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LLC Digest: Miscellaneous

This article describes individual changes introduced by the Law of Ukraine On Limited Liability Companies and Additional Liability (further the “Law”) which, although not comprehensive, are still important for corporate operations even those performed daily. This article also outlines how and for how long it will be necessary to bring LLC charters in line with the requirements of the law.

1. Major transaction. The Law introduces the term “major transactions” which are defined by their value or other criteria and come with a general discretionary rule that LLC charter may provide for a special procedure for approval of such transactions by the corporate bodies authorized to do so. The Law also sets out that if a transaction exceeds 50% of LLC net asset value as of the end of the previous quarter, LLC general meeting will decide whether or not such transaction should be entered into. In such case, the Law does not provide for delegation of such matter to other LLC bodies such as, for example, LLC supervisory board. Another rule set out by the Law should be noted: if LLC could have concluded a major transaction instead of a series of transactions, then each of these transactions will be deemed a major transaction. In other words, in case of several similar transactions that point to the “splitting” of a major transaction to bypass the approval procedure provided by LLC charter or the law, each of these transactions will be deemed a major transaction and will have no legal force on account of the failure to comply with the approval procedure. It is also worth bearing in mind another rule described in more detail in a previous issue of LLC Digest whereby company executives who have failed to comply with the procedure for approval of major transactions are held jointly and severally liable for the losses suffered by LLC as a result of such failure.

2. Related-party transaction. The Law sets out that a transaction is a related-party transaction when one of the following criteria are met: 1) LLC enters into a transaction with its company officers or affiliates; 2) LLC enters into a transaction with a shareholder with a stake of 20% or more in LLC; 3) LLC enters into a transaction with a legal entity in which one of LLC officers or shareholder with a stake of 20% or more participates in the legal entity’s management bodies. Despite the clear definition of these criteria, the Law is overall rather non-mandatory for compliance of this rule by LLC executives and shareholders as it is entirely up to LLC to manage this matter. However, if LLC shareholders agree to regulate related-party transactions and include provisions in LLC charter to regulate these transactions, failure to comply with such requirements would result in joint and several liability for damages caused to LLC as a result of such failure.

3. Dividends. The Law establishes in detail the procedure for payment of dividends as well as restrictions for such payments. Dividends are paid out from the company’s net profits to the entities that were shareholders on the date of adoption of the decision to pay out dividends. Dividends are paid out in proportion to the share held by shareholders and in cash unless otherwise provided in a unanimous decision of general meeting of shareholders in which all shareholders attended. As a general rule, dividends are paid out for a period divisible by the calendar quarter unless otherwise provided in LLC charter. There is also a deadline for payment of dividends: dividends must be paid out within 6 months of the date of adoption of a decision for dividend payment unless otherwise established in LLC charter or decision of general meeting of shareholders.

The Law also provides for cases where LLC is not entitled to adopt decisions for dividend payment or to pay out dividends: 1) No settlement is made with shareholders due to the termination of their participation in LLC or the shareholders’ legal successors, or 2) as a result of the adoption of a decision for dividend payment or as a result of payment of dividends, LLC’s assets will become insufficient to satisfy creditors’ claims that are due and payable. LLC charter may provide for additional conditions under which the general meeting of shareholders may not adopt decisions for dividend payment or under which dividends may not be paid out. The rule under which LLC is not entitled to pay out dividends to a shareholder that has not made its contribution whether in full or in part is still in force.

4. Amendments to LLC charter due to the Law. The transitional provisions of the Law clearly state that the part of the Law of Ukraine On Business Entities relating to limited liability companies as well as companies with additional liability are no longer in force. It is also stated that the provisions of LLC charters not in compliance with the Law will automatically be deemed invalid as of the date of entry into force of the Law. To encourage the introduction of amendments to LLC charters, no administrative charges will be imposed on LLC to register the amendments introduced to bring to their charter in line with the Law. This administrative charge exemption will apply for one year from the date of entry into force of the Law.

To sum up all the articles of our LLC Digest, we can conclude that a great number of changes have been introduced to provide for a way of operating LLC essentially different from previous rules. The aforementioned transitional provisions of the Law make it necessary for LLCs to amend their charter. Most companies will therefore need to tackle the arduous task of thoroughly reviewing and revising their incorporation documents to bring them in line with the new requirements of the Law. Although the Law does not provide for mandatory introduction of amendments and only provides for their invalidity in case of non-compliance with the Law, it is clear that LLC shareholders have a vested interested in the due and lawful drafting of the document on which the activity of LLC, and their rights in particular, are directly based. We can also expect that counterparties will as well be very interested in having charters compliant the Law and duly drawn up both upon conclusion of new agreements and continuation of existing cooperation. We therefore recommend reviewing and revising LLC charters. Please note that our lawyers would be pleased to provide advice and services relevant to LLC activity in light of the new legislative changes.

If you have any questions or require further information, please feel free to contact us. We are always happy to share our experience and recommendations.