We can already speak about certain practice of application of the Law “On Limited Liability Companies and Additional Liability Companies” (the Law) after 4 months of its “experimental operation”. Particularly, regarding the adjustment of companies’ Articles of Association and conclusion of corporate agreements.
Immediate bringing Articles of Association in compliance with the law will help to avoid corporate conflicts and disputes with registrars.
Information in the Articles of Association and in the Unified State Register is different
As of now, drafting Articles of Association of limited liability companies or additional liability companies in accordance with the new rules is not in demand as a separate service. The absolute majority of such requests are received in the process of changes in the membership of existing LLCs. However, parties are often reluctant to adapt their Articles of Association to the new requirements even when concluding and performing relevant agreements (sale or other alienation of shares).
Such practice is currently indeed acceptable as LLCs are not required to indicate data on their founders/members in their Articles of Association according to Part 5 of Article 11 of the Law. Naturally, in the process of changes in the membership, in most cases, Articles of Association are drafted in accordance with the old rules for the content of constituent documents and contain information about members. However, the state registrar is not authorized to demand members to restate the Articles of Association because of changes in the membership. As a result, the company’s effective Articles of Association and the Unified State Register contain different data on the members upon completion of a registration action.
This step seems to be convenient and economical in terms of time and money. However, in the event of such mismatches, the company is sure to face problems in its relations with counterparties, and especially with financial institutions.
To determine governing bodies of an LLC correctly is also a common mistake. The Law expressly provides for the list of governing bodies of an LLC. They are:
- the General Meeting of Members;
- Director/Board of Directors;
- Supervisory Board — if the General Meeting decides to establish it.
As we can see, the Law does not require to establish the Audit Committee. However, because of an unprofessional approach to drafting constituent documents, Articles of Association with provisions on the Audit Committee are submitted for state registration, and companies have to reapply to the registrar to change information about their governing bodies.
The law provides LLC members with ample opportunities to settle their relationship with each other at their own discretion. In this regard, the registrars are very demanding in respect of how new dispositive norms are specified in the Articles of Association.
First, it concerns the acceptance and withdrawal of members of the company. Therefore, a reference to the regulation of this issue “in accordance with the procedure established by the legislation” when drafting the Articles of Association may be insufficient: the registrar will require to describe the relevant procedures in detail. In practice, such cases are quite often, which shows the expediency of engaging professional legal advisers into the process of drafting restated Articles of Association.
It is worth noting that the controversial Clause 3 of the “Final and Transitional Provisions” of the Law has not been finally шinterpreted by the courts in terms of validity of the old versions of Articles of Association after making amendments to them, despite numerous references in court decisions (e.g. see the decision of the Lviv Region Commercial Court dated September 3, 2018 in case 914/844/18). Thus, we can conclude on the need for immediate bringing the Articles of Association of LLCs in compliance with the Law to avoid controversial situations while doing business.
The practice of entering into corporate agreements under the rules of the Law has not become quite common yet. Obviously, this service will be interesting primarily to small and medium-sized businesses that do not have sufficient resources to use foreign holding companies to build their corporate structure.
It seems most likely that major players will remain committed to structuring through foreign jurisdictions and transactions connected with them in the nearest future. The main reason for this is the significant advantages of using foreign structures in terms of tax optimization, high level of trust to service companies and convenience of cooperation with foreign counterparties and investors.
The unpredictability and inconsistency of the judicial and executive systems in Ukraine also do not increase the attractiveness of Ukrainian corporate agreements.
Another important reason, of course, is the lack of practice of successful exercise and/or protection of LLC members’ rights under such corporate agreement.
In individual cases, the parties to a corporate agreement want to apply additional guarantees of its enforcement in the form of notarial certification (which is not mandatory in accordance with the law). However, most notaries refuse to perform such actions because of the lack of practice and unwillingness to be potentially involved in resolution of corporate conflicts. It also does not benefit the application of corporate agreements soon.
Irrevocable powers of attorney – the main mechanism that can guarantee practical enforcement of the terms and conditions of a corporate agreement – have had the same fate. Notaries refuse to certify them, which significantly reduces attractiveness and expediency of entering into a ” Ukrainian style” corporate agreement.
“Old” practice and prospects
The litigation practice in corporate disputes has not undergone any significant changes in connection with the effect of the provisions of the new law yet. Absolutely all legal opinions formulated by the Supreme Court relate to legal relationships that existed prior to the entry of the law into force and are related to the interpretation of the old legislation.
It is noteworthy that the Supreme Court expressly states obvious things in individual cases: impossibility to apply the provisions of the new Law in such cases (paragraph 4.1 of the decision of the Supreme Court of Ukraine dated June 19, 2018 in the case No. 905/1833/17, dated July 3, 2018 in case No. 910/5035/17).
The number of cases with disputes concerning legal relations that took place after the entry of the Law into force is critically small, and all of them are still at the stage of consideration in courts of the first instance.
The conclusions suggest themselves
The novelty of many provisions of the Law, the lack of practice of its application, the willingness of partners to individualize their business relationships are factors that will encourage clients to apply for professional legal assistance to adapt their Articles of Association. So much so that it should be done to avoid corporate conflicts without waiting till the end of the transitional period.
However, the application of corporate agreements executed in accordance with the requirements of the Law and subject to Ukrainian law/courts is unlikely to become a common tool for construction of the corporate structure in the nearest future. And the extent and rate of spread of the new and convenient, but previously unknown to Ukrainian legislation, corporate instruments provided by the Law will depend on opinions of courts regarding their application. However, the latter has to be waited for.
Sergiy Benedysiuk, partner, head of corporate and M&A, and Stanislav Rodionov, associate, exclusively for «Zakon & Business»