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President, Gramatskiy & Partners Attorneys at Law
Corporate Legislation Reform: Back to the Past or a Leap into the Future?
The current processes of democratization, liberalization, integration of Ukraine into Europe and the world define the present stage of development of the national legal system. The signing of the Association Agreement between Ukraine and the European Union of 27 June 2014 undoubtedly played a significant role for all those things, which resulted in rapprochement between Ukraine with the European Community in recent years. These factors substantially affect the legal regulation of corporate relations.
At the same time, the growing interest of foreign businessmen and investors in Ukraine can be explained not only by the country’s extremely favorable geopolitical location, but also taking into account the positive dynamics of legislative reform highly appreciated by strategic partners and international organizations (for instance, Organization for Economic Co-operation and Development, etc.), giving a gradual increase in the ’Doing Business’ ranking. It is worth mentioning the changes regarding improvement of corporate governance in joint stock companies and reform of limited liability and additional liability companies’ legislation which took place in 2017-2018.
However, not all the changes in national corporate legislation deserve a positive assessment. More corporate legislation reform was launched too; it is still impossible to carry out unambiguous assessment of it.
On 5 December 2019 the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine on Counteracting Raiding (hereinafter — Law No.340-IX) aimed at introducing a number of anti-raiding measures and establishing effective safeguards to protect property owners from unlawful encroachment was adopted.
On 20 September 2019 the Verkhovna Rada of Ukraine adopted the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine to Stimulate Investment Activity in Ukraine (hereinafter — Law No. 132-IX), which detailed the provisions regarding model Articles of Association of a limited liability company.
The last of a number of laws that should be considered is the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine on Property Rights Protection, adopted by the Verkhovna Rada of Ukraine of 3 October 2019 (herein-
after — Law No.159-IX). The purpose of the law mentioned above is to provide additional guarantees for the protection of property rights in Ukraine by amending a number of legislative acts which contain outdated and inefficient regulations.
It is worth stressing that the large number of regulatory changes introduced by the above laws are not only incomprehensible in terms of their purpose and necessity, but also require further detailed regulation. Nonetheless, some of them require special attention.
Notarization: For or Against?
Initially the draft law On Amendments to Certain Legislative Acts of Ukraine on Property Rights Protection stipulated that a contract whose subject is alienation (transfer) of a share (part of it) in a company’s authorized capital, shall be entered into in writing and must be notarized.
Undoubtedly, the said requirement of legislation is not only unclear, but also dangerous in terms of ensuring turnover of corporate rights. Thus, introduction of notarization for contracts of sale of shares in limited liability companies could significantly increase the costs to enter into a contract for the parties involved and deprive them of the legal possibility to apply foreign law in relevant contracts. That is directly related to the fact that a notary in Ukraine may perform notarial actions only in accordance with the provisions of national law, which excludes the opportunity to notarize a contract containing regulation of corporate relations under foreign law.
In our opinion, it is obvious that all these aspects indicate a return to the forgotten and unnecessary atavisms of corporate regulation. The corporate practice of many legal systems, including Ukraine’s, justifiably proves that the existence of notarization of contracts that ensure circulation of corporate rights is not a sufficient guarantee to protect the corporate rights and legal interests of participants of corporate relations. On the contrary, it puts a great deal of burden on them.
Fortunately, professional discussions and debates resulted in exclusion of the relevant rule regarding obligatory notarization from draft law No. 159-IX. To date, Law No. 159-IX only states that the contract on alienation of property, the subject of which is a share (part of it) in the authorized capital of the company, shall be concluded in writing (relevant changes have been imposed to the Civil Code of Ukraine).
It should be outlined that Law No. 340-IX will come into force completely on 14 July 2020 and will provide some amendments to Law of Ukraine No. 2275-VIII On Limited Liability and Additional Liability Companies of 6 February 2018 (hereinafter — Law No. 2275-VIII).
Thus, Article 5 of said Law No. 2275-VIII contains the list of rights of company participants which now provides that a participant of a company may establish a requirement of notarization of his/her own signature’s authenticity when making decisions on the activity of the respective company and/or the requirement of notarization of a contract whose subject is a share of this participant in the company’s authorized capital.
Information about establishing or cancelling the mentioned above requirements must be stated in the Unified State Register of Legal Entities, Individuals — Entrepreneurs and Public Formations. It is worth taking into account the fact that such a requirement of a participant of the company (or cancelation of this requirement) is unilateral action, which must be notarized.
Moreover, a similar legal provision was enshrined in Article 21 of Law No. 2275-VIII, which regulates the procedure of alienation of a share in the authorized capital of a company to other company participants or to third parties. To date, a participant of a company may establish a requirement of notarization of a contract of alienation or pledge of such participant’s share in the authorized capital of the company or cancel this requirement. Information about that must also be stated in the Unified State Register of Legal Entities, Individuals — Entrepreneurs and Public Formations.
Model Articles of Association for LLC
On 27 March 2019 the Cabinet of Ministers of Ukraine adopted Resolution No.367 On Certain Issues of Deregulation of Economic Activity (hereinafter — Resolution No. 367), which approved model articles of association for limited liability companies. Resolution No. 367 states that the version of model articles of association is independently determined by the founders of the company by selecting the options by default or the corresponding provisions of the model articles of association, when submitting documents in electronic form for state registration of the LLC, which acts under the model articles of association.
The founders of the company can define the name of the company, the list of the founders (participants), the size of the authorized capital, the size of the shares in the authorized capital of each participant, the method of making their contributions (in monetary and/or non-monetary form) in the model articles of association. Being multivariate, model articles of association of a company provide the possibility of various editions of them being chosen, including the default edition, which is formed from provisions recommended by the Cabinet of Ministers of Ukraine.
Generally speaking, it means that the electronic form for submission of documents for registering a LLC gives an opportunity to choose a variant of the model articles of association which is more acceptable for a certain LLC (selecting various options offered by the form approved).
Due to interaction with an applicant in a question-and-answer format, all the necessary documents for state registration of the establishment of LLC, including application, model articles of association, decision of the founders, are automatically formed by the system taking into account the answers provided. The founder only has to sign the formed package of documents with his/her qualified electronic signature. The service mentioned above was introduced on 9 July 2019 as the On-line House of Justice project. Its main aim was to facilitate and minimize the time and cost of setting up a limited liability company.
Enshrining similar provisions, Law No. 132-IX also stated that the company is entitled to change the version of the model articles of association at any time by choosing other alternative provisions from those provided by the Cabinet of Ministers of Ukraine. If the General Meeting of participants (shareholders) adopts a decision to change the edition of the model articles of association under which the company operates, the provisions of the new edition of the model articles of association shall apply from the date of state registration of the respective changes.
Protection of Creditors Rights
Article 55 of Law No. 2275-VIII states that within 30 days from the date of the adoption of the decision to terminate, the company is obliged to notify all known creditors in writing. Certainly the above provision is not perfect and does not guarantee that creditors will be able to exercise their rights in the proper way.
Taking into account the fact that Law No. 159-IX imposed a new mechanism on securing the rights of creditors during termination of the company and stated that the announcement about termination of the company, the deadlines for the creditors to make a claim must be placed automatically via the Unified State Register of Legal Entities, Individuals — Entrepreneurs and Public Formations in real time.
It is worth noting that current corporate legislation reform is characterized by selectivity and inconsistency. Despite some positive expectations from the implemented changes, they are unlikely to be sufficient to eradicate the raiding of companies in Ukrainian corporate law. At the same time, it is difficult to overestimate certain significant steps like state registration of limited liability companies in electronic form and the new mechanism for protection of creditors rights.