How depository accounting of shares improves business security and opens up new opportunities for digitalising corporate governance

This often occurs with the participation of dishonest state registrars who make changes to the USR on the basis of improperly executed or forged documents. More than 1200 notaries in Kyiv alone have access to the relevant registration actions, which significantly increases the risk of abuse. In many cases, by the time the rightful owner learns of a change in the participants or management, the company`s assets may have already been withdrawn or transferred to third parties. Challenging such actions requires significant time and resources and often involves complex administrative or judicial procedures with unpredictable outcome.

In response to these challenges, and with the aim to enhancing the transparency of corporate governance, Ukraine has introduced a new approach to the accounting of LLC shares through the depository system. This mechanism became operational in March 2024, with the launch of a specialised share accounting system by the National Depository of Ukraine (NDU). Such accounting allows companies to transfer data on participants from the Unified State Register to the NDU system, preventing unauthorised changes and creating a new standard for digital security of corporate rights.

What is the essence of the mechanism and what are the key advantages of registering LLC shares with a depository institution?

The participant’s share in the LLC legally remains legally theirs, but the information about it is no longer stored and displayed in the USR. Instead, it is accounted for in the secure infrastructure of the depository institution in the same way as shares in joint-stock companies are accounted for. This approach ensures a higher level of confidentiality, protection of ownership rights and significantly reduces the risks of unlawful interference by excluding possible corporate changes of registrars and abuse by unscrupulous persons from the process. Only its owner and the selected depository institution have access to the custody account. State registrars do not have the technical ability to make any changes regarding shares. This is a key advantage of the system, ensuring real protection for shares from unauthorised interference.

However, the transition to depository shares accounting not only provides a new level of legal protection but also opens up a range of modern digital services that greatly simplify the management of corporate processes for LLCs: accounting of all ownership rights in one place, quick transfer of ownership rights, guaranteed mechanisms for the execution of transactions, electronic meetings of shareholders (including through preliminary electronic registration of participants, remote voting and automatic recording of meeting results), payment of dividends, and sending of participant notifications. This is especially convenient for companies with multiple participants located in different cities or countries. Participation is possible without the need to issue powers of attorney or personal attendance, which significantly reduces administrative costs. In addition, the electronic form eliminates the risk of administrative or judicial appeals against the meeting due to violations of formal procedures.

Another advantage of the system is the ability to effectively encumber shares. When information about the pledge is entered into the accounting system, the NDU blocks any dispositive actions with the share without the pledgee’s consent. This completely eliminates the loss of collateral without the lender’s knowledge. Unlike traditional shares pledges, where the debtor often blocks their sale, the NDU system allows for foreclosure without the pledger’s involvement, similar to the mechanism for shares. Thus, the pledge of shares in an LLC becomes more accessible to creditors, allowing them to raise financing on more favorable terms.

The share accounting system provides for the possibility of using escrow accounts during share purchase and sale transactions in an LLC. Such an account is opened based on an agreement under which the NDU commits to credit the shares to the account and make changes to the share accounting system only upon the occurrence of the conditions agreed upon by the parties. This feature is particularly relevant for M&A deals where both parties are interested in transparency, legal guarantees and protection of their interests. Moreover, the escrow account operates in a secure mode: transactions are restricted, and the enforcement or imposition of a lien on shares held in such an account is not allowed.

The integration of an LLC into the NDU system also provides a convenient mechanism for paying dividends. The LLC transfers funds to a special account with the NDU. The NDU then distributes the dividends to the participants directly or through depository institutions. This mechanism ensures automated and transparent accounting of payments, reduces the risk of errors or fraud, and provides participants with the confidence in the timely receipt of their income.

One of the key advantages of the transition to the NDU accounting system is the increased level of confidentiality and data protection. This is especially important in the context of the ongoing hybrid war, when digital threats have become part of the reality. The events of late 2024 clearly demonstrated the vulnerability of state information systems when Ukraine suffered one of the largest cyberattacks. As a result, the majority of state electronic resources, including the Ministry of Justice’s registers, were temporarily shut down. The operation of the USR and other critical systems was halted, and although the authorities officially assured that no data breach occurred, the situation itself was a strong signal of the need for alternative, more secure systems for managing sensitive information.

Against this backdrop, the share accounting system maintained by the NDU looks like a strategically safer solution for businesses. Information about the shares of LLC participants is not stored in the state register, but in a separate, specialised infrastructure that is not connected to the systems of the Ministry of Justice. This means that even if a large-scale cyberattack occurs again, state-related risks will not affect corporate rights if the registration is handled by the NSDU.

An additional advantage is that the accounting system operates on cloud-based solutions with a high degree of redundancy and protection. It is accessible only to depository institutions, whose activities are strictly regulated. Unlike the USR, where changes can be made by a notary without a thorough verification of the underlying grounds, unauthorised interference is virtually impossible in the NSDU system. Furthermore, the system’s architecture ensures the data integrity and immutability, while its technical isolation from government systems reduces the likelihood of external interference.

How to transfer the accounting of shares in an LLC to a depository institution? 

First of all, the LLC charter shall include a provision stating that the accounting of shares in the LLC’s charter capital is carried out in the accounting system of shares of the NDU. This is a critical condition because without the relevant provision in the charter, the NDU will not be able to accept documents and the state registrar will not be able to make changes to the USR. Additionally, the general meeting of LLC participants shall unanimously decide to transfer all shares to the accounting system. 

The next step is to conclude an agreement with the NDU and undergo the state registration. After updating the charter and adopting the resolution, the company submits a package of documents to the NDU, including an application for joining the public contract, constituent documents, ownership structure chart, a letter of no relation to the aggressor states, and the account registration form. After verifying the documents, the NDU applies to the Ministry of Justice with a request to enter the information into the USR. This date is considered to be the official start of the registration of the LLC’s shares in the NDU system. It is also confirmed by an extract from the register, which is subsequently used to open accounts.

The last step is the opening of accounts and the commencement of servicing. After the changes are made to the USR, the NDU opens the depositary accounts for the LLC and its participants. The participant can choose where their account will be serviced: directly by the NDU or by any of the depositary institutions that provide such services (e.g., a bank).

The transition to the NDU share accounting system is not just a technical update, but a step towards strengthening corporate security, transparency and trust in business. This approach minimises the risks of unauthorised interference, provides access to modern digital services and complies with international corporate governance standards. For companies seeking stability, investment attractiveness and modern corporate tools, this is a forward-thinking solution.