These are the highlights if you want to know more about Corporate Law in Ukraine. This entry was drafted by Arzinger law firm.
This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case Arzinger law firm an excellent option in Ukraine.
One of the major features of Ukrainian corporate law is that it is now encountering significant reformation aiming at further liberalization of activities of private companies and, in parallel, improving corporate governance, transparency and accountability of public companies. It is expected that the mentioned multi-faceted reformation process will foster business climate in Ukraine, as well as attract foreign investors (first and foremost, international financial institutions and multinational corporations) by setting understandable and comprehensive rules of game at the domestic market.
For the reasons stated, through 2016-2017 and onward the whole set of obsolete legislative corpus, which, in fact, ceased to reasonably adhere to actual commercial realities and needs, is being substituted by new regulations. Notably, four draft laws of utmost importance, which are the laws on (i) protection of rights of investors, (ii) increasing of level of corporate governance in state and municipal entities, (iii) corporate agreements, and (iv) squeeze-out / sell-out procedures, have already been enacted by the parliament. Apart from the above, a number of draft laws (notably, the law on limited liability companies and additional liability companies and the law on ease of business and attracting investments by issuers of securities) are also put on the parliamentary agenda.
Corporate law of Ukraine comprises a number of statutory regulations, including codified legal acts. These prescriptions are the major source of regulation of every facets pertaining to incorporation, conducting business activities, corporate governance and cessation of / exit from different types of business entities. General statutory rules are also unfolded in more details in the companies’ internal documents (typically, the charter and internal regulations).
The hierarchy of corporate regulations may be described as follows:
- charters or articles of association;
- resolutions of shareholders;
- decisions of executive bodies.
Moreover, together with enactment of the Law on corporate (shareholders’) agreements in April 2017, it is also expected that such agreements would become an important source of rules for business entities and shareholders.
The said classification is closely connected to the second one which enables us to reveal the idea of such subdivision. In particular, depending on the method of legal regulation corporate law provisions can be divided as follows:
- imperative (regulations of a strict, imperious nature disallowing any deviations from the rule); and
- dispositive (regulations of autonomous nature enabling the parties to independently agree on how to exercise their corporate rights and fulfil duties).
Imperative provisions establish explicit rules, whereas dispositive rules enable the parties to settle certain issues individually on their own will. Current corporate legislation of Ukraine, as compared with the same in many other countries, is to a greater degree of imperative nature.
For instance, shareholders of a limited liability company (including foreign investors) are often interested in extending the list of issues which can be resolved by a qualified majority of votes. Effective legislation does not provide such opportunity and the parties cannot by themselves deviate from the requirements on the number of votes to adopt valid corporate decisions. The same is with the issue on how the shareholders can cast their votes (voting arrangements).
In many countries lawmakers stipulate more flexible regulations for the issues related to corporate governance (first of all, this refers to private companies the shares of which are not listed at stock exchanges – limited liability companies, private joint stock companies, etc.). Advancing with corporate reforms in Ukraine it is nonetheless expected that a number of imperative regulations will be replaced by dispositive ones and many of the issues will be resolved by shareholders independently (according to their needs and aims pursued). Currently, this perspective is fully reflected in the draft Law of Ukraine “On the Limited Liability Companies and Additional Liability Companies”, which is now considering by the parliament.
Along with the above, enhancing corporate governance in joint stock companies, strengthening protection of rights of investors has become subject of intense debates and subsequent legislative improvements. In particular, according to the Law of Ukraine “On protection of rights of investors” which came into legal force as of 1 May 2016, a number of novelties not yet known and applied in Ukraine before have been introduced, such as:
- derivative action granting the shareholders (meeting 10% cumulative shares threshold) with the right to bring claims against companies’ officials seeking to reimburse damages caused by actions or inactions of such officials;
- concept of independent members of supervisory board (independent directors) that shall meet a number of requirements, such as non-affiliation with the company for the last 5 years; absence of significant relations with the company for the last 1 year; non-receipt of substantial benefits, etc.;
- new rules have been introduced on procedure of approval of significant and interest-related transactions, including the criteria for qualification of transactions as significant and interest-related per se.
It has also become long-awaiting event when in June 2016 the parliament passed the Law “On Introducing Amendments to Certain Legislative Acts regarding Management of State-Owned and Municipal Property”. By the said law a set of well-recognized international corporate governance standards have been implemented for state-owned and municipal enterprises. According to the law, the following key corporate governance mechanisms have been introduced, notably:
- two-tier management structure, whereby supervisory board (appointed upon resolution of authorized management state / municipal body) becomes responsible for appointing executives of the company and supervising their activities. Further to that, majority of supervisory board shall consist of independent directors;
- enhancing operational transparency in state-owned and municipal companies via publishing a variety of data (e.g. quarter and annual financial statements, audit reports, profiles of CEOs and members of supervisory board, information on their remuneration and principles of its calculation, information on significant and interested party transactions) at the official web-sites of either the companies or authorized management state / municipal bodies.
On 23 March 2017 the draft Law on corporate (shareholders’) agreements was adopted by the parliament. The Law is aimed at significantly advancing corporate governance in joint stock companies and limited liability companies by introducing corporate (shareholders’) agreement as a tool allowing the shareholders to agree among themselves how to exercise their rights and fulfil the duties. The said Law can significantly contribute to the business environment by introducing a number of conventional constructions that are widely applied in European jurisdictions, to mention:
- voting arrangements (to vote in prescribed matter or refrain from voting on specific matters);
- rules on share transfers: lock-up, drag along, tag along, options;
- deadlock resolution;
- negative covenants (obligations to refrain from certain pre-determined actions);
- non-revocable power of attorney.
According to the Law, corporate agreements can be binding only upon its parties. The content of the agreement is confidential, unless the parties agree otherwise or the law provides otherwise (e.g. information on the existence, terms and parties of shareholders’ agreement of public joint stock company shall be published).
Finally, the latest amendments to the Law on amending of certain legislative acts of Ukraine regarding increase of corporate governance level in joint stock companies (entered into legal force in June 2017) introduced long-awaited squeeze out / sell out procedures, whereby:
- the shareholder who directly or indirectly owns or acquired more than 95% of ordinary shares has the right to buy shares of the remaining minority shareholders (squeeze-out);
- in turn, minority shareholders may equally require the majority shareholder to mandatorily buy their shares in the given case (sell-out).
To sum up, all recent legislative changes in corporate legislation, as well as considering draft laws on the way, prove that the government is aiming to enhance investment inflow to Ukraine.
Business companies types
A legal entity in Ukraine can be established in different forms, such as:
- joint stock company;
- limited liability company;
- additional liability company;
- full company (full liability company);
- limited partnership.
In Ukraine it is also possible to set up a representative office (engaged in either commercial or non-commercial activities) representing the interests of a foreign company in Ukraine. The representative office is not a legal entity and exercises its activity only for the benefit of the foreign parent company.
Establishing a legal entity in Ukraine involves registering in the Unified State Register of legal entities, individual entrepreneurs and non-governmental organizations, tax authorities, statistics authorities, pension fund and other social security funds, as well as opening a bank account.
Conducting some types of business activities is subject to licensing requirements in Ukraine, for example: banking activities, provision of financial services, medical practice, production, wholesale or retail sale of medicines, certain activities in energy sector, etc. Full list of licensed business activities is defined by the Law “On Licensing of types of business activities”.
Worth mentioning that at the moment effective legislation envisages two types of limitations on the ownership structure of legal entities, namely – vertical ownership structure limitation and horizontal ownership structure limitation. According to vertical ownership structure limitation only a company with no less than two shareholders (legal or natural person) can act as the sole shareholder of Ukrainian subsidiary company. According to horizontal ownership structure limitation one person (legal and/or natural) can be the shareholder of only one single member Ukrainian subsidiary company. The said limitations are applicable to all type of legal entities.
JOINT STOCK COMPANY (JSC) – a type of legal entity with the authorized capital divided into specified number of shares of equal par value. Participation in JSC entails limited liability of shareholders, where they can be held liable for the company’s obligations only in the amount of their shares. Shares are considered as a type of security and therefore their issuance (either initial or subsequent) is subject to registration with the National Securities and Stock Market Commission of Ukraine.
LIMITED LIABILITY COMPANY (LLC) – a type of legal entity with authorized capital divided into the shares (so-called “participatory interest”) the value of which is determined upon decision of participants and is reflected in the company’s charter. Participants of LLC are liable for obligations of the company only in the amount of their contribution to authorized capital.
ADDITIONAL LIABILITY COMPANY – a type of legal entity with authorized capital divided into shares the value of which is determined upon decision of the participants and is reflected in the company’s charter. Participants are jointly and severally liable for debts of the company by their individual property in the amount determined in the company’s charter pro rata to their shares.
FULL LIABILITY COMPANY – type of legal entity participants of which carry out joint entrepreneurial activity and are jointly and severally liable for the company’s obligations with all their individual property. The share of each participant is determined in the charter of the company.
LIMITED PARTNERSHIP – a form of partnership in which there is one or more limited partners (owners) in addition to general partners bearing full liability.
The difference between the above listed business entities mostly relates to: managing procedure, relations and liability of shareholders, requirements to the company’s authorized capital and its formation procedure etc.
The best and the most flexible form of legal entity in Ukraine is LLC, insofar as it is much easier and expedient to incorporate (up to 1 week, including opening a bank account), has no minimum requirements as to the amount of charter capital and is less regulated in terms of corporate governance.
Along with LLC, JSC is one of the most common vehicles to conduct business in Ukraine, although both expenditures on the maintenance and complying with regulatory requirements are by several times higher compared to LLC. Just to mention, the minimum amount of share capital of JSC is 1 250 minimum wages, which for now amounts up to 128 000 EUR. Moreover, the National Securities and Stock Market Commission of Ukraine is attentive and scrupulous as to compliance of JSC with statutory requirements. At last but not least, in order to conduct any operations with securities (including issuance of shares of JSC) the shareholders should have a security account open in Ukrainian depositary institution. Trade operations with securities, including the shares in JSC, can be conducted within Ukrainian depositary system only.
For the reason stated, JSCs are used predominantly in such cases when it is necessary to attract financing from the banks and large financial institutions or for arranging entering of potential partners / co-investors at higher company valuation, or due to requirements of laws as to the legal form for conducting specific activities (such as banks, insurance companies, investment funds).
Contributions to the share capital of legal entities can be made in a variety of forms. For example, by providing monies, in-kind contributions, securities, proprietary rights, intangible assets that are subject to monetary valuation. However, there are restrictions on making contributions by using promissory notes, securities issued by the companies itself, or by incurring by the shareholder of obligation to perform certain works or services for the company. Worth mentioning that at the moment the effective legislation is quite ambiguous on whether the share capital can be formed by means of debt-to-equity conversion mechanism.
General Regulation on Limited Liability Companies
LLC is a type of legal entity with authorized capital divided into shares (so-called “participatory interest”) the value of which is determined upon decision of participants and is reflected in the company’s charter. However, participatory interests per se are not considered as the securities and no registration formalities are applied. In fact, participatory interests in LLCs are simply a mathematical proportion of the amount of contribution of the shareholder to the overall amount of authorized capital. Disposal of participatory interest can be conducted on the basis of written agreement (not subject to notary certification), involvement of intermediary (such as broker) is not required either. At the same time, so far as the participants usually have pre-emptive right, prior to any disposal of participatory interest to any third party the selling participant has to obtain refusal of the remaining participants from enjoying their pre-emptive rights.
Shareholders of a limited liability company are liable for obligations of such company only within the value of their shares.
Activities of LLC are regulated by Civil and Commercial Codes of Ukraine, as well as the Law on Business Entities. At the same time, most of provisions of the Law on Business Entities have become out-of-dated for which reason the new draft law “On the Limited Liability Companies and Additional Liability Companies” is elaborating so far, which entails absolutely new approach towards regulation of activities of LLCs. In particular, it provides a possibility for the participants to conclude corporate agreement enabling them to agree at their own discretion on voting at the general meeting, as well as on procedure of exercising pre-emptive right and share transfer, and many other issues. As another essential novelty introduced by the said Draft Law should be mentioned cancellation of existing prohibition to setting-off of debt of LLC before the participant on obligations of the latter to make contribution to the share capital of LLC (i.e. debt-to-equity swap mechanism), which is perceived to become effective tool for securing interests of creditors. Among other key novelties of the Draft Law:
- introduction of statutory regulation of material and interested party transactions;
- determining that the company’s participant withdrawal from the company should be conducted only through the court procedure;
- mitigating the risks of bad faith participants to block activities of the company;
- introduction of possibility to establish supervisory board within the company;
- elimination of limitation on the number of participants of the company (which for now is no more than 100 participants).
In order to register LLC a founder or its authorized person(s) shall provide a certain package of documents to the State Registrar, which includes resolution of the general founders meeting, charter of the company and information on the participants. Moreover, information on the beneficial owners of LLC shall also be discovered. The data on the company, including the name of beneficial owner(s), is publicly available through online access to the State Register.
LLC has two-tiered management system: highest body – general meeting of participants and executive body, which can either collegial (board of directors, management board) or individual (the director, general director). Although effective legislation is silent on whether LLC can have a supervisory board among its governing bodies, in practice business incumbents are establishing such governing body within a company, but only to extent that the charter contains comprehensive provisions on supervisory board, including procedure of appointment / termination of its members, competence and decision making. Establishing supervisory board can be necessary for the potential investors entering into the company to effectively supervise activities of the local management, and for this particular purpose the supervisory board is usually vested with powers to provide preliminary approvals for certain transactions to be conducted by executive body of the company: i.e. transactions exceeding certain thresholds (depending on the business scale and turnover of the company) or transactions of certain type (such as loan agreements, security agreements, etc.) and the like.
The highest governing body in LLC – a general meeting consists of participants or representatives appointed by them. Pursuant to Law on Business Entities it is a general rule that the general meeting has a quorum if the participants (their representatives) holding together over 50%+1 of the total amount of votes are present at the meeting. Nonetheless, there is a carve-out stipulating that, provided there is no state share in the company, the participants may set alternative quorum threshold (either below or above 50%+1, or even 100%).
In terms of voting arrangements, for ordinary issues the participants adopt a decision by simple majority (50%+1 of votes of those present at the meeting). There are, however, cases where qualified majority of votes are required, namely:
- 75% of votes of all participants of the company for: resolutions on alienation of the company’s assets in the amount exceeding 50% of the aggregate assets value and decisions on liquidation of the company;
- 50%+1 of votes of all participants of the company for: determination of the company’s business dimensions, amending the charter, approval of plans and reports on implementation thereof, and exclusion of participant.
Executive body is responsible for conducting day-to-day business activities of a company. Members of executive body can be appointed either from composition of participants, or not. According to the general rule, the competence of LLC’s executive body is established based on residual principle: it covers all issues not falling within the competence of the general meeting. On the one hand, the participants can limit the powers of executive body to act on behalf of the company by setting certain thresholds or qualifiers in the company’s charter.
Activities of executive body is supervised by an audit commission established by the general meeting out of their members in the number provided in the company’s charter, but not less than 3 persons. In practice it is often impossible to establish the audit commission out of composition of shareholders (simply because there are less than 3 participants). Despite the above provisions, effective laws do not set any liability for non-compliance.
General Regulation on Joint Stock Companies
JSC is a type of legal entity with the authorized capital divided into specified number of shares of equal par value. Activities of JSCs are mainly regulated by the Civil Code of Ukraine and the Law of Ukraine “On Joint Stock Companies”. There also the whole set of regulations adopted by the National Securities and Stock Market Commission of Ukraine relating to certain aspects of activities of JSCs (for example, procedure for issuance of shares or cancellation thereof, disclosure of information, procedure of reorganization of JSCs, etc.).
JSC may issue ordinary and preferred shares. Any issuance of shares, either initial or subsequent, is subject to registration with the National Securities and Stock Market Commission of Ukraine. In case a JSC fails to register the issuance of shares, any transactions conducted with non-registered shares are deemed void. Moreover, any transactions with the shares have to be conducted within depositary system, which means that the owner of shares shall have securities accounts opened in the custodian.
JSC may exist in the form of either public or private company, whereat private JSC may conduct only private placement of shares and public JSC may conduct either private or public placement of shares. There is also a requirement for the public JSC to include its shares into the list of at least one stock exchange in Ukraine prior to 01 January 2018.
A minimum amount of authorized capital of a JSC is 1,250 minimum wages as of the date of incorporation of the company, which amounts approx. to EUR 128 000.
Corporate governance in JSCs is conducted by the shareholders’ general meeting, acting as the highest governing body; supervisory board; executive body (the board of directors or individual director); and the audit commission (or a single auditor). Establishing of supervisory board within a JSC having less than 10 shareholders is not mandatory, in which case all functions of supervisory board are performed by the general meeting of shareholders.
A JSC is obliged to convene a general meeting on an annual basis (annual general meeting). The quorum of the general meeting shall be determined by the registration committee at the time of completion of the shareholders’ registration. The general meeting is deemed quorate if the shareholders holding more than 50% of all voting shares are present at the meeting; no derogation from the rule is allowed.
At the general meeting the votes are casted according to the principle one share – one vote, except for the cases of cumulative voting. Resolutions on ordinary issues are deemed duly adopted is voted by simple majority of votes, which is 50%+1 of votes of those present at the meeting. There are, however, issues requiring qualified majority of votes, namely:
- 75% of votes of all shareholders of the company for: amending the charter, cancellations of treasury shares, alteration of type of JSC (from public to private or vice versa), placements of shares, increase / decrease of charter capital, an termination and spin-off;
- additional matters stipulated in the charter of private JSC.
The general meeting is not entitled to resolve the issues not included into agenda. Ballot papers may be used for voting on the agenda items of a general meeting. There a number of formal requirements in the effective Law on JSC relating to procedure of convening the general meeting and voting at the meeting.
Supervisory board is a governing body responsible for protection of interests of stockholders and, within competence determined in the charter and effective laws, is responsible for supervision and controlling activities of the company’s executive body.
JSC with 10 or more shareholders is obliged to establish the supervisory board. Moreover, supervisory board of public JSC shall consist of no less than 5 members, whereat 2 shall be independent directors.
Competence of supervisory board includes adoption of decisions on such matters as appointment and termination of powers of members of executive body of the company, election of the company’s auditor, preparing agenda of the general meeting, convening ordinary or extraordinary general meeting, redemption of shares, placement of securities by the company, approval of market value of assets, approval of material transactions, etc.
Executive body is responsible for conducting day-to-day business activities of a JSC. Its competence includes dealing with all issues related to the management of the company, except for those falling within competence of the general meeting or supervisory board. The executive body is accountable to the general meeting and the supervisory board and shall arrange implementation of their decisions.
In order to audit the financial and economic activities of a JSC the supervisory board may elect the audit commission (the auditor). The audit commission (auditor) shall be entitled to make propositions to the agenda of the general meeting and request convocation of an extraordinary general meeting. Members of the audit commission (auditor) shall be entitled to attend the general meeting, and participate in the discussion of the agenda with a deliberative vote. Members of the audit commission (auditor) shall be entitled to participate in the meetings of the supervisory board and the executive body, if this is provided by the company’s charter or the by-laws.
JSCs shall disclose relatively large amount of information, including annual and quarterly reports, as well as special information upon occurrence thereof, via, inter alia, publishing it on the web-site.
General overview of foreign investments regulations
The Law “On Investment Activity” dated 18 September 1991 No. 1560-XII defines the forms and types of investment activities. It contains all major principles for conducting investment activities in Ukraine. In particular, an investment activity can be carried out with own or borrowed funds, budget appropriations in form of monetary funds, securities, real estate and movable property, intellectual property rights, know-how etc. The Law provides some guaranties for investors – guarantee of preservation of initial contractual terms against change of legislation worsening position of an investor, protection from interference of state agencies and officials, right to compensation of losses incurred as a result of acts of state bodies, guaranties for protection of investment against expropriation.
Quite recently (i.e. commencing June 2017) mandatory state registration of investments has been cancelled. Instead, a declarative principle of public accounting of investment is effective – which is the submission of statistical reports on the foreign investments that have already been made.
In order to stabilize domestic currency market, which became especially vulnerable during the years of 2015-2016, the National Bank of Ukraine introduced a number of foreign exchange restrictions, which makes it relatively complicated to effectively conduct divestiture shall the need arise. In particular, according to recent resolution of the National Bank:
- it is prohibited to repatriate the dividends, except for the dividends accrued for the years of 2014-2016. However, such dividends can be repatriated by foreign investor within one month in the amount not exceeding the equivalent of USD 1,000,000 or 10% of the total volume of such dividends to be repatriated. If such 10% is more than the equivalent of USD 5,000,000, the threshold sum of the dividends to be repatriated within one month will be the equivalent of USD 5,000,000;
- it is prohibited to purchase and/or transfer foreign currency in order to repatriate funds received by foreign investor from the transaction on the sale of corporate rights / shares it holds in the Ukrainian legal entities;
- payments under export and import of goods operations shall be carried out within the period not exceeding 180 days;
- mandatory sale of 50% of revenues from abroad in foreign currency.
Notwithstanding existing foreign exchange restrictions, is has been a clear message of the National Bank of Ukraine that it will pursue with liberalization measures of foreign exchange regulation, especially in the light of gradual recovery of the national economy. Moreover, the National Bank presented a draft Law on foreign currency that, according to regulator, is intended to overcome the complexity and over-regulation of foreign exchange regulation in Ukraine and lay down new principles underlying a new regulation.
Significant Novelties in Merger Control Regulations
On 18 May 2016 the law establishing increased notification thresholds has come into legal force, whereby the merger clearance is obligatory for the transactions meeting one of the two alternative set of thresholds as of the end of the year preceding the concentration:
- euro 4 million in either assets or turnover in Ukraine for each of at least two merging parties, and euro 30 million either in assets or turnover worldwide for all the merging parties aggregately; or
- euro 8 million in either assets or turnover in Ukraine for the target group (or one of the joint venture partners groups in case of joint ventures establishment), and euro 150 million in turnover worldwide for at least one other merging party (in most cases, – for the party acquiring control/purchasing assets/shares/stakes).
Apart from the above amendments, the law also envisages such important novelties as: elimination of market threshold; introduction of simplified procedure for transactions lacking effect on competition on the Ukrainian markets; introduction of preliminary consultations regarding simplified procedure application possibility; reduction of the number of reasons for in-depth investigation launch; clarification of remedies negotiation procedure, etc.
All the above shows that the Ukrainian market is now encountering substantial reformation of statutory framework in corporate law and foreign investments aiming at creating business friendly business environment with understandable and comprehensive rules both for domestic and foreign businesses.