Corporate law reform in Ukraine unveiled



Since the declaration of its independence in 1991, Ukraine has been an attractive destination for investments. Ukrainian laws adopted in the 1990s were the first attempt to develop the national legal system, and to some extent reflected the reality of that challenging transition period.

However, Ukrainian corporate laws dating back to the 1990s could not offer investors, particularly foreign investors, sufficient levels of comfort and flexibility. The classic mechanisms of corporate governance and M&A have typically been unavailable to parties in Ukraine. Shareholders’ agreements and deadlock provisions were a ‘no go’; debt-to equity swaps could not be dreamed of. Inevitably, this has resulted in a tradition of structuring business groups (with core assets in Ukraine) outside of the country. And naturally, most sizable M&A transactions have also been structured under foreign laws, opting for a foreign forum, and in relation to foreign shareholdings (often offshore), leading to serious capital outflows.

A huge step in reforming Ukrainian corporate law was undertaken in 2008 when the parliament adopted a special law on Joint Stock Companies (JSCs) which came into effect in 2011. And while JSCs received a significant portion of long awaited regulation, other forms of organisations such as limited liability companies (LLCs) had to rely on the old rigid rules.

In 2015-2016, corporate reform in Ukraine gained significant momentum. Multiple draft laws have been prepared, deliberated and passed in parliament, all aiming at deregulation of the business environment and improvement of the investment climate in the country.

In 2015, new rules for business registration were unveiled; as a result, this process has been significantly simplified, becoming faster. The quorum requirement for LLCs has been reduced from greater than 60 percent to greater than 50 percent, and while privately held companies are at liberty to choose a different quorum, the new 50 percent plus quorum is mandatory for state-owned companies.

In May 2016, the new rules for JSCs came into effect. They cover, inter alia, the cancellation of the limitation of the number of shareholders in private JSCs, mandatory listing procedures for all public JSCs, the introduction of independent directors to supervisory boards and the establishment of a minimum number of directors for the supervisory boards (at least 5), the prohibition of JSCs from buying their own shares during placements and the conditional right of mandatory buyout for minority shareholders, etc. Most importantly, the concept of shareholder derivative suits has been introduced into Ukrainian legislation, which will allow shareholders more control over the company and will establish a higher standard of accountability of management before shareholders. Given the novelty of the law, no court practice has yet been developed, though this is only a matter of time.

What appears remarkable is that professional legal society is deeply involved in this legislative process. Representatives of leading and renowned law firms and associations have taken an active part in the drafting and consultation process and in the unveiling of the corporate legal reforms.

The draft laws have been prepared as a result of synergy between governmental authorities and the private sector. In particular, the draft law on shareholders’ agreements, which is currently registered in the Ukrainian parliament and pending its first reading, has been prepared jointly by the State Commission for Securities and Stock Market of Ukraine, together with leading legal practitioners from the private sector. This draft law is a revolutionary step in Ukrainian corporate law reform as it gives parties the liberty to regulate their relations materially as they deem appropriate.

Two new draft laws, which passed the first reading in the Ukrainian parliament in May, address the cancellation of the requirement to register foreign investments and debt-to-equity swaps, and were initiated, prepared and lobbied by the Ukrainian Venture Capital and Private Equity Association.

On 13 May 2016, the new draft law on LLCs was eventually registered with the Ukrainian parliament and is about to undergo its first reading. The draft law was prepared by the working group under the auspices of the Ministry of Economic Development and Trade of Ukraine. This initiative was launched in 2015 and brought together leading corporate law professionals from the public and private sectors.

Ukraine has around 500,000 companies registered as an LLC compared to less than 20,000 JSCs. At the same time, LLCs have been waiting the longest for a proper legal framework. This draft law does not offer merely a facelift to the rules regulating the establishment, activities and corporate governance of LLCs; rather, it offers full-fledged reform. Among many novelties introduced by the draft law, a few to be mentioned are: (i) the option to execute shareholders’ agreements; (ii) new approaches to the disposal of shares (simplified procedures for joining an LLC, new rules for withdrawal from an LLC, limiting the possibility of expelling a shareholder from an LLC, new rules for the realisation of pre-emptive rights, new rules for inheriting a share, better regulation of the pledge of shares, etc.); (iii) cancelling the limit to the number of shareholders in an LLC; (iv) debt-to-equity conversions; (v) related-party transactions and material transactions (allowing minority shareholders to demand mandatory buyout of their shares if they disagree with any such transactions); (vi) cancellation of the notorious so-called ‘anti-chaining rule’ prohibiting the possession of a 100 percent share in an LLC by a shareholder which, in turn, also has only one shareholder, as well as the same shareholder holding of 100 percent of shares in two LLCs. The draft law is aimed at providing more discretion to shareholders in disposing their shares, and at balancing the rights of minority and majority shareholders in a company.

All these and many other legislative initiatives are designed to increase the investment attractiveness of Ukraine, to offer investors security, comfort and flexibility in doing business in the country, to facilitate the return of capital and to revive the market.


Maria Orlyk is a partner at CMS. She can be contacted on +38 (044) 500 17 18 or by email:

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Maria Orlyk


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