2012-02-04 @ admin
Joint stock company
The legal form and functioning of a Ukrainian joint stock company is similar to the joint stock company of the continental legal system. This corporate form has the following characteristics:
Under the Law ‘On Business Associations’, there are two types of joint stock companies: open and closed. The Commercial Code also provides for open and closed joint stock companies (the new Civil Code does not distinguish between these two types).
A Ukrainian open joint stock company is a public issuer of shares, which implies that the company has a right to distribute its shares among an unlimited number of persons. It can issue registered or bearer shares. (See company registration Ukraine)
The legal status of a closed joint stock company is not clearly defined by Ukrainian law. In a closed joint stock company only registered shares may be issued, which can be distributed only among the founders and cannot be freely distributed, including on a stock exchange. During the past two years, there has been a lot of controversy and litigation over whether the foundation documents of such a company may impose certain limitations on the shareholders rights to dispose of shares (pre-emption rights, etc). The Commercial Code, effective from 1 January 2004 adopted the position that the shareholders of a closed joint stock company have a pre-emption right to purchase shares from the other shareholders before they can sell to third parties. A similar provision is also included in the draft Law ‘On Joint Stock Companies’. Nevertheless, it is still ambiguous whether such a pre-emption right applies if a shareholder wishes to dispose of his, her or its shares other than by sale, for example by gift. There is also no legal procedure on how to execute such a pre-emption right and there is still an issue as to what sanctions apply for violations of the pre-emption right, issues that presumably can be addressed by a company’s charter.
For joint stock, liability and additional liability companies, Ukrainian law provides for two foundation documents, a foundation agreement and charter. From a legal standpoint, the foundation agreement is a joint venture agreement, and under the new Civil and Commercial Codes it is optional, as it is no longer required to found these companies. For full liability and mixed liability companies, which do not have a charter, the foundation agreement is their only foundation document.
One of the important issues related to the operation of joint stock companies is corporate governance. A joint stock company has a multilevel management structure. The highest managing body is the general meeting of shareholders that must be convened at least once a year to decide the main issues for the company’s activities. At a general meeting of shareholders, most decisions must be adopted by a so-called ‘simple majority vote’ (ie 50 per cent plus one vote) of the shareholders present. However, decisions on amending the charter and to decide on the company’s liquidation must be adopted by a 3/4-majority vote of the shareholders present. For a meeting to be validly held, there must be a quorum of shareholders attending who represent 60 per cent of the outstanding shares.
Ukrainian law also provides for the possibility to create a supervisory council, and for joint stock companies having more than 50 shareholders, the creation of this body is obligatory. The supervisory council is supposed to permit the shareholders to exercise more control over the company’s management. The executive body of a joint stock company that manages its day-to-day activity is usually its board of
directors, although under the new Civil Code, it can be any other collective body or even a single director, as determined by the charter.
Under the Law ‘On Business Association’, a company’s activities are reviewed by the audit commission, which must consist of at least two members. The new Civil Code does not establish a requirement for any such special auditing controlling body, but instead only requires an obligatory annual independent audit inspection for those open joint stock companies that are public issuers of shares. As the Law ‘On Business Associations’ continues in effect, presumably audit commissions continue to be required, even for open joint stock companies.
By law, there is a list of issues that are referred to the competence of a general meeting of shareholders, some of which may be delegated to the supervisory council or the board of directors by the shareholders.
On 11 December 2003, the State Commission of Ukraine on Securities and the Stock Exchange adopted the ‘Principles of Corporate Governance’, which were developed to reflect generally accepted international standards of corporate governance. This should be viewed as a guidebook intended to recommend practices. In practice, minority shareholder rights are generally poorly protected in Ukraine in the absence of special charter provisions and other protections.
Limited liability company
A Ukrainian limited liability company is similar to a Ukrainian joint stock company in that its shareholders benefit from limited liability; however, it does not issue shares (stock). Instead, it has an authorized capital divided into a certain number of participation shares, the value of which is determined by the charter together with the foundation agreement, if one is used.
The profits of a limited liability company may be distributed in dividends pro rata to each participant’s contributions to the company’s authorized capital. In case a participant of a limited liability company withdraws its participation, then the participant’s contribution must be returned in the form specified in the charter (and foundation agreement if any).
A limited liability company also has a simplified management structure. The highest body of the company is the general meeting of participants, which should be convened at least twice a year unless otherwise provided in the company’s charter. The day-to-day management is handled by a collective executive body, or by a sole director, as the participants may decide. Under the Law ‘On Business Association’, a limited liability company’s activities are reviewed by an audit commission, which must consist of at least three members; however, the new Civil Code does not require the creation of any such audit bodies.
Most decisions of the general meeting of participants must be adopted by a simple majority vote of the participants present at a meeting. However, decisions to determine the main types of the company’s activity, to approve its plans and accounts, to amend the charter and remove a participant from the company (permitted in certain circumstances) must be adopted by participants holding more than 50 per cent of all of the votes of participants. The limited liability company is the most common form of doing business in Ukraine and is typically used for creation of a Ukrainian subsidiary by foreign multinationals.
Nevertheless, this form also has certain disadvantages, which for some investors may be crucial. One of the major drawbacks in using the limited liability company structure for some investors is the preemptive right of participants to purchase the participation share of the other participants that want to sell. Any participant has the right to withdraw from a limited liability company, resulting in cancellation of the participation share and a corresponding reduction of the authorized capital, so that the participant becomes entitled to compensation in respect of its participation share. As a practical matter, unless the charter and foundation agreement (if any) have been drafted specifically to anticipate such a situation, disputes often arise with respect to the methods of valuation of the withdrawing participant’s share.
Another problem for any minority investor in a limited liability company is the provision of the ‘Law on Business Association’ allowing exclusion of a participant who ‘systematically fails to comply with his, her or its obligations or prevents the company from reaching its goals’. A vote in favour of exclusion by participants holding a total of more than 50 per cent of all of the votes of participants is sufficient to exclude a participant.
Private enterprise
Private enterprises were previously formed on the basis of the Law ‘On Enterprises’ and based on ownership by one individual. Under the Commercial Code, a private enterprise can now be founded by one or several individuals or by one legal entity. As a separate legal entity, a private enterprise should give its owner/shareholder the full benefits of a limited investment risk, provided that its charter is drafted appropriately. One of the benefits of the private enterprise form is that the law does not require that any authorized capital be formed, so there is no minimum capital funding requirement, and in addition there are virtually no corporate formalities that must be complied with. The private enterprise is simply governed as provided by its charter.
Subsidiary enterprise
A subsidiary enterprise, also sometimes translated as a ‘subsidiary company’, is another unusual corporate form, which was created in the early 1990s and continued until adoption of the new Civil and Commercial Codes. A subsidiary enterprise is wholly owned by one founder, and should not be confused with the general Western term ‘subsidiary’ as applied to a company owned by a parent company. There was no detailed legislation or regulations defining how such enterprises must be organized or run. For example, there were no legislative provisions on the minimum amount of the charter fund for such entities or on what are their governing bodies. There have been a number of cases where issues on these matters have caused difficulties and misunderstandings between the founders of a subsidiary company and the state authorities. The operations of a subsidiary enterprise were therefore based largely on what the charter provided. Major multinationals and other large investors usually preferred to avoid this corporate form because of the lack of predictability in interpretations from the state authorities as to how it should be legally regulated. In this respect, the subsidiary enterprise was similar to the private enterprise described above.
The new Civil and Commercial Codes do not provide for any such ‘subsidiary enterprise (company)’ as a separate legal form. In defining a subsidiary company, the Commercial Code focuses on the economic and/or organizational dependence of a subsidiary enterprise to a controlling (holding) company. Therefore, the authors of the Commercial Code have finally reflected the Western concept of the term ‘subsidiary company’. Under the Commercial Code, the company created in any legal form established by law is now considered a subsidiary company if the other (holding) company owns a controlling block of shares in such subsidiary company. Presumably, companies currently registered in the form of a ‘subsidiary enterprise’ will have to be re-registered into one of the existing corporate forms.