OECD, Third Eurasian Round Table on Corporate Governance, Kyiv, Ukraine, April 17-18, 2002 CASE STUDY THE RIGHT OF A SHAREHOLDER TO BE INFORMED AND THE RIGHT TO BE REPRESENTED (an example of two court cases) By Ms. Vladyslava Ryabota International Finance Corporation

OECD, Third Eurasian Round Table on Corporate Governance, Kyiv, Ukraine, April 17-18, 2002 DESCRIPTION OF THE SITUATION A Joint Stock Company in Luhans’k oblast A shareholder, dissatisfied with the decisions of a shareholders’ meeting, brought an action to invalidate the meeting and won the case

OECD, Third Eurasian Round Table on Corporate Governance, Kyiv, Ukraine, April 17-18, 2002 BRIEFLY ABOUT THE MEETING The shareholders’ meeting was conducted in March, 2000 Quorum was – 74,5% Representatives of the Securities Commission were present at the registration There were no violations reported by the Securities Commission representatives

OECD, Third Eurasian Round Table on Corporate Governance, Kyiv, Ukraine, April 17-18, 2002 DECISIONS OF THE MEETING Supervisory Board elected Changes to the charter adopted (the first since 1996!!!) 11 by-laws adopted

OECD, Third Eurasian Round Table on Corporate Governance, Kyiv, Ukraine, April 17-18, 2002 GROUNDS FOR THE SHAREHOLDER’S ACTION The shareholder was not personally informed about the meeting A general notification was not published in the national press Improperly issued proxies were registered at the meeting

OECD, Third Eurasian Round Table on Corporate Governance, Kyiv, Ukraine, April 17-18, 2002 FACTS, ESTABLISHED BY THE COURT There was no proof of personal notification and publication of a notice Proxies were issued by the management board improperly. Some of the violations were technical (a date was written in numbers) and some – substantial (documents were signed in the absence of the shareholders or not by the shareholders at all, etc.)

OECD, Third Eurasian Round Table on Corporate Governance, Kyiv, Ukraine, April 17-18, 2002 COURT DECISION All proxies (that in total constituted 37% of the votes) were recognized as invalid The shareholders’ meeting was recognized as invalid due to the absence of a quorum (74,5 – 37 = 37,5) All decisions of that meeting were nullified

OECD, Third Eurasian Round Table on Corporate Governance, Kyiv, Ukraine, April 17-18, 2002 THE CASE ANALYSIS The court decision was correct in principle, but… There were no regulations for the issuance of proxies by the management board, hence, the management board might not have realized that it violated the rights of shareholders The court remained silent on the issue regarding the lack of notification of the shareholder.... A chance decision or a precedent?

OECD, Third Eurasian Round Table on Corporate Governance, Kyiv, Ukraine, April 17-18, 2002 AT THE SAME TIME SOMEWHERE IN ZHYTOMYR A shareholder, holding a 25% stake, brought an action to invalidate decisions of a shareholders’ meeting The only grounds for the suit was the lack of personal notification and publication in the press The shareholder lost the case

OECD, Third Eurasian Round Table on Corporate Governance, Kyiv, Ukraine, April 17-18, 2002 THE COURT GAVE THE FOLLOWING REASONS FOR ITS DESICION: Considering that decisions of the meeting did not violate any of the shareholder’s rights (!!!), INDIVIDUAL VIOLATIONS OF TECHNICAL PROCEDURES cannot be a justification to invalidate such decisions

OECD, Third Eurasian Round Table on Corporate Governance, Kyiv, Ukraine, April 17-18, 2002 WHY IT HAPPENED? In Ukraine, there is no special legislation for the regulation of both issues – issuance of proxies by the management board and the consequences of not providing notice of a meeting, and, hence: in both situations the court decided these cases by analogy, but did not consider the specifics of corporate relations

OECD, Third Eurasian Round Table on Corporate Governance, Kyiv, Ukraine, April 17-18, 2002 SOLUTION Development of special legislation (in particular, adoption of a new Law “On Joint Stock Companies”) Implementation of National Corporate Governance Principles Education

OECD, Third Eurasian Round Table on Corporate Governance, Kyiv, Ukraine, April 17-18, 2002 For additional information, please contact: International Finance Corporation Ukraine Corporate Development Project 4 Bohomoltsya Street Tel. (380-44)