Company & Commercial - Ukraine

One of the most controversial events of recent months was the publication of the Recommendations of the Highest Commercial Court on the Application of Legislation in Deciding Cases Arising out of Corporate Relations (N 04-5/14).

Although at first glance the recommendations seem merely to regulate conflicts of laws and to correct legal deficiencies in the field of corporate law, they not only fill gaps in Ukrainian legislation, but also open new debates.

Corporate Relations

The recommendations have the positive effect of clearly defining the terms of corporate disputes and the persons who may be involved. For instance, the court has clarified that in a case where suit has been filed against a company by a non-member or non-shareholder (eg, a future member or legal successor), the dispute may not be characterized as a corporate dispute. Failure to comply with the requirements of the law and a company's statutory documents cannot be deemed a violation of the rights of such persons, as they are not company members or shareholders.

The recommendations stress that the decision-making influence of individual members or shareholders in general meetings may not be restricted to the number of votes held, but is determined by a number of other factors that must be taken into account. The statement also touches on disputes connected with failure to notify and untimely notification in the context of general meetings.

A section of the recommendations sets out the procedure for calculating the compensation to be paid to a withdrawing member of a company (ie, the value of its part of the company’s assets), which is proportional to the withdrawing member's charter capital share. The value is calculated as the difference between the member's assets and liabilities, multiplied by the percentage charter capital share. This procedure applies not only to the withdrawal of a member, but also to the expulsion and compensation of lawful heirs.

One of the positive tendencies demonstrated by the recommendations is the court's reluctance to involve itself in companies' internal disputes. The following examples illustrate its approach:

• The court proceeds from the assumption that decisions made by a company's highest body are legitimate. Thus, claims to acknowledge the validity of decisions taken by general members’ or shareholders’ meetings may not be upheld.
• Taking part in general members’ and shareholders’ meetings is a right, not an obligation. The courts may not interfere or force members or shareholders to participate.
• The courts may not take decisions which fall within the competence of general members’ or shareholders’ meetings (eg, decisions about rewording charters or the terms and procedure for paying dividends).
• The courts may not prohibit members of an executive body from performing their administrative duties or acting in the name of the company.
• The courts may not prohibit registered shareholders from participating in general shareholders’ meetings. Logically, the courts may neither forbid nor force shareholders to register. The courts may not prohibit a registrar from supplying a register of shareholders for registering at meetings.
• The courts may not seize all of a company's assets, but may, if necessary, prohibit the alienation of part of the assets in specific circumstances.

The court has officially acknowledged the relatively independent status of commercial entities and their right to determine their own affairs. However, other more uncompromising statements have been less welcome. The now notorious Article 6 of the recommendations addresses the application of foreign law in corporate disputes - an issue closely connected to foreign investment. This reactionary article runs counter to Ukraine's wish to move towards a European legal system, going so far as to prohibit the very existence of freedom of enterprise in Ukraine. Its prohibitive statements can be summarized as follows:

The activities of a Ukrainian legal entity and the relations between its members or shareholders (both with each other and with the company) must be regulated by Ukrainian law - no alternative is permitted.

Agreements among shareholders or between the shareholders and the company which declare such relations to be subject to a foreign law are null and void.

Members and shareholders may not subject corporate disputes arising from the activity of Ukrainian legal entities to international commercial arbitration.

Certain corporate relations may not be made subject to foreign law, as this is deemed detrimental to public order. This prohibition covers relations between founders or members which govern:

• the foundation of a legal entity;
• the formation of the entity's bodies and the definition of their powers;
• the procedure for convening general meetings; and
• the decision-making process at such meetings. 

The court attempts to justify its public order reasoning on the basis of Article 228 of the Civil Code, which states that:

“[An] agreement is considered to breach public order if it is aimed at the violation of the constitutional rights and freedoms of man and the citizen, [or] at the destruction [or] damage of property belonging to a physical person or a legal entity, the state, the Autonomous Republic of Crimea or a territorial community, [or] the illegal seizure of such a property. An agreement which breaches public order is null and void.”

In light of this definition, the court has surely gone too far in its judgment.

In addition, the court considers that such agreements need not be declared null and void by the courts, as they are by definition null and void from their inception and cannot give rise to legal consequences. However, the court offers no reference to legislation to justify this opinion.

Although relatively progressive in some respects, the recommendations considerably hinder domestic and foreign investors, acquirers and target companies, and are likely to worsen Ukraine's investment climate.

Pursuant to the recommendations, agreements are null and void if they set the limit of a quorum at anything other than "60% or more". Depending on the issue being decided, other decisions may be passed only by a three-quarters majority, by "over 50%" or by a simple majority. Other variants, such as a 70% or 100% quorum, are invalid. Parties may previously have tried to raise the quorum, interpreting the rule to mean that any figure above 60% was acceptable; now only a 60% quorum is permitted. In the court's interpretation, any deviation from this rule would be deemed to breach public order.   

Comment

As court decisions in Ukraine are based on statute, not court guidance or precedent, the recommendations need not be strictly followed - the court itself does not always follow its own decisions and is not required to do so. However, the recommendations threaten to undermine countless agreements prepared by prominent lawyers in support of the interests of multinational corporations in Ukraine. Money has been invested and advisory fees have been paid, but the very existence of the agreements has now been thrown into doubt - they are dependent on the will of the parties and whether they are satisfied with the content of the agreements that they have concluded. The question is whether the courts will follow and implement the recommendations or simply ignore them - they will not be retracted, as the Highest Commercial Court never admits to making a mistake. Time will tell.