Ukraine continues to reform corporate legislation with a new law governing LLCs
June 2018 – On 17 June 2018, the long-awaited Law of Ukraine "On Limited and Additional Liability Companies" No. 2275-VIII dated 6 February 2018 (the "Law") came into effect, with the exception of some specific provisions related to inheritance that take effect on 17 June 2019. The Law introduces fundamental changes to the rules that apply to the operation of companies with limited and additional liability (the "Company"), grants their participants wide discretion in the regulation of their relations, and introduces a number of progressive corporate law instruments that did not previously exist in national legislation. Below we describe the major changes brought by the new Law.
Wide discretion in the regulation of the Company’s operation and relations between participants
The Law significantly extends the rights of participants regarding the regulation of the Company’s operation and relations between them. In particular, participants may establish at their discretion:
- the term for making contributions in the course of the establishment of the Company and the increase of its charter capital
- that participants do not have a pre-emptive right to acquire a participatory interest in the charter capital of the Company and determine other procedures for exercising of their pre-emptive rights
- the requirement to obtain the consent of other Company participants to sell or pledge participatory interest in the Company
- the terms for payment of dividends and conditions under which dividends cannot be paid
- the number of participants' votes necessary to adopt decisions by the general meeting of the Company, except for those matters which shall be resolved unanimously or by a qualified majority in accordance with the Law
- which persons may be considered to be officers of the Company, and
- a special procedure for the approval of significant transactions and interested party transactions.
Management and increase of liability of the company officers
The Law specifies the procedure to convene and hold a general meeting. At the same time, the general meeting may consider any matter on the agenda without complying with the requirements for their convocation and notification of the participants, provided that all participants took part in the general meeting and unanimously agreed to consider the respective matters of the agenda. The Law also allows absentee voting and provides that the general meeting may be held by a written poll and via videoconference. In companies with a single participant, decisions on matters falling within the competence of the general meeting can be adopted by a written resolution of the sole participant.
The Law allows for the establishment of a Supervisory Board in an LLC, which can be comprised of executive and non-executive directors. The Supervisory Board may, inter alia, elect members of collective executive bodies of the Company and regulate and control their activity within the competence vested to it under the charter.
In accordance with the Law, the powers of a CEO of the Company may be terminated only as a result of his replacement by a new election (i.e., as a result of the election of a new CEO or an acting CEO).
The Law increases the liability of members of Supervisory Boards and executive bodies of the Company, in particular, it provides that such persons:
- shall be jointly liable against the Company for damages caused to the Company by their deliberate actions
- shall not carry out business activity similar to those conducted by the Company without the supervisory board’s or general meeting’s consent
- shall not be members of a general partnership or general partners in limited partnership without the supervisory board’s or general meeting’s consent
- shall not be members of an executive body or Supervisory Board of a business entity which conducts similar business activity to those conducted by the Company without the supervisory board’s or general meeting’s consent.
The Law also provides that officials of the Company, including members of Supervisory Boards, executive bodies and others provided by the charter of the Company, shall declare and avoid conflict of interests and keep confidential information of the Company secret during one year after the termination of agreements between them and the Company.
Corporate agreements
The Law allows the Company’s participants to enter into a corporate agreement, based on which they undertake to exercise their rights and powers in a certain way, or refrain from using their rights. In particular, the corporate agreement may contain conditions under which a participant shall have a right or obligation to purchase or sell the participatory interest and to provide for cases when such a right or obligation arises. Please also note that entering into corporate agreements was initially allowed starting from 18 February 2018, when the Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine Related to Corporate Agreements" No. 1984-VIII dated 23 March 2017, became effective.
In order to enforce and/or secure the performance of the obligations of participants under corporate agreements, the Law introduces irrevocable powers of attorney. Such a power of attorney cannot be cancelled without the consent of the attorney in whose favour it was issued, or it can be cancelled in cases provided therein.
Rights of creditors
The Law implements rules that provide additional guarantees for the realisation of creditors’ rights.
In particular, in case of a charter capital decrease, the Company shall at its discretion take one of the following steps with regard to its unsecured obligations:
- secure the performance of such obligations
- conduct an early performance of obligations (or their early termination), or
- enter into an agreement with the creditor.
If the Company fails to take any of the above measures, the creditor will have a right to demand the early termination or performance of the agreement in court.
The Law also establishes a specific procedure for enforcement over participatory interests in the Company. Thus, as a result of the enforcement, the creditor will have the right to receive the value of such participatory interest after its sale; however, it will not be able to automatically get the ownership thereof or became a participant of the Company. The state enforcement officer will have to procure the sale of the participatory interest if the other participants of the Company refuse to acquire it within the pre-emptive right procedure.
The Law also establishes specific procedures for the protection of creditors’ rights in the course of the spin-off and dissolution of the Company. In particular, it provides that the spin-off or dissolution of the Company cannot be completed until the Company satisfies all creditors’ claims.
Other changes
The charter of the Company may provide restrictions with regard to the change of the ratio of participants’ stakes, which may protect minority stakeholders from dilution. The Law also provides that the value of a participant's contribution cannot be less than the nominal value of its participatory interest but can be higher than the nominal value of the participatory interest if the participants agreed that additional contributions shall be made without observing the initial ratio of the participatory interests in the Company. In case of a charter capital increase, the nominal value of participatory interests may be increased by an amount less than the value of the additional contribution.
The Law allows a third person to became a participant of the Company as a result of its participation in the Company’s charter capital increase, regardless of the fact that it did not have a stake in the Company before making additional contribution to its charter capital.
The Law introduces amendments to the Law of Ukraine “On State Registration of Legal Entities, Individual Entrepreneurs and Non-government Organizations” No. 755-IV dated 15 May 2003. In particular, it provides that in case of a change in the composition of participants, the documents necessary for registration of such a change can be filed not only by the Company but by other persons as well (e.g., by the new or former participant, or heir etc.).
Bringing companies’ charters in line with the Law
The Law provides that the provisions of a charter of the Company that are not in line with the Law but comply with other provisions of Ukrainian legislation shall remain in force for one year after the Law comes into effect. However, the provisions of other laws which regulate the operation of the Company, in particular, the relevant articles of the Law of Ukraine "On Companies” № 1576-XII dated 19 September 1991 and the Civil Code of Ukraine, will become invalid after the new Law comes into effect.
For further information please contact Iryna Nikolayevska, Counsel, at .