Legislative Innovations Related to Business Creation and Development in Ukraine
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This article analyzes amendments to Ukrainian legislation related to business creation and development. The pros and cons of these innovations are shown and practical advice on establishing efficient business is given.
Since 1 January 2016 Ukraine has had its legislation relating to state registration and business operations fundamentally changed with the procedure of submission of documents simplified and fully functional access provided to all currently accessible Unified State Registers. Furthermore, a number of new legislative acts have been introduced and the unified system for business operations and information exchange is being created.
Currently, the simplification of the state registration procedure has been legislated regarding new business entities and amendments to data on existing ones, which has resulted in an applicant and members of the legal entity not being obliged to go to a notary officer for execution of appropriate documents when carrying out state registration of amendments to the statutory documents of the legal entity as well as being able to register business when submitting documents in electronic format, which can certainly be considered a positive step. At the same time, these simplifications can lead to certain manipulations and fraud on the part of unscrupulous partners or even raiders.
Furthermore, the importance for everyone of disclosure and accessibility of information on ultimate beneficial owners is also worth mentioning. Knowing the name of the legal entity, the information on the ultimate beneficial owners of the legal entity can be easily obtained, which gives an opportunity to get information on a direct counterparty owner.
Liabilities and particularities related to submission of information on the ultimate beneficial owner to the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organizations (hereinafter referred to as the State Register) are provided by the On Amendments to Certain Legislative Acts of Ukraine Regarding Identification of Ultimate Beneficial Parties of Legal Entities and Public Persons Act of Ukraine of 14 October 2014 and the On Prevention and Counteraction to Legalization (laundering) of the Proceeds of Crime, to Financing of Terrorism and Proliferation of Weapons of Mass Destruction Act of Ukraine of 14 October 2014.
However, though these legislative innovations have been implemented since the end of 2014 in Ukraine, a number of drawbacks failed to be eliminated by lawmakers.
Particular attention should be drawn to the fact that apart from administrative liability for non-submission of information on ultimate beneficial owners of a legal entity, criminal legislation of Ukraine, namely Article 2051 of the Criminal Code of Ukraine, provides for the applicant to be liable for knowingly giving false information to the state registrar.
A significant number of Ukrainian residents are known to command the services of nominee shareholders, directors, etc., when engaging foreign companies into their business entities. This is due both to existing legislative limitations on free foreign investment for acquisition of corporate rights of foreign business entities and the owners’ intention to make information on their ownership confidential.
Besides, it should be borne in mind that such services are commanded by a great number of business entities, particularly in Ukraine. Thus, it can lead to a situation when a person who is a foreign resident will be identified in the State Register as an ultimate beneficial owner of a number of enterprises, a fact which in itself can attract the attention of regulatory agencies. Furthermore, attention should be paid to the limitations provided by the competitive legislation of Ukraine. For example, to the requirements for getting permission for merger clearance. The engaging of one and the same person by several business groups may simply result in their being interconnected by control relations with any agreement demanding merger clearance permission or leading to violation of competitive legislation.
There are other legislative innovations related to business management, which are worth bringing to your notice. For instance, the reduction of the quorum needed for holding general meetings of members of limited liability companies and general meetings of shareholders of joint-stock companies has become one of the most important legislative innovations for business owners and, particularly, foreign investors. Formerly, the meetings of members/shareholders could take a decision only with a quorum total of 60% of the votes. Currently, meetings are claimed to be legitimate with members/shareholders being present and having more than 50% of votes in total. Thus, a significant problem faced previously by investors has been solved. Namely, when a majority shareholder with less than 60% of voting shares could not ipso facto control business operations because the absence of minority shareholders deprived him/her of the opportunity to take decision on the change of management of the company or other important decisions, which require the convening and holding of a meeting of members/shareholders.
In addition to the above-mentioned amendments, implementation of derivative action, introduction of liability of officials of joint-stock companies in case of infliction of damage to the companies by their misconduct, setting of the clear regulation of related-party transactions, which, in its turn, will protect the rights of shareholders, should all be noted. This means that now a shareholder can enforce the director of the Ukrainian company to recover the damage if it is judicially proved to have been caused by his/her misconduct.
The issue of implementation of the concept of sharing/corporate dealings between members/shareholders of companies to the legislation of Ukraine still remains pending and controversial. Unfortunately, we have not witnessed any legislative changes, but there might be hope this year on this issue.
The sharing dealing will enable members to determine the main activities of the company, specific aspects of its management, the liabilities to be applied to the violators of the sharing dealing terms and conditions, an opportunity for protection of parties’ interests in case of nonfulfillment of obligations by the member, mechanism of dealing with no-win situations as well as other issues to be willingly discussed by the parties.
The fact that the above-mentioned issue is not regulated in Ukraine leads to attempts by business owners to regulate their relations abroad using legal mechanisms available there on the basis of holding companies.
At the same time, when creating business with foreign holding companies engaged, a attention should be paid to the particularities of Ukrainian legislation, namely identification of ultimate beneficial owners of legal entities.
Actually, it is not an innovation, neither in Ukraine, nor in the world, as, for example, in the USA the new Incorporation Transparency and Law Enforcement Assistance Act has been under consideration since August 2013, while in Great Britain the idea of creation of a publicly accessible register containing information on beneficial owners of companies has been discussed since June 2014, having been adopted only at the end of 2015 with the aim of it starting to function only in April 2016. Besides, in comparison to the Ukrainian State Register, the British Register is not open. Only upon a grounded request from the authorized person or agency is the information provided.
As Ukraine joining the automation information exchange system is inevitable, the regulatory agencies and banking institutions will have the chance to automatically exchange information on legal entities and their owners, which can possibly lead to regulatory agencies carrying out checks of information on the ultimate beneficial owners of legal entities provided in the State Register.
That’s why, when providing such information to the State Register now, applicants have to take these facts into account so as to avoid possible liability in future.
It should be mentioned that current Ukrainian legislation does not provide for cases of identification of ultimate beneficial owners of Ukrainian companies, the parent companies of which are public companies. That is, ones which have their outstanding shares on stock exchanges, as well as for cases of Ukrainian companies enlisting entities which have forms of incorporation not covered by Ukrainian legislation. For instance, trusts, foundations, partnerships which are traditional for case law, which are very popular and efficient tools in international structuring.
It should also be remembered that there are still countries where bearer shares are not abolished, which makes it impossible to identify the ultimate beneficial owner of such companies.
In spite of all the positive implementations, a number of issues remain, which require a more thorough analysis and legislative regulation.
That’s why the engagement of foreign entities into business structuring and regulation of relations between partners abroad are still a high priority for both the Ukrainian business community and foreign investors.
Therefore, when engaging foreign companies in business structuring, first of all, current trends of development of this type of relations and their legislative regulation should be taken into account, and the business entity should be adapted to the new circumstances in the world and legal changes, as this is first and foremost a condition for business to feel secure and successful.