On 12 March 2018 the President of Ukraine signed the Law of Ukraine “On Limited Liability Companies and Additional Liability Companies” No. 2275-VIII (the “Law”) adopted by the Parliament of Ukraine in the beginning of February. Most of its provisions will take effect on 17 June 2018 which will significantly improve corporate governance in Ukraine as well as the legal regulations for the creation and operation of the Ukrainian limited liability and the additional liability companies (the “Company”).
For ease of better understanding of this briefing note, please note that in the Ukrainian law the notion of a participant in a Ukrainian limited liability company is akin to that of a shareholder in a joint stock company.
Below are some of the important takeaways introduced by the Law:
- Corporate (Shareholders’) Agreements: The Law further develops a concept of the “corporate agreement” which can be entered into among the Company’s participants and which will work in conjunction with the Company’s charter. This is a new provision in the Ukrainian law which is expected to make a Ukrainian limited liability company a much stronger JV vehicle. The Law is creating an environment that will permit the Company’s participants to establish a bespoke corporate governance structure based on such sophisticated mechanisms that are available, for example, under the English law style shareholders’ agreements. Pursuant to the Law, a Company’s participant can issue an irrevocable power of attorney for the purposes of the participant’s performance under the corporate agreement. This power of attorney may not be cancelled unilaterally without the representative’s consent and can be cancelled only in the events stated therein. The irrevocable power of attorney will terminate simultaneously with the termination of the obligation for the exercise of which it was issued and is subject to notarial certification;
- Removal of Obsolete Restrictions: The Law now does not limit the number of participants in the Company. Previously a Ukrainian limited liability company could not have more than 100 participants and if the number of participants exceeded 100 the limited liability company should have been converted into a joint stock company within a year thereafter and be unwound if the number of Company’s participants does not decrease accordingly. Also the Law removed a quite obsolete “sole shareholder” limitation known as the matryoshka rule which provided that a limited liability company might not have as its sole owner another company with a sole owner. Finally, the Law has cancelled a notorious prohibition preventing the implementation of debt to equity swaps in a limited liability company;
- Company’s Charter Capital: The Charter capital of a Ukrainian limited liability company is comprised of the nominal value of the Company participants’ equity (participatory) interests expressed in the national Ukrainian currency (Hryvnia). The Law reduces the term for the formation of the Company’s charter capital by its participants from 1 year to 6 months from the date of the Company’s state registration. The charter capital of the Company may now be increased not only by virtue of additional contributions but also at the account of the Company’s undistributed profit. Moreover, the Law expressly allows to make additional contributions to the charter capital by third party investors;
- Supervisory Board and Audit Commission: The Law expressly provided that a limited liability company can have a Supervisory Board in order to supervise and control the Company’s activities. The legislation which is still in effect is silent as regards this issue which used to causing much debate amongst the Ukrainian business community. Further, it is no longer mandatory to establish an Audit Commission in the limited liability company which statutory requirement was rarely complied with in practice;
- General Participants’ Meetings (GPM): The Law introduced a more simplified set of rules for the convocation of and taking decisions by the participants at the GPM. In particular, participants can participate in the GPM via conference, by means of electronic communication or take decisions via absentee voting. In addition, pursuant to the Law no quorum for the validity of the GPM is required and the participants can vote by the majority of the votes of the total participants in the Company. Participants will now have more flexibility in resolving upon the issues which were not included into the agenda of the GPM in advance provided that the participants vote unanimously for the inclusion of any new issue for consideration at a particular GPM. Another positive moment for foreign participants is that the Company’s GPMs may be convened abroad provided that all participants agree to such convocation in writing;
- Material/Interested Party Transactions: The Company’s charter may provide limitations as well as set out criteria for the interested party and material transactions. The Law contains a set of customary protections and limitations applicable to the Company’s executive bodies’ powers in the context of the entering by the Company into (a series of) major transactions as well as defines what transactions must be viewed as interested party transactions together with the relevant approval procedures for such transactions;
- Limitations on the Payment of Dividends: The Law provides that dividends can be paid to the participants quarterly unless otherwise is provided by the Company’s charter. At the same time, the Company is prohibited from taking any resolution on the approval and payment of dividends if, inter alia, (a) the Company failed to make settlement of its indebtedness before any terminated/expelled participant or his/its legal successor, (b) the Company has insufficient property for the satisfaction of creditors’ claims which have become due and payable or the Company’s property will become insufficient as a result of the Company’s decision to pay dividends;
- Expulsion from the Company: The Law has finally removed almost any ground to expel a participant from the Company. Previously, a participant could be expelled from the Company based on his/her alleged “systematic failure to perform or where the participant’s actions adversely affected the goals of the company”. The foregoing murky and obscure statutory provision has often been used by all types of corporate raiders as grounds to expel a participant seizing the participant’s income and his participatory interest in the Company. The Law therefore has made a huge step forward in matters of combatting corruption within the Ukrainian limited liability companies.
All Ukrainian limited liability companies will need to review and amend their Charters in order to comply with new legal requirements within one year of the Law coming into force.