article by OLEKSANDR KOSHOVYI, Lawyer, economist, analyst, expert in the functioning of capital markets
Last week, the National securities and stock market commission (NSSMC) announced the forced alienation of shares of strategic enterprises, including PJSC "Ukrnafta", PJSC "Ukrtatnafta", JSC "Motor Sich", PrJSC "AvtoKrAZ", PrJSC Zaporizhtransformator", into state property.
The regulator noted: "The seized shares acquired the status of military property. Their management was transferred to the Ministry of Defense of Ukraine. At the end of the martial law, in accordance with the requirements of the law, those shares will be returned to the owners, or their value will be reimbursed."
The main questions that arise before this procedure: is this, actually, seizure, or alienation, or, maybe, nationalization, after all? Or maybe expropriation? Is it possible to appeal this decision in court, when? How should compensation amounts be assessed? In general, what does such a step look like from the investor's point of view and how will it affect the investment climate?
In any case, one should not count on investor loyalty, and it is worth realizing: every mistake of the state in this process will be used against it.
Let's start with the easiest things – terms. Different ones are heard: nationalization, alienation, seizure, expropriation. Confusion is added by the NSSMC. For example, it is not immediately clear why the regulator calls the shares "seized", since according to the law, seizure means "deprivation of state enterprises, state economic associations of the right of economic management or operational management of individually determined state property with the aim of transferring it for the needs of the state in the conditions of the legal regime of martial law or state of emergency". Well, let’s assume the regulator can sometimes "get confused in the terms". But the point is different.
The whole regime of the mentioned event is already full of legal uncertainty, why add it? By the way, Minister Oleksii Reznikov is right when he asks to adhere to legislative concepts, but, unfortunately, this does not solve the problems. According to the Law "On the Transfer, Compulsory Expropriation or Expropriation of Property under the Legal Regime of Martial Law or State of Emergency", referred to by state speakers, there are two concepts: alienation and seizure. The first one refers to private and communal property, the second – to state property. The concept of "nationalization" is not found there at all. Therefore, not nationalization, not seizure, but alienation. But this is only from the point of view of the national legislation.
The international legal aspect of the issue indicates that what happened falls under the definition of expropriation. Moreover, it may be qualified both as direct and as indirect - it is up to the investor and his protection tools. And when the question arises in investment arbitration, Ukraine will need to prove that such expropriation:
- was carried out for public purposes;
- was in accordance with the proper procedure;
- had a non-discriminatory nature;
- was accompanied by prompt and adequate compensation.
Yes, the concept of "investors" in relation to the shares of those enterprises whose shares were alienated (that is, created not by investors, but as a result of privatization), is quite conditional. Here, everyone understands everything, at least in Ukraine. But from the point of view of positive law, especially international law, they are exactly investors, and it is necessary to proceed from this context.
Regarding the alienation procedure. According to the requirements of the law, at first glance, everything here is more or less clear: the deed of alienation, delivered-accepted, signatures of the parties, done! But everything specified in the law is extremely difficult to implement in practice.
For example, the deed must be signed by the owner or his representative. In case of absence of the person from whom the property is alienated or seized, or his legal representative during the execution of the act of forced alienation or seizure of property, such act is drawn up without his participation. But, we apologize, where exactly? Who, when and in what way should announce their presence? And now let's imagine that it is not about a car, but about shares. How many owners are there? Hundreds? Where are they? Have they been notified? In a proper way? By whom? Are you familiar with the assessment? Who made it? It was almost impossible to gather the shareholders at these enterprises, even in the best of times.
So it turns out that the NSSMC itself drew up an act, passing a decision "on ensuring the conduct of depository transactions in the depository accounting system regarding the forced alienation of the shares of the specified companies into state ownership"? The right of state ownership of property arises from the date of signing the act. But was it signed exactly according to the form established by the Cabinet of Ministers? There are currently no answers to these questions. For investors who will feel their rights have been violated due to the violation of these procedures, the lack of clear answers only adds to the arguments for protection.
Regarding the return of shares. Let's put aside the formalities and assume that everything was done according to the procedure: the documents were drawn up, the prices were fixed, and the property was sold.
The regulator's statement that "upon the end of martial law, in accordance with the requirements of the law, those shares will be returned to the owners, or their value reimbursed" is very interesting. First of all, on which law is this conclusion, albeit variable (either-or), but imperative in both cases, based?
Shares are not redeemable by themselves. Answers to the question "who returns?" and "to whom are they returned?" are missing. The mentioned Law "On the Transfer, Compulsory Alienation or Seizure of Property under the Legal Regime of Martial Law or State of Emergency" says: "In the event that after the cancellation of the legal regime of martial law or a state of emergency, the property that was compulsorily alienated remains intact, and the former owner or a person authorized by him insists on the return of the property, such return shall be carried out in court."
Thus, the return of property (shares) occurs only at the request of the former owner. Without a demand for return, the state, if there are any unforeseen circumstances, cannot carry out reverse alienation, i.e. return the shares, and demand funds. Those who focus society's attention on such a possibility as the right of the state can and undoubtedly will be perceived as those who inflate the expectations of investors and thereby create legal consequences for claims for damages. In this case, the investor may choose not return but compensation, and its amount will depend on all circumstances: violation of the procedure, deterioration of the property, changes in the economic situation as a result of regulatory influence, etc. What will those who promise today to return the shares to the former owners say?
By the way, about the responsibility of performers. Someone has forgotten, and someone does not know, that the current regulator was formed by the fugitive Yanukovych in a way that directly violated Article 106 of the Constitution of Ukraine. But for some reason, the unconstitutional status of the regulator is only prolonged. Amendments to the Law "On Capital Markets and Organized Commodity Markets" were adopted within two minutes by Law No. 738-IX. And if you look closely at it, the text that was voted does not have section 4, which should have settled the question of validity in time. Without this section 4, which was inserted into the text no one knows when and by whom, the entire legislation on capital markets is still in doubt until the first appeal to the Constitutional Court. So, precisely in accordance with this legislation, the body, formed in an unconstitutional manner, actually alienated property in favor of the state, the value of which is practically impossible to determine in a transparent manner. By the way, in these cases, the state, that is, the budget, that is, all citizens of Ukraine, should be responsible for all mistakes or illegal decisions.
Value is the main thing
The words "assessment", "value" are indeed mentioned in the law. But didn't the state limit itself only to the formal legislative regulation of relations regarding compensation for taken property, without providing real rights of protection to those who are deprived of the right to property? Of course it did. And this cannot satisfy those who have been deprived of their shares. Is it enough to mention in the law that the assessment is carried out in the prescribed manner? Of course not. The investor is not satisfied with this and immediately provides arguments against alienation and for the protection of rights.
Remember the squeeze-out share pricing adventure? In short, evaluation of non-exchange-traded shares is a difficult and not always fair matter. Then the Grand Chamber of the Supreme Court, based on the results of consideration of the case No. 908/137/18, considering forced alienation of shares, noted that the provisions of the Convention on the Protection of Human Rights and Fundamental Freedoms of 1950, the Constitution of Ukraine and the Civil Code of Ukraine on the inviolability of property rights "entrust the state with positive obligations to ensure the inviolability of the right to private property and control over exceptional cases of deprivation of a person's right to property... Limiting the state's positive obligations only to the legislative regulation of property relations without proper control over their implementation can make it impossible for owners to exercise their rights, which will contradict the specified norms of the Constitution of Ukraine and the Convention".
However, at that time there was a whole layer of legislation on the side of the shareholders, even if it was not ideal. The currently proposed procedure for determining the value of shares is as follows: "in accordance with the procedure established by the legislation on valuation of property, property rights and professional valuation activities", or by state authorities, or by local self-government bodies "independently". This procedure a priori provides the investor who cares about his asset with tools for protection – it is practically impossible to assess the value of shares without violating the investor's rights. Since the time when the current prime minister declared the absence of a stock market in Ukraine and the desire to build it, nothing has changed, therefore, there is no market – no market value. But fair compensation can always appear. By the way, those statements of the prime minister will also be used by investors to their advantage, given the existing practice of dispute resolution.
So, with the passage of time, the acuteness of the issue will only increase. Despite the fact that the decision on alienation was made under the conditions of martial law, such decisions in terms of consequences obviously go far beyond the limits of martial law. This makes it possible to deploy various scenarios of the development of events. Especially considering the multi-layered nature of the relationship.
So does the end justify the means? From a purely economic point of view, government management of business is utopian in almost all cases. Experiments have all been carried out, and the results are known. The main thing is that the attempt to alienate shares does not become an attempt to cover other, real, intentions with high rhetoric.
The reasons for alienation of assets can obviously include the need to quickly use the capabilities of enterprises to meet the needs of the Ukrainian Armed Forces and state needs in the conditions of martial law, which cannot be implemented in any other way. Let's hope that those who made the decisions set these goals. But in view of our investment climate of the "far north", we must note that those who made this decision should have had solid concrete reasons for this, which far exceed the possible compensations and costs in the future.