Further Changes Expected to Company Law - International Law Office

Corporate legislation has changed little since the new Civil Code came into force on January 1 2004. However, in April 2007 Parliament finally turned its attention to the question of eliminating conflicts between the code and the Company Law. On June 20 2007 the Law on Amendments to the Company Law came into force, making fundamental changes to the legislative framework which regulates companies in Ukraine.

The aim of the changes was to bring the Company Law into line with the code. However, the amendments have not all had the expected or intended effects. The most significant changes are as follows:

• The requirement to publish an official notification of a company's liquidation or reorganization has been amended to comply with the code. However, the new provision directly contradicts the Law on State Registration of Legal Entities and Individual Entrepreneurs. Therefore, the effect of the change remains uncertain.

• The new provisions prohibit increases in charter capital by means of converting debentures into shares.

• The rule requiring qualified majority approval of a decision to establish a branch, subsidiary or representative office has been revoked.

• A change which has given rise to great uncertainty limits the number of shareholders in a limited liability company: such companies may have no more than 10 shareholders. Although the law requires companies to make the appropriate changes to their shareholding structures within one year of the law coming into force, no mechanism for this has been proposed, let alone approved.

• A company charter need no longer set out a mechanism for the assignment of shares. However, if the charter capital is not paid within the first year of operation,(1) the company is required to reduce its charter capital. This means the end of companies with unpaid charter capital.

• A shareholder in a limited liability company may assign its shares to another shareholder without the prior consent of the remaining shareholders. The period during which remaining shareholders may exercise pre-emption rights if shares are to be assigned to a third party has been reduced from three months to one month.

• Shares which are not fully paid up may be sold up to the value which has already been paid.

• If a shareholder's debts are recovered at the expense of assets comprising its share of a company's assets, it forfeits its status in the company.

• The new provisions formally recognize certain bodies which shareholders may establish within the structure of a limited liability company.

• A general partner's creditors may no longer require that a general partnership be liquidated.

• If a limited partner's name appears in the title of a limited partnership, the partner automatically becomes a general partner.

• Limited partners now have a form of pre-emption right. However, the assignment of a share in a limited partnership need be notified to other members of the partnership only after it has taken effect.

The practical effects of the recent amendments have yet to be fully evaluated, but certain changes appear to be conducive to hostile takeovers. However, in June 2007 the Cabinet of Ministers submitted to Parliament a draft law proposing further amendments which are intended to clarify the ambiguous drafting in the amended law and resolve the remaining conflicts with the code. The draft law includes proposals to:

• allow shareholders to assign their rights in the company;(2)

• resolve the enduring conflict concerning the allocation of authority to determine the composition of the management board in such a way as to vest its power exclusively in the general meeting;

• define and differentiate between the status of founders and shareholders;

• require that company charters include details of how information regarding the company's business must be disclosed to shareholders, as well as provisions concerning the appraisal of contributions and mandatory buy-outs;

• require shareholders to sign the company charter and any amendments to it which they approve;

• exempt shareholders that do not vote for an increase in charter capital from the corresponding payment obligations;

• require that companies pay dividends to shareholders annually, within six months of the end of the financial year and to a total value of at least 15% of the company's profits for the year;

• reduce the quorum for the shareholders' meeting of a joint stock company to 50% of the shareholders (by number);(3)

• establish a mechanism for pledging shares in a limited liability company;

• provide that a shareholder is not deemed to have withdrawn from the company until the date on which the withdrawal is officially registered with the state; and

• exempt a sole shareholder of a limited liability company from the requirements relating to calling a general meeting.

Although future developments in corporate legislation remain uncertain, recent changes indicate a positive trend towards reform. However, until Parliament approves either a new general law on companies or special laws on joint stock companies and other corporate structures, the legislative ambiguity in the sector will remain.

For further information on this topic please contact Yaroslav Abramov at Arzinger & Partners by telephone (+380 44 390 5533) or by fax (+380 44 390 5540) or by email (yaroslav.abramov@arzinger.ua).

Endnotes

(1) The legislation does not specify whether this provision refers to the first calendar year or the first financial year.

(2) Neither established legal doctrine nor the proposal itself suggests a mechanism for this.

(3) Several previous attempts to introduce such a measure have failed.