Impact of new LLC law on M&A in Ukraine
June 2018 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2018 Issue
On 6 February 2018, the Ukrainian parliament took a final vote and approved a new law on limited liability companies (LLCs) and additional liability companies. This final vote followed more than two and half years of preparatory work aimed at changing the landscape of Ukrainian corporate law. The new LLC law will come into force on 17 June 2018 and open a new epoch in the regulation of LLCs, the largest group of legal entities in Ukraine.
Comprising of around half a million entities, compared to around 20,000 joint stock companies, LLCs are the most common mergers and acquisitions (M&A) targets in Ukraine. Furthermore, LLCs are the most popular form of legal entity in the Ukrainian market for international investors. Most subsidiaries of foreign companies in Ukraine are registered in the form of an LLC.
The new LLC law has been specifically designed to harmonise corporate regulations in Ukraine with those in the EU. The changes introduced by the new LLC law are expected to improve the investment climate in the country, promote the development of small- and mid-size businesses and prevent capital outflow from Ukraine.
The legal rules currently applicable to LLCs in Ukraine, which will be replaced with new regulations in the near future, are one of the main reasons why traditionally M&A deals are structured outside of the country. Under the existing rules, it is impossible to enter into shareholder agreements to pre-agree on voting, on corporate governance terms and on management appointments and procedures. Combined, these measures did not contribute to Ukraine’s attractiveness as a corporate destination. The deficiencies of the soon-to-be-former rules have driven many business structures and M&A transactions offshore.
Enforcement of the new LLC law is expected to introduce the game-changing rules which will allow a greater number of M&A transactions to be structured, executed and completed in Ukraine directly, without creating artificial foreign holding structures on top of Ukrainian assets.
The new LLC law introduces numerous innovations into the regulation of LLCs, and offers shareholders broad discretion when disposing of their shares, choosing the preferred method for managing LLCs and structuring their constitutional documents.
It significantly improves corporate governance in LLCs. In particular, shareholders of LLCs will now have an option to establish a supervisory board with independent members. Furthermore, the document also provides for a better balance between the liberty of directors in taking management decisions and effective shareholders’ control over the activities of directors. The new LLC law also sets a higher standard in regulating the liability of directors.
Sole shareholders of LLCs will be able to enjoy simplified procedures for managing their assets. They will not need to comply with a number of formal requirements for convening and holding shareholders’ meetings.
One of the most important novelties introduced by the new LLC law is explicit permission to enter into shareholders’ agreements, which is standard and mature practice in other developed jurisdictions facilitating resolution of various deadlocked situations. Such agreements may provide for obligations for shareholders to vote in a certain manner, seek approval for a sale or purchase shares at the pre-agreed purchase price or conditions, and refrain from selling shares, to name a few.
The new LLC law offers better regulation of procedures for entering into, succession and exit from a business. For example, a third-party investor will now be in position to become a shareholder in the LLC, simply by making a contribution to the charter capital of the company. Achieving the same result under the old rules has been much more difficult, and required the execution of multiple consecutive actions. Furthermore, formalisation of shareholder changes will become easier due to removal of the requirement to list shareholders in the charter and to register amendments to the charter.
The new LLC law further simplifies registration procedures and does not put a cap on the number of shareholders in an LLC. This should give joint-stock companies the opportunity to convert into LLCs and simplify their activities, regulations and reporting.
At the same time, these simplified registration procedures do not further expose companies and their shareholders to potential raider attacks. Instead, a higher level of shareholding protection is required due to notarial certification of particular shareholders’ resolutions and notarial certification of signatures at ballots for absent voting.
One of the most significant achievements of this new piece of legislation is the direct effect it will have on M&A transactions in the country, including the introduction of a debt-to-equity conversion mechanism in relation to shares in LLCs and new regulations applicable to foreclosure on a pledged share.
The new LLC law also cancels the ‘anti-chaining rule’, prohibiting possession of a 100 percent share in an LLC by a shareholder which, in turn, also has only one shareholder. This rule also prohibited a single shareholder from holding a 100 percent share in more than one LLC. Over the past few years, these restrictions have complicated a number of M&A transactions in Ukraine, inducing the introduction of artificial additional shareholders. This change in the law will simplify the internal structuring of corporate groups in Ukraine.
In light of the above novelties, the new LLC law will become a landmark instrument and will constitute a comprehensive and fundamental piece of legislation regulating the activities of LLCs, while balancing the rights of minority and majority shareholders, management, investors and creditors. As soon as shareholders and investors feel comfortable within the Ukrainian corporate legal framework, a greater number of M&A transactions will be completed in Ukraine, and not offshore.
Maria Orlyk is a partner at CMS. She can be contacted on +38 (044) 500 17 18 or by email: firstname.lastname@example.org.
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