It’s been a year since the Law of Ukraine “On Limited Liability and Additional Liability Companies” became effective (hereinafter referred to as the “Law” ). Over the period, the law enforcement practice has been developed, as well as necessity to remove certain loopholes has arisen. We will discuss the major issues of the Law further in this article.
Though the Law is designated to ensure bigger discretion of the parties to corporate relationships, part 2 article 44 of the Law envisages an imperative norm whereby entering into a significant agreement (i.e. an agreement, which value (price of assets, works or services) exceeds 50% of a company’s net asset as of the last day of a preceding reporting period) shall be subject to approval of a company’s general meeting of shareholders. This provision becomes more inconvenient or even burdensome when applied to newly-established or small companies, since any deal to which such company becomes a party is conditional upon the above imperative norm, hence requires that a general meeting take a decision. Thus, there is a commonly accepted approach whereby obtaining of an approval for a significant deal shall be a discretion of the company shareholderds and shall be properly addressed by the company’s articles of association.
Parties to the corporate (shareholder) agreement
Court practice in cases related to conclusion of corporate agreements is almost no-existent, since such agreements are still quite new for Ukraine. There are unresolved issues associated with the definition of parties to such an agreement.
Market players still argue about the third parties. From its prospective, the Law sets forth as follows: the corporate agreement is an agreement whereby the company shareholders undertake to enjoy their rights and powers in a prescribed manner or abstain from the enjoyment thereof.
This provision may be interpreted to imply that only company shareholders may be parties to the corporate agreement given the subject-matter of such an agreement – responsibilities of shareholders – to enjoy shareholders’ rights and powers in a prescribed manner or to abstain from their enjoyment.
However, there is another position, which suggests that the above provision shall be deemed only as a reference to the subject-matter of the agreement and not the parties thereof. There is a possibility to include third parties into a corporate agreement (for instance, investors or future shareholders) provided requirements to the subject-matter of the agreement are met.
The Law is silent on whether a company itself may be a party to the corporate agreement; this possibility could help in resolving a number of issues associated with the company’s responsibilities towards its participants. Therefore, if a company becomes a party to the agreement, the latter may envisage that the company may be a party to any litigation arising from violation of a corporate agreement.
In this context, we should also refer to the English law, which provides for a possibility of future participants (shareholders) to enter into a corporate agreement; it also states that a company itself may be a party to the agreement. In such a case, corporate agreement may include an obligation of future shareholders to carry out certain actions in order to become the company’s shareholders or vise versa – an obligation of the company or company shareholders to fulfill obligations necessary to ensure joining of the new members.
Corporate agreement: scope limitations
Major issues of Law interpretation arise in connection with the ambiguous scope of the corporate agreement. Article 7 of the Law sets forth that a corporate agreement may envisage conditions that regulate purchase of the company’s shares. At the same time, it is not clear why this provision is limited to share purchase and does not cover any other share disposal. Similarly, article 20 of the Law envisages pre-emptive right of a share purchase and procedure thereof; part 6 of this article states that the company’s articles of association may provide for alternative procedure of pre-emptive right realization. Considering the above, there is a question on whether a procedure of pre-emptive right realization may be stipulated by the corporate agreement (and not by the articles of association) as a document, which, according to the Law, determines responsibilities of the shareholders to enjoy their rights and powers or abstain from their enjoyment.
Irrevocable power of attorney
There still remain issues arising from irrevocable power of attorney (PoA) that is a novelty to the civil law of Ukraine. Currently, the notaries refuse certification of irrevocable PoAs given their legal uncertainty. Following the above, there is a proposal that the Law or any other regulatory document (for example, the Procedure for Notarial Acts Performance by the Ukrainian Notaries) provide for more detailed requirements to the form and substance of the PoA.
Notification of creditors in case of a charter capital decrease
The Law sets forth that in case of a decision to decrease the charter capital, the executive body of the company shall notify the creditors accordingly in order to enable creditors to take actions prescribed by the law. However, to date, the situation, in which a company does not have creditors, remains unresolved. It would be reasonable to assume that in such a case respective provisions of the Law shall not apply and the company shall have the right to decrease its charter capital right away – as of the date of a respective decision or immediately thereafter. However, the Law may be interpreted conservatively and require that the prescribed mandatory waiting period shall anyway elapse before the company proceeds with the decrease of its charter capital even in case the company does not have creditors; it should be noted here that the registrators do not have a possibility to verify whether the company has creditors or not.
Data in the articles of association
It is still not clear whether certain provisions must be included into the articles of association. Thus, article 11 of the Law provides for a list of data, which the articles of association must include. Notwithstanding the foregoing, article 82 of the Commercial Code of Ukraine envisages a bigger list of mandatory data, particularly in part of scope and objectives of the company, composition of founders and shareholders, as well as value of their shares. Despite the guidelines issued by the Ministry of justice of Ukraine by its Letter dated 7 June 2018 No 6623/8.4.3/32-18 this issue remains disputable. The Letter states that paragraph 1 part 6 of the Final and Transitory Provisions of the Law amends article 79 of the Commercial Code of Ukraine, which states, in particular, that the procedure for establishment and scope of activities of certain economic entities be governed by the Law. Considering the above, legal status of limited liability and additional liability companies, procedure for their establishment/winding-up, scope of activities, rights and responsibilities of their participants are governed by the Law, therefore provisions of the Law (and not the Commercial Code of Ukraine) shall prevail. It should be noted, however, that the provisions of article 12 of the Law are non-exhaustive; additional norms of the Commercial Code of Ukraine may be interpreted as such that supplement the Law and do not conflict with it.
Enforcement of a collateral in form of a shareholders’s share in the charter capital
Article 22 of the Law sets forth a new share enforcement procedure applicable within the enforcement proceedings.
Sale of a debtor’s share to other company’s shareholders is another novelty introduced by the Law. According to the Law, a bailiff shall offer other participants to realize their pre-emptive right and to purchase a share being the subject of the enforcement proceedings. The Law is silent on the period, during which shareholders may realize this right, thus respective period apparently shall be determined by the bailiff in the enforcement document. It should be noted also that the company’s articles of associations may provide for special requirements applicable to the pre-emptive right of the shareholders or establish no such right for participants. However, even if shareholders do not have the pre-emptive right, wording of part 5 article 22 of the Law instructs the bailiff to negotiate in writing with the company shareholders (save for those who withdrew their pre-emptive right) in the first place.
Issues of share transfer to a new purchaser also remain unresolved. The Law does not directly authorise the bailiff to execute on his/her behalf a share purchase agreement with a shareholder, who used his/her pre-emptive right. Given that currently the practice of share enforcement is not widespread, registrators do not have sustainable practical approach in respect of the procedure for registration of respective amendments to the articles of association.
Signing of minutes
Changed wording whereby the minutes may be signed only by the chairman of the meeting resulted in a conflict of laws. Pursuant to part 4 article 33 of the Law, minutes shall be signed by the meeting’s chairman of by another person authorized by the general meeting. Each company shareholder present on the general meeting shall have the right to sign the minutes. At the same time, article 15 of the Law of Ukraine “On State Registration of Legal Entities, Individual Entrepreneurs and Public Organizations” states that a decision of the authorized managing body of the company, being submitted for the state registration of amendments to the records of a legal entity in the Unified State Registrar, shall be made in writing, bound, numbered and sighed by the founders (shareholders), persons authorized by them or by the chairman and secretary of the general meeting (provided such decision is made by the general meeting). Thus, the registrator shall refuse to accept a document without the signature of a meeting’s secretary.
Given the above, it is of paramount importance that the provisions of the foregoing laws be adjusted in order to avoid potential implications in practice.
In general, the Law positively impacts corporate relations, provides for new efficient mechanisms of protection of shareholders’ rights and interests. At the same time, to boost this positive effect it is important to adjust provisions of the Law and other regulatory acts, as well as to provide more detailed norms in respect of the new matters, which are not applied uniformly.