Ukraine: Does The New Law On Limited Liability Companies Require Amendments?

Last Updated: 11 July 2019
Article by Dmytro Gron
Most Read Contributor in Ukraine, July 2019

It's been a year since the Law of Ukraine "On Limited Liability and Additional Liability Companies" became effective (hereinafter referred to as the "Law" ). Over the period, the law enforcement practice has been developed, as well as necessity to remove certain loopholes has arisen. We will discuss the major issues of the Law further in this article.

Significant Transactions

Though the Law is designated to ensure bigger discretion of the parties to corporate relationships, part 2 article 44 of the Law envisages an imperative norm whereby entering into a significant agreement (i.e. an agreement, which value (price of assets, works or services) exceeds 50% of a company's net asset as of the last day of a preceding reporting period) shall be subject to approval of a company's general meeting of shareholders. This provision becomes more inconvenient or even burdensome when applied to newly-established or small companies, since any deal to which such company becomes a party is conditional upon the above imperative norm, hence requires that a general meeting take a decision. Thus, there is a commonly accepted approach whereby obtaining of an approval for a significant deal shall be a discretion of the company shareholderds and shall be properly addressed by the company's articles of association.

Parties to the corporate (shareholder) agreement

Court practice in cases related to conclusion of corporate agreements is almost no-existent, since such agreements are still quite new for Ukraine. There are unresolved issues associated with the definition of parties to such an agreement.

Market players still argue about the third parties. From its prospective, the Law sets forth as follows: the corporate agreement is an agreement whereby the company shareholders undertake to enjoy their rights and powers in a prescribed manner or abstain from the enjoyment thereof.

This provision may be interpreted to imply that only company shareholders may be parties to the corporate agreement given the subject-matter of such an agreement – responsibilities of shareholders – to enjoy shareholders' rights and powers in a prescribed manner or to abstain from their enjoyment.

However, there is another position, which suggests that the above provision shall be deemed only as a reference to the subject-matter of the agreement and not the parties thereof. There is a possibility to include third parties into a corporate agreement (for instance, investors or future shareholders) provided requirements to the subject-matter of the agreement are met.

The Law is silent on whether a company itself may be a party to the corporate agreement; this possibility could help in resolving a number of issues associated with the company's responsibilities towards its participants. Therefore, if a company becomes a party to the agreement, the latter may envisage that the company may be a party to any litigation arising from violation of a corporate agreement.

In this context, we should also refer to the English law, which provides for a possibility of future participants (shareholders) to enter into a corporate agreement; it also states that a company itself may be a party to the agreement. In such a case, corporate agreement may include an obligation of future shareholders to carry out certain actions in order to become the company's shareholders or vise versa – an obligation of the company or company shareholders to fulfill obligations necessary to ensure joining of the new members.

Corporate agreement: scope limitations

Major issues of Law interpretation arise in connection with the ambiguous scope of the corporate agreement. Article 7 of the Law sets forth that a corporate agreement may envisage conditions that regulate purchase of the company's shares. At the same time, it is not clear why this provision is limited to share purchase and does not cover any other share disposal. Similarly, article 20 of the Law envisages pre-emptive right of a share purchase and procedure thereof; part 6 of this article states that the company's articles of association may provide for alternative procedure of pre-emptive right realization. Considering the above, there is a question on whether a procedure of pre-emptive right realization may be stipulated by the corporate agreement (and not by the articles of association) as a document, which, according to the Law, determines responsibilities of the shareholders to enjoy their rights and powers or abstain from their enjoyment.

Originally published by Yurydychna Gazeta.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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