NAKO Analyzes Changes to the Articles of Association of SC Ukrspecexport

On August 30, 2019, President Zelenskyi dismissed Bukin from the office of Ukroboronprom CEO. In September, Bihus.info journalists published an investigation alleging that on August 19, 2019, a few weeks before the dismissal, the CEO of the State Concern Ukroboronprom Bukin approved a new wording of the Articles of Association of Ukrspecexport by his order. Ukrspecexport is a state-owned company for the export and import of military and special-purpose products and services, regulated, coordinated and controlled by the state concern Ukroboronprom as an authorized entity managing state-owned entities in the defense industry.

Independent Defence Anti-Corruption Committee (NAKO) analyzed the changes in the Articles of Association of Ukrspecexport with the involvement of external independent expertise and reached the following conclusions:

Major changes to the new Articles of Association compared to the version of 11/04/2017 

1. The new version clarifies that the Company is a private-law entity. The peculiarity of the status of a private legal entity is that the criminal liability for its officers is much lower (mostly fines and restrictions of freedom as the maximum punishment), in addition, such officials are not covered by the Law on Prevention of Corruption in terms of conflict of interest, declarations, etc.
2. The provision restricting the right of the company to establish legal entities other than subsidiaries established before the approval of the 2017 Articles of Association has disappeared.
3. The requirement to sell obsolete AFU property or property in little demand at a price below its residual value has been removed. Now there is no limit on the cost of sale.
4. The right of the Company to enter into contracts not only with enterprises, institutions and organizations, but also with individuals has been established.
5. The preferential right of the Concern to appoint the Acting Chief Executive Officer (CEO) of the Company and the need to have the persons for the posts of Chief Accountant, Head of Security, Head of Legal Services agreed upon by the Concern has been removed. From now on, this will be done at the discretion of the Company director.
6. The structure and the staffing list will be approved by the head of the Company, but without prior agreement by the Concern.The head of the Company will independently determine the number of employees and their positions.
7. From now on, the financial and investment plans of the Company will only be agreed upon, rather than approved, by the Concern.
8. The rule that established the Concern’s right to hold the Company’s employees liable, apart from carrying out inspections of the Company, has disappeared. From now on, this will be done by the head of the Company independently.
9. From now on, the Company does not have to agree upon joint venture agreements, commission agreements, powers of attorney and property management with the Concern.
10. The profit margin of the company and the procedure for its calculation has disappeared from the Articles of Association.
11. The head of the Company is obliged to ensure that not all the Concern’s decisions are executed, but only the decisions made as a result of the Company’s audits.
12. Strengthening the Company’s control over its subsidiaries. Now the head of the Company will

• coordinate financial, investment, and strategic plans for the development of subsidiaries;
• initiate the process of reorganization and liquidation of subsidiaries before the Concern;
• agree on the receipt of loans and credits;
• submit to the Concern proposals on appointment and dismissal of heads of subsidiaries, application of incentives and imposition of disciplinary sanctions;
• determine the procedure for coordinating the activity and interaction between the Company and its subsidiaries in the course of export-import transactions.

So, the introduced changes

• have actually brought the Company’s activities out of Concern’s control, both institutionally and operationally. In the important management and financial processes (HR decisions, structural changes in the Company, bringing employees to disciplinary liability, approval of financial plans), the Head receives almost complete autonomy from the Concern.

• have made relatively independent subsidiaries
  (SpetsTechnoExport, Ukrinmash, Ukroboronservis, Promoboronexport, SZF Prohres and ZTF Tasko-Export) strictly dependent on the head of the Company

From now on, it will be the Company’s head that will propose the appointment or dismissal of the heads of subsidiaries, agree upon receipt of loans, approve financial or strategic plans, or even reorganize or liquidate these enterprises.  Therefore, the control over export-import defense activities is concentrated in the hands of one person – the Head of Ukrspecexport.

Let us also pay special attention to the fact that one of the key changes in the Articles of Association was the definition of Ukrspecexport as a private law legal entity, which caused many indignation, as Ukrspecexport is a state-owned enterprise established by the Cabinet of Ministers resolution.

Today, the only statutory criterion for distinguishing between public and private legal entities is the procedure for their incorporation. According to Art. 81 of the Civil Code, a private law legal entity is established by the founders on the basis of constituent documents, and a public law legal entity – by an executive act of the President, public authority or local self-government body. However, it is not that simple – according to Art. 167 of the Civil Code, the state, represented by its bodies, has the right to establish private law legal entities. The establishment of these private law legal entities, as well as public law legal entities, is also carried out on the basis of an executive act of a state body. Thus, the mere fact of establishing Ukrspecexport on the basis of a resolution of the Cabinet of Ministers cannot unambiguously testify to it being a public or private law legal entity.

At the same time, the doctrine and specialized explanations highlight a number of other features that distinguish between public and private law entities. In its explanations, the National Agency on Corruption Prevention (Decision No. 368 dated 08.02.2019) states that “…legal entities whose establishment procedure, legal status are determined by the Civil Code of Ukraine and the laws of Ukraine adopted on the basis of the Civil Code Ukraine should be private law legal entities. “ At the same time, the legal status of Ukrspecexport as a state-owned enterprise is governed by the Commercial Code, rather than the Civil Code.

Another feature emphasized by NACP is that in private law legal entities, the legal entity itself is the full owner of the transferred state property, while in the public law legal entities, the ownership of the transferred property remains with the state. Both under the old and the new version of the AoA of Ukrspecexport, the property of the company remains state property and is allocated to Ukrspecexport only on the right of business management. Therefore, Ukrspecexport has another essential feature of a public law entity.

It is the court that can make the final decision as to the nature of Ukrspecexport. However, the validity and integrity of the change in the status of Ukrspecexport today raises many unanswered questions in the professional environment and in the public. The definition of Ukrspecexport as a private law legal entity in the AoA can help its officials to avoid electronic declarations, since according to the Law on Prevention of Corruption, declarations are to be submitted only by public law entities.

We recommend that Ukroboronprom pay attention to the legal analysis of NAKO to optimize the AoA of Ukrspecexport to mitigate the risks described above.

Source: NAKO