New law for companies with limited liabilities
On February 6, 2018, the Ukrainian Parliament adopted a law "On Limited Liability Companies (LLC)". Once signed by the President of Ukraine, the law will become effective on June 17, 2018.
By Ulyana Kit & Oksana Khariv
Changes introduced by the new law
Overall, the law is anticipated to improve the investment climate in Ukraine, promote development of small and middle size businesses, and prevent capital outflow from Ukraine. Summary of the relevant changes is as follows:
Under the new law, the charter should not contain information about the size of the authorized capital, equity shares and contribution by the shareholders as well as their personal information. Such information is only included in the Unified Register of Legal Entities, Individuals - Entrepreneurs and Public Associations. Information that is required for the charter is: 1) full and abbreviated (if any) name of the LLC; 2) governing body, board members function and capacity, procedure for making decisions; 3) procedure for entering and exiting the LLC.
Right of a shareholder to exit an LLC depends on their equity share in the authorized capital
Shareholders with equity share of less than 50% of the authorized capital may exit the LLC at any time without consent of other participants by simply filing an application to withdraw from the LLC with the State Registrar. The application (i.e., signature of the withdrawing participant) must be notarized. In this case, charter’s amendment is not required. The State Registrar will make a note of the reduction in the authorized capital and, on the day of the filling, send a copy of this filling to the LLC and its shareholders.
A shareholder with equity share exceeding 50% of the authorized capital may leave the LLC only with consent of other shareholders. The remaining shareholders have one month from the date when an exiting shareholder submitted application to make a decision, unless a different term is specified in the charter. The exiting shareholder may withdraw from the LLC within one month from the consent date filed by the last shareholder, unless a shorter period is specified. In order to withdraw from the LLC, an application and consent of the remaining shareholders must be submitted to the State Registrar with all signatures notarized.
This implies that a withdrawal from an LLC may be blocked if at least one shareholder, regardless of their equity share in the authorized capital, doesn’t approve it. Essentially this requirement intends to protect the LLC and its creditors.
Another new requirement is that equity shares of the exiting shareholder are evaluated at their market value not a book value. Because of the imperative nature of such a requirement, a shareholder holding the majority share will not be able to obtain consent of all other shareholders to withdraw from the LLC through court.
Limitation of the possibility of excluding a minority shareholder
The new law establishes only two grounds to remove a shareholder: 1) no deposit for repayment of debt during a given additional term; 2) death of a natural person-shareholder / termination of a legal entity-shareholder, if such shareholder owns less than 50% of the company’s authorized capital, in case of failure to appeal by heirs within the established term.
Share transferability to a successor with or without the consent of the remaining shareholders
The new law protects the heirs and gives them a right to become a shareholder in the LLC at their own will. However, this law also protects the interests of the shareholders in the event of death, missing or deceased (as determined by court) - an individual or the termination of the shareholder - a legal entity whose equity share in the authorized capital is less than 50%, in case of his or her heirs ignoring their right to inheritance in the company. The law allows for the shareholders to remove such a participant from the LLC without taking into account his or her vote. If a participant’s share in the authorized capital is more than 50%, the LLC may consider liquidation of the company without taking into account this participant’s vote.
Full contribution term is reduced from one year to six month from the date of the LLC registration
Considering the fact that failure to contribute funds to the LLC is one of the reasons for removal from the partnership, the reduction in contribution term is an important improvement.
Changes to the preemptive rights
The new law excludes any option of establishing other terms in the company's charter and allows only 30 days to buy shares in the LLC. The law states that, on the 31st day after the date of receipt of the notice of sale, such shares (even partial) may be transferred to a third party under conditions communicated to the LLC shareholders.
The law introduces concepts of interested-party transactions and material transactions. The shareholders are at liberty to agree on whether prior approval will be required for the execution of any related-party transactions.
However, material transactions (with a value of more than 50% of the LLC’s net assets as per the previous quarterly accounts) require pre-approval by shareholders by default. The shareholders may also agree to extend the definition and list the material transactions for this purpose. The LLC management shall bear joint liability for damages caused due to the execution of a material transaction without its approval by the shareholders. The Supervisory Board may monitor and regulate these activities, acting within the capacity defined by the company’s charter.
The law regulates increases in the authorized capital more thoroughly, removes restrictions on the number of shareholders and enables them to enter into confidential shareholders' agreements.
The new law provides more flexibility to manage an LLC – shareholder agreements, establishment of a supervisory board, a simplified approach to the charter development, which makes administrative operations certainly easier. The law also improves regulation around forcing the shareholder removal, reduces the risk of raider attacks, and other important issues such as inheritance of equity shares in the company.
At the same time, the law requires the LLCs to make the appropriate changes to their charters within one year from the date the law becomes effective. During this period, the LLCs are exempt from paying a fee for filing such changes.