In­vestors lobby for im­proved busi­ness cli­mate

The in­vest­ment and busi­ness com­mu­nity has a full set of de­mands for gov­ern­ment to adopt in or­der to spur the pri­vate sec­tor.

Kyiv Post Legal Quarterly - - Contents - By Bozhena Sheremeta

The drawn-out talks on cre­at­ing the ukrainian Ven­ture Cap­i­tal and Pri­vate Eq­uity As­so­ci­a­tion fi­nally ended in Novem­ber. The as­so­ci­a­tion’s goals, com­mit­tee struc­ture and elected board have been pub­lished.

The as­so­ci­a­tion’s Face­book page states that it is “ded­i­cated to at­tract­ing in­vestors and cre­at­ing one of the best in­vest­ment cli­mates.”

The group has its work cut out for it. The coun­try is among the world’s most cor­rupt ones and the hryv­nia has lost half its value this year as new for­eign di­rect in­vest­ment shrank to an es­ti­mated $2 bil­lion this year. Cu­mu­la­tive FDI in the na­tion hit a mea­ger $56.4 bil­lion last year.

Jaanika Mer­ilo, the or­ga­ni­za­tion’s ex­ec­u­tive direc­tor, is can­did about the fact that the changes won’t hap­pen overnight. The as­so­ci­a­tion is de­vel­op­ing a road map of 60 items for the gov­ern­ment of­fi­cials to fol­low closely.

“We want to ini­ti­ate new projects, not du­pli­cate old ones,” Mer­ilo ex­plains. “Our goal is to fo­cus on things which have re­ceived the least sup­port, pri­mar­ily – the cre­ation of a fa­vor­able in­vest­ment cli­mate. With war in the coun­try, the Ukrainian gov­ern­ment ob­vi­ously can­not raise enough funds to sup­port the in­vest­ment mar­ket, but it should at least try to re­duce in­tru­sive reg­u­la­tions.”

The group’s ini­tia­tives mainly fo­cus on in­tel­lec­tual prop­erty pro­tec­tion, rule of law, re­duc­ing cor­rup­tion, shrink­ing the bar­ri­ers for for­eign in­vest­ment and build­ing a healthy in­vest­ment in­fra­struc­ture.

With en­hanc­ing the in­vest­ment cli­mate a pri­or­ity, the group plans to stress en­force­ment of share­hold­ers’ agree­ment clauses to en­sure in­vestors have their rights pro­tected. An­other con­cern is con­vert­ing debt to eq­uity, for which there is no legal mech­a­nism in ukraine.

“There should be a bal­ance be­tween what the gov­ern­ment en­ables and what it re­stricts. For ex­am­ple, when there is a will to struc­ture the trans­ac­tion with a tag-along

clause, it can­not be legally im­ple­mented,” Mer­ilo says. “Just en­abling the main points of euro­pean Union leg­is­la­tion would be a sig­nif­i­cant step to­wards cre­at­ing a good in­vest­ment cli­mate.” Es­tab­lish­ing a fair and in­de­pen­dent ju­di­ciary is an­other pri­or­ity. Of­ten the rea­son in­vestors avoid or flee Ukraine is the lack of pro­tec­tion in court.

Ac­cord­ing to Mer­ilo, who is an “an­gel” in­vestor – some­one who aims to de­velop a mar­ket rather than profit from it – there is no sense in in­vest­ing with­out pro­tec­tion by law and courts.

Legal ex­perts say there is a lack of po­lit­i­cal will to im­prove the ju­di­ciary, one of the world’s worst ones.

An­driy Popko, se­nior part­ner at PLP Law Group, says that too many bu­reau­cratic hur­dles and the fail­ure of pub­licly listed com­pa­nies to dis­close their de­tailed fi­nan­cial trans­ac­tions also need to be ad­dressed.

“Con­sid­er­ing the fact that the re­cently pre­sented coali­tion agree­ment con­tains eight short points of two lines each ded­i­cated to in­cor­po­rat­ing in­ter­na­tional cor­po­rate law stan­dards into the Ukrainian leg­isla­tive sys­tem, I don’t think they re­ally care about it,” Popko says. “Six out of seven mem­bers of Na­tional Se­cu­ri­ties Com­mis­sion fall un­der the lus­tra­tion law. Ap­point­ing new mem­bers is the pres­i­dent’s task, so I doubt that changes will take place fast, be­cause he must keep his head in other more ur­gent mat­ters in the cur­rent sit­u­a­tion.”

Popko also be­lieves “sell-out” and “squeeze-out” clauses to pro­tect mi­nor­ity and ma­jor­ity share­hold­ers rights are a must. He ar­gues that the right to ap­point an in­de­pen­dent ex­ec­u­tive direc­tor and set a quota for mi­nor­ity share­hold­ers’ rep­re­sen­ta­tives in a com­pany’s su­per­vi­sory board should also be im­ple­mented in Ukraine’s cor­po­rate law.

Yaroslav Sverdlichenko, the head of cor­po­rate prac­tice at OMP, be­lieves that changes are un­likely to take place in the next six months. He says the rea­son for the slow progress is partly be­cause of long ne­go­ti­a­tions among in­vestors, par­lia­ment and the min­istries.

How­ever, Sverdlichenko re­mained cau­tiously op­ti­mistic that Dmytro Shymkiv, for­mer chief ex­ec­u­tive of­fi­cer of Mi­crosoft Ukraine and now deputy head off the Pres­i­dent Pres­i­dent’ss Ad­min­is­tra­tion, to­gether with many fresh par­lia­mentnt mem­bers, may even­tu­ally be able to push through the nec­es­sary leg­isla­tivesla­tive changes.

“Con­sid­er­ingg that the Pres­i­dent’s Ad­min­is­tra­tion n has joined the re­form process with Dmytro tro Shymkiv head­ing it, there is hope,” he said.

A key item on their agenda, ac­cord­ing to Sverdlichenko,ko, should be a reg­u­la­tion for buy­ing g and sell­ing cur­rency: “In­vestors must st have a clear idea of how to bring in n and with­draw in­vest­ments from maa coun­try. In terms of re­cent Na­tional Bank re­stric­tions, it is hard to freely buy and sell cur­rency at a real mar­ket rate.”

Dmytro Fe­doruk, cor­po­rate prac­tice ad­viser at Clif­ford Chance Ukraine, agrees that weak rule of law, non-trans­par­ent courts and cor­rup­tion are the key prob­lems. How­ever, he says re­stric­tions of in­vestors’ abil­ity to repa­tri­ate prof­its, the prohibition on use of for­eign law for share­hold­ers’ agree­ments, the dif­fi­culty in pro­tect­ing in­tel­lec­tual prop­erty rights and em­ploy­ment law is­sues are also re­lated con­cerns.

Anti-share di­lu­tion pro­vi­sions also have to be granted. Ac­cord­ing to Fe­doruk, there have been cases when share­hold­ers weren’t no­ti­fied of a share sub­scrip­tion. Their shareholding was di­luted with­out their knowl­edge. “Th­ese is­sues are much more fun­da­men­tal and they can­not be fixed sim­ply by mak­ing changes to law. Ob­vi­ously a deep cul­tural change and strong po­lit­i­cal will are re­quired to deal with them,” Fe­doruk says.

The Ukrainian Ven­ture Cap­i­tal and Pri­vate Eq­uity As­so­ci­a­tion is “ded­i­cated to at­tract­ing in­vestors and cre­at­ing one of the best in­vest­ment cli­mates.” The group has its work cut out as the na­tion’s cur­rency sinks and in­vestors shy away from Ukraine’s cor­rup­tion.

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