Model Charter for Ukrainian Companies
A Limited Liability Company (LLC) in Ukraine, must adopt a Company Charter (also known as Memorandum and Articles of Association or Company Constitution in other countries) as part of the company registration procedure. The charter is a standard statutory document used for incorporation and operation of legal entities, and sets forth statutory rules regulating legal status, rights, obligations and relations in connection with incorporation, management and operation of business activity by legal entity.
Recent amendments to the Ukrainian legislation introduced the concept of a model charter which provide the option of registering an LLC on the basis of a model charter offered by the government. The purpose of this article is to provide an overview of the model charter and guidelines on adopting the model charter for a Ukrainian LLC.
A Limited Liability Company (LLC) in Ukraine (in Ukrainian – Товариство з обмеженою відповідальністю) is the most popular type of legal entity formation in Ukraine. Compared to other types of business forms in Ukraine, a LLC offers simpler registration and administration requirements while maintaining the full protection of limited liability.
Effective 23rd of November, 2011, LLCs in Ukraine can be registered on the basis of a model charter or an individually drafted charter at the discretion of its shareholders. According to Ukrainian legislation, General Shareholders’ Meeting of a LLC (the highest management body of LLC, hereinafter – the GSM) may at any time adopt a decision to continue its activity on the basis of model charter or to stop working on the basis of model charter (subject to registration of such decision with the Companies Registrar).
Due to conflicting and incompatible legislative acts, for a while, companies that adopted model charter had difficulties with opening of bank accounts, obtaining licenses, execution of notarial deeds, etc which made using model charter not attractive. However, these legislative conflicts have now been resolved and the use of model charter is a viable option for LLCs in Ukraine.
For registration of the company on the basis of model charter, the decision of GSM on incorporation of a LLC has to contain resolution of shareholders to use model charter as the charter for the LLC. In such a case, there is no need to file the charter for the LLC. Instead, as part of the LLC registration application, you just have to indicate that the LLC will be using the model charter.
Key characteristics of model charter
The current version of model charter for a Ukrainian LLC reflects general provisions of the legislation regulating the activity of LLCs, in particular Law of Ukraine “On Business Companies”, Civil Code of Ukraine and Commercial Code of Ukraine. The official charter is in Ukrainian language however for ease of reference for our readers, we have created an English version of the model charter.
The key provisions contained in the model charter include:
- Main Provisions. The section contains information about the legal nature of the entity, the laws governing the entity, and refers to resolution on creation of the company that contains details about the company name, location, shareholders, directors, etc.
- Legal Status. This section contains information about the legal capacity of the company including its independent nature, its ability to incorporate subsidiary entities, about its limited liability nature, etc.
- Shareholders. This section contains general rights and obligations of the company shareholders.
- Share Capital. This section contains information about procedure for allotment and changes to share capital of the capital.
- Company Assets. This section describes what types of assets can be treated as company assets. Examples include fixed assets, working capital, paid-up capital, etc.
- Profits & Losses. The section defines what comprises profits of the company, reserve capital requirements, losses and procedure for covering them, and payment of dividends.
- Company Management. This section defines the management structure of the company, types of statutory meetings, and powers of shareholders and directors.
- Labour Collective. This section states the rights of employees to form a labour collective and refers to the relevant legislation for terms and conditions of labour agreements.
- Accounting and Reporting. This sections describes the accounting and reporting standards to be used by the company.
- Procedure for Amending the Charter. This section states that when adopting the model charter, the company agrees to conform to the future amendments to the model charter as dictated by the Government of Ukraine.
- Company Closing. This section outlines the procedure for closing the company.
Since the model charter is a generic document and therefore does not contain company specific information, all company specific information has to be captured in the respective decisions (minutes of the GSM) and/or in respective regulations (regulation on GSM, Board of Directors, Reserve Commission etc) subject to approval by the GSM. Examples of company specific information includes:
- Company name
- Registered address
- Business activities
- Share capital
- Details of shareholders and percent of shareholding for each
- Details and powers of company directors
Note that during the course of business operations, a company’s counterparties will generally refer to the information available with the Company Registrar. According to Ukrainian law and similar to most other jurisdictions, information available from Company Registrar can be relied upon as accurate and up-to-date. Therefore it’s crucial that all statutory information about your company is kept up-to-date with the Company Registrar at all times.
Summing It Up
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When to Use Model Charter
You are incorporating a small one-person type Limited Liability Company with sole shareholder or if all the shareholders are in the same group of companies (with the same Ultimate Beneficiary Owner) and there is no need to include in the charter detailed regulation of powers of management bodies, rights and obligations of shareholders etc.
When to Use a Customized Charter
Companies in Ukraine shall use a customized charter when there is a need to :
- include multiple shareholders and/or appoint company directors different from the shareholders;
- introduce additional rights and/or obligations of shareholders;
- implement additional forms of supervision over the executive body’s activity;
- limit the powers of the Executive Body of the LLC;
- describe the procedure of expulsion of shareholder from the LLC, withdrawal of a shareholder from the Company, procedure of payment of compensation to shareholder which withdraws from the LLC;
- order of execution of priority right in case of sale of share by the shareholder etc
In order to avoid making regulation of the LLC’s activity distributed among lots of various internal documents (regulations) and necessity to provide such documents to company’s counterparties for verifying company’s legal status and powers of its representatives, the LLC should rather be registered on the basis of customized charter, approved by the GSM and stipulating all the specific rules and procedures, regulating LLC’s activity, in one document.
Such an approach will provide a reliable basis for a legal entity and minimize risks of complicated corporate disputes.
In cases when LLC works on the basis of a model charter but still needs to include limitations of the executive body’s authority, together with adoption of the respective decision / regulation, the LLC has to ensure that information on such limitations has simultaneously been filed with the Companies Registrar.
- Business Structures in Ukraine
- Taxes in Ukraine
- Investing in Ukraine – A Guide for Foreigners
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