On 20 December 2016, the Ukrainian Parliament approved the Draft Law On Limited Liability Companies and Additional Liability Companies (the “Draft Law”) (draft law No. 4666) in its first reading. When adopted, the Draft Law will constitute a comprehensive piece of legislation regulating the activities of the most commonly used legal form of entities in Ukraine - the limited liability company (the “LLC”).

The Draft Law introduces numerous novelties in the regulation of LLCs and offers shareholders broad discretion in disposing of their shares, choosing the preferred method of managing the LLCs and structuring their constitutional documents. Furthermore, the Draft Law explicitly allows shareholders to enter into shareholders’ agreements. Lack of proper regulation of shareholders’ agreements in Ukraine has driven many business structures off shore. The Draft Law will make Ukrainian LLCs a more suitable vehicle for directly attracting capital.

The Draft Law significantly improves corporate governance in LLCs. In particular, shareholders of LLCs will have an option to establish a supervisory board with independent members. The Draft Law also provides for better balance between the liberty of directors in taking management decisions and effective shareholders’ control over the activities of directors. The liability of directors is significantly increased.

The Draft Law aims at balancing the rights of different stakeholders, the minority and majority shareholders, investors and creditors and offers them the following benefits:

  • better regulation of procedure for entering into, succession and exit from business;
  • minimisation of opportunities for raider attacks (e.g. via the notarial certification of particular shareholders’ resolutions and notarial certification of signatures at ballots for absent voting);
  • simplification of the procedure for share transfer (via cancellation of the requirement to list the shareholders in the charter and also register amendments to the charter);
  • limitation of the possibility to expel a shareholder from an LLC (permissible only through a court decision);
  • introduction of a debt to equity conversion mechanism;
  • possibility of automatic foreclosure on a pledged equity share in an LLC;
  • establishment of a time schedule for dividend payments;
  • ntroduction of a concept of significant and interested party transactions requiring approval by shareholders or supervisory board and allowing for the right to demand mandatory buy-out of an equity share by the LLC.

The Draft Law further simplifies the registration procedures and does not put a cap on the number of shareholders in an LLC. This should give joint-stock companies an opportunity to convert into LLCs and significantly simplify their activities, regulations, and reporting.

The Draft Law also cancels a so-called ‘anti-chaining rule’ prohibiting possession of a 100 percent share in an LLC by a shareholder which, in turn, also has only one shareholder. This rule also prohibited a single shareholder from holding 100 percent share in more than one LLC. This change in law aims to simplify the internal structuring of corporate groups in Ukraine.

The Draft Law is expected to improve the investment climate in Ukraine, promote the development of small and middle size businesses and prevent capital outflow from Ukraine. It also aims to harmonise corporate regulations in Ukraine with those in EU.

The Draft Law is expected to be passed in its second reading in the Ukrainian Parliament and become law in first half of 2017.

Maria Orlyk, Partner of CMS Reich-Rohrwig Hainz is one of the members of the working group on the preparation of the Draft Law and also one of its co-authors.

Source: Text of the draft Law of Ukraine “On Limited Liability Companies and Additional Liability Companies” No. 4666 as submitted for the first reading in the Parliament.