FOR THE RECORD: Memorandum on the capital market in Ukraine (04/19/98)

FOR THE RECORD: Memorandum on the capital market in Ukraine

Memorandum of Understanding on the Special Task Force on Corporate Governance and Shareholder Rights signed on April 8 in Kyiv by Serhii Tyhypko, vice prime minister of Ukraine on economic issues, and Ambassador Richard Morningstar, special advisor to the U.S. president and secretary of state on assistance to the newly independent states. The text was released by the Embassy of Ukraine in Washington.

The Government of Ukraine (GOU) and the United States Government (USG) hereby affirm their commitment to develop an open, competitive, private-sector, and well-regulated capital market in Ukraine. Towards that end, the GOU will create a Special Task Force on Corporate Governance and Shareholders Rights.

The Special Task Force will include participants in equal members from the GOU on the one hand and the U.S. Embassy and donor community on the other. GOU participants will include the vice prime minister for economic issues, National Security and Defense Council, the Securities and Stock Exchange State Commission (SSESC), the National Agency of Ukraine for Development and European Integration and the Ministry of Justice, and others as appropriate. Participants from the donor community shall be invited to the task force including the World Bank, USAID, EU TACIS and the International Finance Corporation, and others as appropriate. Also, representatives from the private sector including broker-dealers shall be included into the task force. An initial meeting of the Special Task Force will be held on April 9.

The Special Task Force will undertake to:

establish the objectives and an agenda of tasks needed to institute sound corporate governance in Ukraine, to be administered by Ukraine's Securities Commission, that will properly protect shareholder rights and improve the investment climate of the country; it is agreed that the Securities Commission, with the support of its consultants, shall draft the agenda for the consideration of the Task Force;
set a schedule for achieving the objectives and fulfilling the tasks enunciated above;
review and comment on specific shareholder cases that indicate problems with the current corporate governance program and advise on practical steps that can be taken to address such cases in a way that is consistent with open, competitive, transparent capital markets;
advise on legislation and regulation requirements to promote shareholder protections and a healthy investment climate;
advise on appropriate enforcement mechanism needed to achieve the corporate governance objectives enunciated by the Task Force.

It is envisaged that through such actions Ukrainian and foreign investors will have greater confidence investing in Ukraine. Thus, shares of Ukrainian companies will trade at higher values in the securities market. Ukrainian companies will be able to more readily raise capital. And, investors will be more willing to buy Ukrainian companies in the government's privatization program increasing the revenues to the GOU from these sales.

The United States Government is committed to support the work of the task force through technical assistance to Ukraine's SSESC provided by Financial Markets International (FMI). In particular, FMI will help the commission draft a joint stock company law and develop new corporate governance program including the implementation of "mode" corporate governance pilot projects. The USG will assist the commission to introduce international accounting standards in its corporate disclosure program. Finally, the USG will assist the commission [to] expand the functionality and capacity of its public information program on shareholder rights.

As the task force initiates its work, priority attention will be given to several key legislative and enforcement items. These include:

adoption by the Securities Commission of regulations, based on current law, which will provide further shareholder protections (e.g., authority to cancel share issuances based on false information, ensuring reorganizations are conducted at fair market value, procedural protections against "squeeze-outs");
passage of the joint stock company law which will provide comprehensive shareholder rights (e.g., independent appraisals when shareholder disputes occur on share values, protections against insider transactions, shareholder approvals for major transactions, greater authority to the commission in enforcing corporate governance matters);
improvement in the commission's enforcement program, including the adoption of anti-fraud provisions and institution of an in-depth training program on enforcement techniques.

The task force will meet periodically and shall have the authority to submit recommendations to the Presidential Administration, the Cabinet of Ministers and the SSESC.