Companies Going Closed
Big Ukrainian business is tired of never-ending corporate wars. Open (publicly held) companies are turning into closed (privately-held) ones on a mass scale. This enables a company to build an additional wall in the fortress that protects it from hostile encroachments. The law in effect from January 1 prohibits selling closed companies’ (CC) stock without the knowledge and consent of company shareholders. Being an open joint-stock company today is tantamount to displaying goods in a shop window during a bombing. Over the past few months, the Rivneazot, Ukrferri, Kyivoblenerho, Rivneenerho, and Borshchahivsky Farmkombinat companies have gone closed, while Ukrplastmash is still being reorganized. The main reason why companies go closed is as a rule the fear of being swallowed by a powerful industrial-financial group. There are four or five of these in this country today, and the high-income part of the economy is gradually being concentrated in these holding companies.
Stock market experts comment that this tendency was to be expected. “A close company is a form of defense,” says Vadym Hryb, president of the Tekt Investment Company, “because corporate conflicts is one of the most burning problems of today. I think this tendency will be on the rise in the next couple of years. The law is imperfect, there is no corporate culture or rules of the game, but there are unprincipled judges of general jurisdiction who interfere in economic processes. All this will trigger more and more high-profile scandals. Corporate law specialists are going to be flooded with work for the next two years.”
Kyivoblenerho (Kyiv Regional Electric Company) was a striking example of a public company going closed. Just on the eve of the shareholders’ meeting, Kyiv was rife with rumors that the company’s stock was going to be bought off by entities controlled by Russian capital. However, Kyivoblenerho itself prefers to give other reasons why a closed corporation is a better format. “It is one of the company’s minority shareholders who proposed that we turn into a closed corporation. He put forward such arguments as better manageability and reduced administrative costs. These arguments were accepted,” said Oleh Strekal, foreign relations manager at Kyivoblenerho. He noted that even after formally going closed, the company remains loyal to the principles of public business and informational openness. This is another indication of the true reasons for the transformation.
Yet, it turned out that the CC format also has some drawbacks. In theory, it is still possible, given a great desire of the seller and “enthusiasm” of the buyer, to take over a closed corporation. All one has to do is make a public announcement about the deal in such a way that certain people remain unaware of it. “The code has a provision that, to buy or sell CC stock, a public offer must be made to all shareholders, but it is still not clear how this should be done technically. Is it enough to put up a notice or is it necessary to notify everybody in person? Other procedures are also explained unclearly,” says Mr. Hryb, adding that a CC can just be a temporary refuge for those company owners who do not want to be bought out by larger business entities.
Significantly, the State Commission for Securities and the Stock Market (SCSSM) quite encourages the process of open companies going closed. They hope this will help reduce the number of corporate scandals and, hence, headaches for the commission. The commission recommends that enterprises immediately turn into a private limited company, rather than a closed corporation, to be on the safe side. “Open companies in their present shape are of no use to themselves or the Ukrainian economy. They only cause scandals,” says Serhiy Biriuk, SCSSM deputy chairman. There are about 20,000 open companies in Ukraine today. Conversely, the US has half as many public corporations. This paradox is quite easy to explain: “serious people” will not stoop to organizing some kind of “Ltd.” A joint-stock company is a far more prestigious format, and gaining prestige is worth any effort. “In this country, they all registered themselves as public companies at first, and only then did they understand what this was,” Mr. Biriuk opined.
The Ukrainian government also prefers, for some reason, to establish businesses as open companies, although the state is the original shareholder of such companies. This gross mistake resulted in the successful elimination of state-run businesses and an unheard-of blossoming of the shadow economy in Ukraine. Private business seems to have been the first to see through all the supposed openness of this fashionable form of organization. The slogan, time to go closed, sounds increasingly louder over the trenches of corporate wars. In all probability, only the joint-stock companies that hope to attract large-scale investments by share emissions will remain open (publicly held).
