Rada changes rules of the game for limited liability companies

On 6 February 2018, the Ukrainian Parliament took a huge step on the way of corporate reform in Ukraine and passed the Law on Limited Liability Companies and Additional Liability Companies (the “Law”) designed to significantly change the legislative regulatory framework for most sizable group of legal entities in Ukraine.

Despite its popularity limited liability company (the “LLC”) as a legal form had a number of deficiencies, including lack of proper flexibility in its regulation and corporate governance. Without any doubt, the former rigid regulation adversely affected the development of small and medium-sized businesses, as well as the investment attractiveness of Ukraine at large.

For these very reasons, the new Law was developed and finally adopted, introducing the game-changing rules in the Ukrainian corporate law.

The Law introduces numerous novelties in the regulation of LLCs and offers shareholders broad discretion in disposing of their shares, choosing the preferred method of managing the LLCs and structuring their constitutional documents.

Furthermore, the Law explicitly allows shareholders to enter into shareholders’ agreements, being a standard practice in other developed jurisdictions. Lack of proper regulation of shareholders’ agreements in Ukraine has driven many business structures off shore. Such agreements may provide for obligations that shareholders vote in a certain manner, seek approval for a sale or purchase of shares at the pre-agreed price or conditions and refrain from sale of shares. At the same time, the shareholders cannot be obliged to vote according to instructions from the governing bodies of the company (except for the cases where a shareholder of the company is a member of its governing body). Moreover, shareholders’ agreements may regulate various issues of company management (such as appointment of directors, business strategies and investment policies etc.), and resolve deadlock situations.

The Law significantly improves corporate governance in LLCs. In particular, shareholders of LLCs will have an option to establish a supervisory board with independent members. The Law also provides for better balance between the liberty of directors in taking management decisions and effective shareholders’ control over the activities of directors. The liability of directors is significantly increased.

The Law aims at balancing the rights of different stakeholders, the minority and majority shareholders, investors and creditors and offers them the following benefits:

• better regulation of procedure for entering into, succession and exit from business;
• minimisation of opportunities for raider attacks (e.g. via the notarial certification of particular shareholders’ resolutions and notarial certification of signatures at ballots for absent voting);
• simplification of the procedure for share transfer (via cancellation of the requirement to list the shareholders in the charter and also register amendments to the charter);
• introduction of a debt to equity conversion mechanism by eliminating provisions that blocked such mechanism;
• new regulations applicable to foreclosure on a pledged share in an LLC;
• introduction of a concept of significant and interested party transactions requiring approval by shareholders.

The Law further simplifies the registration procedures and does not put a cap on the number of shareholders in an LLC. This should give joint-stock companies an opportunity to convert into LLCs and significantly simplify their activities, regulations, and reporting.

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

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

The Law has already been signed shall come into force on 17 June 2018.