Corporate contracts are unlikely to become a mechanism for hiding the beneficial owners of limited liability companies (LLC) because of risks and legal uncertainty, experts polled by Interfax-Ukraine have stated, commenting on the provisions of the laws on corporate contracts and limited and additional liability companies. Partner of PRIME K.A.C. Group law firm Tetiana Kuzmich notes that “the institution of a corporate contract will allow real business owners to remain out of publicity on a legal basis.”
“The owners at the start largely ignored the law, adopted in 2014, which requires the disclosure of ultimate beneficial owners in the state register. Data transfer from the Ukrainian register to the global register of beneficial owners of companies within the OECD contributed to the process of reviewing approaches in this matter. And the norms of financial monitoring actively adopted in the past year, which block transactions on accounts in case of non-disclosure of information, confronted with an accomplished fact,” she said.
The lawyer drew attention to the fact that “every owner chose his own unique way.”
“It’s not a secret that the registers still often lack data, shares are fragmented according to the number of participants up to the hurdle, business is still registered for affiliated trusted individuals, offshore jurisdictions or Ukrainian companies with a chain of parent founders. Such a structure of working property contains risks of human factor,” she said. At the same time, Kuzmich stressed that the new law on limited liability companies gives a solution, providing as a tool a corporate contract protected by the secret of disclosure.
Serhiy Benedysiuk, the head of the corporate law and M&A practice at Evris law firm, agrees with the expert. “The law on limited liability companies in part that deals with corporate contracts really has drawbacks, primarily related to the privacy of corporate contracts, an undetermined list of potential parties to corporate contracts, as well as the consequences for third parties in case of transactions that are contrary to the corporate contract. We cannot rule out the theoretical possibility of using corporate contracts to conceal the beneficial owners of companies,” he told Interfax-Ukraine.
At the same time, the lawyer wonders how effective this concealment mechanism will be, because “unlike corporate contracts in Ukraine, trust declarations in foreign jurisdictions are used in conjunction with secretarial companies that are responsible for keeping the register of the company’s shareholders and enjoy a high level of confidence.”
“Another situation is in Ukraine, where participants in an LLC can be replaced a wide range of entities empowered to carry out functions in the sphere of public registration, who will replace the participants irrespective of the corporate agreement (which they do not know and must not know), if the participant of the LLC expresses the wish to sell of its stake to a third party,” he said, stressing that “the beneficiary may apply for protection of his or her rights to Ukrainian courts, but the process of returning shares in the company to him or her may be delayed for years if there is a series of subsequent resales and the new owner proves his or her good faith.”
The lawyer also pointed out a lack of confidence of the beneficial owner in the effective protection in the judicial system under a corporate contract. “We are clearly against the occurrence of additional tools for concealing the beneficial owner. We consider it expedient to remove additional tools from the law on limited liability companies, which can contribute to this. However, even if prior to the enactment of the law on LLCs the relevant provisions are not finalized, we hope that the beneficiaries would not be concealed with the help of corporate contracts widely,” he said.
In turn, Director for Corporate rights and Management at Smart-Holding Andriy Natrus believes that the use of corporate agreements as a tool for concealing beneficiary owners of LLCs is unlikely due to some risks which the agreement brings. The expert’s forecast is based on the fact that, in his opinion, the wording of the law on limited liability companies regarding the regulation of this obligation to third parties that are not participants in the company is blurred, which creates legal uncertainty.
“In the future this will lead to ambiguous judicial practice and the legislator will most likely be forced to settle this issue by introducing more precise language into the law,” he said.
In addition, Natrus said that the corporate agreement “will not be an effective mechanism for protecting the beneficiary from selling stakes in the company by a nominal participant in favor of other third parties because of the difficulty of recognizing the invalidity of a share disposal agreement.”
“Due to the confidentiality of the corporate contract and a lack of obligation to disclose information on the conclusion of this contract, it will be very difficult to prove that a party acting as the buyer of the stake in the company knew or could know that the selling of the stake is in violation of the provisions of the corporate contract. There would be a possibility of claiming compensation from the nominal participant in the judicial procedure for the damage suffered in theory, but this compensation may be incommensurable with the loss of the rights to the stake in the company,” he said.
According to the expert, Ukraine has a weak legal basis for the application of corporate contracts, “unlike some European countries, where the history of the application of these contracts is estimated for decades,” which generally threatens low effectiveness of protecting their rights by beneficiaries when using a corporate contract under Ukrainian law. “Most likely, these schemes will be used by government officials, as the requirements for disclosure of information on ultimate beneficiaries have toughened in traditional offshore zones, and in some cases, foreign lawyers routinely refuse to provide the nominal ownership service to this category of nominal owners because of their civil service. Officials are forced to seek new instruments to protect their rights to assets without disclosing information inside Ukraine,” the expert said.
He also said that “in a situation where the legislator thoughtlessly, or more likely, deliberately lays an ambiguous interpretation of the application of certain provisions in practice in the legislation in the interests of certain categories of citizens, it is difficult to come up with an effective mechanism to counteract the creation of schemes for concealing information.”
