• Volodymyr Vorobiov

    Managing Partner, Quantum Attorneys

  • Oleksandr Vygovskyy

    Partner, Quantum Attorneys

Quantum Attorneys


9-A Pokrovska Street, Office 5,

Kyiv, 04070, Ukraine

E-mail: office@quantum-attorneys.com

Web-site: www.quantum-attorneys.com

Quantum Attorneys is a full-service law firm based in Kyiv, which advises corporate clients, start-ups, financial institutions, private clients and government bodies.

We advise clients in all areas of business law and across key sectors with a particular focus on innovation. Our team is driven by client success and always aim to provide the best legal solutions, while remaining innovative, flexible and compliant.

Our partners and lawyers are qualified attorneys with high academic credentials from Wes-tern universities and extensive work experience gained at international law firms.

Capital Markets in Ukraine: Keeping Abreast of the Times

There is every reason to believe that this year may witness a real breakthrough of the Ukrainian stock market, especially for financial debt instruments if contemplated revolutionary amendments are introduced to national legislation. It is no secret that current problems related to the launch of Eurobonds projects, one of the most important mechanisms for raising long-term finance, by Ukrainian issuers in the international market, are caused in the main by drawbacks in the domestic legal field. In particular, we should note the absence of legal rules providing for comprehensive protection of the rights and interests of bondholders, including absence of legislative recognition of the bondholders’ meetings and their resolutions, as well as powers of bondholders’ trustee appointed by the issuer for the benefit of all bondholders. The validity and enforceability of rights created under the English-based concept of trust may appear highly tentative and doubtful. Ukrainian legal acts are also silent on the events of default under such financial instruments which may entail their acceleration.

It is no surprise that up to date Ukrainian corporate bonds issuers often preferred the structuring of their deals via the issue of loan participation notes or credit-linked notes by a foreign SPV for efficient raising of capital in international financial markets. Under such schemes, funds obtained by the SPV (a formal issuer of notes) from international investors were transferred to Ukrainian borrowers in accordance with the loan agreement. Redemption of LPNs/CLNs and payment of interest to the ultimate noteholders were subject solely to repayment of the loan and accrued interest under the loan agreement. Potentially, the SPV platform could become a multi-faceted capital-raising hub making various issues of LPNs and providing underlying loans to borrowers from multiple jurisdictions. However, such schemes might appear to be ineffective in terms of protection of foreign investors, and this risk was starkly illustrated by the bail-in procedure following the nationalization of Privatbank in December 2016, which left investors in LPNs issued by its SPV with empty pockets and making frantic efforts to obtain justice both in Ukraine and abroad.

These legislative drawbacks may be eradicated in the short run by adoption of the Draft Law of Ukraine On Making Amendments to Certain Legal Acts of Ukraine Related to Simplification of Attraction of Investment and Introduction of New Financial Instruments (registration No. 2284 of 17 October 2019), which was recently adopted by the Verkhovna Rada of Ukraine in the first reading. Practical implementation of its provisions will harmonize the Ukrainian legal field with the best European regulatory practices related to debt capital-raising.

In particular, the Draft Law On Capital Markets (the Draft Law On Capital Markets) establishes bondholders’ meetings as the collective decision-making body formed for passing resolutions by a majority vote of bondholders on the most significant issues, such as waiver of acceleration of the bonds and calling an event of default, approval of changes to the prospectus and restructuring plans, conversion of debt into equity, election and removal of the administrator. These resolutions will be binding upon all the bondholders, even those who voted against them or did not participate in the voting. Such bondholders’ meetings will be convened by an issuer or bondholder(s) holding at least 10% of the total nominal value of the issue. The legislator has introduced an enhanced quorum in 75% of the total number of votes for bondholders’ meetings. If there is no such quorum, resolutions passed during such a meeting shall be void. Investors shall vote through the depository system of Ukraine using all or part of their bonds. This remote voting process lasting 10 business days will facilitate participation in the decision-making process by investors from various jurisdictions.

The Draft Law On Capital Markets also sets out the events of default, unless they are determined in the securities prospectus. An event of default may be called, in particular, if the issuer has delayed payment of any amount for more than 10 business days or has gone into bankruptcy, or if the issuer has caused severe losses to bondholders.

In international practice of Eurobonds issues the rights of individual bondholders to call default, accelerate the bonds and take action against the issuer in court are generally conferred on the bondholders’ trustee, who may exercise them on behalf of the bondholders as a group. Individual bondholders are not permitted to call default or demand acceleration of bonds. Only the trustee is conferred a power by the bond instrument to accelerate the bonds on the occurrence of default. In fact, majority bondholders can pass a resolution on acceleration or waiver of an event of default at bondholders’ meetings. By virtue of an express “no-action” clause bondholders are prohibited from taking any action in a court of law to enforce their rights to principal and interest under the bonds; only the trustee has a primary right to do so. Instead, bondholders acquire secondary rights to proceed in a court of law only where (i) the trustee has become bound to proceed against the issuer, and (ii) the trustee has failed to bring proceedings in court within a reasonable time.

Since the concept of trust and trustee is extraneous for continental legal system (including Ukraine), Ukrainian legislators envisaged an administrator as a representative of the interests of bondholders being quite akin to the classic bondholders’ trustee. The issuer will be entitled to appoint such administrator, which is a financial institution or other qualified legal entity (otherwise it will be elected by the bondholders’ meeting). An agreement on appointment of such an administrator will be concluded by the issuer and the selected administrator for the benefit of the bondholders provided for a fee payable to the administrator by the issuer. In fact, no trust will be established in this case: the administrator will provide its professional services under the agreement which can be terminated only upon the consent of the bondholders’ meeting. He must act bona fide in the best interests of the bondholders and can be a party in court disputes related to protection of the rights and interests of bondholders. Upon an event of default bondholders holding at least 25% of total nominal value of bonds can file a request to the administrator on calling default without convening a bondholders’ meeting. Unless the meeting has waived such acceleration, the administrator must submit a request on early redemption of the bonds to the issuer and exercise other actions related to acceleration.

Based on the foregoing, we can conclude that the Draft Law On Capital Markets, even in its present form, establishes an adequate and efficient system of protection of investors in the debt instruments of Ukrainian issuers and, therefore, lays the foundation for improving the capital-raising environment in Ukraine and its overall reputation among international investors.