In times of war, governments hardly worry about the bureaucratic hassle for businesses (Gorodnichenko et al. 2022). Not so in Ukraine, where in March 2024 the Cabinet of Ministers revised more than 50 laws and updated 15 prior ministerial resolutions on a seemingly trivial topic: the removal of the need for businesses to use a company seal when dealing with government agencies (Ministry of Economy of Ukraine 2024). All regulatory requirements to affix seals on documents that entrepreneurs submit to state authorities were declared void, even if such a requirement was established by law that is not expressly annulled (Dyachkina 2024).
History of the reform
This is the third time that the government of Ukraine has attempted to get rid of company seals. A 2017 law removed the requirement for mandatory use of seals.
The law went a step further and introduced a fine ranging from 50 to 100 minimum monthly incomes of citizens (a sizable amount) for government bodies that demand seal imprints on official documents. Bad habits die hard, however, and bureaucrats continued to mandate such usage – in disregard of the law.
Enter a 2022 law that regulates the voluntary use of company seals and annuls a list of previous legal acts, which state that the seal is mandatory.
Ukraine is a civil law country and the passage of new legislation does not automatically annul previous laws in the same field, unlike in common law countries where jurisprudence relies on precedent (Djankov et al. 2003). This second attempt at doing away with the company seal also sputtered, as the law failed to account for the full list of prior laws that mandated usage of the company seal. Over 50 laws continued to compel entrepreneurs to use company seals, some of these laws going back to the time of the Soviet Union.
The third time is the charm. In March 2024, the government tried again, this time abrogating every existing law or ministerial resolution that requires a company seal. Addressing the usual rationale for using seals – to ensure that fake or fraudulent business transactions do not take place – the government made mandatory the usage of electronic document signatures. These were already available, but for a small fee. With the new law, this fee is waived.
Why the reform matters
On the surface, the battle to eliminate the use of company seals seems not worth the effort. In March 2024, a seal cost the equivalent of ten dollars and the accompanying ink another four dollars. Even small businesses could afford this expense.
There is a deeper reason, however, that of bureaucratic discretion (Djankov et al. 2002, Bosio et al. 2020). Officials at different government agencies in Ukraine have required seals on various documents that the law does not explicitly specify. Furthermore, the evidence that the Ministry of Economy (2024) used to motivate the new legislative change suggests that even the place where the seal is affixed to a document can be subject to debate. This uncertainty gives bureaucrats powers to extract bribes in return for accepting documents with ‘incorrect’ application of seals. Or worse, bureaucrats may delay procedures should they decide that documents are not properly sealed.
The cost of a company seal is, in other words, much larger than its purchase price. The true cost is a function of the possibility of bureaucratic hassle. This is consistent with a prominent strand of the public choice theory, which holds that regulation is pursued for the benefit of bureaucrats (De Soto 1990, Shleifer and Vishny 1998). “An important reason why many of these permits and regulations exist is probably to give officials the power to deny them and to collect bribes in return for providing the permits” (Shleifer and Vishny 1993: 601).
Lingering usage
Ukraine is not alone in trying to get rid of the company seal as a bureaucratic nuisance. The UK failed to do away with this practice in 2006, when it first revised the Company Act to eliminate the seal requirement. Usage lingered in secondary legislation and sector-level regulation and so the government went more resolutely about it in 2016, by making the use of company seals illegal on any government documents.
Similarly, in 2001 Australia amended its Corporations Act to make company seals optional, allowing entrepreneurs to execute documents without a seal if signed by two directors, a director and a company secretary, or the sole director of a proprietary company, with electronic signatures permissible. However, uncertainty persisted, leading to the enactment of the Corporations Amendment (Meetings and Documents) Act 2022, which introduced the concept of "technology-neutral signing", which allows a person to sign an electronic form of the document.
Japan has also faced challenges in eliminating the use of company seals, despite efforts to digitise administrative procedures. In 2020, the Japanese government went as far as publishing a memorandum stating that placing a company seal is not necessary to enter into a business contract (Iwaki 2020).
Hong Kong, too, has struggled to eliminate the use of company seals. The New Companies Ordinance, which came into effect in 2014, made the use of a common seal optional for all companies. In the same vein, in 2017 Singapore amended its Companies Act to remove the requirement for companies to use a common seal. Despite the changes in legislation, many companies in Singapore continue to use common seals for reasons such as conducting international business or in complying with their company constitution (SimpliReso 2022).
What makes these common law countries different from Ukraine is the lack of fervour of their bureaucracies in insisting on the usage of company seals in official government business. The majority of reforms were motivated by state agencies wishing to not deal with more paperwork. In rebuilding Ukraine after the war, the same motivation should apply.
References
Bosio, E, S Djankov, E Glaeser and A Shleifer (2020), “Corruption in public procurement”, VoxEU.org, 5 November.
De Soto, H (1990), The Other Path, Harper and Row.
Djankov, S, R LaPorta, F Lopez-de-Silanes, and A Shleifer (2002), “The Regulation of Entry”, Quarterly Journal of Economics 117(1): 1-37.
Djankov, S, E Glaeser, R LaPorta, F Lopez-de-Silanes, and A Shleifer (2003), “The New Comparative Economics”, Journal of Comparative Economics 31 (4): 595-619.
Dyachkina, A (2024). “The Government Removed Unnecessary Seal Requirements” (in Ukrainian), Pravda, March 29.
Gorodnichenko, Y, I Sologoub and B Weder di Mauro (eds) (2022), Rebuilding Ukraine: Principles and Policies, CEPR Press.
Iwaki, H (2020), “Is a seal still necessary for contracts?”, Law Office of Hajime Iwaki, June.
Ministry of Economy of Ukraine (2024), “Removing Another Burden on Businesses”, 29 March 29.
SimpliReso (2022), “Common Seal – To have or not to have?”, 29 June.
Shleifer, A and R Vishny (1993), “Corruption,” Quarterly Journal of Economics CVIII: 599–617.
