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Raider attacks through illegal registration actions<\/span><\/b>\u00a0<\/span><\/p>\n The issue of illegal re-registration of shares in the authorised capital of limited liability companies (LLCs) has existed for a long time and, unfortunately, remains relevant. Today, you own a successful business, but tomorrow, information about your share in the LLC mysteriously disappears from the Unified State Register (USR) without any legal grounds. Such unlawful re-registrations of companies to new owners are carried out with the involvement of so-called “black” registrars or notaries. The latter, knowingly or mistakenly, make changes to the USR based on improper documents. When the actual owner finds out about this, <\/span>they<\/span> will try to regain their lost company. However, practice shows that all valuable assets are withdrawn from the company within the first day. Therefore, by the time <\/span>of <\/span>the rescue operation, the company is left with only debts and the unfamiliar name of a newly appointed director.<\/span>\u00a0<\/span><\/p>\n As of June 2024, <\/span>5,608<\/span><\/a> private notaries have access to the USR; in Kyiv alone, there are <\/span>1,335.<\/span><\/a> These notaries have the right to register transactions with LLC shares, including a change in the <\/span>shareholding composition<\/span>.<\/span>\u00a0<\/span><\/p>\n According to open statistical data<\/span> from<\/span> Opendatabot<\/span><\/a>, in 2023 alone, the number of registered criminal proceedings on corporate raiding charges exceeds 2022<\/span> results<\/span> by almost three times, totalling 312 cases.<\/span>\u00a0<\/span><\/p>\n The good news is that <\/span>now <\/span>there is a solution that allows businesses to protect themselves from the risk of corporate raiding and also opens up several additional useful opportunities. The authors already have successful practical experience in implementing this solution, which we share in this article.<\/span>\u00a0<\/span><\/p>\n The <\/span><\/b>new<\/span><\/b> accounting system reliably protects shares like stocks<\/span><\/b>\u00a0<\/span><\/p>\n Since 2023, the Law of Ukraine <\/span>“On Limited and Additional Liability Companies”<\/span> has been updated, and in particular, the so-called depository accounting of LLC shares has become available. However, this provision <\/span>be<\/span>came <\/span>workable in practice only<\/span> in March 2024, when the National Depository of Ukraine (NDU) began servicing LLCs in the new share accounting system.<\/span>\u00a0<\/span><\/p>\n This tool allows the transfer of participants’ shares from the Unified State Register (USR) to the NDU’s share accounting system. <\/span>T<\/span>he share remains with the previous owner, but it is now stored not in the state register but in a special NDU accounting system, similar to stocks and other securities.<\/span>\u00a0<\/span><\/p>\n As a result of transferring shares to the NDU accounting system, LLCs retain flexibility in decision-making and avoid the burdensome regulation applied to joint-stock companies. At the same time, LLC participants receive the highest level of share protection, which was previously only available to joint-stock company shareholders. Business owners often did not convert regulated and cumbersome joint-stock companies into LLCs due to the more reliable protection of stock rights than LLC shares, which are vulnerable to unwarranted re-registration. Now, this advantage of joint-stock companies over LLCs has disappeared.<\/span>\u00a0<\/span><\/p>\n Three main steps for transferring an LLC to the accounting system<\/span><\/b>\u00a0<\/span><\/p>\n An LLC can be transferred to the accounting system within a month, provided proper organisation, experience, and effective interaction among all participants involved. The main ones are the LLC, its participants, the NDU, the depository institution (which can be a bank), and the state registrar (notary). Below are the three main steps necessary for the transfer.<\/span>\u00a0<\/span><\/p>\n Before applying to the NDU for the accounting of LLC shares in the share accounting system, the <\/span>company <\/span>Charter <\/span>must be updated <\/span>to explicitly state that the shares in the company’s authorised capital are accounted for in the NDU’s accounting system. According to the law, the absence of such provisions in the Charter is a basis for refusing the accounting of shares.<\/span>\u00a0<\/span><\/p>\n After updating the Charter, the LLC enters into an agreement with the NDU for the accounting of shares. Following this, the NDU submits an application to the Ministry of Justice of Ukraine for the state registration of information regarding the accounting of LLC shares in the share accounting system.<\/span>\u00a0<\/span><\/p>\n The company <\/span>concludes t<\/span>he agreement with the NDU by applying to join the terms of the public contract. Along with the application, the LLC must provide documents as specified by the NDU. These documents include <\/span>by-laws<\/span>, an account questionnaire, an ownership structure scheme, a confirmation letter about the absence of persons in the ownership structure related to russia or belarus, etc. If the documents are not submitted in full or are incorrectly completed, the NDU may refuse to transfer the share accounting to the share accounting system.<\/span>\u00a0<\/span><\/p>\n The date the accounting of the company’s shares in the share accounting system begins is the date the relevant information is entered into the USR. The transfer of shares is confirmed by an extract from the register, which indicates the start date of the company’s share accounting in the share accounting system.<\/span>\u00a0<\/span><\/p>\n After receiving an extract from the USR, the NDU opens accounts for an LLC and its participants.<\/span>\u00a0<\/span><\/p>\n Only the participant or an authorised person by them will have access to such an account. Neither the state registrar nor notaries will physically be able to perform actions with the shares in the NDU’s accounting system account. This is the main value of the new procedure, as this exclusive access of a specific, owner-known depository institution to the share protects it from unwarranted re-registration by an unknown registrar or notary.<\/span>\u00a0<\/span><\/p>\n The NDU exclusively opens accounts for LLC <\/span>participants<\/span>. A depository institution (e.g., a bank) can, based on an agreement with the participant, initiate the opening of an account for the participant by providing the relevant instructions to the NDU. The participant’s account can be further serviced at the NDU or the selected depository institution. For instance, the participant can receive this service at their trusted bank, where they are known. As of the time of writing this article (June 2024), three <\/span>depository institutions<\/span><\/a> provide this service. <\/span>We <\/span>expect that their number will increase.<\/span>\u00a0<\/span><\/p>\n To service the accounts, an LLC and a <\/span>participant<\/span> enter into an agreement by submitting a joining application and providing a questionnaire, a signature sample card, and consent for personal data processing. The NDU or the chosen depository institution may request additional documents.<\/span>\u00a0<\/span><\/p>\n Notably, the LLC can always return from the NDU’s accounting system back to the USR by making the appropriate decision at a general meeting of participants (unanimously).<\/span>\u00a0<\/span><\/p>\n Estimated cost<\/span><\/b>\u00a0<\/span><\/p>\n As of June 2024, <\/span>NDU established <\/span>the following tariffs for the accounting of shares in the accounting system:<\/span>\u00a0<\/span><\/p>\n Current NDU tariffs <\/span>are available <\/span>on the depository’s official <\/span>website<\/span><\/a>.<\/span>\u00a0<\/span><\/p>\n Private depository institution tariffs are slightly lower, but additional conditions may apply. For example, in <\/span>PUMB<\/span><\/a>, share accounting services are provided exclusively to bank clients.<\/span>\u00a0<\/span><\/p>\n Additional features of the share accounting system<\/span><\/b>\u00a0<\/span><\/p>\n In addition to protecting shares from raiding, the share accounting system opens up various useful business opportunities.<\/span>\u00a0<\/span><\/p>\n This feature allows participants to hold general meetings regardless of<\/span> their<\/span> location through electronic voting using the NDU’s electronic system. All communication, participant registration for the general meeting, and voting are also done through the electronic system. This is convenient as it allows participants to attend meetings from any location in person, thereby eliminating the need to issue proxies to representatives. Additionally, electronic meetings protect against disputes over compliance with formal requirements.<\/span>\u00a0<\/span><\/p>\n The NDU’s fee for facilitating a general meeting is UAH 10,000 (EUR 228) as of June 2024.<\/span>\u00a0<\/span><\/p>\n An escrow account guarantees the fulfilment of obligations under transactions involving company shares. In virtually every M&A deal involving the sale of a stake in a business, legal teams on both sides face the issue of ensuring a guaranteed exchange of the share for payment. No party is eager to fulfil their obligation first without assurance that the other side will fulfil its part of the deal.\u00a0<\/span>\u00a0<\/span><\/p>\n An escrow account provides an effective solution: the share transfers from the seller to the buyer as soon as the payment for the share is confirmed. This procedure is pre-established in the escrow agreement involving the depository institution. The depository institution is not a party to the agreement and neutrally ensures the share exchange for its price payment through the NDU’s accounting system infrastructure.<\/span>\u00a0<\/span><\/p>\n Transferring shares in an LLC to the accounting system improves the procedure for dividend payments. When using the accounting system, an LLC first transfers funds to a special NDU account, after which the NDU transfers the dividends to the accounts of depository institutions or directly to the participants. Funds intended for dividend payments are recorded in the accounts of the NDU or depository institutions until they are disbursed to the participants.<\/span>\u00a0<\/span><\/p>\n Information about encumbrances on shares is <\/span>recorded<\/span> in the accounting system. If<\/span> an encumbrance blocks <\/span>a share, the NDU refuses to make changes to the accounting system or execute instructions regarding such shares.<\/span>\u00a0<\/span><\/p>\n Without this new option<\/span>, a pledge on shares in an LLC is not a reliable form of collateral. It is occasionally used, but its effectiveness is low because to enforce it<\/span> \u2014<\/span> typically through re-registration to the creditor-pledgee \u2014 active cooperation from the debtor-pledgor is required. In practice, such cooperation is rare. Without a signed acceptance and transfer <\/span>protocol<\/span> executed by <\/span>the pledgor, re-registering the share to a new owner is legally impossible. This dependency on the debtor diminishes the value of the share pledge in an LLC. However, if the share is accounted for in the NDU system, <\/span>a pledgee can enforce <\/span>the pledge without the involvement of the debtor-pledgor. This <\/span>procedure <\/span>works for <\/span>stocks<\/span>. Therefore, the share<\/span>holder<\/span> gains additional opportunities for business financing, while creditors obtain effective and efficient collateral. This benefits all parties involved.<\/span>\u00a0<\/span><\/p>\n Conclusions and first successful experience<\/span><\/b>\u00a0<\/span><\/p>\n The main advantage of the accounting system is the centralised storage of LLC shares. After transferring an LLC to the NDU accounting system, the only authorised entity that technically has access to these shares is the specific depository institution trusted by the share<\/span>holder<\/span> and familiar with their client \u2014 the shareholder. Now, it’s not thousands of individuals across the country with access to the Unified State Register who can perform registration actions with LLC shares, but only one depository institution authorised by the participant’s written order, their authorised person, or in clearly defined cases under the law, such as enforcement actions on pledged shares.<\/span>\u00a0<\/span><\/p>\n In early April 2024, “Vasil Kisil & Partners” successfully completed <\/span>the first project in Ukraine<\/span><\/a> to transfer LLC shares to NDU’s share accounting system. These new tools are in demand by business owners for directly protecting their companies, expanding financing for their partners, and for use in M&A transactions involving LLC shares.<\/span>\u00a0<\/span><\/p>\n Although the share accounting system is just beginning to operate, we believe its beneficial features will enhance the protection of participants’ and companies’ rights in Ukraine.<\/span>\u00a0<\/span><\/p>\n\n
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