Legal guide for company directors and CEOs in Ukraine

Because environmental, social and governance (ESG) is such an increasing focal point of good corporate governance, we address ESG duties and responsibilities first. For more general duties and responsibilities of directors and CEOs, please scroll down the page or use the navigator to jump to the relevant section. 

Yes, as part of directors' general duty to promote the best interests of the company and act in good faith, and also other more specific obligations that fall in the scope of ESG considerations, such as creating a safe and healthy workplace, avoiding discrimination at work, and complying with environmental regulations. These specific ESG obligations can also be outlined in the companies' charters and other internal regulations.

ESG issues are gaining increased attention, leading to growing pressure on directors to consider them when fulfilling their duties. This can be seen in companies' "white papers" and the official recommendations on sustainable development issued by various regulatory authorities, including the National Securities and Stock Market Commission. 

Apart from their general duties as directors, Ukrainian labour law requires that directors establish a safe and healthy workplace for employees, avoid discrimination (including gender pay gaps), and comply with minimum wage regulations. It also encompasses an extensive range of social benefits, entitlements, and safeguards for employees, such as annual leave, maternity (and paternity) leave, severance pay, and compensation for workplace injuries. Directors and other officials are required to adhere to these regulations. Moreover, the law is reinforced with robust liability measures to address any violations in the sphere of employment and social welfare, which have been notably strengthened by recent legislative updates. 

Ukraine has been actively addressing its international environmental commitments through the implementation of various plans, strategies, and legislative measures, particularly focusing on achieving carbon neutrality and combating climate change. For example, in 2021, a new law was enacted to regulate state oversight of greenhouse gas emissions, aiming to enhance monitoring and ensure companies' compliance with emission limits. Directors, who bear ultimate responsibility for adhering to environmental regulations, are urged to avoid any violations of these statutory limits.

In addition, in 2021 the National Securities and Stock Market Commission standardised the application of corporate governance laws and introduced an addendum on corporate governance and sustainable development (ESG) to the Corporate Governance Code. This addendum outlines the rationale for adopting ESG best practices, addresses investor interests in ESG practices, sets performance and reporting standards for sustainable practices, and offers guidance on implementing the code's recommendations.

Looking ahead, Ukraine, which possesses Europe's third-largest group of coal-fired power plants, pledged at the COP26 conference to phase out coal-fired electricity generation by 2035 while significantly investing in renewable energy. Achieving this goal will necessitate concerted efforts and effective cooperation from energy sector management. Additionally, following the outcomes of COP28, Ukraine will focus on environmentally friendly reconstruction, decarbonising the energy sector, attaining climate neutrality, and mitigating the effects of Russia’s illegal invasion of Ukraine. 

Currently, only large companies, classified as such based on certain financial indicators, are required to submit a management report. This report must include ESG considerations or provide explanations if ESG practices are not implemented. Ukrainian law does not specify any other requirements regarding ESG-related reporting or disclosure.

However, the EU Directives concerning ESG have a significant indirect influence on the Ukrainian market due to the strong ties many local entities have with the European economy. Additionally, several Ukrainian businesses are listed on regulated stock markets in Europe, necessitating compliance with the highest standards of regulation. Consequently, many local companies are allocating resources to prepare for the forthcoming EU reporting standards, aligning themselves with EU regulations. 

This guide focuses on the rules applicable to directors of a limited liability company (Tovarystvo z obmezhenoiu vidpovidalnistiu) (“LLC”), which is the simplest and the most common form of a business entity in Ukraine, although much of the information on directors’ duties will apply equally to other company types, including private joint-stock companies.

In Ukraine, LLCs have either a sole director or a board of directors. The structure and powers of the board are set out in the company’s charter and other internal rules and regulations, if adopted. A charter can also set the number of board members, the manner of their election (which can be a vote of a general meeting of company’s participants (“GMP”), a resolution of a supervisory board, etc.), and how often the board meets.

While there is no minimum number of board members, the board normally consists of an odd number of directors, to avoid voting ties, and a small enough number to avoid inefficiencies, to facilitate coordination of meetings and make feasible action by consent.

The board structure is very specific and determined by various factors, the most important of which include the ownership structure, the type of industry and the market position of the company.

A board of directors is headed by a chairman (usually called a “general director”) elected by the board (unless otherwise provided for by the company’s charter), which manages its work, convenes meetings and maintains minutes and other documentation. The chairman may act on behalf of the company without a power of attorney, simply according to resolutions of the board, among others, to negotiate, transact on behalf of the company, issue orders and give instructions binding for all employees. Any other board member may also be vested with these powers if the charter so provides.

For the purposes of this guide, the term ‘director’ refers to both a sole director and a general director, as the chairman of the board. 

From a legal standpoint, there is no clear-cut difference between the various types of directors in an LLC. All directors are company officials and must adhere to the relevant standards of conduct while carrying out their duties.

The board of directors can comprise both executive and non-executive members. A non-executive director is someone who is elected to the board but primarily focuses on supervising, managing risks, and controlling the company's activities alongside the executive directors. They do not have the authority to intervene directly in the day-to-day operations of the company, except through participation in board decisions or committee meetings if such committees are formed. Additionally, a non-executive director may be an independent member of this executive body.

Where an LLC adopts a two-tier board structure, which involves a supervisory board overseeing activities of the board of directors, the latter manages the company's daily operations while the former safeguards the rights of participants (shareholders). Independent members may also serve on the supervisory board.

In certain industries, such as capital markets, LLCs may be required to establish this dual-board structure to comply with relevant licensing regulations. 

Only a person with full legal capacity can serve as a director. While the law does not impose any restrictions based on nationality for directors, in practice only Ukrainian citizens can be appointed as directors during the incorporation of a new company, due to specific aspects of Ukrainian law. However, post-incorporation, a Ukrainian director can be replaced by a foreign national. In most cases, the employer will be required to obtain a work permit to hire a foreign national as a director.

Furthermore, independent directors of an LLC must adhere to the relevant requirements outlined in the Joint-Stock Companies Law.

In certain industries like insurance, banking, and securities trading, only individuals with the requisite education, professional qualifications, and a proven track record are eligible for directorial positions.

It is important to note that a director cannot simultaneously hold a position on the supervisory board, if one is established. 

Typically, a director can be appointed through a resolution passed by either a GMP or a supervisory board, if applicable. The appointment of a director needs to be recorded in the Ukrainian companies register.

The contractual arrangement between the company and its director usually comes in the form of either an employment contract or a civil-law service agreement (outlined below).

There are no legal constraints on the duration of a director's appointment: it can be indefinite or for a specified term. 

The dismissal of a director must adhere to both corporate and employment laws (if the director is employed). From a corporate law perspective, either a GMP or a supervisory board, if applicable, holds the authority to remove a director at any time with a simple majority vote, unless the company's charter requires a higher threshold. This removal can only occur alongside the simultaneous appointment of a new director. The change of a director needs to be recorded in the Ukrainian companies register.

From an employment law perspective, a director can be terminated for various reasons, including those outlined in an employment contract, mutual agreement, notification to the company, or if a GMP or supervisory board decides to terminate the director's position without cause, at any time.

There is no obligation to separately inform any authorities about the director's removal, except for applying for the cancellation of the work permit to the relevant employment authorities in the case of the removal of a foreign national director. 

A director is responsible for the day-to-day management of the company. A sole director or a general director heading the board of directors represents the company without requiring a power of attorney. Additionally, the director can delegate their authority by granting a power of attorney to third parties, unless this right is specifically restricted by the company’s charter.

The director's ability to carry out transactions is generally not restricted by law, except for transactions that exceed 50% of the company’s net assets based on the most recent approved financial statements. It is possible, however, to increase this limit in the company’s charter. The company’s charter may impose limitations on the director’s authority, such as requiring prior approval from a GMP or a supervisory board (if one is established) for certain transactions. These limitations must also be registered in the Ukrainian companies register to be legally binding on third parties.

From the perspective of third parties, a director is presumed to have the authority to bind the company, even if they lack actual authorisation. Consequently, a director who acts without proper authority (and thus breaches their duties) might still make the company liable to a third party. However, this liability does not apply if the third party is aware that the director is not authorised. 

The law offers a fair amount of flexibility when it comes to how the board of directors operates. Typically, if more detailed guidelines or restrictions on the board's functioning are desired, they are outlined in the company's charter, internal policies, regulations, or in contracts with directors.

For example, if permitted by the company's charter, board meetings can be conducted via telephone, videoconference, or other virtual platforms that allow all directors to participate simultaneously. This also extends to "hybrid meetings" where some attendees are in-person while others join remotely.

Decisions in the board are generally made by a majority vote of the members present at the meeting, unless the charter specifies a higher vote requirement or a different voting procedure. If an issue arises that falls outside the usual scope of the company's business, it is customary for the chairman to bring it before the board or the GMP. There are no legal requirements regarding the minimum number of board meetings or specific agenda items. 

Simply appointing a director by a corporate resolution does not automatically establish a contract with the company. The director will typically have a contractual relationship with the company in one of the following ways:

• as an employee under an employment contract.
• as a consultant under a civil-law service agreement.

However, in exceptional circumstances (e.g. for IT companies benefiting from the "Diia City regime"), the director may have a contractual relationship through a separate company or firm contracted by the company to provide their services. It is worth noting that certain legislative changes are still pending to make this option operational in practice.

Each of these options has different tax implications. 

Directors are prohibited from benefiting where their personal interests and their duty as directors conflict. A conflict of interest is defined as 'a conflict between the private interests of an official or his/her affiliates and the responsibilities of such an official to act in the best interests of the company, in good faith and reasonably'.

Among others, the above statutory prohibition specifically includes the duty not to accept benefits from third parties and not to make a secret profit by reason of being or acting as the company’s director.

To comply with this duty, directors should:

• declare a conflict of interest to the board, the GMP, or the supervisory board (whichever is relevant) within two days after he/she becomes aware of it; and
• submit a list of his/her affiliates to the company as part of the appointment/hiring procedure and update this list as necessary to ensure that it remains accurate and complete.

Directors are not under a duty to avoid transactions that they may have an interest in (i.e., related party transactions), but they must declare the nature of the interest to the board (direct and indirect) or another relevant governing body and seek prior approval from this body. A failure to disclose an interest and obtain approval will be considered a breach of duty and can result in the transaction being challenged in court. 

Apart from the obligations directors have regarding conflicts of interest, Ukrainian law imposes other general duties on directors. These include acting in the company's best interests, with good faith and reasonableness, and refraining from abusing their authority.

Furthermore, the law prohibits directors from engaging in competition with their company in the same business sector, serving as a director or board member for a competing company, and disclosing confidential information or trade secrets they have access to in their capacity as a company officer, except in cases permitted by law. Formally, the duty to maintain confidentiality persists for one year following the director's dismissal, with the possibility of a contractual extension.

The director’s duties are owed to the company itself, rather than to its participants (shareholders). In practice, when the company is solvent, this means acting in the best interests of the participants (shareholders) as a whole. 

A director must prioritise the best interests of the company and, consequently, take all necessary steps to ensure its financial well-being. Should the net assets value of the company decrease by more than 50% compared to the previous financial year, the director must notify the company’s GMP or supervisory board within 60 days.

If a director detects any indications of potential insolvency, they must promptly inform the GMP or supervisory board and initiate appropriate measures to facilitate financial recovery and efficient management of the company’s obligations towards its creditors.

If the company becomes unable to fulfil its financial obligations to its creditors, including unpaid salaries, a director is obliged to file a petition with a commercial court to initiate insolvency proceedings within one month of the occurrence of the situation. A failure to fulfil this duty may render the director personally liable for the company’s outstanding debts.

In the event of formal insolvency, the appointed insolvency practitioner has the authority to scrutinise the conduct of the directors, particularly in the period leading up to insolvency. Should a director be found to have breached their duties to the company, including through inaction, and such breach contributed to the company’s insolvency, they may be held personally liable for any resulting loss suffered by the company or its creditors. 

Apart from the liability related to insolvency, directors face a broad spectrum of potential liabilities stemming from their wrongful or negligent actions or omissions during the company's operations, whether mandated by law or contract. This includes fines and penalties for breaches of statutory duties and offenses, such as those outlined in the Criminal Code of Ukraine.

Directors owe their duties to the company itself, thus potentially facing liability for any breaches of those duties. However, they will not typically be directly liable to individual shareholders.

Additionally, there is a statutory framework for derivative claims, allowing any shareholder holding at least 5% of shares to file a claim on behalf of the company against directors who have breached their duties or acted negligently, resulting in harm to the company.

Lastly, under LLC law, a failure by a director to adhere to conflict of interest, non-compete, or confidentiality obligations could lead to various consequences, including the early termination of their contract with the company without any severance payment.

In general, a director's civil liability is typically unlimited, with some statutory exceptions. However, in principle the company can offer indemnity to a director for liabilities arising from civil actions by third parties, such as damages, costs, and interest. It is worth noting that Ukrainian law does not explicitly recognise indemnity, so it is uncertain whether such provisions would operate similarly to those in other European jurisdictions.

Directors can also have their liability waived by the GMP or the supervisory board retroactively endorsing their actions or transactions on behalf of the company, provided those actions are capable of being endorsed.

From an employment law standpoint, a director's material (financial) liability may vary depending on the type of damage caused to the company. Typically, an employee's (including a director's) material liability is limited to one average monthly salary. However, unlimited material liability may apply if there is a written agreement stipulating full material liability, particularly for the storage of the company’s property and valuables. Moreover, full material liability could also be imposed if a director causes damages due to criminal offences, illegal dismissals or transfers of company employees, or abuses their responsibility to represent the company.

While companies are allowed to purchase directors’ and officers’ (D&O) insurance on behalf of their directors, this practice is still rather rare. The specific terms of D&O liability insurance would need to be negotiated with the respective insurance company on a case-by-case basis.