The Parliament of Ukraine has adopted in its entirety draft law “On Joint Stock Companies” No. 2493, dated 25 November 2019 (“Draft Law”). The Draft Law is designated to align the regulation of joint stock companies (“JSC”) operation with EU corporate governance standards.
Choice of the governance structure
The current Law of Ukraine “On Joint Stock Companies” (“Law”) provides for the mandatory establishment of a supervisory board for public JSCs and private JSCs with more than 10 shareholders. However, the Draft Law allows JSCs to choose a one-tier or two-tier governance structure:
- one-tier governance structure consists of a general shareholders’ meeting and a board of directors. In turn, the board of directors includes executive directors and may include non-executive directors. Executive directors manage the JSC’s operational activity, while non-executive directors perform the supervisory and controlling functions
- two-tier governance structure consists of a general shareholders’ meeting, a supervisory board (controlling the executive body’s activity), and an executive body (managing the JSC’s operational activity)
A JSC may decide to switch to a one-tier or two-tier governance structure at any time.
Officers’ fiduciary duties
The Draft Law increases the standards of liability of the JSC’s officers:
- officers must act in the interests of the JSC, in good faith and reasonably, and take independent resolutions to achieve successful results of the JSC’s activities
- if net assets’ value is less than 50 per cent of the JSC’s share capital, officers must take actions to improve the JSC’s financial condition or convene a general meeting to take the resolution on reducing the JSC’s share capital or its liquidation. If officers fail to carry out the appropriate actions, they may be held personally liable for the JSC’s obligations
The Draft Law takes into account the urgency of modernising corporate relations and provides the shareholders with a right to participate in general meetings through an electronic system as follows:
- notification of the general meetings, registration and identification of shareholders, voting, and vote counting may be carried out through a special electronic system
- to participate in an electronic general meeting, a shareholder must have an electronic signature or other means of electronic identification provided for by the National Securities and Stock Market Commission
- based on the results of the electronic general meeting, the JSC’s authorised person signs and the Central Depository certifies the minutes of such general meeting
The Draft Law clarifies some important issues related to shareholders’ agreements:
- a shareholders’ agreement may be entered into with or without consideration
- in addition to the shareholders, the JSC itself and third parties may be parties to a shareholders’ agreement
- if a party enters into any contract in violation of the shareholders’ agreement, the respective contract is deemed null and void, provided that the counterparty was aware or should have been aware of the relevant violation
Issuance and consequences of violation of an irrevocable power of attorney
The Draft Law expressly provides that an irrevocable power of attorney may be issued to fulfil or secure obligations under a share pledge agreement.
Additionally, under the Draft Law, in case of violation of the principal’s rights and interests, the relevant representative must cease acting under the irrevocable power of attorney and renounce it at the request of such principal. The court may cancel such irrevocable power of attorney if a dispute arises.
Restrictions for JSC-controlled companies
The Draft Law provides for several restrictions for the companies controlled by the JSC. In particular, such companies may not:
- purchase JSC’s shares
- provide a loan to purchase the JSC’s shares
- guarantee obligations under a loan provided by a third party for purchasing JSC’s shares
Restrictions on payment of dividends
The Draft Law supplements the list of cases when the JSC may not pay dividends. Now such restriction will also apply if the JSC’s assets are or become (as a result of a relevant resolution) insufficient to satisfy the claims of the JSC’s creditors. The court may order to return dividends paid out to shareholders if such requirements are violated.
Competence of the general meeting
The Draft Law establishes the principle of non-interference of the JSC’s governing bodies in the activities of each other. As a general rule, a general shareholders’ meeting may not take resolutions on the issues that fall under the competence of a supervisory board or a board of directors (unless otherwise expressly provided for in the JSC’s charter). At the same time, the supervisory board or the board of directors may, on its initiative, include in the agenda of the general meeting any issue that falls within the relevant body’s competence.
Changes in LLCs’ operation
In addition to changes regarding JSCs’ operation, the Draft Law provides for a number of amendments relating to limited liability companies (“LLC”):
- by the participants’ resolution, participatory interests in the LLC’s charter capital may be kept by the Central Depository. In this case, the LLC may also pay dividends through the participatory interests’ accounting system, as well as hold general participants’ meetings through an electronic accounting system
- similarly to the JSC, a shareholders’ agreement in relation to the LLC may be entered into with or without consideration
- enforcement of the share pledge may be carried out in extrajudicial order as provided for in a relevant share pledge agreement following requirements of the Law of Ukraine “On Securing Creditors’ Claims and Registration of Encumbrances”
- an irrevocable power of attorney may also be issued to fulfil or secure the pledgor’s obligations to transfer a participatory interest in the LLC’s charter capital
- the LLC’s charter may provide that a participant holding 50 per cent or more of the charter capital may withdraw from the LLC without a prior consent of other participants
- similarly to the JSC, executive and non-executive directors may be appointed to the LLC’s board of directors
By Aleksandr Volodin, Associate, Yelyzaveta Kravtsova, Associate, and Anastasiia Karpenko, Associate, Avellum