July 29, 2020 · 5 min read
On June 17, 2018, the Law of Ukraine "On Limited and Additional Liability Companies" No. 2275-VIII dated February 06, 2018, came into force, introducing significant changes and innovations to the procedure for the establishment, organization of activities, relationships between founders, and termination of LLCs.
Particular attention should be paid to the new provisions in the field of regulating LLC activities, which concern new requirements and responsibilities of the executive body – the director.
As has been noted in many places, one of the law's novelties is the introduction of the concept of a "significant transaction". According to clause 2 of Article 44 of the Law, "Decisions on granting consent to enter into a transaction, if the value of property, works, or services that are the subject of such a transaction exceeds 50 percent of the value of the company's net assets as of the end of the previous quarter, are made exclusively by the general meeting of participants".
Therefore, in the event of concluding any purchase/sale agreement, provision/receipt of services, performance/receipt of works, etc., for an amount exceeding 50% of the value of the LLC's net assets according to the balance sheet data as of the end of the previous quarter, consent from the General Meeting of LLC Participants must be obtained to conclude such an agreement. We also draw your attention to the fact that if such a transaction is divided into several separate agreements with the aim of reducing the transaction amount, the consent of the General Meeting must still be obtained, as according to clause 4 of Article 44, "If, instead of several transactions, the company could have entered into one significant transaction, then each of such transactions is considered significant".
That is, before signing any agreement, the director must check whether such a transaction is significant and whether consent from the General Meeting of Participants is required first.
In case of non-compliance with the above requirement, such agreements may be declared invalid by court order, and officials of the company guilty of violating the procedure for entering into significant transactions shall be jointly and severally liable for damages caused to the company.
According to the Transitional Provisions of the Law, within one year from the date this Law enters into force, the provisions of the charter of a limited liability company that do not comply with this Law, remain valid to the extent that they comply with the legislation as of the date this Law entered into force. This clause does not apply after amendments are made to the charter of a limited liability company, or an additional liability company. Based on the foregoing, the director must now obtain the consent of the General Meeting for transactions as specified above, regardless of whether amendments have been made to the Charter.
Another new development for the LLC director is the so-called "conflict of interest", which can effectively lead to the director's dismissal from their position.
Thus, according to Article 42 of the Law, upon election to office, an official (director) of the company is obliged to submit to the company a list of their affiliated persons. In case of a change in the composition of affiliated persons, the official is obliged to inform the company about such change within five days from the day they became aware of it. The concept of affiliated persons is taken from the Law of Ukraine "On Joint-Stock Companies" No. 514-VI dated September 17, 2008:
– family members of an individual – spouse, as well as parents (adoptive parents), guardians (custodians), brothers, sisters, children, and their spouses;
– legal entities, provided that one of them exercises control over the other or both are under the control of a third party;
– an individual and their family members and a legal entity, if this individual and/or their family members exercise control over the legal entity.
Moreover, as soon as the director becomes aware of a conflict of interest, they must notify the company's supervisory board (if formed) and all participants of the company in writing within two days from the day of receiving information about the existing conflict of interest.
Failure to do so, according to clause 8 of Article 42 of the Law, may be grounds for the company to terminate the agreement (contract) with the director without compensation.
Separately, the provisions of Article 40 of the Law regarding the combination of the director's activities and those of a sole proprietor (FOP) also deserve attention. Thus, according to clause 5 of Article 40 of the Law, the director of the company, without the consent of the General Meeting, cannot:
– conduct entrepreneurial activity as a sole proprietor (FOP) similar to the company's activity,
– be a director of another company that conducts activity similar to the company's activity.
Again, violation of these requirements may be grounds for the company to terminate the agreement (contract) with the director without compensation.
Therefore, to avoid misunderstandings and unpleasant situations in relationships with the director, we advise LLC founders to immediately stipulate these conditions in employment agreements (contracts) with the director.
We also recommend you read the article regarding general changes introduced by the new LLC Law, as well as the article where our colleague elaborates on changes in the LLC corporate agreement in accordance with the new Law.
