Oleksandr Pysarenko. Attorney at law, MBA degree.

Establishment of a company in Ukraine and management of its share.

Generally, foreign investors provide direct investments in Ukraine by establishment and taking part as a co-party in limited liability entities. Investors’ financial inflow is presented in a form of contribution to chartered capital of such entities, leading to the ownership of shares in charted capital based on investors’ inflow amounts. Starting from the date of the state registration of a limited liability company in Ukraine, the investors acquire status of a co-partyand therefore are entitled to the rights of shareholders, which are stipulated by current legislation and the relevant business entity charter.

Shareholder of a limited liability company in Ukraine has a right to dispose of it’s share of property in chartered capital in case of decision to withdraw from LLC in Ukraine.
Efficient options for disposal of the co-party share in chartered capital are as follows:
1. Share sale,
2. Withdraw from the entity in compliance with the order stipulated by the current legislation and the relevant business entity charter.

In case of cessation of business activities in Ukraine through sale of the share in chartered capital the shareholder shall offer its share acquisition, first of all, to other co-parties of the LLC, as the Civil Code and the Law of Ukraine “On commercial companies” stipulate the priority right for the share acquisition by other shareholders of LLC. Investor-co-party shall offer other shareholders to purchase its share under the same price and contractual terms, which are offered to third parties. However, if other co-parties of the LLC disclaim of priority right for the share acquisition, shareholder has a right to sell its share to the third party on the same terms and conditions. The settlement for the share acquisition is conducted between foreign shareholder and purchaser. Breach of the established regulations might to be a cause for declaring the Share Sale-Purchase Contract as illegal.

In case of cessation of business activities in Ukraine through withdrawing from a limited liability company the foreign shareholder shall make an appropriate statement. Its share is reapportioned among other co-parties of the LLC. In this case the limited liability company shall pay out the withdrawing co-party the cost of it’s part of the LLC property and profit, pro rata to the withdrawing co-party’s share percentage in chartered capital. The settlement is conducted between former shareholder and the limited liability company itself.

Settlement with shareholder in case of its withdrawal from a company in Ukraine.

Some aspects in respect of settlements with shareholder in case of withdrawal from limited liability company in Ukraine (herein after – LLC) are described in this article based on the lawsuits processed.

If the LLC shareholder intends to cease business activity and there is no parties interested in acquisition of its share on adequate price, the legislation provides the shareholder with a possibility to withdraw from LLC.

Two options for the definition of the date for the withdrawing shareholder from LLC have framed.
Per Article 148 of the Civil Code of Ukraine shareholder can withdraw from LLC, having notified the other parties 3 months prior his withdrawal, if another term is not stipulated by relevant LLC charter. The Supreme Commercial Court of Ukraine interprets that shareholder is considered to be withdrawn from LLC starting from the moment of decision of the shareholders meeting referring its withdrawal based on notification on behalf of the shareholder about withdrawal. While in case of absence of such decision – starting from the date of termination of a 3-months period or another term, envisaged by the charter, for the withdrawal notification submission (p.3.5. RECOMMENDATIONS OF PRESIDIUM OF THE SUPREME COMMERCIAL COURT OF UKRAINE, dated 28.12.2007, Nr. 04-5/14 “On practice of application of legislation in court proceedings associated with corporate relationship”).
The other option for the date definition is the date of withdraw, approved by the shareholders meeting, which does not coincide with the above mentioned dates, however, remaining within a 3-months or another period, stipulated by the LLC charter, for submission of notification about withdrawal. Shareholders’ meeting is a supreme body of LLC, entitled to make decisions on all issues of its activities.

Terms for settlement with a co-party upon its withdrawal from business entity in Ukraine.

Per Article 148 of the Civil Code of Ukraine order and method of appraisal of value of the company property on the pro rata basis of the shareholder’s part in the chartered capital, as well as order and terms for its settlement are envisaged by the charter and the relevant Law.
This publication covers the cases if matters under discussion are not regulated by the charter.

Per Article 54 of the Law the settlement is conducted after approval of the annual report, when the shareholder withdrew from LLC, and within the period of 12 months since the date of its withdrawal. The Law does not stipulate which exactly report shall be approved (a part of financial accountability “Report on equity capital” or report of executive body of the entity about the results of activities or another one). In fact, it does not matter, as LLCs which are not interested in instant settlement provision for the withdrawing party, delay its conduction for 12 months since the co-party withdrawal. Upon termination of this period the withdrawn shareholder is entitled to claim the settlement due to ruling of court, irrespective of approval of the annual report.

Configuration of the property to be used as a basis for the settlement calculation.

Property assets, which value serves as a basis for calculation of amount to be paid to the withdrawn party, include not only the property owned by LLC per the ownership right, but also proprietary rights of possession of property (assets), rented by LLC.
Article 190 of the Civil Code of Ukraine stipulates that property assets mean totality of assets, as well as proprietary rights and obligations. Definition “proprietary rights” includes any rights associated with property, which differ from rights of ownership, including rights which are constituents of right of ownership and right of claim (Article 3 of the Law “On appraisal of property, proprietary rights and expert assessment activity in Ukraine”. Per point 5 of the Regulation of Bookkeeping No. 242, approved by the Decree of the Ministry of Finance of Ukraine, dated 18.10.1999, intangible assets mean, particularly, rights for usage of property (right for usage of land lot in compliance with the land laws, right for usage of building, right for premises rent). Point 3.7. of the above mentioned RECOMMENDATIONS OF PRESIDIUM OF THE SUPREME COMMERCIAL COURT OF UKRAINE, dated 28.12.2007, No. 04-5/14, envisages that in the framework of such litigations the courts shall take into account the totality of property, which also includes proprietary rights, besides the assets. Value of a part of the entity property which was owned by the withdrawn co-party and deemed to be compensated to it, is defined based on the value of all property, including fixed and intangible assets.
Hereby, if the LLC entity leaseholds, for example, the land plot or another immovable estate on the date of its shareholder withdrawing, cost of proprietary rights for the mentioned shall be included into the total property of LLC in order to be used as a basis for computation of the settlement to be reimbursed.

Market or balance value of the property?

The main issue in litigations referring settlement for the withdrawn shareholder is a method of appraisal of the LLC property value, which was applied during its expertise, i.e. market or book value, because even given the absence of infringements in bookkeeping, value of the LLC property, calculated on the basis of these two methods, can differ several times.
Neither the Law “On commercial entities”, nor the Civil Code of Ukraine stipulates the exact answer to this issue. But comprehensive analysis and examination of current legislation and provisions issued on behalf of the Supreme Commercial Court of Ukraine bring to decision of application of the market value of the LLC property, if the withdrawn shareholder insists on it.
Per Article 148 of the Civil Code of Ukraine, order and method of appraisal of a part of the LLC property value to be reimbursed are defined by charter and legislative acts, while claims on specification of cost of a part of property are being ruled by court.
The legislative act which stipulates order and method of appraisal of value of a part of property to be reimbursed is the Law “On appraisal of property, proprietary rights and expert assessment activity in Ukraine”). The Law defines legal foundation for conduction of appraisal of value of the property and further application of its results. Per Article 7 of this Law conduction of independent appraisal of property is obligatory in cases of specification of measure of settlement in the framework of disputes resolving. Per Article 9 of this Law, if laws and Governmental normative legal acts of the Cabinet of Ministers of Ukraine or court do not specify a type/method of the value appraisal, which shall be applied during legal expertise, market value of the LLC shall serve as a basis for such appraisal. Per Article 12 of this Law, appraisal report is a document which contains summary of the property value.
Per The Law “On book-keeping and financial accountability“, financial accountability and balance report of the entity are not considered to be the documents which contain conclusions and summaries about value of the LLC property.
Per Article 34 of the Commercial Procedural Code of Ukraine circumstances of the lawsuit, which shall be confirmed by definite written evidences, can not be affirmed by other means.
Per Article 12 of the Plenum of the Supreme Court of Ukraine ruling, dated 22.12.1995, No 20 “On Court practice in lawsuits of property rights protection” the courts shall proceed from the fact that value of disputed property is defined by parties accordance, and if the last is not achieved – on actual value as of the date of the dispute consideration. If necessary, the relevant expertise for its definition shall be provided.
Per Articles 509, 11 of the Civil Code of Ukraine commitments shall be based on principles of good faith, reasonableness and justice.
In compliance with point 64 of the ruling of the European Court of Human Rights in case ‘SovTransAvto Holding” vs Ukraine (Claim No 48553/99), dated 02.10.2003, being a part of legislation of Ukraine, which referred the reimbursement of just satisfaction settlement of the property value of the business entity, it is stipulated that the Court takes into account argument of claimant which stated that book value of assets was far from real value of assets or, by other words, their market value.
Hereby, compensation to the withdrawn shareholder shall be conducted exactly on a basis of market value of the LLC property as of the date of the co-party withdrawal, if the last claims that book value of the company assets/property is lower than its market value.
Point 3.7. of the mentioned RECOMMENDATIONS OF PRESIDIUM OF THE SUPREME COMMERCIAL COURT OF UKRAINE, dated 28.12.2007, No. 04-5/14, clarifies that any shareholder of LLC has a right to claim a final settlement, based on current (market) value of property of LLC. The Court can satisfy a solicitation on behalf of appraisal the withdrawing shareholder referring conduction of expert of current (market) value of fixed assets (capital), intangible assets, long term or current biologic assets in order to appraise value of a part of property, which shall be compensated to the withdrawn shareholder.

In order to avoid further trials it is worth paying proper attention to correct definition of issues to be resolved by legal expertise. Expert shall draw report on market value of the LLC property as of the date of its shareholder withdrawal, as well as to specify the exact value of a part of the LLC property to be calculated and paid out to withdrawn shareholder-claimant*.

*The article is developed on a basis of the law office lawsuits.

Oleksandr Pysarenko, attorney at law, MBA degree,
Pysarenko Law Office. Kiev, Ukraine.

Tel.: +38 (044) 279 56 32
E-mail: info@fides.com.ua