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President, Gramatskiy & Partners Attorneys at Law
Novelties in Legislation on Limited Liability Companies: Certain Aspects
Ukraine has substantially reformed certain spheres of the economy and its own legislation. This is due, first of all, to the fact that Ukraine has taken a course towards a market economy, rapprochement with the European Union and becoming a high-level economic and legal state. One of the values under such circumstances is the provision and protection of the private interests of individuals and legal entities in accordance with the requirements of law and best international practices. Therefore, in this context, corporate law is of paramount importance.
National corporate legislation is quite young and at the stage of formation and development. At the same time, the geographical location, economic potential of Ukraine and increase of its level on the world business arena have for a long time objectively determined the need to improve domestic corporate legislation, especially in the context of limited liability and additional liability companies. The importance of limited liability companies cannot be overemphasized as this legal form of business incorporation is defined as the most demanded for doing business in Ukraine.
Significant achievements in this area include the adoption by the Verkhovna Rada of Ukraine on 6 February 2018 of the long-awaited and objectively contingent upon time Law of Ukraine No. 2275-VIII On Limited Liability and Additional Liability Companies, which became effective as of 17 June 2018. With the coming into effect of this legislative act, the reform and rethinking of the existence of limited liability companies has actually taken place.
With the adoption of the Law On Limited Liability and Additional Liability Companies, significant changes were brought to corporate law, particularly with regard to the regulation of the exercise by the company’s participants of their rights and powers or refrain from their exercise, if there is such an agreement — a corporate agreement. In addition, a quite necessary tool for the effective implementation of a corporate agreement was introduced, an irrevocable power of attorney for corporate rights. At the same time, another extremely positive innovation is the possibility of introducing a body like a supervisory board in companies.
The Limited Liability and Additional Liability Companies Law defines a mechanism that is quite necessary in limited liability companies — a corporate agreement, which is also referred to as a “shareholders’ agreement” in the West. It is an agreement under which a company’s participants undertake to exercise their rights and powers in a certain way or refrain from exercising them, shall be gratuitous and executed in writing.
The Limited Liability and Additional Liability Companies Law also provides for cases when the corporate agreement is null and void (it does not have any legal consequences), namely:
— if it does not meet the requirements of The Limited Liability and Additional Liability Companies Law;
— if it stipulates the obligation of participants to ensure voting in accordance with the instructions of the company’s management bodies;
— if a party to the corporate agreement has entered into a separate agreement, in violation of such a corporate agreement, and the other party under the agreement knew or should have known about such a violation.
As a general rule, the content of a corporate agreement shall not be subject to disclosure and shall be confidential. An interesting innovation is also that a corporate agreement may provide conditions or a procedure for determining the conditions in which a participant shall be entitled or obliged to buy or sell a share in the authorized capital (or part of it), as well as to determine cases where such right or obligation arises.
Irrevocable Power of Attorney for Corporate Rights
An irrevocable power of attorney for corporate rights is issued for the proper performance of obligations by parties of a corporate agreement and is subject to mandatory notarization.
If the power of attorney is issued for the performance, or to ensure the performance, of obligations of participants as parties to the corporate agreement, the subject of which are the rights to a share in the authorized capital or the powers of participants, the principal can indicate in the power of attorney that before the expiration of the term it cannot be revoked without the consent of the representative, or can only be revoked in cases provided for in the power of attorney (irrevocable power of attorney). Thus, the company’s participants, who are at the same time the parties to the corporate agreement, are given the opportunity to provide for a security mechanism in order to make sure that the obligations under such an agreement will be fulfilled. In this case, the main purpose of the power of attorney is to make it impossible to abuse the rights of the parties to the corporate agreement, since such abuse will have negative consequences.
In general, this power of attorney is intended to ensure the exercise of both the function of representation and the functions of ensuring the performance of contractual obligations. It shall be terminated in case of termination of the obligation, for fulfilment or enforcement of which it was issued.
The Limited Liability and Additional Liability Companies Law also directly provides that in case of a violation of rights and interests of the principal, the representative can, at the request of the principal, stop using the irrevocable power of attorney and refuse from it. In the event of a dispute, an irrevocable power of attorney can be cancelled by a court.
For the first time at legislative level, a company’s participants have the right to establish such a body as a supervisory board. A company’s articles of association can provide for the formation of a supervisory board. The ability to establish a supervisory board is a progressive step, since not every company objectively requires the establishment of such a body.
As a rule, the need to introduce a supervisory board arises in companies in the presence of large-scale business activity, or where a significant number of management personnel is required to perform the tasks of the company, or for other objective reasons.
Therefore, it is for such cases, in order to ensure the effective management of the company, that the establishment of an independent supervisory board is expedient. First of all, such an introduction is aimed at protecting the interests of the company’s participants from abuse of management, involving both investors and independent members in the supervisory board.
The supervisory board shall, within its competence defined by the company’s articles of association, control and regulate the activities of the company’s executive body. In particular, the competence of the supervisory board can include the election of a sole executive body of the company or members of the collegial executive body of the company, suspension and termination of their powers, establishment of the amount of remuneration of members of the company’s executive body.
The foregoing means that the supervisory board becomes the intermediate link between the management and the company’s participants, which is intended to exercise effective control over the activities of the executive body and represent the interests of the company’s participants.
The powers of the general meeting of participants can be delegated to the supervisory board of the company other than those issues that are reserved for the general meeting of participants.
Unlike The Joint Stock Companies Law, where there is significant overregulation in the supervisory board’s issues, in limited liability companies virtually all the basic foundations for the formation and operation of the supervisory board shall be determined by the company’s articles of association. This approach appears correct and meets the demands of the time. The members of a company’s supervisory board shall be liable to the company for losses caused to the company due to their guilty acts or inaction.
My Personal View
1. A corporate agreement as an institution is new for domestic legislation, although it was applied before its enshrinement in legislation. Adoption of The Limited Liability and Additional Liability Companies Law is a positive aspect in the legalization of arrangements between the company’s participants and raising the level of responsibility for non-performance of arrangements.
2. In the light of ensuring the implementation of arrangements under a corporate agreement, an irrevocable power of attorney for corporate rights should be expressly approved. This tool should really be an effective way of the exercise by the company’s participants of their rights and obligations.
Despite the rather positive result of the innovations introduced, there is still no established jurisprudence on the issues of conclusion and implementation of corporate agreements and the issue of irrevocable powers of attorney.
3. The possibility of introducing a supervisory board in companies is a progressive step in raising the level of corporate governance. Vesting a company’s participants with wide powers to establish, operate and supervise the supervisory board allows them to independently carry out corporate governance depending on the needs of the company, the scale of its activities and other circumstances. It is fair to note that the issues of formation and operation of the supervisory board are still in their infancy.
4. Liberalization of the legislation on limited liability companies is, on the one hand, a positive step in the development of this area and, on the other, it increases the role of a legal adviser. This is due to the fact that The Limited Liability and Additional Liability Companies Law provided for the self-regulation by the company’s participants in the articles of association of a significant part of the issues of conclusion of corporate agreements, issuance of irrevocable powers of attorney and formation and operation of the supervisory board.