A few years ago, the Ukrainian Bar Association conducted a study among its members regarding the perception of the country’s corporate governance laws, which have remained unchanged since 1991. According to the poll’s results, only 14 percent of respondents gave the laws four points out of a possible five, and none of those questioned gave a five.
That’s not a surprise, because for several decades local entrepreneurs have had no stimulus to register their business, develop it and pay taxes in Ukraine. Instead, the majority of them preferred to use other jurisdictions. At the same time, investors who were potentially interested in Ukraine felt hesitant to step in and work in the local legal field.
The legislative base remained archaic and ineffective both for business and the Ukrainian economy in general until Feb. 6. Around the world, this day was notable for the historic launch of Elon Musk’s Falcon Heavy. We in Ukraine had yet another reason to celebrate: on this day, the Verkhovna Rada, Ukraine’s parliament, adopted the long-awaited law on limited liability companies, or LLC’s.
As a result of joint efforts by the Parliamentary Committee on Economic Policy, leading legal firms and experts in corporate law, the new regulation base will affect half a million companies, or about 43 percent of the total number of business entities in Ukraine. It will have a direct positive impact on small- and medium-sized enterprises, as LLC is the most common form of small- and medium-sized enterprises in the country.
This will be a real game-changer for business, both local and international, and here’s why.
First, it makes LLC regulations more transparent, and flexible due to a higher level of discretion. This means owners themselves have the ability to agree among themselves about how they want their relations to be. It also introduces the practice of corporate deals – owners will be able to set the conditions for establishing, operating and closing their business entity in the way that most suits them. Besides, it will also be impossible for LLC participants to kick out a minority owner out of the partnership without a court ruling, or for those in power to take the business away from its owners through raider schemes.
The law enables debt to equity conversion, and allows LLC participants to control deals with interest, as well as preventing conflicts between different businesses of the same partners. It also presents the instrument of corporate liability rights as collateral for loans. This will facilitate the attraction of additional funding and offers great opportunities for business development.
In addition, the newly adopted legislation introduces supervisory boards to Ukrainian private companies. This mechanism has proved to be effective in many countries as one that helps to improve transparency and accountability. Its successful implementation in Ukraine is especially vital for local business seeking foreign investors.
All these innovations make the new corporate governance law a great signal, and yet another step to making Ukraine a great place to invest in. It will benefit not only Ukrainian companies, but also foreign businesses operating and creating jobs in the country. Now there is less chance for anybody to illegally gain control over companies, appropriate their assets or block operational activities if there is a dispute with one of the co-owners. From now on, private companies in Ukraine will act according to new rules that, I am sure, will move Ukraine up the World Bank Doing Business rating in terms of protecting minority rights and generally improving the local business climate.
By integrating best world practices into Ukrainian law, we’re continuing to make it transparent and simple for both locals and foreigners. Concession legislation, successful privatizations, and further moves in deregulation are next on the to-do list.
Yulia Kovaliv is the head of the Office of the National Investment Council, a non-governmental organization that partners with government to bring investors to Ukraine.
