Ukraine: Law on Limited Liability Companies is Now in Effect

On 17 June 2018, the long-awaited Ukrainian Law “On Limited Liability Companies and Additional Liability Companies” (the “Law”) has come into force after its adoption by the Ukrainian Parliament on 6 February 2018. The Law constitutes a comprehensive piece of legislation regulating the activities of the most commonly used legal form for entities in Ukraine – the limited liability company (the “LLC”).

The Law introduces numerous innovations in the regulation of LLCs. It offers shareholders broad discretion when disposing of their shares, choosing the preferred method of managing the LLCs and structuring their constitutional documents. It will make Ukrainian LLCs a more attractive vehicle for investment.

New corporate governance standards

The Law significantly improves the corporate governance of LLCs. In particular,

• the necessity for reaching quorum at shareholders’ meetings has been removed;
• new thresholds for adoption of decisions by the shareholders’ meetings have been introduced;
• procedures for adoption of shareholder’s resolutions in the LLC owned by a single shareholder have been simplified;
• supervisory boards with independent members are now explicitly allowed;
• audit commissions are no longer required;
• better balance has been achieved between the liberty of directors to make management decisions and the ability of shareholders to exert effective control over the activities of directors; and
• the liability of directors has been significantly increased.

Shareholders’ agreements

The Law separately regulates the execution of shareholders’ agreements in LLCs. Such agreements are confidential, except when concluded with the state, a municipality, or a state- or municipally-owned company. An irrevocable power of attorney may be issued for the purposes of securing the performance of obligations under such a shareholders’ agreement.

The lack of adequate regulation of shareholders’ agreements in Ukraine has driven many business structures off shore in the past.

Share transferability

The Law sets forth new standards for share transferability. It aims to balance the rights of various stakeholders, the minority and majority shareholders, investors and creditors, and offers them a set of new tools, including:

• better regulation of procedure for entrance into and exit from business, as well as for successions;
• simplification of the procedure for share transfer (through the removal of the requirement to list the shareholders in the charter and also to register amendments with the charter);
• introduction of a debt to equity conversion mechanism; and
• new rules on foreclosure on a pledged equity share in an LLC.

Related-party and material transactions

The Law introduces the concepts of interested-party transactions and material transactions. The shareholders are at liberty to agree on whether prior approval will be required for the execution of any related-party transactions.

At the same time, material transactions (with a value of more than 50% of the LLC’s net assets as per the preceding quarterly accounts) require pre-approval by shareholders by default. The shareholders may also agree to extend the definition and list the material transactions for this purpose. The LLC management shall bear joint liability for damages caused due to the execution of a material transaction without its approval by the shareholders.

Removal of the ‘anti-chaining rule’

The Law finally removes the so-called ‘anti-chaining rule’, which prohibited possession of a 100 percent share in an LLC by a shareholder who, in turn, also has only one shareholder. This rule also prohibited a single shareholder from holding a 100 percent share in more than one LLC. This change in the law aims to simplify the internal structuring of corporate groups in Ukraine.

Other changes

The Law introduces a number of other game-changing rules related to the operation and management of LLCs. The innovations include:

• cancellation of the ceiling on the number of shareholders in an LLC (making possible the conversion of joint-stock companies into LLCs and leading to a major simplification of their activities, regulations, and reporting);
• the possibility of excluding the preemptive right application during the sale of shares;
• notarial certification of particular shareholders’ resolutions and notarial certification of signatures at ballots for absent voting (leading to a minimization of the risk of raider attacks);
• simplified registration procedures; and
• new rules for charter capital increase.

The Law is expected to improve the investment climate in Ukraine, promote development of small and middle size businesses, and prevent capital outflow from Ukraine. It also aims to harmonize corporate regulations in Ukraine with those in EU.

Maria Orlyk, a partner at CMS Reich-Rohrwig Hainz, is one of the members of the working group entrusted with the preparation of the Law and one of the Law’s co-authors.

Legislation:

Law of Ukraine “On Limited Liability Companies and Additional Liability Companies” No. 2275-VIII dated 06 February 2018