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Managing Partner, Poberezhnyuk & Partners.
Specialization: corporate law,
land use and zoning law,
litigation and real estate
Partner, LL.M, Attorney-at-Law, Poberezhnyuk & Partners.
Specialization: M&A, financial, corporate and commercial law, foreign investment, complex litigation and international arbitration
Corporate Disputes in Ukraine: Scope and Remedies
Under Ukrainian law corporate disputes refer to disputes relating to the rights of shareholders in a company. Thus they often involve issues of a company’s control. In recognition of the importance of such disputes, the highest courts of Ukraine clarified various aspects of the law regarding their resolution.
Scope and Types of Corporate Disputes
A corporate dispute has two features. First, it relates to the formation, operation, management or termination of a company. Second, it arises between the company and its shareholders (including former ones) or between the shareholders themselves. Former shareholders may only be parties to such a dispute if it relates:
— payment to a former shareholder of the value of his share of the company’s assets;
— challenging a company’s decision to exclude a shareholder from the company; or
— contesting any other decision of a company affecting the rights of a former shareholder adopted before the shareholder left the company.
Corporate disputes may involve claims regarding:
— invalidation of the founding documents (the charter and, if available, the foundation agreement) of a company;
— liquidation of a company;
— cancellation of the registration of a company as a legal entity;
— transfer of rights and duties under share acquisition agreements in case of violation of priority rights of a party to acquire shares of a company;
— rights to property contributed by a shareholder to the capital of a company.
By contrast, corporate disputes may not relate to claims for invalidation of company decisions by non-shareholders or acquisition of shares in a company.
Special Rules for Corporate Disputes
Corporate disputes are subject to special rules as to their jurisdiction and other matters, including the following:
— A shareholder may not sue on behalf of the company.
— A shareholder may not base his claims on violations of rights of other shareholders (hence no class action suits are possible).
— Claims to invalidate the founding documents of a company or management decisions must be brought against the company itself (and not against the company officers adopting the decisions or the authorities handling the company’s registration).
— Such disputes are heard by the commercial court at the place of the company’s registration. This means that even if the actual plaintiff (e.g. another shareholder) is a foreigner, the claim must still be brought in Ukraine.
— The rights and duties of shareholders are governed by Ukrainian law. Thus, all shareholder agreements regarding the operation of a company are subject to Ukrainian law.
— Such disputes may not be submitted to international arbitration.
It has been noted that the rules on the mandatory jurisdiction of Ukrainian courts, the prohibition against the use of foreign law and international arbitration in corporate disputes are hostile to foreign shareholders and so would tend to discourage foreign investment in Ukraine. On the other hand, it is easy to see why corporate disputes, given the frequent multiplicity of parties, may often be ill-suited for arbitration.
Remedies in Corporate Disputes
The Supreme Court and the Supreme Commercial Court of Ukraine have explained the kinds of legal remedies available to parties in corporate disputes. These can be broadly grouped into the following types:
— remedies related to dividend payments;
— remedies related to the transfer of shares;
— remedies related to the annulment of decisions of the shareholder meetings of a company; and
— remedies related to the annulment of the founding documents of a company.
The Courts have also clarified what claims cannot be granted by a court because they do not involve proper legal remedies under Ukrainian law. Generally, a court may not substitute its own decision for a decision of the company, resolving a matter that may only resolved by the company. On the other hand, a court may order a company to adopt a certain decision. Thus, a court, in particular, may not at the request of a plaintiff through a decision adopted by it:
— amend the founding documents (charter or a foundation agreement) of a company;
— include a matter on the agenda of a shareholders meeting;
— call a shareholders meeting;
— declare the decision of a shareholders meeting valid (because of the presumption of validity if such decisions) or a shareholders meeting as having taken place;
— change the venue of a shareholders meeting;
— enforce rights that may only be breached in future (e.g. preventing a shareholder from attending a shareholders meeting in future);
— compel a shareholder to take part in a shareholders meeting;
— force a company to pay dividends not declared by a shareholders meeting.
In the case of such claims a court must issue a decision in favour of the plaintiff rather than refuse to consider the claim as not being subject to the jurisdiction of Ukrainian courts.
Outlined below are some specific remedies available in corporate disputes:
A court may order a company to pay dividends only if they have been declared by the shareholders meeting. As explained by the courts, a shareholder may not force a company to declare dividends because such a decision may only be made by shareholders.
Transfer of Shares
The sale of shares by a shareholder in violation of the priority rights of other shareholders to buy the shares does not render the sale invalid. In this case the proper remedy is for the other shareholders to ask the court to transfer to him/her the rights and obligations of the buyer of the shares under the acquisition agreement.
Contesting Company Decisions
A shareholder may challenge the decisions of the company in court, including those of the shareholders meeting or the supervisory board. Such claims may be only brought by persons who were shareholders in the company at the time of adoption of the decision. Thus, buyers of shares who have not yet acquired ownership of the shares cannot contest the company’s decisions.
Not all irregularities in the conduct of a shareholders meeting automatically result in the invalidity of its decisions. But a decision must always be voided by a court on the following grounds:
— lack of a quorum at the shareholders meeting;
— failure by the company to include a matter on a meeting’s published agenda (the same applies to resolutions passed under such unspecific heading as ’miscellaneous’, “organizational matters”, as this has the effect of depriving a shareholder of the right to know the matter to be considered by the meeting);
— failure to provide the necessary information to shareholders where a decision relates to changes in the company’s capital.
In all other situations a court must consider whether and how an irregularity contributed to the adoption of the decision. The court must in particular examine whether the irregularity resulted in a violation of shareholder rights; if there was no violation, then no grounds for voiding a decision exist. For example, where an irregularity prevented a shareholder from attending a shareholders meeting, the decisions adopted by the meeting may only be voided if the shareholder’s absence could have materially affected the outcome of voting at the meeting.
Contesting the Founding Documents of a Company
Claims to invalidate the charter of a company must be brought against the company itself, without joining shareholders to the proceedings. By contrast, if a company has the founding agreement it may only be contested in court proceedings with the participation of all its shareholders.
The courts have clarified that the founding documents of a company may be voided by a court where the following three conditions are met concurrently:
— the documents contain irregularities at the time of hearing of the dispute;
— the irregularities cannot be corrected; and
— the irregularities infringe the rights or legally protected interests of the plaintiff (e.g. a shareholder).
Furthermore, although a court may not itself amend a company’s charter (which is the prerogative of the shareholders meeting), it may order the company (essentially, its shareholders) to amend the charter. For example, in a dispute regarding the transfer of a participation interest in a limited liability company, a court may order the company to amend its charter so as to list the buyer of the interest as a company member in the company’s charter.