related party transactions in limited liability companies and joint-stock companies in ukraine:...

Related Party Transactions in Limited Liability

Companies and Joint-Stock Companies in

Ukraine: Comparative Aspects

Ivan Romashchenko, LL.M. (Adv.),

PhD Candidate at Leiden Law School,

Assistant Professor, Department of Civil Law,

Faculty of Law, Taras Shevchenko National University of Kyiv

Structure

• Regulation before the Law of Ukraine “On Joint-Stock Companies”

(2008)

– before 29 April 2009

• Regulation under the Law of Ukraine “On Joint-Stock Companies”

(2008) before the enactment of 2015 amendments

– 29 April 2009 – 30 April 2016

• 2015 amendments for Joint-Stock Companies

– effective since 1 May 2016

• Provisions on RPTs in the Draft Law of Ukraine “On Limited and

Additional Liability Companies”

• Current problems and further perspectives

Regulation before the Law of Ukraine “On Joint-

Stock Companies” (2008) – before 29 April 2009

• The Law of Ukraine “On Economic Companies” (1991): no

regulation

• The Civil Code of Ukraine (2003): no regulation, but…

… duty of management to act in the interests of legal entity, fairly

and reasonably, and not to exceed its competence (part 3 article 92 of

the Civil Code).

Art. 92 CC: an obligation of abstract nature, without any specific

mechanism or procedure to follow, subject to interpretation and

debate.

Regulation under the Law of Ukraine “On Joint-

Stock Companies” (2008) before the enactment of

2015 amendments – 29 April 2009 – 30 April 2016

• Art. 71 of the Law of Ukraine “On Joint-Stock Companies”:

self-interested transactions

• The concept of self-interested transaction: transaction between a

company and an interested person




• What did the self-interested transaction trigger?

1. Procedure:

1. Interested persons had to notify the company within 3 days

from the moment the interest arose about their interest in

transaction

2. The management had to notify the supervisory board within 5

working days from the moment of receipt of information (or the

shareholders – if there was no supervisory board).





1. Procedure:

3. The supervisory board within 5 working days had to either

confirm transaction (if it corresponded to the interests of the

company), or to prohibit it, or to pass the issue to…

the general meeting of shareholders (also competent if there was

no supervisory board, the majority of supervisory board is biased

or the supervisory board failed to react in time).





2. If procedure was not complied (Art. 72)

1. Transaction could be declared null and void;

2. The interested person was liable for any harm inflicted by

transaction




• Who were interested persons for self-interested transactions?

The concept changed with time (the Law of Ukraine as of 3 February

2011 excluded some categories of affiliated persons, including legal

entities, controlled by shareholders or controlling them), but mostly

preserved the same features

• After 3 February 2011 amendments

3 categories of interested persons:

1) company officers, their family members;

2) shareholders, their family members, with 25% > share capital;

3) legal person, 25 % > owned by company officers, their family

members.




Question: Who are company officers?

Answer: paragraph 15 Art. 1:

• Head and members of management board

• Head and members of supervisory board (if created)

• Head and members of audit committee

• Head and members of other company bodies (if created)




Question: Who are family members?

Answer: Art. 71:

• wife (husband)

• parents (adopters)

• guardians

• brother, sister

• children, their spouses




Question: Under what conditions company officers, shareholders with

25% >, their family members, and legal entities, 25% > owned by

company officers are interested persons?

Answer: Art. 71: if they met at least one condition

1) party to contract or member of management in legal entity, party to

contract

2) receives benefit from transaction (beneficiary)

3) buys property as a result of transaction (very weird spelling, could

be subject to interpretation as acquisition)

4) enters in a transaction as a representative or a mediator

2015 amendments for Joint-Stock Companies –

effective since 1 May 2016

• Art. 71 amended (general remarks)

The concept of self-interested transaction changed: rules on RPTs

cover only transactions for the amount more than 100 minimum

salaries – in 2016 it is 137 800 UAH, which is around 4900 Euros.

The list of interested persons is extended (see next slides).

Better terminology (e.g. to be interested a relevant person has not to

‘buy’, but to ‘acquire’ property, so that transactions without payment

are included).



• Art. 71 amended (interested persons)

Category 1

Before: company officers, their family members;

Now: company officers, their affiliated persons, that besides family

members also include legal persons controlled by company officers or

their family members.




Category 2

Before: shareholders, their family members, with 25% > share capital;

Now: shareholders, their affiliated persons, with 25% > share capital, that

besides family members also include…

1. legal persons controlled by shareholders, their family members, and

2. in case shareholder is a legal person, then affiliated person may also

be:

1. legal person controlling shareholder;

2. legal person under control of third legal person, which also controls

the shareholder.

Exception: shareholders, with 100% share capital.




Category 3

Before: legal person, 25 % > owned by company officers, their family

members;

Now: legal person, where persons in Category 1 or Category 2 are

company officers.

Observation: if before to be interested a legal person had to be 25% >

owned by company officers, their family members, now to be

interested it has to be 50% > owned (as affiliated person) – this is

where scope of interested persons has been narrowed.




Category 4 (NEW):

other persons, indicated in the

articles of association.



• Art. 71 amended (improved procedure) – management level

Before: an interested person had to notify management within three

days after the interest arose

Now: an interested person has to notify management in advance

Before: no provision on what information haв to be disclosed to the

management

Now: an interested person has to inform about the interest and to

submit draft transaction document



• Art. 71 amended (improved procedure) – supervisory board level

Before: no independent evaluation needed.

Now: the supervisory board (if there is no supervisory board – the

management) has to carry out independent evaluation of the

transaction, with the help of independent evaluator.

Same provision as before: The supervisory board takes decision on

approval of self-interested transaction by majority of non-interested

members.



• Art. 71 amended (improved procedure) – general meeting of

shareholders

Before: the general rule applied that the general meeting of

shareholders decided by simple majority of shareholders present at

the meeting.

Now (VERY IMPORTANT): the general meeting of shareholders

decides on approval of self-interested transaction by majority of non-

interested shareholders present at the meeting.



• Art. 72 amended (different

consequences)

Before: self-interested transaction,

entered into with the violation of

procedure under Art. 71, could be

declared null and void.

Now: self-interested transaction is

binding if it is approved within the

procedure, specified in Art. 71.

Legal strategies used for joint-stock companies

(wording as indicated in

the Anatomy of Corporate Law, chapter 6):

1) partly affiliation strategy: mandatory disclosure to shareholders by

management if there is no supervisory board; conditions of approved

self-interested transaction have to be made public (procedure to follow)

2) partly agent incentives strategy: approval of transaction by supervisory

board, procedural rules

3) the decision rights strategy: mostly used – in case supervisory board is

either incompetent, or reluctant to decide, or there is no supervisory

board

4) no rules strategy: no express prohibition of RPTs

5) almost no standards strategy: almost no provisions, except Art. 92 Civil

Code of Ukraine with abstract duty of care

Current transition problem (1)

• Are self-interested transactions approved before 1 May 2016

(before the enactment of new amendments) valid?

• No regulation in transition provisions

• Expert opinion: yes, they are valid, because company’s will has

already been formed and expressed

Current transition problem (2)

What if the authorities take conflicting decisions on self-interested

transactions?

Before 1 May, if the amount of transaction is between 10% and 25%

of company’s assets, even if it is self-interested, it was subject to the

approval of supervisory board (art. 70)

After 1 May, if the amount of transaction is between 10% and 25% of

company’s assets, it is subject to the approval of supervisory board

(art. 70), but if it also self-interest, then it is subject to approval by the

general meeting of shareholders (amended art. 71).

What if:

supervisory board approved transaction before 1 May, but…

…the general meeting of shareholders disapproves it after 1 May?

Which decision prevails?

At the moment –

no regulation of related

party transactions for

limited liability companies

in Ukraine.

Provisions on RPTs in the Draft Law of Ukraine

“On Limited and Additional Liability Companies”

Draft Law is under consideration in

the committee of economic policy

in the Verkhovna Rada of Ukraine

(the Parliament), subject to

committee approval and further

approval by the Parliament.

Received by the Verkhovna Rada

of Ukraine on 13 May 2016.



The same concept of self-interested transactions as in joint-stock

companies (art. 46):

transactions between company and interested person.



4 categories of interested persons:

1. company officers, their affiliated persons;

2. shareholders, their affiliated persons, with 20% > share capital;

3. legal person, where persons in category 1 or category 2 are

company officers;

4. other persons, indicated in the articles of association.

Difference: in JSCs shareholders are interested if they have 25% >.



Self-interested transaction is subject to rules on self-interested

transactions if one of the conditions is met:

1. the amount of transaction is:

…either more than 10% of company assets and more than 50

minimum salaries (currently ≈ 2450 Euros)

…or more than 200 minimum salaries (currently ≈ 9800 Euros)

2. it is a loan or financial support to company officer or affiliated person

3. it is a pledge or surety to company officer or affiliated person.



Body to approve self-interested transaction

General rule: general meeting of shareholders, may be supervisory

board (if created)

Difference: in JSCs general rule is opposite, supervisory board is

competent, if not created – general meeting of shareholders



Procedure for self-interested transactions

Step 1. Interested person has to inform the company about conditions

of transaction within 2 working days the person became aware of the

intent to enter into transaction.

Step 2. The management has to forward the information on self-

interested transaction to the supervisory board (if created) and

shareholders.

Step 3. The votes of interested persons are not considered during

voting in the supervisory board and in the general meeting of

shareholders.



Provisions on RPTs are not applied:

1. if there is only one shareholder in LLC

simultaneously managing company

2. non-payable acquisition of property



Consequences of self-interested transactions:

self-interested transaction is binding if it is approved within the

established procedure.

Same approach as in recent amendments for JSCs.

Available defence against RPTs in LLCs

under current laws

Every shareholder has the right to exit.

Consequences of exit from LLC

(art. 54 of the Law of Ukraine “On Economic Companies”):

LLC has to pay part of property proportionately to the share after the

year report is approved, but within 12 months after the date of exit.

New rules in the Draft Law:

shareholders with 50% > may exit under consent of shareholders;

the market price of share is determined as of the date of exit;

the LLC has to pay shareholder’s share within one year.

Further perspectives

• Implementation of amendments on RPTs for joint-stock companies

• Improvement of regulation of RPTs for joint-stock companies,

adoption of regulatory legal acts (e.g., for mandatory disclosure of

RPTs and use of standards based strategy)

• Elaboration and adoption of the Law of Ukraine “On Limited and

Additional Liability Companies”

Ivan Romashchenko

[email protected]

Thank you for your attention!

Welcome to Kyiv!