The Way to the European Standards: Ukraine Improves Work of Small and Medium Business

Ukrainian officials in cooperation with European structures somehow have an access to regulatory documents, standards, rules and procedures of the EU and want to implement such rules and standards to the domestic Ukrainian law. Recent projects of changes in legislation concern primarily small and medium business, as this business actively uses organizational and legal forms of business such as limited liability company (more than 95% business associations have just such legal form) and company with an additional liability. Typically, business in Ukraine still cautiously treat proposed changes, possibly because they do not fully understand their meaning and benefits. Therefore, in this article we will try to consider main innovations in the law, benefits and opportunities that these changes will give to small and medium businesses.

INNOVATION №1: shareholder agreement
In English practice, this legal instrument is sufficiently known and widespread. In Ukrainian business practice and legislation, there is the concept of the foundation agreement, but it is used exclusively in operation of such organizational forms as full, limited and joint stock companies that are not as widespread as a limited liability company is. Lack of opportunities to enter a corporate agreement in a national law often is a major obstacle in relations with foreign founders, for which a contract is the bedrock of any business cooperation. The absence of such a legal instrument often leads to significant corporate disputes, such as the issue of separation or termination of business cooperation, because of which even a successful business that could bring significant profit to its founders often die.

INNOVATION №2: withdrawal of restrictions on the number of participants
In business practice, because of legal restrictions on the number of participants some companies do not have an alternative and have to choose a stock company as the legal form of business. But this form of business is very difficult and expensive to maintain, as it means the submission of a significant number of reports, receiving an agreements, disclosure of public information, significant agreements, annual independent audits, maintaining the register of shareholders, impossibility of compulsory purchase of shares etc. Because of these reasons, it turned out that a significant number of joint stock companies in Ukraine essentially are not stock, but due to quantitative restrictions of participants of a limited liability company are forced to work as joint stock companies. Due to the mentioned innovations, these companies will be able to change the legal form and to optimize the number of participants by buying shares of those who are interested doing business in the future, which in turn will help to optimize the management system and improve the economic performance of enterprises.

INNOVATION №3: judicial procedure of exclusion of company`s members
In Ukraine, although it is not an exception in Europe or the US, there is a negative practice of power grab by majority members of society harmfully for minority members and frank cases of raiding by majority members. The current law still allows excluding any member, that asks “inconvenient” questions or require his share of company profit, easily. Instead, proposed changes provide that exclusion can occur only by court order, unless his death, announcement as missing or dead. This is definitely a positive change because a judicial procedure will be a safeguard in the majority of potential difficult situations.

INNOVATION №4: reducing the mandatory requirements for the content of the charter
According to Ukrainian law, all members of the company and their shares in the authorized capital should be necessarily specified in the charter. 2 years ago, work of companies with the so-called “model charter” was stipulated, when entrepreneurs choose this model charter approved by the Cabinet of Ministers of Ukraine and do not spend too much time on signing of the revised statute in all cases of changing of shareholders or their parts. Proposed changes provide that the charter may contain only operational procedure and management of the company, and all information about members and their proper shares will be only in state registrars’ files. Under these changes, it will be not necessary to make any changes to the charter in case of sale/alienation/transfer of shares, which will greatly simplify the process, make it short-term, and increase the circulability of corporate rights in companies.

INNOVATION №5: the regulation of the preferential right to purchase shares in the authorized capital
The current version of the law only declares such right but does not provide clear mechanisms for its implementation. In the cases when the participants prescribed in charters of their companies the rules and procedures for priority rights for redemption / purchase of shares in share capital, such provisions of charters have often been profoundly challenged by stakeholders in court, that is why the current situation did not help participants in realization of these rights. Proposed changes to the law set clear deadlines for notification of the sale of shareholder’s stake to other members and introduce special form of judicial protection of such rights in form of requirement to transfer the rights and obligations of the buyer of shares.

INNOVATION №6: automatic procedure of foreclosure of corporate rights
Today, the lack of clear procedures for the implementation of a security in the enforcement proceedings or out of court, it is important to say that pledge of corporate rights for share in the authorized capital is at least something valuable. This situation reduces the asset circulability, make business lending on bail of corporate rights impossible, and so on. The proposed changes describe the procedure for implementing of charged corporate rights in detail, that, in our opinion, will significantly improve credit and financial climate and open new ways and opportunities to obtain bank loans and other forms of lending/investment for business and will ensure the loan agreement for banks and investors.

INNOVATION №7: introducing of concept of a “significant transaction” and ” interested party transaction”
The concept of a “significant transaction” has existed in Ukrainian legislation for a long time, in particular, today, members have right to set limits for the executive organ on making decisions on transactions exceeding a certain amount, but the concept of “interested party transaction” is an innovation in corporate law. An example is the interested party transaction/agreements that have no signs of significant transactions but are committed for the benefit of parties or members of the executive, supervisory or auditing bodies of companies, their families, and so on. The proposed changes to the law foresee getting the consent of general meeting or the supervisory board for the conclusion of these categories of transactions by the executive body, and transactions without proper approval will be considered not concluded. This is quite a positive change, but the final word in such matters, in our opinion, will put the court.

THE REMAINING INNOVATIONS
The remaining innovations are not so significant but also useful, and we will make quick points:
1. Introduction of institute of the Supervisory Board. Something similar to the Supervisory Board was also in Ukrainian companies – Chairman of the company. Instead, the proposed changes are more harmonized with the European legislation and will effectively control management.
2. Debt to equity conversion. The proposed bill provides the ability to convert property claims by the community to share in the authorized capital on the basis of the conversion of debt into capital and establishes clear rules. This possibility was before, but in the absence of legislative rules, most businesses have not use this opportunity.
3. Consequences of failure to contribute to share capital by a member. The result of delinquent contribution of the share to the share capital may be a reduction in size of the share capital or liquidation of the company. The current law also provides such consequence but does not contain procedures of action or responsibility, so today it is practically impossible to punish the member for failure to contribute to authorized capital of the company.

Summing up, changes in the laws regulating the activity of the most common legal forms of business in Ukraine, such as Limited Liability Company and Additional Liability Company, are quite progressive and seasonable. These changes bring the corporate right of Ukraine to the standards of the EU and other developed countries, make business dealing by the foreigners in Ukraine easier, predictable and controlled by the investor.

Author: Kydalov Igor