LLC Digest: Charter, share capital and management bodies

The Law of Ukraine On Limited Liability Companies and Additional Liability (further the “Law”) could obviously not eschew addressing concepts essential to LLC activity such as charter, share capital and LLC management bodies. The changes introduced by this Law are quite revolutionary and unusual for Ukrainian business. These changes are described in more detailed below.

1. No restrictions. First, we would like to mention the removal of quantitative barrier for LLC establishment and activity. The number of LLC shareholders was previously limited to one hundred people. This requirement has been repealed, and the business community sees this as a positive change because until now if more than one hundred people wanted to set up a company, they would have had to select a legal form other than LLC, namely joint-stock company. This will in the future entail many additional (and quite heavy) actions for regulators in the securities market. The law does not now imposes joint-stock companies on a large number of founders.

2. Charter and new rules. More lax mandatory requirements for LLC charter contents have been introduced for LLC founders (and shareholders). According to the new rules, LLC charters must contain only three mandatory items: 1) Full and short (if any) company name; 2) management bodies of the company, their competence, and procedure for adopting decisions; 3) procedure for joining and withdrawing from the company. Any further information is recorded in the State Register of Legal Entities and Individual Entrepreneurs of Ukraine by completing and submitting relevant applications. This greatly reduces “paperwork” and simplifies the introduction of amendments to charters. The first charter is to be signed by all the shareholders, and the authenticity of their signature has to be certified by a notary. However, any amendments to the company charter are signed only by the shareholders who have voted for the introduction of such amendments.

3. Share capital. Significant changes have been introduced to everything concerning share capital. From now on (unless the charter provides otherwise), each LLC shareholder must pay their contribution in full within six months of the date of state registration of their company. On the one hand, this term has been reduced by half in comparison with the previous rules, and on the other hand, LLC shareholders are now entitled to set this term in the charter. The law focuses more on “deliberate non-payers” of share capital and describes in detail the actions that LLC can take in such case. So, if a shareholder fails to pay its share within the prescribed period, a warning is issued, and additional time for payment is granted (maximum of 30 days). Warnings are sent by LLC directors who also set the aforementioned additional time for payment (unless it is set out in the charter). If the share is not paid within that period, then a general meeting is called by the general director and convened to adopt one of the following decisions:

• Expulsion of the shareholder owing payment;
• Share capital decrease by the unpaid part of the shareholder’s share;
• Company liquidation;
• Redistribution of the unpaid share (part of share) among other shareholders without changing the company’s share capital amount, and payment of the amount owed by the relevant shareholders.

The last item is new and considerably expands the choice of actions that LLC shareholders can take in case of non-payment of share.

As for share capital increase, the Law allows such increase not only through additional contributions (as now), but also using retained earnings. The Law also provides that shareholders have a pre-emptive right to make additional contributions, whereas third parties will be able to make additional contributions only after LLC shareholders have exercised their preemptive right. The Law even allows LLC and a shareholder and/or third party to enter into agreements for additional contributions.

The Law has reduced the period for share capital decrease during which creditors notified of the share capital decrease may apply to LLC. This period will be 30 days as soon as the Law enters into force, but for now the law does not expressly set such period, although decisions for share capital decrease enter into force within 3 months of their state registration date precisely, it is assumed, to protect the interests of creditors.

Important note: The Law finally repeals the ban on transfer (conversion) of debt to the share in LLC share capital. As noted above, the Law provides that “shareholder contribution may be money, securities and other assets unless otherwise provided by law.” And, in accordance with Chapter VIII of the Law Final and Transitional Provisions, Article 144 providing for the above limitation is to be excluded from the Commercial Code of Ukraine.

4. Management bodies – Audit Commission vs Supervisory Board. LLC management bodies have also been changed so, instead of audit commissions, supervisory boards will oversee LLC directors’ activity. Unlike the audit commission provided in the Law of Ukraine On Companies, setting up a supervisory board is optional under the new Law. LLC charters set out how supervisory boards are to perform their activities, their competence, how many members they can have and how they are elected, including independent members, their remuneration, as well as the procedure for their election and termination. Unlike the audit commission, members of the supervisory board do not necessarily need to be company shareholders. A civil law or employment contract is entered into with members of supervisory boards. These contracts are signed on behalf of the company by a person authorized by the general meeting (not necessarily LLC director). The office of supervisory board members may be terminated at any time and on any grounds by decision of the general meeting of shareholders.

The changes introduced by the Law to key and major LLC concepts such as charter, share capital and management bodies are overall seen as positive as they do away with a number of cumbersome requirements for both current and future LLC shareholders. The inclusion of the discretionary nature of rules should be noted separately as the abovementioned legal relationships previously were regulated exclusively in a peremptory manner.

This article is the next installment in a series of brief informative items – so-called LLC Digest – dedicated to certain changes and new developments introduced by the Law. Our lawyers are always willing and happy to provide any advice on LLC activities in light of these new legislative changes

Please feel free to contact us. We are always pleased to share our experience and recommendations with you.