Charters of LLCs and ALCs: two-year-long corporate ambiguity fixed

On February 27, 2021, Law № 1183-IX on Amendments to the Commercial Code of Ukraine to Eliminate Legal Conflicts in the Requirements to the Charters of Limited and Additional Liability Companies entered into force.

The law eliminated the conflict between the Law on Limited and Additional Liability Companies and the Commercial Code in terms of mandatory requirements for the charters of LLCs and ALCs, which arose from the fact that the Commercial Code required the indication in the constituent documents of the concerned companies its authorized capital, while the Law on Limited and Additional Liability Companies did not.

Background

The old Law on Commercial Companies and the Commercial Code required a large amount of information to be specified in the charters of LLCs and ALCs. In particular, the charter had to indicate the list of participants of the company and the size of their shareholding. In practice, this meant that after the acquisition of a share in the authorized capital of the LLC, the new owner had to obtain additional approval from the general meeting to make the appropriate changes to the charter.

In 2018, the Law on Limited and Additional Liability Companies came into force. One of the progressive innovations of the Law cut the list of information to be defined in the charters of LLCs and ALCs. After this, in the charter it was only necessary to specify

  • the name of the company;
  • management bodies, their competence, decision-making procedure; and
  • procedure for joining and leaving the company.

In accordance with the transitional provisions of the new Law on LLCs, the provisions of the old Law on Commercial Companies governing LLCs and ALCs became invalid.

Revealed Conflict

However, in due course of running business, lawyers soon discovered that legislators, deliberately or not, had forgotten to exclude the old requirements for the charters of LLCs and ALCs from the Commercial Code. Thus, the Commercial Code still has requirements to indicate a company’s participants and their shares in a charter, the amount of authorized capital, the purpose of economic activity, etc. (Article 57; Article 80, of Article 82 of the Commercial Code). The negligence of the legislators led to a conflict between the provisions of the new Law and the Commercial Code in terms of requirements for the charters of the aforementioned legal entity types.

The old Law on Commercial Companies and the Commercial Code required a large amount of information to be specified in the charters of LLCs and ALCs. In particular, the charter had to indicate the list of members of the company and the size of their shares. In practice, this meant that after the acquisition of a share in the authorized capital of the LLC, the new owner had to obtain additional approval from the departing participants to convene a general meeting and vote for the appropriate changes to the charter. Needless to say, such a drawback created some bad faith practices to seize the opportunities created by it.

Solution

Fortunately, the latest legislative amendments excluded from the Commercial Code the provision on reflecting the size of the shareholding of participants in the authorized capital in the constituent documents of the concerned LLC or ALC. Moreover, the new edition of Part 4 of Art. 82 of the Commercial Code stipulates that the list of information which must be contained in the charters of LLC and ALC companies is determined exclusively by the Law on Limited and Additional Liability Companies.