Legal Regulation of Limited Liability Companies Improved

On 17 June 2018 Law of Ukraine "On Limited and Additional Liability Companies" No. 2275-VIII (the "Law") will enter into force. The Law eliminates a number of legislative gaps and contradictions as well as envisages the improvement of the procedures for the creation and operation of Limited and Additional Liability Companies (the "Companies"). Participants of the Companies will have much more discretion to structure their relations, use modern mechanisms of corporate governance, efficiently exercise their rights and protect their interests. The Law will significantly improve the business climate, bolster Ukraine's position in the Doing Business rating, and approximate Ukrainian legislation on the Companies to that of the EU.

The major novelties of the Law are as follows.

1. Participants number is unlimited. The outdated norm, limiting the participants number by 100, is repealed.

2. Participants can conclude a corporate (shareholders') agreement on their rights exercise (the "Agreement"). The Agreement can establish, inter alia, the conditions for the participants disposing their equity interests, requirements to attend the general meeting of participants ("GMP") and vote thereat in certain way, procedures for resolving disputes between the participants, as well as procedures for the Company's spin-off or termination.

3. Participants' powers of attorney delegating their rights can be irrevocable. This will increase, inter alia, efficiency of the Agreement.

4. List of mandatory information in the charter is substantially reduced. It shall include only (i) the Company's full and, if any, abbreviated names, (ii) management bodies, their competence and decision-making procedures, and (iii) the procedure for becoming a participant of and withdrawing from the Company.

5. Procedure for formation and change of the authorized capital is revised. In particular, the term for the authorized capital formation is reduced from one year to six months. The Law also allows increasing the authorized capital not only by means of additional contributions of participants, but also at the account of the Company's non-distributed profit.

6. Participants can now make contributions to the authorized capital by offsetting claims against the Company. The Company can use a debt-to-equity swap to restructure its debt.

7. Participants can adopt decisions in a more flexible and timely manner. The Law, inter alia, specifies that GMP can be held by means of electronic communication (e.g., tele- or videoconference), provides for precise mechanisms for absentee and poll voting, as well as establishes simplified decision-making procedure for the Companies with a sole participant.

8. Supervisory Board is introduced. The Company can now establish a Supervisory Board to control and regulate the activities of the Company's executive body.

9. Rules for approval of material and interested party transactions of the Company are established. The rules safeguard the Company's assets and rights from possible inefficiency and misuse of office by the Company's managers and participants.

10. Liability of the Company’s officials is strengthened. The officials shall, inter alia, timely inform the Company on any conflict of interest, e.g., a conflict between his/her duty to act in good faith and reasonably for the benefit of the Company and his/her private interest or that of his/her affiliated person.

11. The Company termination and spins-off rules are elaborated. In particular, the Law specifies the procedure for the conversion of equity interests in the event of the Company's termination and spin-off of a new company therefrom, and peculiarities of protection of its creditors' rights during such procedures.

12. Groups of companies can create efficient corporate structures. The Law cancels the obscure prohibition for the Company from having a business entity as a sole participant that, in its turn, is owned by a sole shareholder.

The Law will repeal or change a number of norms of the Commercial and Civil Codes, the Law of Ukraine "On Business Associations" and other laws. The Companies shall bring their charters in compliance with the Law within 1 year following its entry into force. During this period, the state registration of such amendments to the charters shall be free of charge. 

For further information, please contact Asters' partner Vadym Samoilenko and counsel Oles Kvyat.

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