On Feb. 6, 2018, the Ukrainian parliament adopted Law No. 2275-VIII “On Limited Liability and Additional Liability Companies,” which comes into force on June 17. The new law improves the regulation of creation, operation and termination of limited liability and additional liability companies.
Being one of the most popular forms of doing business, changes in LLC’s regulation will affect the huge part of Ukrainian business environment. Some of the developments will be familiar to foreign investors who might have met similar provisions in worldwide practice or western legislation. Now while running a LLC the participants will enjoy more freedom in internal governance and more control over management.
The key changes we would like to draw your attention to:
No restrictions on chain 100 percent ownership
Ukrainian law has had a rule which prohibited LLC to have a sole participant which is at the same time a sole participant of another company. In addition, a person/entity could have been a participant only in one LLC that had one participant. This rule impeded to build a straight shareholding line with 100 percent ownership from parent company to Ukrainian LLC. Now after restructuring the group owners may exclude the second participants which were brought in only to formally abide the law and notably decrease intragroup paperwork and corporate expenses.
The list of obligatory information in charter is shortened
Information on the registered capital and list of shareholders of LLC is now not mandatory required to be included in the Charter. Only the following needs to be included in the charter: The name of the company; management bodies of the company, their competence and decision-making procedures; procedures for entering and leaving the company.
Nevertheless the participants may set in the charter own rules regarding:
- detailed procedures, means and terms for increasing the registered capital;
- existence of pre-emptive rights of a participant to acquire a share and the procedures of exercising of such rights (if they are set by the charter);
- ban for pledging the share;
- the terms, procedures and means of settlement with the participant which leaves the LLC;
- the period for which dividends are distributed, the term of payment of dividends, the conditions when the dividends can not be distributed;
- detailed procedures for convening and holding a General Participants Meeting;
- special quorums for taking certain decisions at General Participants Meeting. However, some decisions can be made only unanimously by all participants;
- possibility of absentee voting and voting by polling;
- the procedure for the appointment of members of collegial executive body of the LLC and their competence;
- the procedure for the appointment of members of the Supervisory Board (if there is one) and their competence;
- the procedures for the conclusion and approval of material and interested party transactions.
Shareholder Agreement
Shareholder Agreement has been finally allowed to be used in LLC. It may define the procedure how the participants will execute their corporate rights or restrain from certain actions. Such agreement is optional and can be executed by all or part of the participants, or even between participant(s) and a third party. The agreement can be made in simple written form and is strictly confidential.
Irrevocable power of attorney
Another breakthrough is introduction of irrevocable power of attorney for corporate matters, issued to ensure execution of participant rights as a party of shareholder agreement. Such power of attorney needs to be notarized, cannot be revoked by its issuer and automatically terminates in case of termination of obligations for which it had been issued.
Additional control over net assets
The new rule regarding the value of net assets was introduced. If the value of the net assets of the LLC decreased by more than 50 percent compared to the value by the end of the previous year, the executive body shall convene a general participants meeting to be held within 2 months, where participants shall discuss the measures to be taken to improve the company’s financial position, reduction of the registered capital or the liquidation of the company.
Shortened term for registered capital contributions
The term for participant’s full contribution of the company was reduced from one year to six months since the state registration of the company (can be changed by the charter). Additional contributions during increase of registered capital shall be made within one year.
New rules on enforcement of a share in LLC
The lawmakers finally have set the detailed procedure for enforcement of a share in LLC. The enforcement of a share in LLC will be carried out based on enforcement document. State enforcement officer shall address to the LLC with request for financial data basing on which he shall calculate the monetary value of the share. Enforcement of the share in LLC is executed taking into account the pre-emptive rights of other participants.
New rules on exit and change of the participant
A LLC’s participant whose share in the registered capital of LLC is 50 or more percent now may exit from the company only with the consent of other participants.
Also worth mentioning that there is no more need to convene the General Participants Meeting and sign minutes of the General Participants Meeting to register sale/transfer/assignment of the share. Only a transfer/acceptance act is required for registration of the change of participant. Now previous or new participant can apply for registration of changes without any dependence on LLC’s management or the other party.
Procedure for calling and holding of a General Participants Meeting becomes flexible.
The possibility for participants to vote in absentia at a General Participants Meeting is established. Additionally, it will be possible to adopt resolutions by polling through electronic means. The law also enshrines the possibility of holding a General Participants Meeting via videoconference.
Managerial changes
From now on participants of LLC will be able to set up a Supervisory Board that will control and regulate the executive body of the LLC. Moreover, the Members of the Supervisory Board will be (like the executive body) liable for damage made to the company due to their guilty actions or inactivity.
The members of the Supervisory Board will be able to perform their duties based on a civil or employment contract. The same capability is now also applied to the executive body (before – only employment agreement). This means that the foreign management now can be hired without a need to receive costly work permit in each case.
When appointing a member of the Supervisory Board and a member of the executive body, they shall submit to the company a list of their affiliates and keep it updated.
Set up of internal audit committee in LLC is now not required.
Material and interested party transactions
Another innovation is imperative regulation of material transactions. Transaction which value exceeds 50 percent of the net assets of the company at the end of the previous quarter now requires prior consent of the General Participants Meeting.
Also now the charter may include special procedures on approving interested party transactions. The interested could be LLC’s official, a participant who owns a share of at least 20 percent of the registered capital of LLC or their affiliates
Limitation of business activity of an executive body and a supervisory board.
The law sets limits on business activity of members of the executive body and the Supervisory Board. Now it will not be possible for them to do the same business as LLC does without receiving LLC’s consent regarding it.
Until June 17, 2019 (one year from the date of entry into force of the new law) LLCs may govern their corporate life in accordance with their effective charters.
After June 17, 2019 the provisions of the new law will prevail over the charters.
This rule does not apply from the moment when the LLC amends the charter any time after June 17, 2018 (the date of entry into force of the new law). The amended charters must be harmonized with the new law.
