Corporate Disputes & Derivative Claim

As business in Ukraine has developed, the number of individuals willing to invest in a Ukrainian company is also increasing; and this also applies particularly to foreign investors. At the same time, along with the growth in the number of enterprises and their participants, the risks of disputes between the participants themselves or between the company and its participants increase proportionally. Such disputes are corporate in nature. So, an integral part of the suits considered within the framework of economic legal proceedings are corporate disputes.

Judicial reform and changes in Ukrainian legislation in the area of economic activity, particularly the adoption of new regulatory acts, have served as the basis for the transformation of judicial practice to resolve corporate disputes, which today relies on both well-established approaches and new norms of corporate legislation.

Basically, the main features of the resolution of corporate disputes have remained unchanged, as follows:

— via legal proceedings, corporate disputes are subject to consideration by economic courts exclusively;

— territorially, corporate disputes are resolved at the registered location of the company, regardless of whom the dispute is between;

— as a general rule, corporate disputes cannot be referred to an arbitration court or international commercial arbitration;

— in addition to the norms of the Ukrainian legislation in resolving corporate disputes, an important role is played by the provisions of a company’s consti­tuent documents (charter), which establish the specific order of activities and competence of governing bodies, the mechanisms of entry and exit of participants from the company, payment of dividends, etc;

— the violation, non-recognition, or contesting of the rights of a participant of the company is imperative for judicial protection;

— corporate disputes cannot be considered in summary proceeding;

— the peculiarities of taking measures to secure a claim, which do not allow the imposition of a prohibition on certain actions, in particular, such as: holding a general mee­ting of the company members; for participants-taking part in such meetings or voting.

However, all disputes between the participants and the company are corporate and are subject to consideration in the procedure of economic proceedings.

Thus, according to established practice, the following disputes were not considered corporate:

— to invalidate decisions of the gover­ning bodies of the legal entity, if the clai­mant is not a member of such company. This category also includes decisions made before the entry or after the withdrawal of such a member from the company;

— between the company and the participants (potential participants) if they arose on the basis of family, inheritance, or contractual relations (for example, when divi­ding the property of the spouses, coming into a legacy by heirs or assignees, alienating a share (shares) under the contract). Such disputes were considered corporate only if there were violations of the preemptive rights of shareholders to purchase shares;

— disputes on the recognition of ownership of a share in a company;

— labor disputes, even if they are initiated by a person who is a member of the company’s management body or has the status of an official.

In this case, if the parties to the dispute are legal entities, they will be consi­dered by an economic court, although they are not considered to be corporate.

However, the issue of distinguishing corporate disputes from others is still widespread and problematic in judicial practice. The current findings of a court of appellate jurisdiction, which, in particular, change previous approaches, include the following positions:

— if a person who is no longer a participant but used to be at the time of making the complained decision, claims to invalidate the decision of the company’s governing body, the dispute is corporate;

— a dispute over contracts for the sale of corporate rights (their change, termination) is corporate because it relates to the ownership, use, and disposal of shares in the authorized capital of the company owned by a party to a lawsuit;

— a dispute is considered corporate if the heir who received a share in the company (stock) declares a claim for recovery of dividends belonging to the testator, because the transfer of corporate rights occurred during the inheritance process;

— in the case of a participant’s claim to cancel the entry in the register, despite the fact that such a claim is addressed to the subject of state registration, it is of a corporate rather than public law nature, while it will definitely be involved in the company’s case;

— if the subject of a participant’s (shareholder’s) claim is invalidation of a contract concluded by a company (for example, on the alienation of the property of this company), and such a claimant substantiates his/her claims with violation of his/her rights as a participant in the company, then the dispute is corporate and subordinate to economic courts regardless of the status of the other party to the contract;

— a dispute is not a corporate one if it arose between a public organization and its members, as such a legal entity is not a profit-seeking company.

So, in order to correct determine the jurisdiction, it is important to study not only the subject composition of the dispute, but also the nature of the relationship that has arisen between the parties. If the enforcement demands are related to the creation, activity, management, and termination of the company, or the rights and obligations of the participants (shareholders), the dispute should be conside­red as corporate and it should be referred to the economic court at the company’s location.

The so-called “derivative” claim is a special mechanism for the protection of corporate rights.

The content of a derivative claim is such that the company has the right to compensation for damages caused by the actions or inaction of officials, including an official whose powers have been terminated.

After making amendments to the procedural legislation of Ukraine, the participants (shareholders) of the company have the right to make such a derivative claim.

That is, a rule has been introduced, according to which a participant or sharehol­der, representing the interests of the company, has the right to appeal to a court for damages caused to the company by its officials.

This provision is very progressive, because it provides an opportunity for the owner to protect the interests of his/her enterprise, which has suffered losses as a result of illegal actions by a manager or director, for example, as a result of a knowingly unprofitable contract exceeding the powers established by the constituent documents.

However, in practice, this type of corporate dispute is not common, and is associated with the complexity of the process of proof.

So, in order to get an award of damages, the company owner will need to prove the following facts:

1) the official performing out the actions, carried them out on behalf of the society, and not on its own behalf;

2) by his/her actions, the official violated the provisions established by legislation or constituent documents, or exceeded the powers granted to him/her;

3) existing financial losses sustained by the company in the form of specific damage in a certain amount;

4) there is a causal link between the actions of the official and the losses incurred;

5) the official sought, through his/her actions, to cause harm to the company, was aware, or should have been aware, that such losses could be caused.

Such a participant usually no longer works in the particular company and is geographically far so it’s difficult to obtain documents confirming all the necessary circumstances. This is especially true of foreign investors.

In this regard, there are still no final decisions in judicial practice that would oblige such an official to compensate for losses incurred by the company.

At the same time, such disputes are also subject to consideration in economic courts, and a positive decision on the suit can be obtained only in the event of collection of documents relating to the economic activities of the company, in particular, accounting.

Even if the interests of a participant of the company are actually violated, after long consideration of the case and material costs you can get a decision to close the proceedings, stating that the claim had to be submitted to a court of another jurisdiction or a decision to dismiss the claim due to the lack of adequate evidence.

It is obvious that the correct determination of the type of legal proceedings in each specific situation, and the collection of the necessary evidence, are the first steps towards successfully resolving a corporate dispute.

At the same time, improvements in Ukrainian legislation and the renewal of judicial approaches to resolving corporate disputes reinforce the ability of investors, including foreign ones, to protect their violated rights as a participant of the company and the violated rights of the company itself, which indicates positive transformations in business processes and a prerequisite for improving the investment climate in Ukraine.