Partial amendments concerning corporate governance in Limited Liability Companies

In addition to the modernisation of corporate governance in joint stock companies (“JSCs”), the new version of the Law of Ukraine “On Joint Stock Companies” (“Law”) introduces partial amendments concerning corporate governance in limited liability companies (“LLCs”).

However, the Law introduces such amendments in an unusual way, in particular:

• Rather than describing LLCs’ corporate governance structures in the Law of Ukraine “On Limited Liability Companies and Additional Liability Companies” (“LLC Law”), the Law amends the article of the Civil Code of Ukraine (“CCU”) that regulates corporate governance structures of JSCs, stating that its provisions apply to LLCs by way of analogy.
• The CCU establishes two structures of corporate governance in JSCs (and, therefore, in LLCs):
  • one-tier structure consisting of a general shareholders’ meeting and a board of directors, and
  • two-tier structure consisting of a general shareholders’ meeting, a supervisory board and an executive body.

We analysed such structures’ main advantages and disadvantages in our previous publication.

• Most importantly, the Law introduces only minor amendments to the LLC Law regarding the LLCs’ executive body and its members. In particular, under the LLC Law (as amended by the Law):
  • under Article 28, the general shareholders’ meeting, the supervisory board (if established), and the executive body are the LLC’s governing bodies;
  • under Article 31, the general meeting may be convened by the LLC’s executive body or upon a request of the supervisory board or the board of directors. Therefore, in this article, the LLC Law distinguishes the executive body from the board of directors;
  • under Article 39, the charter may provide that the executive body of the LLC is a collective one and is named the “directorate”, unless the charter provides otherwise. In this article, the LLC Law does not explicitly offer the option to establish a board of directors in case of a one-tier corporate governance structure; and
  • at the same time, Article 39 provides that the executive and non-executive directors may be elected to the collective executive body and that the non-executive director is an individual elected as a member of the company’s board of directors who carries out supervision, risk management, and control over the executive directors and the company as a whole. Only these provisions minimally regulate the activity of the board of directors in LLCs, indicating that the board of directors is the company’s executive body. Additionally, in contradiction with Article 39, which entitles to choose any name of the collective executive body in the LLC’s charter, the mentioned provision defines the non-executive director as a member of the board of directors only.

As a result, the Law only amends the CCU by applying the corporate governance structures of JSCs to LLCs by analogy. It does not explicitly entitle to select a one-tier or two-tier corporate governance structure in the LLC Law and does not clearly differentiate between them.

Given the above, we recommend introducing additional amendments to the LLC Law. These amendments should clearly define and differentiate between various corporate governance structures, as is done for JSCs. Pending such amendments, we recommend describing LLCs’ corporate governance structure as well as the composition and powers of LLCs’ bodies in detail in their charters, using the discretionary nature of the LLC Law.

AVELLUM provides legal assistance in structuring corporate governance and amending the LLCs’ charters to align them with recent legislative amendments and business owners’ vision. For more detailed legal advice, please contact AVELLUM partners – Mykola Stetsenko and Yuriy Nechayev.