New Law on Companies
The Ukrainian Law on Limited and Subsidiary Liability Companies (Companies Law), in effect since 17 June 2018, gives rise to new opportunities as well as new risks. Here are some of the most important new legal features that foreign companies should consider when entering the Ukrainian market.
LLC shareholders can conclude a corporate agreement (either when establishing the LLC or later), which can regulate the manner for exercising shareholder’s rights and discharging obligations. The corporate agreement is confidential by default, and it is not subject to mandatory registration or notarisation.
We would pay special attention to the risk stemming from Art. 7 (6) of the Companies Law, according to which an agreement entered into by a party to a corporate agreement that violates such corporate agreement is null and void if the other party under the agreement knew or should have known about such violation. This provision increases the vulnerability of the company’s creditors.
Irrevocable Powers of Attorney
Irrevocable powers of attorney were introduced, which cannot be cancelled without the consent of the authorised person, or can be cancelled only in the cases provided for therein. Such a power of attorney may be issued for fulfilling or ensuring the fulfilment of the obligations of the parties to the corporate agreement.
Corporate agreements together with irrevocable powers of attorney enable nominal shareholders in an LLC. While a nominal shareholder is registered and disclosed, the real beneficiary may be hidden and control the company as an authorised person under an irrevocable power of attorney.
However, unfair use of these mechanisms creates a risk of seizing control in affiliated companies via irrevocable powers of attorney, which would be extremely difficult to cancel, even after the removal of the director who issued such power of attorney. Consequently, limitations on a director of a holding company to issue an irrevocable power of attorney and/or conclude a corporate agreement are strongly recommended.
The quorum requirement (more than 60% of all votes) for a general meeting has been cancelled. However, most decisions should be approved by more than 50% of the votes of all shareholders of the company (and not those present, as before). Furthermore, some decisions of the general meeting can only be approved by unanimous consent of all shareholders.
It should be noted that general meetings may now be held by video-conference. Also, the place of a general meeting may be outside the territory of Ukraine.
For the first time ever, the Companies Law provides a possibility to establish a supervisory board for an LLC, which controls and regulates the activities of the company’s executive body. The supervisory board may be vested with some powers of the general meeting, excluding questions falling under the GM’s exclusive competence.
The Companies Law envisages that any significant transaction exceeding 50% of the net assets of the company by the end of the previous quarter must be approved by the company’s general meeting. Otherwise, such significant transaction does not create any binding obligations for the company (i.e. it is null and void).
For those purchasing under such “null and void” agreements there is a risk that the tax authorities will not recognise respective VAT credits as well as deductible expenses.
The rules on significant transactions are extremely inconvenient for companies with small net assets. In some cases, instead of an LLC it is advisable to choose the form of a private enterprise (that can be established by one legal entity, or by one or several individuals), which is not subjected to restrictions on significant transactions.
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