Participation in a Ukrainian company: risks for foreigners

A Limited Liability Company (LLC) has been and remains the most popular form of doing business in Ukraine, and the sale of a share in the authorized capital is a common option for attracting investment. Earlier we talked about the peculiarities of this business structure, now we will focus on the issues that in practice interest foreigners – owners of shares in Ukrainian LLCs. If you are a member of Ukrainian business or planning to become one, our recommendations will be useful for you.

What do you need to know about the general meeting of LLC members in Ukraine?

This is the supreme body of the company, it includes owners of shares in the authorized capital of LLC. The Law of Ukraine “On Limited Liability Companies and Additional Liability Companies” provides for the exclusive powers of the general meeting, which cannot be delegated to other management bodies of the company. For example, only the general meeting can change the amount of the authorized share capital of the company.

In general, this supreme body can make any decisions concerning the limited liability company. The articles of association of the company may also provide for additional exclusive rights of the general meeting, thus limiting the decision-making space of the management.

If you do not own the majority of votes in the LLC, you should carefully read the decision making procedure provided for by the law and the charter of the company.

In Ukraine, it is not uncommon when important decisions on the business are made without regard to the rights of minority shareholders, for example, with violation of the order of convening and holding a general meeting. This is especially true when you reside abroad: your company’s Articles of Association should clearly stipulate the procedure for notifying you about convening a general meeting. We help our foreign clients, we develop legally verified charters without “pitfalls”.

The Articles of Association may also provide for options for remote decision-making procedure for the members of the LLC, such as through absentee voting or by poll. A written document in which your decision on a certain issue is recorded must be notarized. But not all decisions can be taken remotely, key issues must be considered by the general meeting in general order, in the presence of a quorum. A general meeting can be held remotely provided that all members of the company have given their written consent.

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Relations with the management of limited liability companies in Ukraine

Building and properly formalizing the relationship between owners and management is a key element of effective operation in Ukraine. The main task is to create a balanced system in which the director will be empowered to effectively manage the business, but will not be able to arbitrarily dispose of the company’s assets apart from the will of its beneficiaries.

A widespread example of Ukrainian practice: the head of the company in collusion with the chief accountant created a number of legal entities, with which, on behalf of the company, he concluded a number of fictitious contracts in order to withdraw profits in his favor.

Or the company management creates artificial “intermediaries” – fictitious legal entities through which clients receive goods or services from the company. In this way, management makes its affiliated structures the monopoly counterparties to your business, effectively making itself indispensable to the company.

The law contains safeguards for such cases, for example, the Charter may define the significant transactions for the company and require the consent of the general meeting. The same applies to related-party transactions – a person with a conflict of interest will not be able to make decisions without the consent of the highest body of the company.

In addition, the legislation provides for the liability of the hapless directors for deliberate driving to bankruptcy, misrepresentation of financial indicators, and other corporate antics. But proving these facts is a long and valuable road, at the end of which you can get the desired court decision and the guilty manager without a penny in his pocket.

It is better to do everything properly from the very beginning: structure the business, develop algorithms for each of its elements, enable managers to act responsibly within a transparent system of control and accountability. That is what we professionally help foreign entrepreneurs with, who can be sure about their business with us.

Whatever the trust between you, your business partners and your subordinates, clear legal formalization of your cooperation will increase mutual respect and make the business more stable.

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How to protect yourself from raiding in Ukraine?

Raiding is a collective term, the manifestation of which is most dangerous in the weak zones of the Ukrainian legislation and judicial system. In general, raiding is the forceful seizure of a company by illegal means. Being as protected as possible from this phenomenon can only be with the involvement of professional lawyers, who will prepare the “bullet-proof” documents and eliminate vulnerabilities in your business.

You can also use certain protective actions on your own, for example:

• establishing the requirement to notarize signatures on documents on making decisions by the company, selling or pledging a share. It will be organizationally more difficult to manage the business, but there is less risk of your signature being forged;
• Making sure that you have the pre-emptive right to acquire a share of the business for sale (to prevent “dilution of your share”);
• Developing restrictions for the director, for example, by setting limits on the amount of transactions he/she can make without your consent;
• Creating a supervisory board of the company, which will monitor the actions of management and can detect collusion or inefficiency in advance;
• Members may agree on mandatory periodic audits, you can also organize legal reviews of certain aspects of your company.

Remote control of business is not an easy task, but a real one. Our team understands the legal intricacies of Ukrainian companies and can guarantee the legal safety of your business activity. We have experience of business support in various spheres and will help to achieve the desired result.

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