Corporatization of defense enterprises in the draft law №3822 – what and why?

What are the purpose and main tasks of the draft law “On the peculiarities of reforming the enterprises of the military-industrial complex of the state form of ownership” (№3822)?

As stated in the preamble, the main purpose is to determine the features of legal, economic, and organizational regulation of the transformation of the State Concern “Ukroboronprom” into a joint-stock company, state unitary enterprises, including state-owned enterprises that are part of “Ukroboronprom” – into companies, as well as the introduction of a corporate model of management of state-owned objects in the military-industrial complex (hereinafter – MIC).

In other words, draft law №3822 introduces the idea of ​​expanding the powers of Ukroboronprom as a managing economic structure in the defense industry together with expanding the powers of its Supervisory Board.

This draft law will be the first but very important step in the transformation of the defense industry, as it will provide a legal basis for the transformation of defense companies into state joint-stock companies.

The project regulates how the Concern and its members should be reformed in three stages:

  • the first stage of reform involves preparing the members of the Concern for reorganization.
  • the second stage of reform envisages the formation of companies in two alternative ways: the transformation of a member of the Concern into a company in the organizational and legal form of a joint-stock company or limited liability company; or joining the members of the Concern to another participant and simultaneously transforming such participant into a business company according to a special procedure.
  • the third stage of reform envisages the transformation of the Concern into a joint-stock company, which will include the following actions:
    • The Cabinet of Ministers of Ukraine must decide on the reorganization of the Concern through its transformation into a joint-stock company and approval of the charter;
    • On the basis of the decision of the Cabinet of Ministers of Ukraine – introduction into the authorized capital of the joint-stock company of blocks of shares (shares) of the companies formed at the second stage;
    • With the Cabinet of Ministers’ consent based on the joint-stock company’s decision, the shares of companies formed in the second stage may be contributed to the authorized capital of another company formed as a result of the transformation of a Concern.

On January 19, 2021, the Central Scientific Experts Office (CSEO) of the Verkhovna Rada published a negative conclusion on this draft law.

CSEO believes that the draft law №3822 needs to be refined from terminology to conceptual provisions that could lead to negative consequences. The conclusion consists of 12 points, which indicate the creation of special conditions for Ukroboronprom and the provision of unjustified benefits to enterprises or officials of Ukroboronprom, which are not in accordance with applicable law.

“Such a disposition of state property creates opportunities for the actual privatization of state-owned defense enterprises and companies formed on their basis outside the Law of Ukraine “On Privatization of State and Municipal Property” – it is stated in conclusion.

Besides, CSEO recommends that the parliament obtain an expert opinion from the Cabinet.

On January 20, 2021, the Verkhovna Rada Committee on National Security, Defense and Intelligence considered the draft law and recommended that it be included in the agenda of the session and adopted as a basis. It is noted that, according to the draft law, a modern model of corporate governance is being introduced at the Concern’s enterprises, which will protect them from corruption risks, conflicts of interest, and direct political influence. In addition, Ukroboronprom’s enterprises will be rehabilitated at all levels: financial, social, and production-technological.

On the last day of the fourth session of the Verkhovna Rada, January 29, the parliament adopted the draft law in the first reading. Now the draft law awaits amendments from MPs.

Ukroboronprom itself believes that the draft law can be passed by April 30, 2021, after which, by the end of June 2021, the Concern will be liquidated. A new defense holding company in the form of a joint-stock company will be created on the basis of its 65 most promising enterprises. In addition, branch business units will be established in the form of joint-stock companies, united in the areas of aircraft repair, armored vehicles, radar systems, marine systems, high-precision weapons, ammunition, and special chemicals.

The corporatization of Ukroboronprom is a step in line with the OECD Guidelines (Organization for Economic Co-operation and Development, with which Ukraine cooperates).

The OECD Guidelines define generally accepted international standards of corporate governance. Transforming Ukroboronprom in line with these OECD recommendations, in particular through the adoption of draft law №3822 and the implementation of the prescribed steps, will mean that Ukraine will have opportunities for transparent and accountable governance in the defense industry and, consequently, for cooperation with international partners and investors.