from takeovers are not so easy to arrange for an OJSC, in particular because there are certain difficulties with the enforceability under Ukrainian law of shareholders' agreements providing for additional pre-emptive rights and other such protections.

Out of the 165 banks licensed in Ukraine, 41 banks, including Prominvestbank, Privatbank and PUMB, operate as CJSCs, and 32 banks (mostly the smaller ones) are LLCs. Now, all 73 of these banks must be reorganized.

The task of changing the organizational form of a company to comply with this new statutory requirement should be straightforward, but in reality this is not so. Ukrainian law does not provide a simplified procedure for changing the organizational form of legal entities. Instead, a whole range of provisions created to govern more complex transactions, such as reorganizations, mergers, divestitures and even liquidations, have to be complied with. This is because, under Ukrainian law, the company that is changing its corporate form is deemed to be terminated and a new entity created.

So many apparently irrelevant formalities must be complied with, such as entering changes into various state registers and setting a period for the submission of creditors' claims after official publication of a notice on the termination of the existing entity. The process could take at least six months for an ordinary company.

For a licensed bank, the procedure to change its corporate form is particularly complicated and burdensome. As of yet, there is no special procedure for the reorganization of the corporate form of banks (including under the new organizational form requirement), other than the outdated Reorganization Guidelines issued in 2000 by the National Bank of Ukraine (the NBU), which do not correspond to Ukrainian legislation presently in effect. The new law on the organizational form for banks gives the NBU three months, in principle, to bring the NBU's regulations into compliance with the new form requirement. Hopefully, the new NBU regulations, when issued, will clarify and simplify the reorganization procedure and make the transition easier for the 73 banks that now have to change.

Bate C Toms
Zoya Milavanovna

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