On 6th February 2018 the Ukrainian Parliament has adopted the highly-anticipated Law of Ukraine “On Limited Liability and Additional Liability Companies” (Law). The Law shall become effective just three months following its publication (except for one clause) and LLCs shall soon operate in a new manner. Therefore, we would like to provide the brief overview of the Law’s novelties and clarify how it shall affect the Ukrainian business.
It seems, that everyone’s tired of 9-month waiting for the Law of Ukraine “On Introduction of Amendments to Some Legal Acts of Ukraine on Corporate Agreements” (Project No.4470) (providing for corporate agreements) to be signed by the President of Ukraine. Luckily, some of its provisions were duplicated in the Law of Ukraine “On Limited Liability and Additional Liability Companies”. Therefore, subject to its coming into force, we shall be able to enter into corporate agreements so to provide for the manner of exercising by the shareholders of their rights and duties, namely, establish the voting rules on any issues. To secure the rights and interest of the parties to such corporate agreement, the legislator provided for an opportunity of issue of the irrevocable power of attorney. Unfortunately, in case of breach of the interests of one of the parties, the only remedy is court.
Shareholders’ meetings and voting anew
Currently, the Law of Ukraine “On Business Companies” provides only for simple (50%+1 of votes of the number of votes of the shareholders being present at the meeting) and qualified (50%+1 of votes from the total amount of votes of all shareholders) majority. As opposed, the Law provides for three categories of issues, deciding on which requires different number of votes:
- majority (50%+1 of votes from the total amount of votes of all shareholders);
- ¾ of votes from the total amount of votes of all shareholders, and
- unanimous voting, required for deciding on specific issues, e.g. on estimation of non-monetary contribution of the shareholder, reallocation of shares among the shareholders etc.
At the same time, the shareholders may establish their own number of votes required for deciding on any issues to be, however, not less than the majority and except for the issues requiring unanimous voting.
Separate issue – holding of the shareholders’ meeting. The Law provides for possibility for shareholders to submit proposals to the agenda, as well as decide on issues not included into the agenda. It is expressly provided, that the minutes shall be signed by the chairman of the meeting (or any other person authorized by the meeting). And if there is only one shareholder in LLC – the decisions shall be taken by such shareholder solely and formalized in written. And one more novelty for the shareholders’ meeting – no quorum is established.
Charter capital: its formation and change of the amount
From now on, when establishing the LLC, the shareholders shall be obliged to form the company’s charter capital in full within 6 months following the state registration date, unless otherwise is provided by the charter (today the term is 1 year). It is important, that the Law finally cancels the existing prohibition of debt-to-equity swap in LLCs.
In addition, the Law provides for possibility to increase the company’s charter capital not only for the account of additional contributions, but also for the account of undistributed profit. The Law also establishes the pre-emptive right of the shareholders to make additional contributions and the third persons shall be able to make such contributions only after the shareholders. Unlike today, the Law also establishes terms for making of additional contributions – 1 year for shareholders and 6 months for third persons (prior to this the terms had to be established by the decision of the shareholders). Moreover, the Law also provides for possibility to enter into agreement between the company and the shareholder and/or third person on making of additional contribution.
As to the charter capital decrease – the Law reduces the term during which the creditors may apply to the LLC. When the Law becomes effective such term shall constitute 30 days (currently, the laws do not expressly provide for such term, however, provide that the decision on the charter capital decrease shall become effective in three months following its state registration. Such term was implemented to protect the creditors interests).
One of the Law’s novelties – possibility to establish the Supervisory Board in LLC which is considered by the Law as a governing body. This shall bring to end all disputes on possibility of establishment and competence of such body in the company.
One more nice news on corporate governance is the possibility not to establish the Auditing Commission (which was impossible to establish meeting all legal requirements if there were less than three shareholders in LLC. Besides, such commission usually did not perform any controlling functions).
The Law provides for detailed procedure of the share forfeiture (currently, this issue is poor regulated by the laws and results in many problems – share forfeiture is almost impossible to execute). In general, in such case the executor shall notify the company, which shall provide information, necessary to calculate the share value (determination of its market value). Other shareholders shall be offered to acquire the share, otherwise – it shall be sold via auction.
Withdrawal and exclusion from LLC
The Law provides for some amendments and details of the procedure of the shareholder withdrawal from LLC. Currently, the shareholder may withdraw from the company subject to prior (3-month) notification (unless otherwise specified by the charter). The Law provides for an opportunity to withdraw from LLC either without shareholders’ consent (if the share is less than 50%), or with such consent (if the share is 50% and more). In addition, the Law provides for the value of share to be paid to the withdrawing shareholder (today – the value of part of the property in proportion to the shareholder’s share in the company’s charter capital). The value of shareholder’s share shall be calculates based on market value of all shares of shareholders and proportionally to the amount of share of the withdrawing shareholder.
As for the exclusion of the shareholder from the LLC, the Law expressly provides for such exclusion in case of failure to make contribution into the charter capital by the shareholder, as well as in case of death / termination of the shareholder, if such shareholder holds less than 50% in the charter capital of LLC, subject to failure of its heirs / successors to apply to LLC within the established term.
The Law cancels the limit of number of shareholders in LLC (no more than 100 persons for now), details the procedure and terms of dividends payments (currently poor regulated), provides for discretion of pre-emptive right of shareholders to acquire shares of the other shareholders (imperative for today), specifies and amends the terms of purchase of shares by LLC in its own charter capital (in case of such purchase without charter capital reduction, LLC is obliged to form the reserve capital in amount of the acquisition price of the shares and alienate such shares to the other persons within one year).
The Law also provides for amendments to the Law of Ukraine “On State Registration of Legal Entities, Individual Entrepreneurs and Public Formations”. Among the most crucial issues – possibility to submit the documents to the state registrar in case of change of shareholders’ structure not only by company, but also by the other persons (new shareholders, former shareholders, plaintiffs, heirs), as well as – the obligation of the state registrar to provide extract from the USR (Unified State Register) to the applicant, company, new and former shareholders in case of registration of change of shareholders’ structure or shares proportion.
Generally, the Law provides for many new, as well as discretionary provisions, including opportunity not only to amend, but also exclude some provisions from the constituent documents. Therefore, the shareholders of a Ukrainian LLC shall consider more carefully their charters, which remain effective only to the extent when they do not contradict the Law, till they are brought in compliance with it.