The Law on LLC in force: the first practice in applying the Law

More than one year ago Ukrainian business has been granted a wide variety of flexible instruments for corporate governance, established by the Law of Ukraine “On limited and additional liability companies” (hereinafter referred to as “the Law”).

Only by the end of the first year of the Law being in force, Ukrainian companies have intensified their efforts to adapt to new rules and amend their charters, however still apprehensively and not using all the proposed possibilities. The flexibility and freedom in regulation of corporate relations which appeared to replace outdated rules are unusual for Ukrainian business community. In this connection, some of the new developments such as shareholders’ agreements, new shareholders’ meetings procedure up to now still undeservingly remain without business’s attention and are not broadly used. Meanwhile, companies have already gained some experience in applying the Law and first case law has occurred, although it is still insignificant.

Significant transactions. The Law establishes that transactions exceeding 50% of net asset value of the company by the end of previous quarter shall be previously approved by the general shareholder’s meeting exclusively. Taking into account the fact that vast majority of limited liability companies (hereinafter – “LLC”) in Ukraine have low net asset value and sometimes even negative value, the mentioned rule caused additional load on LLC’s operating activity and its contracting parties.

It caused situation when during day-to-day economic activity, before signing of an agreement, the parties are forced to request accounting statements and decision for the transaction approval from each other. Moreover, this rule created possibility for manipulations from unconscientious contractors. There have occurred first court decisions related to contracts invalidation based on absence of required approval from LLC participants.

Of course, some options for resolving the issue are already developed. In particular, general meeting of shareholders may adopt the decision for preliminary approval of transactions which will be concluded during the year with further additional post-approval by the end of six-month period etc.

Supervisory board. The possibility for creation of supervisory board in LLC is frequently used by the companies for purpose of partial transfer of the shareholders’ meeting powers to supervisory board which simplifies corporate governance. Additionally, members of supervisory board can perform their obligations either on the basis of employment contract or non-remuneration civil contract. This enables foreign investors to appoint their representatives (non-residents) as members of supervisory board of Ukrainian companies without need to obtain work permits for foreigners.

Free LLC’s shares circulation. According to the Law, for the purpose of shareholders’ change on the basis of sale and purchase of shares or their succession, there is no need to summon the shareholders meeting and amend the company’s charter (if it complies with the Law). This greatly simplified circulation of shares and reduced list of documents required for registration of changes related to it. From the other hand, for the companies, which included to their charters maximum amount of information (including list of shareholders, amount of their shares etc.), the new regulation caused certain inconveniences. In such a case they will be required to perform several separate registration actions to perform change of shareholders.

Shareholders’ agreements. Practice for shareholders agreements conclusion has began to take shape, however is still not very popular. Considering absence of case law in relation to shareholders’ agreements, clients cast fearful glance at this instrument. At the same time, shareholders agreement is the most flexible arrangement between business partners that enables adjusting business management according to needs of owners and to prescribe peculiarities of particular shareholders’ rights and obligations execution, order of dispute and deadlock situations resolution.

Overall, summarizing the results of the Law in action, it can be stated that its influence on doing business in Ukraine is positive to a greater extent. Ukrainian business finally can stay away from usual for Ukrainian law imperative over-regulation of corporate relations and head to general free discretion.