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LLC Digest: Executive Body

This article is dedicated to the changes introduced to the status and regulation of LLC executive body as the most significant body directly affecting the activity and very existence of LLC. The most significant changes are addressed below.

1. Title. Although the director – or “directorate/management board” in case of a collegial body – remains as before LLC executive body, the discretionary nature of the Law of Ukraine On Limited Liability Companies and Additional Liability (further the “Law”) also applies to this LLC body, and so it is now possible to specify in LLC charters other titles to refer to executive bodies.

2. Non-compete and non-disclosure. The Law introduces partial non-compete for LLC executives so, from now on, LLC directors (or management board members) will need the consent of their company’s general meeting of shareholders to: 1) engage in their company’s field of activity as an individual entrepreneur; 2) be a participant in a full partnership or a full participant in a commandite company engaged in their company’s field of activity; 3) be a member of the executive body or supervisory board of another company engaged in the same field of activity as their company. If these requirements are not met, the LLC agreement (contract) entered into with offending executive body members will be terminated with no compensation payment.

The Law has introduced another common concept in the Western corporate environment, i.e. non-disclosure. LLC executives are now prohibited to disclose their company’s trade secret or confidential information that has become known to them while performing their executive duties. They may, however, do so if the disclosure of such information is required by law. It is important to note that the law now sets out that such prohibition remains effective for one year from the date of expiration (termination) of the agreement between LLC and a particular executive unless another term is provided for in the agreement.

3. Powers, limitations and termination. All matters related to the management of LLC current activities fall under the competence of LLC executive body except for those matters under the exclusive competence of the general meeting of shareholders, and now also of LLC supervisory board (if any). LLC director or board chairman (general director) may act on behalf of LLC without power of attorney. LLC charters may also provide that all or certain members of LLC collegial executive body may act on behalf of LLC without power of attorney or that all or certain members of LLC executive body may, solely together, act on behalf of LLC without power of attorney. If we consider the termination of executive body’s powers, we can see a certain conflict between the rules of labor and corporate law. So the powers of LLC director or general director may be terminated at any time, and their contract will automatically be terminated from that moment onwards. A new sole executive – or board chairman in case of collegial executive body – or a body temporarily performing their duties is elected in such case.

4. Liability. LLC executive body members or LLC supervisory board members are, as a general rule, jointly and severally liable to LLC. Although this rule is also found in the Civil Code of Ukraine (Article 92(4)), what is important is that it has been strengthened by its inclusion in the Law. LLC executive body members (and supervisory board) are thus liable for:

  • Losses caused to LLC through their wrongful acts or omissions;
  • Losses incurred as a result of violation of the procedure for major transactions;
  • Losses incurred as a result of violation of the procedure for related-party transactions.

Please note that offenders are liable to LLC itself, but not to, for example, creditors involved in transactions.

Important note: If LLC net asset value has decreased by more than 50% compared to its net asset value at end of the previous year, LLC executive body will be required to convene a general meeting of shareholders. Such general meeting should be held within 60 days of the date of such decrease to consider measures to improve LLC financial condition, decrease its share capital or liquidate LLC. If such meeting is not held and LLC is declared bankrupt within 3 years of the net asset value decrease, LLC executive body members will be subsidiarily liable for LLC obligations.

As you can see, many changes have been introduced. Some are not that obvious and somewhat “lost” in the text of the Law (for example, subsidiary liability for LLC obligations), while others tend to stand out more (for example, non-compete and non-disclosure). Overall, at this stage, it is necessary to ensure that these changes are fully reflected in LLC charters, and also bear in mind that the motto “practice will show” remains as usual relevant.

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 and will always be pleased to share our experience and recommendations with you.