On 6 February 2018, the Ukrainian parliament adopted the Law on Limited Liability and Additional Liability Companies (the “New Law”). Although the New Law is yet to be signed by President Poroshenko and published in official media, it is already difficult to overestimate its possible impact on the activities of more than half a million companies. Indeed, the New Law is a complex document establishing an entirely new legal framework for limited liability and additional liability companies in Ukraine. In this article, we identify ten of what we believe are the most important issues raised by the New Law.
1. Corporate Agreements
The New Law introduces the long-awaited option of concluding corporate agreements, something previously not common in limited liability companies due to a lack of regulations. Corporate agreements between participants of an LLC may now inter alia serve to regulate the sale and purchase of shares and issues of corporate governance. It is also worth mentioning that on 15 February 2018, the President of Ukraine finally signed the Law on Corporate Agreements adopted by parliament almost one year earlier on 23 March 2017.
2. New Rules for Payment of Dividends
The New Law introduces a number of rules relating to the payment of dividends by LLCs. The New Law states that dividends are payable for any quarter or any multiple quarters unless the charter establishes a different period. Secondly, the New Law lists circumstances when the LLC may not distribute dividends. This includes if the LLC has debts towards former participants or their successors, if the LLC does not have sufficient assets to settle all creditor claims, or if such insufficiency will occur after payment of dividends. Additionally, the LLC may not pay dividends to any participant who failed to make their contribution to the share capital (partially or in full).
3. Significant and Interested-Party Transactions
The concept of ‘significant’ and ‘interested-party’ agreements is not new. It already exists for joint stock companies. Since LLCs are mostly private companies, the idea here is to allow LLCs to decide whether they want to require corporate approvals for significant and interested-party agreements. However, the article on significant transactions, as seen in the last available draft of the New Law, is subject to interpretation in a way that makes it an obligatory requirement to seek corporate approvals for transactions exceeding 50% of the net assets of the LLC. This could be an issue for a number of LLCs, especially those with negative net assets.
4. Net Assets
Many of us are well aware of the existing provision requiring LLCs to adopt a decision on liquidation in the event of negative net assets. The New Law changes this by setting forth that “if the value of net assets of the company has decreased by more than 50% compared to their value as of the end of the previous year, the executive body of the company shall convene a general participants’ meeting. This meeting is to take place within 60 days from the day of such a decrease. The agenda of the meeting shall include measures to be taken to improve the financial condition of the company, decrease the charter capital of the company, or liquidation of the company.” Therefore, an LLC may adopt a business plan to restore net assets without having to liquidate. The main purpose of this provision is to ensure participants are well aware of the current financial condition of the LLC.
5. Supervisory Board and Audit Commission
The New Law allows for the creation of a Supervisory Board to control the executive body of the LLC. In parallel, it abolishes such archaic bodies as the Audit Commission.
6. Maximum Number of Participants
The New Law removes the maximum number of participants in a LLC, which, according to the Law on Business Companies, constitutes 100. This will allow joint stock companies with thousands of shareholders to consider the possibility of changing their business form.
7. Civil Law Contract with General Director
Although the New Law is not explicitly clear, it mentions the possibility of concluding a civil law governed contract with the general director as an alternative to employment. In fact, this provision corresponds to the “fiduciary duty”, which is also introduced by the New Law as indicated below.
8. Fiduciary Duty
The New Law imposes liability on Supervisory Board members and members of the Board of Directors (the Director) for damage caused to the LLC. Moreover, these officers may not act as private entrepreneurs in the same field where the LLC is active. They cannot be full participants of a partnership conducting business in the same field where the LLC is active. Nor can they be members of the Supervisory Board or the Board of Directors (the Director) of a company that operates in the same field where the LLC is active.
9. Debt to Equity Swap
The New Law abolishes a number of provisions in the Civil Code of Ukraine. One such provision is the prohibition on releasing participants from the obligation to contribute to charter capital, including by way of set-off. This provision was often cited as prohibiting debt to equity swaps by way of set-off of claims
10. Last But Not Least
The New Law introduces a number of important additional concepts and tendencies including removal of the quorum requirement, simplification of charters, the possibility of pledging shares, and wide discretion for LLCs to depart from general rules.