Ukraine: New Legislation Governing Corporate Agreements And Strengthening Creditors' Rights Takes Effect In Ukraine

February 2018 - On 18 February 2018, a long-awaited Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine Related to Corporate Agreements" No. 1984-VIII adopted by the Ukrainian parliament on 23 March 2017 (the "Law") became effective.

Among the changes introduced, the Law enables participants of limited liability companies (“LLCs”) and shareholders of joint stock companies (“JSCs”) to determine, at their own discretion, the procedure for the exercising of their corporate rights by entering into corporate agreements. The Law also introduces additional mechanisms for the protection of creditors' rights and certain novelties in contract law. By virtue of new legislation, Shareholder’s Agreements called in Ukraine “Corporate Agreements”, which are widely used in the international practice, have been implemented in the national legislation.

Shareholders’ Agreements

Based on an “Agreement on Exercising of Participants’ Rights of LLC” – in case of a LLC and  an “Agreement between Shareholders” – in case of a JSC (“Shareholders’ Agreement”) the parties undertake to exercise their rights as participants (shareholders) of a company in the way provided by such agreement and/or refrain from exercising of such rights. Under a Shareholders’ Agreement, inter alia, the parties may provide the following obligations: to vote or manage the company in a particular way; approve the acquisition or disposal of participatory interests (shares) at the price and/or subject to the terms agreed by the parties; or refrain from the alienation of participatory interests (shares) until certain circumstance defined by the agreement occur.

Shareholders’ Agreements shall be executed in writing for either a fixed term or an indefinite period. Their content is confidential and cannot be disclosed unless otherwise provided therein. However, information that such an agreement has been concluded must be notified to the company by one of its parties within three business days following its conclusion. Public JSCs must disclose information of the existence of their Shareholders’ Agreement based on the rules set out by the legislation for the disclosure of special information on the issuer.

A separate law will govern the procedure for entering into Shareholders’ Agreements to which the state or companies of the state sector of the economy are a party.

Securing the performance of the Shareholders’ Agreements and consequences of their breach

In order to enforce and/or secure the performance of the obligations of participants (shareholders) of a company, the Law introduces irrevocable powers of attorney in relation to corporate rights, which cannot be cancelled unilaterally by the principal unless otherwise provided therein. Such powers of attorney shall be terminated upon termination of the obligations secured by them and must be notarised. Transfer of authorities under such powers of attorney are not allowed unless otherwise provided therein.

Any agreement entered into by a party to a Shareholders’ Agreement in violation thereof may be invalidated based on a court decision under a claim of an interested party under the Shareholders’ Agreement, provided that the counter-party knew or could know of the limitations provided under the Shareholders’ Agreement.

A breach of a Shareholders’ Agreement cannot be grounds for the invalidation of the decisions of the company's bodies.

The Shareholders’ Agreement may provide for the general means ensuring that obligations are met and the liabilities for their breach. The parties to the Shareholders’ Agreement regarding JSCs may also provide for payment of compensation in case of its breach. Such compensation may be fixed or determined based on the procedure provided by the parties in the Shareholders’ Agreement.

The Law establishes separately, with regard to LLCs, the right of a party to the Shareholders’ Agreement to claim before a court a compulsory execution of an obligation to purchase (sell) participatory interest at the price and/or based on the terms agreed by the parties in case of a breach of the agreement.

Protection of creditors' rights

The Law introduces the right of creditors to enter into an agreement with shareholders (participants) that obliges them to exercise their corporate rights in the way provided by the agreement and/or to refrain from exercising such rights. Such an agreement, inter alia, may limit the right of participants (shareholders) to alienate participatory interest (shares). All general provisions provided by law in relation to the Shareholders’ Agreement shall be also applicable to such agreements with creditors.

Novelties in contract law

The Law introduces changes to the Civil Code of Ukraine extending the list of circumstances that may be grounds for exercising, modifying or termination of rights under contractual obligations and expanding the means for the protection of creditors’ rights. In particular, the Law provides that:

• the fulfilment of obligations or the exercising, change or termination of certain rights under contractual obligation may be conditioned by the performance or refraining from the performance of certain actions by one of the parties, or the occurrence of other circumstances provided by the agreement, including those which fully depend on the will of one of the parties; and
• in case of breach by the debtor of a negative obligation (i.e., the obligation not to take action), a creditor, in addition to the right to claim damages and punitive damages, has the right to require termination of the action from which the debtor undertook to refrain. Such a claim can be made by a creditor even if the negative obligation is not violated but there is a justifiable threat of a violation of such obligation.

The parties to a sale and purchase agreement may agree that one party will acquire from the other party the right to unilaterally terminate the contract. A sale and purchase agreement is deemed to be terminated if the party that acquired the right to terminate the agreement does not claim its fulfilment. The parties may agree that the termination of a sale and purchase agreement may be conditioned by the performance by a certain party of specific actions or the occurrence of certain circumstances within a specified period or at a specified time.

Part of novelties may soon become ineffective

Certain changes introduced by the Law regarding LLCs will become ineffective if the president signs the draft Law of Ukraine "On Limited Liability Companies and Additional Liability Companies" (the "Draft Law"), which was recently adopted by parliament. The Law introduced the above novelties by amending the Law of Ukraine "On Commercial Companies", some of which will become ineffective if the Draft Law, in its current wording, takes effect. We hope that legislators will fix this legislative contradiction soon.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.