Shareholders Agreements in Ukraine
Managing Partner, Avellum Partners
Corporate law of major Western countries has long been adapted to the needs of private investors to ensure maximum flexibility in arranging relations of shareholders amongst themselves. One of the main instruments, which provide such flexibility, is shareholders agreements. Such agreements usually include corporate governance provisions, voting arrangements, deadlock resolution mechanisms, dividend distribution procedures, and rules on the issuance and transfer of shares. Quite often they set out a more detailed regulation than the one provided in the legislation using a flexible corporate law regime of the local law. While this instrument was first invented in common law countries, over the past three decades it was adopted by leading continental jurisdictions such as Germany, France and The Netherlands. Unfortunately, Ukrainian law is seriously lagging behind in this area. In fact, Ukrainian court practice principally prohibits any shareholders agreements, which contradict mandatory norms of Ukrainian law. Given that Ukrainian corporate law is very inflexible and court practice on such matters is virtually nonexistent, it is pointless to enter into a shareholders agreement at the Ukrainian company level. This forces investors to structure shareholders agreements outside of Ukraine at the foreign holding company level. Hence, Ukrainian law and courts have little influence on the relations of shareholders in companies, which often have all of their assets in Ukraine. Such situation prevents Ukrainian corporate law from developing and contributes to the lack of investment attractiveness of Ukraine as a whole. In the last few months the Committee on Corporate Law and Stock Markets of the Ukrainian Bar Association with significant input of the legal team of Avellum Partners launched an initiative to bring Ukrainian corporate law in line with leading Western practices in this area. The proposed reform aims to introduce changes to the Civil Code of Ukraine, the Law on Joint Stock Companies and the Law on Business Entities. These changes will introduce the notion of the shareholders agreements (corporate agreements) to Ukrainian law, providing that such agreements may be signed for an indefinite term. Special rules will be provided for joint stock companies and companies, in which the state has a stake. Proposed changes also create the possibility to issue an irrevocable power of attorney, clarify that performance of agreements may be subject to will of one of the parties, and finally introduce a notion of option agreements into the Civil Code of Ukraine. These suggested changes are only the first step in the corporate law reform that awaits Ukraine in the next few years. Foreign investors and the Ukrainian legal community agree that Ukraine desperately needs a brand-new Law on Limited Liability Companies, which would give more flexibility to participants of LLCS to structure their corporate governance. Furthermore, a substantial overhaul of the Civil and Commercial Codes of Ukraine is needed to introduce progressive practice in mergers and acquisitions, such as warranties, indemnities and limitation of liability of parties in commercial contracts.