Major Transactions: Key Issues

Perhaps the most significant stir among all innovations of the Law of Ukraine "On Limited and Additional Liability Companies" dated 06.02.2018 No. 2275-VIII (hereinafter – the LLC Law) was caused by the introduction of the concept of a significant transaction, in particular, the issue of the mandatory consent of the general meeting of participants of the company (hereinafter – GM) for the execution of a transaction if the amount of operations under it exceeds 50 percent of the value of the LLC's net assets for the previous quarter (Part 2, Article 44 of the LLC Law).

Many limited and additional liability companies daily face a number of questions related to this norm, for which there are currently no official answers. We propose to consider some of them and suggest possible solutions.

• What about existing agreements concluded earlier, before the law came into force? How is the prolongation of an existing agreement, or the signing of other additional agreements, carried out?

The main rule here applies: the law has no retroactive effect. This means that all operations carried out under agreements/appendices/additional agreements concluded before the LLC Law came into force (before 17.06.2018) do not require a decision to grant consent for their execution. However, all appendices/additional agreements/agreements concluded/prolonged after the law came into force, according to the logic of Part 2, Article 44 of the LLC Law, must be approved by a corresponding GM decision.

• How to conclude agreements with an unknown amount in advance?

We suggest specifying the amount in the agreement, or in an appendix to the agreement (if the cost of the service/work is immediately known for at least one appendix), and using it to determine the necessity of formalizing a decision to grant consent for the transaction: if the amount does not exceed 50% of the net asset value at that specific moment, – do not formalize a decision until the agreement amount is exceeded (for example, in subsequent appendices/invoices/acts).

It should be noted: the agreement amount is calculated not for each individual operation, but cumulatively for all operations under one agreement.

Also, we recommend stating in the agreement itself that if the actual total amount of all operations under the agreement reaches and exceeds the total agreement amount, the parties reserve the right to increase the agreement amount to the necessary size, and only after that should the new agreement amount be compared again with the value of net assets.

In addition, please note that according to Part 4, Article 44 of the LLC Law, if the company could have entered into one significant transaction instead of several transactions, then each of such transactions will be considered significant.

• Negative assets: for which agreements should the general meeting's consent be obtained in such a case?

If net assets are negative, we recommend formalizing a decision to grant consent for the transaction every time any agreements are concluded, including those for which the amount is not known in advance.

• Does the General Power of Attorney, issued by the parent company to the director of a subsidiary, lose its meaning? Can the procedure for approving significant transactions be simplified with the help of a power of attorney?

In our opinion, the General Power of Attorney does not lose its meaning if it stipulates that the authorized person has the power to grant consent for significant transactions on behalf of the GM. This will save time and speed up the procedure for granting consent to conclude transactions.

• Who can declare a transaction invalid and what consequences will this entail?

Several consequences should be noted:

1. Declaration of a transaction as invalid by a court.

A transaction executed without proper authority may be declared invalid by a court in accordance with Part 3, Article 215 of the Civil Code of Ukraine, if any interested party disputes its validity.

According to Parts 1, 2, Article 216 of the Civil Code of Ukraine, an invalid transaction does not create legal consequences other than those related to its invalidity, and if a court declares a transaction invalid, the parties return to each other everything received under that transaction, or compensate the value of everything received.

2. Non-recognition of the agreement by tax and other controlling authorities.

From the content of Article 44 of the LLC Law, it follows that a transaction executed in violation of the established procedure for its execution (without the GM's consent), if it was not subsequently approved, and if no actions were taken for its execution, does not create legal consequences for the legal entity.

The risk is particularly tangible for transactions that involve expenses for the legal entity, for example, purchase and sale agreements where the legal entity acts as the buyer, as tax authorities, during an audit, may not recognize expenses for such an unapproved transaction. Such cases have already occurred in practice today.

3. Liability of the Director or other authorized person.

Negative consequences may affect not only the legal entity but also the Director/other person authorized to sign such an agreement, as according to Part 5, Article 44 of the LLC Law, in case of violation of the procedure for approving significant transactions, the officials of the LLC will be jointly and severally liable for damages caused to the company.

Thus, we can state that currently, the LLC Law has somewhat complicated the "life" of Ukrainian LLCs, rather than simplifying it. We hope that the gaps will soon be rectified both by amending the LLC Law itself and by issuing official clarifications by competent state authorities.