Starting June 17, 2018, companies will begin to “operate in a new way,” as the Law of Ukraine “On Limited Liability and Additional Liability Companies,” signed by the President of Ukraine on March 12, 2018, takes effect.

Undoubtedly, one of the main topics that takes effect upon the Law’s entry into force is the concept of a “corporate agreement.”

Article 7 of the Act regulates the new provisions of the Act on Corporate Agreements. “This agreement may, in particular, establish: the obligation of the parties to the agreement to vote in the manner specified therein at the general meeting of the Company’s shareholders; the procedure and conditions under which shareholders have the right or are obligated to buy or sell a share in the authorized capital; the circumstances under which such a right or obligation arises; and the procedure for taking other actions related to the management, dissolution, or reorganization of the company. Such an agreement is confidential (except where the state or its agencies are a party thereto), and agreements entered into by a party in violation of the corporate agreement are automatically deemed null and void.”

Presumably, the purpose of introducing the corporate agreement is to attract investors to conduct business in Ukraine, who, through the corporate agreement, will be able to fully control the company’s operations.

Article 8 of the Law supplements the concept of a corporate agreement, specifically by defining an irrevocable power of attorney regarding corporate rights, which may be issued to fulfill the obligations of the participants under the corporate agreement. The provisions governing this power of attorney are set forth in Article 8 of the Law. Such a power of attorney cannot be revoked at the principal’s request and effectively enables the parties to a corporate agreement, in the event of a breach of the corporate agreement’s terms by other participants, to lawfully apply to the state registrar to transfer to themselves the share of the participant who failed to fulfill the terms of the agreement, or to take other actions on behalf of such a participant.

Another significant change introduced by the new Law is that, from now on, the successor of an heir is not required to obtain the consent of all participants to join the company, unless otherwise provided for in the company’s articles of association, which must be adopted by 100% of the participants’ votes. In the event of inheritance, the share passes to the heir without the consent of the members.

To implement this right, amendments were made to the Law on State Registration, pursuant to which an heir may become a member of the company based on an application for membership submitted to the state registrar together with a document confirming the heir’s right to the inheritance. Regulated by Articles 23–24 of the Law.

“The Law significantly changes the approach to regulating the withdrawal and expulsion of a member.” Article 25 of the Law.

Thus, from now on, a company member holding a share of 50% or more of the authorized capital may not withdraw from the company without the consent of the other members. Upon receiving consent for withdrawal, the company is required to notify the former member within 30 days of the value of their share and provide copies of documents confirming the calculations.

Furthermore, the law does not provide for the possibility of expelling a member for failure to fulfill obligations or if the member’s actions hinder the achievement of the company’s objectives. A member may be expelled only if they fail to pay the value of their share in the authorized capital or in the event of the member’s death or dissolution (or if their successors fail to timely submit an application to join the company).

“The Option to Establish a Supervisory Board”

Article 39 of the Law provides for the possibility of establishing a Supervisory Board. Members of the Supervisory Board may perform their duties either under an employment contract or under a civil law contract.

At the same time, the Law establishes that the executive body and the supervisory board are liable to the company with all their assets for losses caused by their actions or inaction. In addition, the executive body is required to convene a general meeting of the company if the value of the company’s net assets has decreased by more than 50% compared to the previous year (Article 32 of the Law).

In the event of a failure to fulfill this obligation, as well as in the event of the company’s bankruptcy, the members of the executive body will be jointly and severally liable for the company’s obligations to its creditors.

“The Law partially introduces a mechanism to restrict competition for company officers”

Thus, members of the executive body and the supervisory board may not engage in business activities (as sole proprietors or as participants or officers of other companies) in the same field of activity as the company in which they hold a management position without the prior consent of their employers.

Among other things, the changes also concern the composition of the company’s members; specifically, the Law removes the restriction limiting the number of the company’s members to no more than 100 persons, and Article 14 of the Law reduces the deadline for a member to fully contribute their capital from one year to six months from the date of the company’s state registration.

The Law also eliminates the requirement for members to specify the amount of the authorized capital and the composition of the LLC’s members in the articles of organization.

Another new provision is the ability to specify in the company’s articles of association the procedure for holding general meetings via videoconference (Article 34 of the Law).

The Law also establishes a new right for members: if third parties intend to make an additional contribution to the LLC’s authorized capital, existing members have a preemptive right to make an additional contribution within the limits of the increase, in proportion to their share, in order to maintain the size of their share. This matter is governed by Articles 18 and 20 of the Law.

“In the event of a reduction in the authorized capital, the company’s creditors are granted only 30 days under the new Law to file their claims against the company.” (Article 19 of the Law).

In addition, shareholders are permitted to participate in meetings by submitting a notarized document reflecting their votes, which must be attached to the minutes (the concept of absentee voting is regulated by Article 36 of the Law). Of course, this provision is relevant in 2018; moreover, flying in from Cyprus every time is not very convenient.

The procedure for enforcing a claim against a share in the authorized capital is also regulated (Article 22 of the Law).

Now, such enforcement may be carried out on the basis of an enforcement order to collect funds from a shareholder or to enforce a claim against a property guarantor’s share.

The Law also defines the concept of a “significant transaction” (the criteria for which the members may establish in the articles of association) and a “transaction involving a conflict of interest” (transactions with officers or affiliates of the company or other persons specified in the articles of association). This is governed by Articles 45–47 of the Law.

In any case, the law requires that transactions whose value exceeds 50% of the company’s net assets as of the end of the previous quarter be approved in advance exclusively at a general meeting. Subsequent approval of significant transactions is permitted.

Well, the new law is intended to change the “rules of the game” for companies in the conduct of their business; only time will tell whether these changes will be positive or negative.