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LLC digest: shareholder withdrawal

The most significant event in corporate law recently was the adoption of the Law of Ukraine On Limited Liability Companies. And, although the law (save for certain provisions) will enter into force only on July 17, 2018, it is already now the subject of scrutiny and heated debates in the business community that mostly consists of limited liability companies (LLC). We have reviewed below one of the new changes introduced, i.e. shareholder withdrawal from LLC, and attempted to determine whether it will have a positive or negative effect on business.

You will find below a brief overview of the main changes introduced by this new law.

1. Withdrawal conditions. According to the new rules, LLC shareholder whose share in LLC share capital is 50% or more may withdraw from LLC with the other shareholders’ consent. This is a very important and revolutionary change because, first, there were previously no restrictions on the shareholder’s right to withdraw that were dependent on their share size. Second, this rule is mandatory, and LLC charters may not provide for alternative options. This is a controversial change because the legislator’s intention to protect business from potential collapse in case of majority shareholder’s withdrawal is somewhat canceled out by the majority shareholder’s exposure to possible abuse and unfair behavior of minority shareholders whose consent will determine the majority shareholder’s future.

2. Withdrawal procedure. Under the current procedure, shareholders must notify LLC of their intention to withdraw by submitting an application three months prior to the date of withdrawal or as prescribed in LLC charter. The authenticity of the signature on the withdrawal application must be certified by a notary. This requirement is the only one left in the new law from the previous procedure. If a shareholder holds a share of less than 50%, such shareholder may submit to the state registrar a notarized withdrawal application for record in the Unified State Register (NB: the new law provides that this is possible only if shareholders and their shares are not specified in the charter). We should note a very important point here: upon receipt of an application for shareholder withdrawal, the state registrar records a decrease in share capital in the amount of the shareholder’s share. In other words, in the absence of other conditions and circumstances, shareholder withdrawal automatically translates into a share capital decrease. If the withdrawing shareholder holds a share of 48%, then such decrease will be fairly substantial. Since the other shareholders are in no way involved in this process and actually find out about the share capital decrease only post factum (the state registrar is to send an extract from the Unified State Register to all LLC shareholders after registration of shareholder withdrawal), then such news could be, to put it mildly, very unpleasant.

3. Procedure for determining share. A change relating to the base for determining share value, which, at first glance, appears to be positive, is somewhat questionable. The new law sets out that a shareholder’s share is calculated on the basis of the market value of all the shares held by LLC shareholders in proportion to the share held by such shareholder. Previously, there was no general rule to determine such base so the share value used to be determined on the basis of its book value. At first glance, this change works in favor of shareholders because of the assumption that market value should increase with LLC performance of activity. However, in practice, this makes the calculation procedure more complicated because there is no clear methodology provided in the law to estimate and calculate market value. This new rule could therefore give rise to problems and inconveniences for both shareholders and LLC. The old provisions on the possibility to receive a share in kind have remained unchanged in the new law.

4. Procedure for share payment. The new rules provide that LLC must inform of the share value, provide justified estimation and copies of documents required for calculation within 30 days of the date on which LLC found out or should have known about the shareholder withdrawal. Withdrawing shareholders should therefore no longer wait for annual report approval to receive the share due to them. The period for payment of share to a shareholder withdrawing from LLC has remained unchanged and is still 1 year from withdrawal although the charter may provide for another period.

This article is the first of a string of brief informative items - so-called LLC-digest - that we will be drafting and sharing to address certain changes and new developments introduced in the new law. Our lawyers are always willing and happy to provide any advice on LLC activities in light of these new legislative changes.

We are always pleased to share our experience and recommendations with you!