Law of Ukraine "On limited liability and additional liability companies" – new possibilities for business
The new Law of Ukraine "On Limited Liability and Additional Liability Companies", No. 2275-VIII (the Law), became effective on 17 June 2018, replacing the outdated provisions of the 1991 Law of Ukraine "On Business Companies" that regulated the operation of limited liability and additional liability companies (LLCs and ALCs).
Please see below our insight on opportunities created by the Law for the most popular form of business company (LLC).
Whether LLC shall immediately amend its charter after 17 June 2018?
(і) LLC shall not amend its charter to comply with the Law.
(іі) Until 17 June 2019 (incl.) within one year as of the date the Law becomes effective, current LLC's charter prevails over the Law (subject, however, that such charter complied with the applicable laws as of the day on which the Law became effective). This rule does not apply if the charter is amended within one year since the Law became effective (i.e. until 17 June 2019).
What else may be provided in the charter at the discretion of participants?
(і) Some provisions that used to be mandatory now may be excluded from the charter. Under the Law, the only must-be-in-the-charter provisions are as follows:
(А) LLC name;
(B) governing bodies and their competence;
(C) procedure of joining and exit from LLC.
The Law does not require to indicate the share capital amount, name of participants, and their participatory interest (shares). Hence, the State Registrar shall now be the only source of information about amount of share capital, LLC participants, and their shares.
(іі) On top, participants at their discretion may provide in the charter the new regulations about:
(A) procedure for execution of pre-emptive rights by participant or refusal from such rights;
(B) detailed procedure and terms for share capital increase (by reinvestment of dividends, additional contributions, debt to equity swap);
(C) terms for shares charge;
(D) terms and procedure for settlement with participant exiting LLC;
(E) dividend payment period, terms of payment, and events precluding payment of dividends;
(F) procedure for calling the general participants' meeting (GPM);
(G) discretional quorum for the GPM (the Law does not provide for obligatory quorum now);
(H) discretional thresholds for GPM resolutions; it is also possible to hold GPM by absent voting and ballot voting. However, certain decisions may be adopted only unanimously and such procedure may not always be amended by the charter;
(I) simplification for calling GPM for LLC with one participant;
(J) procedure for appointment and operation of the management;
(K) procedure for appointment and operation of the supervisory board;
(L) procedure for entering into material and related-party transactions.
3.Formation of share capital
The Law does not establish a minimum threshold for the share capital amount. For instance, share capital may be UAH 1.
4.Number of participants
The Law abolishes the participants limit (previously, they may not exceed 100). For GPM decisions, they shall be made from all participants of the LLC, but not from those present on the meeting.
5.Flexible rules for shares transfers and prevention of hostile takeovers
Now participants at their discretion may establish individual rules for disposal of shares to other participants or third-parties; charge of shares; execution of pre-emptive rights, or refusal from it; distribution of shares in case of share capital increase. Such rules may be implemented in the charter by the unanimous decision of participants.
In case of acquisition and disposal of shares there is no need to convene GPM and to approve amendments to the charter to reflect the change of participants. However, this rule seems to apply only if LLC charter has been amended to exclude the information about participants and their shares. In practice, it means the freedom of participants to transfer shares without need to approve it by GPM. Change of LLC participants is held only by making the respective entry in the State Registrar. Hence, any interested party may apply to the State Registrar to amend information about LLC participants irrespective of the willingness of other participants.
Rules for disposal of shares were also amended. The Law cancels quasi-judicial control of the notary over the content of the agreement re shares disposal (if the parties wish to notarize such agreement). The Law allows now to use instrument of share transfer for the purpose of registration of the change of participants with the State Registrar.
Also, instead of certifying agreement by notary, it is possible now to:
(і) certify instrument of transfer of shares (should be useful for complicated transactions), any other agreement re transfer of shares (for example, share contribution agreement) or other deed regarding the change of the title to shares (for instance, exit application); or
(іі) verify validity of signature on the shares sale and purchase agreement.
Nevertheless, if the parties still wish to certify the agreement, certification cost shall now amount to one untaxable minimum income, and not 1% of the agreement's price as it used to be.
6.What has changed in regulation of actions of LLC's management?
Director and members of supervisory board may act on the basis of labor or civil contract.
The Law establishes non-compete rules for management of LLC. Non-compete rules apply in case of engagement in competing businesses and if there is a conflict of interest between the manager’s duties and his/her private interests.
The Law provides for employee's duty to act in good faith and reasonably in the interest of LLC.
Officers of LLC are jointly liable for damages made to the LLC.
7.LLC net assets – what is new?
(і) LLC net assets value serves as test for financial health of LLC. Management shall call GPM if the value of net assets has decreased for more than 50% comparing to the value on the last year end. Failure to comply with this rule may result in secondary liability of management in case of LLC bankruptcy;
(іі) requirement to adjust value of the LLC net assets to share capital amount is now abolished;
(ііі) value of the LLC net assets also serves as a criterion to determine whether certain contract is material and requires approval of GPM.
8.Agreements with LLC
LLC charter may provide for tailor-made rules for entering into material and related-party transactions. Criteria for such transactions as procedures for their approval may be established at the discretion of participants in the charter.
9.Whether participant may be expelled from LLC?
(і) No, except for two following instances, where GPM may expel participant:
(A) if participant did not made contribution to share capital on time;
(B) if heir of the participant, which holds less than 50% of shares, did not apply for entry into LLC within one year after the term of entry into heritage expired.
(іi) Expelled participant is entitled to get the value of its paid shares established at the market value. Such value shall be determined on the day preceding the day of GPM resolution approving the expel.
10.Whether procedure of exit of participant from LLC has changed?
(і) Participant that holds less than 50% of LLC's shares may exit from LLC without consent of other participants. However, the participant that holds more than 50% of LLC's shares now requires consent of other participants to exit from LLC. Participant may not exit LLC if there will be no one left;
(іі) Participant that exits entitled to get the value of its paid shares established at the market value. Such value shall be determined on the day preceding the day of filling application for exit to the State Registrar;
(ііі) Finally, date of exit is determined as a date of the relevant entry in the State Registrar. Simultaneously with registration of such exit, the share capital decrease in the amount of shares of exiting participant is also registered.
11.Corporate (shareholders) agreement and irrevocable PoA
(і) LLC participants may enter into corporate (shareholders) agreement (SHA);
(іі) SHA establishes the procedure for execution of participants’ rights and competences. The agreement has different subject comparing to LLC charter, as the latter establishes the scope of such rights and competences within the limits provided by law;
(ііі) participants do not need to notify LLC regarding the existence and contents of SHA, if they have not agreed otherwise. This rule does not cover LLC, where state or municipality holds any shares;
(iv) To execute SHA participant may issue irrevocable power of attorney, for instance, authorizing the sale of certain shares for a certain price in case of prescribed event;
(v) If LLC enters into a commercial contract in breach of SHA such contract is void, only provided that other party knew or should have known about such breach. In any other event such contract shall be effective;
(vi) If LLC participant being a party to SHA acted in breach of it, such action may not result in declaring the relevant resolution of GPM of LLC void. At the same time, rights and interests of other participants – parties to SHA shall be protected by compensation mechanisms such as damages and fine.
12.What else changes?
(i) Provisions of the Law of Ukraine "On Commercial Entities" regarding LLC and additional liability companies (ALC) are abolished;
(ii) Articles 140-151 of the Civil Code of Ukraine covering provisions on LLC and ALС are abolished;
(iii) Provisions of the Commercial Code of Ukraine, which duplicated regulation of LLC and ALС provided by other laws are partially abolished.