Top-10 novelties in operation of limited liability companies

On March 12, 2018 the President of Ukraine has signed the long-awaited Law “On Limited Liability Companies and Additional Liability Companies”. The Law establishes crucial changes to regulation of activity and management of limited and additional liability companies, which will come into force in 3 month from the day of its official release. All LLCs should bring their charters into conformity with the new Law.

Shareholders agreements (Corporate agreements)

One of the most anticipated and revolutionary innovations of the Law “On LLCs and ALCs” is introduction of such fundamental corporate tool as a corporate agreement whereby participants may establish the obligation to vote in a manner determined by such an agreement on a general meeting of the participants of the LLC, specify procedure and terms on which they have the right or obligation to buy or sell a share in the authorized capital of the company and determine terms when such right or obligation may arise, as well as to perform other actions related to the management of a company, its termination or reorganization. This kind of agreement is exclusively confidential (except cases when at least one party of this agreement is a state or its authorized body) and agreements which violate such corporate agreement are automatically considered null and void.

Irrevocable power of attorney on the shareholders rights

Another novelty of the Law is irrevocable PoA which can be issued to ensure fulfilment of participant’s obligations under the corporate agreement. Such power of attorney can not be revoked upon the request of the principal and in fact allows parties of the corporate agreement, in case of violation by other participant of the relevant terms, on the legal grounds to apply to the courts, state registrar with request on transfer of the share or to perform other actions on behalf of the participant acting in bad faith.

Formation of Supervisory board

The issue with formation of the Supervisory board in LLC is no longer matter of concern. The Law expressly states that LLC may form the Supervisory board, whose members will be able to perform their duties, both on the basis of a labor or civil agreement. It means that foreign companies doing business in Ukraine now are able to appoint their foreign representatives to the Supervisory board of subsidiary in Ukraine without obtaining of work permit for a non-resident. In parallel, provisions regarding the head of the company and the audit commission are excluded from legislation.

Participants of the company and authorized capital

In view of adoption of the new Law the restriction on maximum number of participants of LLC in 100 persons is finally removed. As a result, joint stock companies with more than 100 shareholders are allowed to change the organizational form to LLCs at their own discretion.
Also the Law eliminates an obligation to indicate the amount of the authorized capital and the composition of the participants in the charter of LLC. The deadline for participants to make contributions to the authorized capital is reduced from one year to six months. In addition, the Law establishes a new right of participants: in case if third party intends to make an additional contribution to the authorized capital of LLC, the effective participants, in order to preserve the size of their share, have a pre-emptive right to make an additional contribution within the amount of the increase, in proportion to their share. Considering reduction of the authorized capital, the creditors of the company under the new Law are given only 30 days to provide an application with their claims to the company (and not 3 months, as it was earlier).

Duties and liability of the officials

The Law introduces personal liability of an executive body and a supervisory board within all their assets for losses caused to the company by their actions or inactivity. Furthermore, an executive body has an obligation to convoke general meeting of company`s shareholders if the value of net assets of company decreased by more than 50% in comparison to the previous year. Such changes will induce executives to perform their duties more responsibly and to inform business owners with due advance about the financial problems of the company. In event of non-performance of such duties, as well as in case of company`s bankruptcy, the director will bear joint liability for the obligations of the company to the creditors.

In addition, the Law partially introduced a non-compete mechanism for company`s officials. Thus, a member of executive body and a supervisory board can not carry out business activities (either as private entrepreneur or as a participant or an official of other company) in the sphere of the company’s activity in which they hold a high-ranked position without the prior consent of their employers.

Significant and interested-party transactions

The Law specifies definition of a significant transaction (specific criteria of which could be determined by the charter) and interested-party transaction (transactions with affiliated companies or other individuals, specified in the charter). In any case, the Law has a binding provision to preliminary agree the transaction that exceeds 50 % of the net assets of the company by the end of the previous quarter, exclusively by the general meetings of the participants. The law provides that such transactions are valid even if they are approved after their implementation.

New rules for succession

The law stipulates that the successor does not need to get the prior consent of all participants to become a member of the company. To make it enforceable, the respective amendments to the Law on state registration were envisaged, according to which in order to become a member of the company the successor has to provide State registrar with relevant application along with documents confirming his rights to inheritance.

Withdrawal and expulsion of the participant

The law significantly changes the approach to regulation of withdrawal and exclusion of the participant. In particular, a member of LLC holding a share of 50% or more in the authorized capital can not withdraw from the company without primary consent of other participants. Once the company has received from the participant an application on withdrawal, it is obliged within 30 days to inform such participant on the value of his share and to provide copies of the documents confirming calculations.
In addition, the Law does not provide the possibility to exclude a participant for non-performance of his duties or if his actions impede to reach company’s aims. As for now it is possible to exclude a participant only in case of non-payment of the value of the share in the authorized capital or in case of death / termination of the participant (or in case if the successor does not apply in due time with the application on accession).

Foreclosure of a share

Finally, the provision that enables the creditor to foreclose the share in the authorized capital only if the debtor does not have enough assets to repay the debt, is excluded from the Civil Code. Such changes can persuade banks to be more confident in providing business with loans, because in case of default, the bank will be able to get control over the borrowing company, and at its own discretion to manage company`s property and its further destiny.
Furthermore, from the effective date the Law will resolve a thorny issue regarding the seizure procedure of a share in the charter capital. Now such foreclosure can be implemented on the basis of an executive document on collection of the participant`s funds or foreclosure on guarantor`s share.

New way to hold the General meeting

And last but not least, the law provides the possibility to determine in the company’s charter the procedure of holding general meetings of the shareholders by means of videoconference. In addition, participants are allowed to participate at the meeting by sending a notarized document that reflects their votes regarding issues in the agenda and must be annexed to the minutes. These novelties are specifically important and relevant to foreign investors considering significant time and cost consuming for personal attendance at the meetings.