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Corporate Governance Reform in Ukraine
Author: Vadym Samoilenko, Oles Kvyat
Source: CEE Legal Matters. – November 2018
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2018 has been an enjoyable year for those wanting the Ukrainian legislator to improve the country's corporate legal framework. Since limited liability companies (LLCs) and joint stock companies (JSCs) are the most frequent forms of business in Ukraine, improvement in this direction appears to be especially important. On June 17, 2018, the Law on Limited and Additional Liability Companies (the "LLC Law") came into force, completely replacing the outdated regulation of LLCs. Moving to JSCs, the legislator adopted a law that amended several legal acts regulating these companies and the stock market in general (the "JSC Law"). Below we will outline these major changes in the Corporate Governance in Ukraine.

The LLC Law

A simple yet notable change introduced by the LLC Law is the abolishment of the maximum number of participants in LLCs, which was previously capped at 100 persons. This creates an opportunity for many existing private JSCs (which are de facto closer to LLCs than to public companies) to be reorganized into LLCs and enjoy, among other things, softer disclosure requirements and simpler corporate governance structure, which became even more appealing after the amendments. The law also gives LLCs a chance to avoid charter revision for minor adjustments to their status or corporate structure. Further, the LLC Law elaborates on the decision-making process by introducing precise mechanisms for absentee and poll voting, and simplifies decision-making by a sole participant of a company.

The LLC Law provides LLCs participants with the long-sought-after ability to customize their relations through a corporate (shareholders') agreement, which should make the corporate governance of LLCs even more flexible. Participants can agree, in particular, on circumstances that could trigger the obligation to sell or purchase equity interests in LLCs through, for example, a lock-up period, a buy-out, a sell-out, a special manner for the exercise of voting rights, and so on. In addition, the law establishes the right to have a supervisory board in LLCs, which should bring Ukrainian Corporate Governance closer to common foreign practice in controlling executive bodies and regulating company activities. The LLC Law also introduces the concepts of substantial and interested party transactions, as well as the rules for their approval and execution. To further secure owner and company interests, the law establishes the responsibility of executive body and supervisory board members for losses borne by the company through their fault.

The JSC Law

With the JSC Law the Ukrainian legislator introduced a completely new and more effective criterion to distinguish between public and private JSCs, based the determination on the actual public status of a company instead of the outdated and unjustified approach involving the number of its shareholders. Now all JSCs are divided into public or private depending on whether their shares undergo a public offering and/or are listed at a stock exchange. Trading in shares at a stock exchange is still permitted regardless of JSC type.

The JSC Law moves away from the unlimited competence of the shareholders' meeting by granting its portion to that of a supervisory board. It also appears that the supervisory board is now more independent, as matters of its exclusive competence cannot no longer be resolved by the shareholders' meeting.

To minimize the possible abuse of voting rights, the legislator has also introduced a quorum restriction, under which shares of a JSC owned by a legal entity controlled by that JSC are not considered for quorum determination and do not allow their owner to participate in voting. Among other positive innovations is the liberalization of the information disclosure procedures of the Ukrainian stock market. However, disclosure requirements in certain areas – for example, the banking sector – remain conventionally high.

Summing up the overview, we should mention that even though the new laws are surely aimed at improving Ukraine's corporate governance framework, they appear to be not entirely free of drawbacks. Nonetheless, we are sure that the overall outcome is improved safety and greater flexibility in the Ukrainian market. To fully enjoy these benefits, both JSCs and LLCs should bring their charters and by-laws in compliance with the updates within the timeframes specified in the two laws.