Corporate (shareholders’) agreements are permitted
Avellum, Kyiv, Ukraine,
Thu, Feb 22, 2018
On 18 February 2018, Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine Related to Corporate Agreements” No. 1984-VIII (“Law”) became effective.
The Law allows participants and shareholders of Ukrainian companies to enter into shareholders’ agreements and regulate the most important corporate relations according to their commercial arrangements.
The members of AVELLUM corporate/M&A team actively participated in drafting process and public discussions of the draft Law.
Explicit approval of corporate (shareholders’) agreements
The Law entitles participants of limited liability companies (“LLCs”) and shareholders of joint stock companies (“JSCs”) to enter into corporate (shareholders’) agreements. Such agreement governs how they exercise their rights as participants or shareholders.
The parties to a corporate (shareholders’) agreement will be permitted to settle, at their own discretion, such important matters of corporate relations as the procedure for the disposal of participatory interests/shares, including predetermination of the sale price and voting method at the general meeting.
State and state-owned enterprises that are participants/shareholders of companies will be able to enter into corporate agreements according to a separate law that must yet be adopted.
Previously, the negative court practice has, in fact, outlawed shareholders’ agreements in Ukraine, disregarding the freedom of contract doctrine. As a result, shareholders had to settle their relations in foreign jurisdictions, where they could enter into full-fledged shareholders’ agreements.
We expect that from now on, both participants of LLCs and shareholders of JSCs will be able to use such well-known instruments of corporate governance in joint ventures, as the right of first offer (ROFO), the right of first refusal (ROFR), tag along, drag along, deadlock resolution mechanisms, etc.
Negative covenants and option agreements
To ensure the functioning of corporate (shareholders’) agreements, the Law introduces the concept of “negative covenants”. This instrument is used when the parties of the corporate (shareholders’) agreement want to stipulate the lock-up period for shares transfer or to include an obligation of the shareholders to comply with the pre-emptive rights procedures (ROFO, ROFR) before disposal of shares to any third party, etc.
The Law also provides a legal framework for entering into option agreements.
Irrevocable power of attorney
The Law introduces irrevocable powers of attorney to exercise corporate rights. This instrument is used to ensure exercising voting rights in a certain manner and/or disposal of participatory interests/shares by the party to the corporate (shareholders’) agreement that is obliged to do so under such agreement.
Generally, it is one of the security instruments used in the jurisdictions with developed corporate law to ensure due performance of obligations under the shareholders’ agreements.
The Law creates solid grounds for direct investments into Ukrainian joint ventures without the need to establish foreign holding structures.