Authored by partners and expert from NOBLES, the chapter provides expert insights into a comprehensive overview of the laws and regulations governing their use in jurisdictions around the world.
The guide covers a range of topics, including the types of joint ventures available in Ukraine, rules relating to foreign joint venture parties; ownership disclosure requirements; setting up and operating a joint venture; common governance issues; competition law considerations; intellectual property rights; joint venture funding; tax considerations; deadlock, exit and termination provisions and considerations; and dispute resolution.
Types of joint venture
What are the key types of joint venture in your jurisdiction? Is the ‘joint venture’ recognised as a distinct legal concept?
Ukrainian law recognises two forms of joint venture: a joint venture as a cooperative business activity, without the creation of a legal entity (ie, an unincorporated joint venture) and a joint venture as a separate legal entity (ie, an incorporated joint venture).
In an unincorporated joint venture, the parties enter into a joint venture agreement whereby they undertake to cooperate without the creation of a legal entity and set to achieve specific business objectives. Such joint venture agreements may envisage the consolidation of parties’ assets (simple partnership) or a collective business without such a consolidation of assets.
An incorporated joint ventureis a joint-entity company, incorporated based on the joint capitalof two or more businessentities. Joint ventures are usually organised in the form of either a joint-stock company or a limited liability company in Ukraine.
In what sectors are joint ventures most commonly used in your jurisdiction?
An unincorporated joint venture is widely used in public–private partnerships in Ukraine, where the investor aims to make a profit from state-owned resources or property rights under contractual arrangements, in particular for different industries. This is common in the oil and gas industry, and in road construction and transport infrastructure projects.
An incorporated joint venture structure is often used by non-Ukrainian investors in the sectors where local expertise, assets or know-how are essential for their collective business enterprise. The most common industries for this type of cooperation are agriculture, IT, consulting services and machinery.
Rules for foreign parties
Are there rules that relate specifically to foreign joint venture parties?
Many foreign ownership restrictions were abandoned during Ukraine’s transition into a market economy. Regulatory restrictions still apply to foreign capital investments in banking and finance, insurance and media.
Most investment activities of Russian businesses (including those controlled by Russian entities and individuals) are banned in Ukraine. In the wake of the Russia-Ukraine war, which started on 24 February 2022, Ukraine has taken legislative measures to expropriate the assets of local businesses that are owned or controlled by Russia as well as businesses owned or controlled by Russian entities and individuals who encourage, finance or otherwise facilitate the conflict.
Foreign investors should be aware that cross-border transfers (especially outbound payments) are usually subject to currency control and financial monitoring regulations. After 24 February2022, most outbound cross-border payments for the benefit of Russian, Belorussian businesses and those controlled by them have been banned for the duration of martial law. Foreign investors may perform a wide range of investment activities through special investment accounts opened with Ukrainian banks or directly from their foreign accounts.
Ultimate beneficial ownership
What requirements are there to disclose the ultimate beneficial ownership of a joint venture entity?
Ukrainian law defines an ultimate beneficial owner as a natural person that directly or indirectly exercises material influence (control) on the activity of a legal entity:
a natural person is deemed to exercise direct material influence on the entity if he or she immediately owns a share of 25 per cent, or more, of the share capitalor voting rights; and
a natural personis deemed to exercise indirect material influence on the entity if he or she owns a share of 25 per cent, or more, of the share capital or voting rights through related entities or, regardless of any formal ownership exercises:
the right to decisive influence on making binding decisions that have a material influence on the activity of the entity;
the right to decisive influence on the execution of legal deeds that enable the definition of the principal conditions of the entity's business activity;
the right to decisive influence on the appointment or voting results of the entity’s governing bodies;
the right to receive an income from the entity’s activity; or
the right of control, possession, use or disposalof all assets or their part of the entity.
With respect to trusts established according to the legislation of a foreign country, the ultimate beneficial owner is considered their founder, trustee owner, protector (if available), beneficiary or a group of beneficiaries, as well as any other natural person who exercises material influence on the activity of the trust.
However, the ultimate beneficial owner cannot be a person who is the commercial agent, the nominee (the nominal holder) or only the intermediary of such rights.
Information on ultimate beneficial owners must be disclosed upon the incorporation of a company as well as updated upon the registration of amendments to the company's charter and to the company's data in the Ukrainian Company Register.
Starting in 2021, all companies shall annually update the data on their ultimate beneficial owners contained in the Ukrainian Company Register. Any such disclosure or update requires the company to submit notarised and apostilled copies of its non-resident ultimate beneficiaries' passports.
Disclosure of ultimate beneficial owners is also required when opening a bank account in Ukraine, during joint venture competition clearances, or upon the acquisition of banks or financial institutions. Notaries, real estate agents and lawyers are required to conduct know your client procedures for significant transactions.
Are there any particular drivers in your jurisdiction that will determine how a joint venture is structured?
Typical drivers for joint venture structures are industry practice, regulatory framework and taxation.
For instance, Ukraine has a long-standing practice of joint venture agreements for cooperation in the oil and gas industries, owing to certain tax considerations. Certain regulated business activities can only be conducted by legal entities that are registered in the designated form (eg, banks can only operate as a public joint-stock company). Owing to possible double taxation, joint venture parties sometimes prefer to cooperate as an unincorporated business in the initial stages before proceeding to a joint corporate entity.
Since February 2022, IT businesses that comply with certain criteria can apply for registration as so-called 'Diya City residents' and enjoy a number of statutory preferences, including a special taxation regime, flexibility hiring IT specialists and governing their engagement, the possibility to conclude non-competition agreements, and implement debt-to-equity swaps,etc.
When establishing a joint venture, what tax considerations arise for the joint venture parties and the joint venture entity? How can tax charges be lawfully mitigated?
An incorporated joint venture is a tax payer under the general rules (regarding corporate profit tax, value added tax (VAT), real estate and other taxes). Since February 2022, IT joint ventures eligible for registration as so-called 'DiyaCity residents' can, instead of the general system of taxation with corporate profit tax (at 18 per cent), opt to pay capital withdrawal tax at the rate of 9 per cent. Small undertakings whose annual income does not exceed certain thresholds (approximately 7.5 million hryvniasin 2022) may enjoy preferential taxation regimes.
In the wake of the Russia-Ukraine war, which started on 24 February 2022, the Ukrainian government introduced an alternative system of taxation for joint ventures earning not more than 10 billion hryvnia annually: for the duration of martiallaw, such businesses can choose to pay 2 per cent turnover tax instead of 18 per cent corporate profit tax.
Temporary VAT and corporate profit tax exemptions exist in the cinematography industry, and in the space and aircraft industries. After 24 February 2022 and for the duration of martial law in Ukraine, most imports for defence purposes and humanitarian aid are released from import VAT and customs duties.
An unincorporated joint ventureis subject to separate taxation, for which special tax accounting regulations apply. The joint venture agreement shall define a (resident) participant responsible for the venture’s tax accounting and payment; this participant and the agreement are registered by the tax office.
In-kind contributions (as opposed to cash contributions) of founders or participants into the (both incorporated and unincorporated) joint venture trigger Ukrainian VAT, subject to further tax credit and refund.
Asset contribution restriction
Are there any restrictions on the contribution of assets to a joint venture entity?
The parties can agree on the contribution of any assets into an unincorporated joint venture. Importantly, the investments of the parties are deemed of equal value if the parties do not state otherwise in their joint venture agreement.
There are restrictions on the contribution of certain assets to the capital of a separate corporate entity. The following cannot be used for the formation of registered capital:
budget and loaned funds; bills (promissory notes);
state (municipal) property that cannot be privatised; and
state property that is under the operational management of a state-financed institution.
Interaction between constitution and agreement
What is the interaction between the constitution of the joint venture entity and the agreement between the joint venture parties?
For unincorporated joint ventures, the joint venture agreement shall be registered with the local tax office for VAT purposes if the total volume of VAT transactions in the last 12 calendar months exceeds 1 million hryvnias. Additionally, the joint venture partner responsible for tax accounting is subject to a separate registration with the tax office.
In incorporated joint ventures, the parties can enter into a corporate (shareholder) agreement determining certain aspects of their cooperation as shareholders. Such agreement is not subject to registration and may not contradict the joint venture’s constituent documents (charter). In case of a conflict, the constituent documents shall prevail.
As of 2021, non-Ukrainian law may be chosen for a corporate agreement if at least one of the shareholders of the joint venture is a non-resident party.
How may the joint venture parties interact with the joint venture entity? Are there any restrictions?
In an incorporated joint venture entity, the shareholders can participate and vote at general shareholders’ meetings and, therefore, interact with the joint venture by governing it on the most important issues. The shareholders only have access to a limited amount of information regarding the entity.
How may the joint venture parties exercise control over the joint venture entity’s decision-making?
In an unincorporated joint venture, the parties may agree that all affairs are to be carried out jointly by all shareholders. In such a case, the consent of all shareholders must be obtained to execute each transaction.
In incorporated joint ventures, the shareholders may exercise their will through participating in general shareholders’ meetings.
In joint-stock companies, most issues on the agenda of the general shareholders’ meetings are resolved by a simple majority vote of all participating shareholders. However, in a private joint-stock company, the shareholders can agree to a biggerquorum (eg, unanimous consent of all present shareholders) for any issuesexcept:
the pre-term termination of the powers of the company’s bodies’ officials;
the commencement of a claim against the company’s officials regarding the reimbursement of damages incurred by the company; and
the commencement of a claim regarding non-compliance with the law in the case of a significant transaction.
Therefore, a minority investor can have more power and control over a private joint-stock company.
In a joint-stock company, a qualified majority (more than 75 per cent of the present shareholders) is required to adopt the following decisions:
an amendment ofthe company’s charter; a cancellation of the bought-out shares; changing the type of the company; regarding the placement of shares; changing the registered capital;
the issue of securities that may be converted into shares; and the termination of the company.
In a limited liability company (LLC), as a general rule, all issues are decided by an absolute majority of votes. However, issues of changing the charter and registered capital, reorganisation or liquidation of the company require a qualified majority (at least 75 per cent of the total number of votes of participants of the company). Unless the company charter sets a lower number of votes (but no less than a majority), unanimous decisions of all participants are required for:
the approval of the monetary assessment of a non-pecuniary contribution of a participant; the redistribution of the participants’ shares;
the establishment of other corporate bodies; and
the purchase of a participant’s share by the company.
The minority investors are also entitled to demand internaland external audits. For instance, minority shareholders that hold over 10 per cent of a joint-stock company may request a special review by an internal auditing committee or a proper inspection of financial accountsby an independent auditing firm.
What are the most common governance issues that arise in connection with joint ventures? How are these dealt with?
In an unincorporated joint venture, the parties are free to establish special procedures relating to adopting decisions and running the business in a practical manner, according to the terms and conditions of a joint venture agreement.
The two most common governance issues that arise for joint venture corporate entities are the presence of a quorum and adopting decisions on specific issues.
In the case of corporate disputes, the parties may resolve them in the courts or through arbitration tribunals. Shareholders have more freedom and flexibility to handle governance issues through shareholder agreements.
With an incorporated joint venture, what controls exist in your jurisdiction in relation to nominee directors? How should a nominee director balance the potentially conflicting interests of the joint venture company and the appointing shareholder?
In Ukraine, a majority shareholder (participant) usually nominates a director, but the former must act in the best interestsof the joint venture company.
In LLCs, supervision over the board of directors can be exercised by a supervisory board (if foreseen by the charter) or another corporate body appointed by the general shareholders’ meeting, or both. The general shareholders’ meeting may delegate certain powers to the supervisory board, including the appointment and dismissal or suspension of the board of directors. Moreover, shareholders that hold at least 10 per cent of the charter capital may initiate a financial audit of the company by an independent auditor. The board of directors is obliged to provide documents regarding the company at the request of the auditor.
In a joint-stock company, the executive body is accountable to the general shareholders’ meeting and supervisory board (including its standing auditing committee). The general shareholders’ meeting can elect an auditing commission as aseparate corporate body as well. In public joint-stock companies, an annual audit by an independent and certified auditor is obligatory. The board of directors is obliged to provide documents regarding the company at the request of the audit commission or an auditor.
What competition law considerations are engaged by the formation and operation of the joint venture? Is approval needed?
Assuming the turnover thresholds are met, the creation and operation of the joint venture may trigger the need to obtain certain approvals. Depending on whether a joint venture will be full-function or not, there may be a need for clearance of:
merger: in the case of a joint venture’s creation, if operating permanently, all the functionsof an autonomous economic entity (full-function joint venture) and such a creation will not lead to coordination of competitive behaviour between the parent companies of the joint venture themselves, or between the joint venture and its parent companies; or
concerted actions: if a joint venture is established with an objectiveof, or results in the coordination of, competitive behaviour between the parent companies of the joint venture themselves or between the joint venture and its parent companies.
Provision of services
What are the key considerations in your jurisdiction in structuring the provision of services to the joint venture entity by joint venture parties?
In an unincorporated joint venture, in the case of a simple partnership, the approval of all parties is needed for the execution of every transaction unless stated otherwise in the simple partnership agreement.
In a joint-stock company, provision of services to the joint venture entity by joint venture parties (ie, its shareholders) may be recognised as an interested-party transaction if the transaction value exceeds 1 per cent of the company’s asset value, unless the company charter sets a lower value. The party interested in the transaction may be a shareholder (or shareholders or their affiliated persons) who alone or jointly owns 25 per cent or more of the company’s shares. Interested-party transactions with a value of up to 10 per cent of the company’s asset value require the approval of the company’s supervisory board and transactions with a value of more than 10 per cent of the company’s asset value require the approval of a general shareholders’ meeting. During the voting process, the shareholders interested in the transaction do not have the right to vote and a decision on this matter is made by a majority of votes of the non-interested shareholders present at the meeting.
In an LLC, a transaction is considered an interested-party transaction if the other party is, inter alia, a shareholder (or shareholders or their affiliated persons) who alone or jointly owns 20 per cent or more of the company’s shares. However, it is entirely up to the shareholders to provide in the company charter for regulations concerning the need for pre-approval for interested-party transactions. All shareholders shall approve the relevant charter provisions unanimously. If the charter does not contain such provisions, no restrictions regarding interested-party transactions apply, except that such transactions shall be at arm’s length.
What impact do statutory employment rights have in joint ventures?
Employees are entitled to all available statutory employment rights in joint ventures. Transferring the business will result in the automatic transfer of its employees to the new employer. At the same time, the mere fact of the business transfer may not serve as a reason for dismissal. In the case of transferring foreign employees, the employer must obtain a work permit prior to commencing the foreign party’s employment with a Ukrainian company. Under general labour laws, a transfer to another job in the same company and a transfer to another company, or other area or location, requires the consent of the employee concerned. However, in the context of the Russia-Ukraine war, after 24 February 2022 and during the validity of martial law, no employee consent is required in some instances (related to the liquidation of consequences of such aggression).
In the case of non-incorporated joint ventures, employees will be employed directly by the joint venture parties.
Intellectual property rights
How are intellectual property rights generally dealt with on the creation, operation and termination of a joint venture in your jurisdiction?
The parties of a non-incorporated joint venture can regulate issues of ownership and use of their intellectual property (IP) rights either in their joint venture agreement or in a separate agreement such as a licence agreement. The same applies to an incorporated joint venture.
Economic (proprietary) IP rights may be transferred or assigned for ownership or use (eg, under a licence agreement) to an incorporated joint venture. On the termination of the joint venture, IP rights are dealt with in the same manner as any other proprietary rights; they are either sold (transferred) to third parties to pay off debts or distributed between the shareholders of the company.
How are joint ventures generally funded in your jurisdiction? Are there any particular requirements relating to funding and security packages?
The standard procedures for financing incorporated joint ventures in Ukraine are either through capital contributions or corporate loans. Donations or non-refundable financial assistance also exist but can trigger unfavourable tax consequences.
The advantages of a capital contribution include the relativesimplicity of its implementation (which requires a shareholders’ resolution, amending the joint venture’s charter and its state registration), as well as no repayment obligation (except for withdrawal from and liquidation of the joint venture) and no interestpayments.
Funding through a loan would necessitate a formal loan agreement with a non-resident lender. The loan agreement must correspond to the National Bank of Ukraine’s requirements. Security packages are not required by law.
Non-incorporated joint ventures are funded through the contributions of the parties. This issue is governed by the joint venture agreement.
Capital injection restrictions
Are there any legal or regulatory restrictions on the injection of capital into, or the distribution of profits or the extraction of cash by other means from, the joint venture entity?
The National Bank of Ukraine has the right to temporarily (for up to six months) reintroduce currency restrictions owing to certain material reasons related to the general situation of the national financial market. Due to the Russia-Ukraine war, which started on 24 February 2022, the regulator has taken sweeping measures designed to avert major negative consequences of the war for the national financial market. These drastic measures include, in particular, a complete ban on most non-essential cross-border payments, including the distribution of profits and the extraction of cash from joint ventures. The indicated ban and other for ex restrictions are regularly reviewed amended but expected to apply so long as martial law is in force.
A number of Russian-controlled businesses are subject to sanctions that have been imposed in response to the annexation of Crimea, the backing of separatist forces in eastern Ukraine, as well as the support provided for the above-mentioned Russia-Ukraine war after 24 February2022. These sanctions cover, inter alia, the freezing and expropriation of assets and a ban on financial transactions, including the repatriation of capital and dividends.
What tax considerations should be taken into account in the operation of the joint venture?
In contrast to incorporated joint ventures, parties of unincorporated ventures are fully liable for the tax debts of joint ventures.
Corporate profit tax
An incorporated joint venture is obliged to pay an advance corporate profit tax at the rate of 18 per cent on dividends disbursed to its shareholders. This tax is charged on top of the dividend amount exceeding the taxable profit of the entity and is not deducted there from. It is further set off against the regular tax liabilities of the joint venture.
A non-refundable financial relief granted by a shareholder to an incorporated joint venture adds to its financial result and increases its tax liabilities accordingly (unless balanced with the company’s losses).
Moreover, Ukrainian capital gainstax (15 per cent) applies to capital gains derived by a non-resident from the (director indirect) sale of its shares in a Ukrainian company, 50 per cent or more of the value of which is made up of real estate in Ukraine (either owned or leased), if the shares are sold to another non-resident.
Thin capitalisation rule
Interest amounts paid by an incorporated joint venture to non-resident creditors that exceed 30 per cent of the venture’s earnings before interest, tax, depreciation and amortisation are not deductible if the loan exceeds 3.5 times the venture’s net capital.
An incorporated joint venture is obliged to deduct 15 per cent Ukrainian with holding tax from the amount of dividends paid out to its shareholders, unless an effective double taxation treaty (DTT) provides otherwise. Numerous DTTs set lower or preferential with holding tax rates (usually, 5 to 10 per cent).
Starting in 2021, payments by Ukrainian subsidiaries to their non-resident shareholders due to a decrease of the share capital or withdrawal from a subsidiary, as well as other payments by Ukrainian subsidiaries to non-resident shareholders under shares held in such subsidiaries, will be considered constructive dividends, which are subjectto 15 per cent with holding tax if those payments do not correspond with the arm's-length principle.
Likewise, interest amounts paid out by an incorporated joint venture to its shareholders, which are non-resident lenders under corporate or intra-group loan agreements, are also levied with 15 per cent Ukrainian with holding tax, unless an applicable DTT provides for a lower rate.
Non-resident participants of non-incorporated joint ventures are ineligible for preferential with holding tax rates with regard to the distributed profit.
Value added tax
In-kind contributions of shareholders to the joint venture are taxable with 20 per cent value added tax (VAT), subject to further VAT credit.
Accounting and reporting issues
Are there any noteworthy accounting or reporting issues for the joint venture parties regarding their investment in the joint venture?
There are no accounting or reporting issues that affect non-resident shareholders or parties of a joint venture. The only exception concerns the Ukrainian capital gains tax: a non-resident that – directly or indirectly – purchases shares in a Ukrainian company from another non-resident, 50 per cent or more of the value of which is made up of real estate in Ukraine (either owned or leased), shall, prior to the transaction, register with the tax office in the location of the Ukrainian company’s seat, as well as with holdand pay the tax from the capital gains amount that is due to the seller.
Resident shareholders must indicate their investments in regular financial and statistical reports under the general rules.
In an unincorporated joint venture, a resident party determined by the joint venture agreement is responsible for tax accounting, reportingand payment.
What deadlock provisions are commonly included in joint venture agreements in your jurisdiction?
The parties of unincorporated joint ventures can include any applicable deadlock provisions in their joint venture agreements.
The Law of Ukraine on Limited Liability Companies and Additional Liability Companies and the Law of Ukraine on Joint-Stock Companies do not provide wide discretion for agreements between the participants or shareholders of an incorporated joint venture. Provisions on the formationof corporate bodies, their competence, procedures for convening general meetings and adopting decisions at such meetings shall be drafted in accordance with Ukrainian law. In turn, the afore mentioned laws do not provide deadlock provisions to be used by participants or shareholders, except for appraisal rights of minority shareholders in joint stock companies.
Shareholdersare also able to stipulate certain deadlock provisions in their shareholder agreements.
What exit provisions are commonly included? Does the law restrict any forms of mandatory transfer provision or any basis of calculation?
A party to an unincorporated joint venture may make a notice of its refusal to further participate in the joint venture agreement no later than three months before the withdrawal. This period cannot be altered by the agreement. Items (property) transferred to the joint venture shall be returned to the participant who provided them without remuneration, unless otherwise provided by the agreement.
For incorporated joint ventures, their shareholders – in some instances – have pre-emptive rights (rights of first refusal) in the case of an exit of other shareholders. For example, a shareholder of a private joint-stock company must notify other shareholders about the intention to sell its shares. The company charter may set a notification period. Other shareholders may have from 20 calendar days to two months to exercise their pre-emptive rights to buy the shares. A similar rule is applicable to limited liability companies (LLCs), where the participants are entitled to their pre-emptive rights in proportion to each participant’s share (unless the charter provides otherwise). Shareholder agreements can provide, in particular, in which cases shareholders are obliged to alienate their shares.
Participants in LLCs have a general statutory right to exit the company upon giving notice of a demand to pay the proportionate amount of assets. Such a payment must be made within 12 months of the date of the exit (unless the charter sets another payment term). The participant also receives the proportionate amount of the profit received by the company in the given year. Participants that hold 50 per cent or more of the charter capital require the consent of the other shareholders for withdrawal. The withdrawal of a participant becomes effective with its state registration.
Tax considerations following termination
What are the tax considerations on termination of the joint venture?
Termination of an incorporated joint venture triggers a mandatory tax audit conducted by the tax office. The entity may not be liquidated for as long as it has outstanding tax debts (unless declared bankrupt).
Other tax considerations in relation to the transfer of assets include value added tax (VAT) levied when in-kind (as opposed to monetary) assets are returned to participants of a jointventure owing to its termination.
Finally, income derived by a non-resident shareholder of an incorporated joint venture from the disposalof its shareholding is subject to the Ukrainian with holding tax of 15 per cent (unless an applicable double taxation treaty provides otherwise). Capital gains derived by a non-resident from the direct or indirect sale of its shares in an incorporated joint venture – 50 per cent or more of the value of which is made up of real estate in Ukraine (either owned or leased) – if the shares are sold to another non-resident, are subject to capital gains tax (15 per cent). At the same time, transactions with shares and other corporate rights are not VAT taxable.
Choice of law and resolution methods
In your jurisdiction, are there constraints on the choice of law or the method of dispute resolution provided for in joint venture agreements?
Until recently, in joint ventures incorporated in Ukraine, relations between shareholders regarding joint ventures and corporate governance have been subordinated exclusively to Ukrainian law and Ukrainian courts. Legislative changes introduced in 2021 to the Law of Ukraine on Private International Law permit a choice of law governing a corporate (shareholder) agreement if at least one of the shareholders of the joint venture is a non-resident party.
Disputes arising from a shareholders’ agreement can be subjected to international arbitration only if the joint venture and all its shareholders have explicitly consented there to and signed a respective arbitration agreement (covenant in the shareholders’ agreement).
Joint venture agreements between participants in an unincorporated joint venture and disputes between them may be subordinated (except for imperative provisions of Ukrainianlaw) to a foreign jurisdiction and arbitration.
Mandatorily applicable local law
What mandatory provisions of local law will apply irrespective of the choice of governing law?
Legal provisions pertaining to areas of Ukrainian public law – such as accounting, taxation, monetary regulations and currency control, as well as customs, competition, regulatory, administrative and criminal law – remain mandatory and must be complied with.
Regardless of the chosen law, Ukrainianlaw also applies to all real estate matters for real estate situated in Ukraine,as well as to other property subject to state registration in Ukraine, such as transport vehicles and securities. Overall, according to the general principle of private international law, Ukrainian law shall determine the property and other proprietary rights to things located in Ukraine.
In addition, some types of disputes are subject to the exclusive jurisdiction of Ukrainian courts, such as disputes related to real estate located in Ukraine, intellectual property rights registered in Ukraine, and corporate disputes regarding Ukrainianlegal entities and their bankruptcy.
Are there any restrictions on the remedies a tribunal can grant that would have a bearing on the arbitration of joint venture disputes? Are there any restrictions on the arbitration of shareholder claims?
Corporate disputes or shareholder claims of incorporated joint ventures may not be subject to arbitration. State commercial courts are the competent courts of Ukraine. The only exception is for disputes arising out of a shareholder agreement between shareholders of an incorporated joint venture. Such disputes may be subjected to international commercial arbitration based on an arbitration clause (agreement) endorsed and signed by the joint venture and all its shareholders.
Courts may decide on injunctive relief to the extent permitted under procedural legislation. The following interim measures, however, may not be used as injunctive relief in corporate disputes:
prohibition on holding shareholders’ meetings and taking decisions (except for certain decisions determined by court directly related to the subject matter of a dispute and a prohibition to amend the company charter with respect to charter capitalif the subject of a dispute is the shares of the joint venture);
prohibition on issuers, registrars or custodians that provide the shareholders’ registers or information on shareholders necessary for the holding of general meetings; or
prohibition on participation (registering for participation) in shareholders’ meetings and determining their quorum.
Injunctive relief measuresmust be proportionate to the claimant’s demands and not affect other shareholders’ rights.
Minority investor protection
Are there any statutory protections for minority investors that would apply to joint ventures?
With regard to an incorporated joint venture, a minority investor can file an action to the court against the company’s officials who have caused damage to the company. Shareholders that hold 10 per cent or more of the company are entitled to file such an action and initiate a general shareholders’ meeting.
Additionally, shareholders in joint-stock companies shall have the right to claim from the company to buy out their shares at market value if they have registered at the general shareholders’ meeting and voted against a decision on one of the following:
a merger, accession, division, transformation, spin-offor change of company type;
granting consentto a substantial or interested-party transaction;
refusal to exercisethe pre-emptive right of a shareholder to purchase shares of an additional issue in the process of their placement; or
a change (decrease or increase) of the share capital.
Moreover, in joint-stock companies, in the case of a purchase of the controlling shareholding (ie, more than 50 per cent of the shares), the new majority shareholder (acting alone or with its affiliates) is obliged to offer the remaining minority shareholders the ability to buy out their shares at the market value.
Participants of limited liability companies (LLCs) that hold less than 50 per cent of the shares have a general right to exit the company upon giving noticewith a demand to pay the proportional amount of assets.Participants that hold 50 per cent or more of the sharesrequire the consentof the other participants to withdraw from the company.
How can joint venture parties have liabilities to each other beyond what is expressly agreed in the joint venture agreement?
With regard to an incorporated joint venture in the forms of an LLC and a joint-stock company, the Law of Ukraine on Limited Liability Companies and Additional Liability Companies and the Law of Ukraine on Joint-Stock Companies prescribe that the shareholders can be held liable within the amount of their shares only. A notable exception applies in the case of a joint venture’s bankruptcy resulting from its shareholders’ fault. Such shareholders can bear subsidiary liability for the company’s obligations if its assets are not sufficient to cover the creditors’ claims. Few other forms of legal entity can envisage the full responsibility of their shareholders for the joint venture’s liabilities.
For non-incorporated joint ventures, the participants bear joint responsibility under all joint obligations, irrespective of the grounds for their emergence. If a joint venture agreement was not terminated due to a participant’s refusal to participate in it further, or if the agreement is terminated on request of one of the participants, the participant whose participation in the agreementis terminated is liable to the third parties under joint obligations that emerged during the term of its participation in the agreement.
A shareholder agreement can provide for liability (eg, financial sanctions or reimbursement of damages, or both) of its parties for failure to comply with their obligations. These liability measures are enforceable by the courts.
Disclosure of evidence
Are there any particular issues that can arise in joint venture disputes in your jurisdiction concerning disclosure of evidence?
According to the Law of Ukraine on Limited Liability Companies and Additional Liability Companies and the Law of Ukraine on Joint-Stock Companies, shareholders and participants of an incorporated joint venture can only have access to a limited portion of a company’s documentation. As a matter of practice, a majority shareholder has full access to the company’s documentation and, in the case of a dispute with their partners, can obstruct the disclosure of evidence.
Otherwise, if a shareholder initiates an independent audit of a joint venture in form of a joint-stock company or an LLC, the company’s executive body is obliged to provide documents that relate to the subject of the audit. If a joint venture dispute is considered by a court, the company is obliged to provide evidence pertaining to the case (eg, corporate documents) upon the request of the court.
What advantages does your jurisdiction offer for parties wishing to set up and operate joint ventures?
The main legal advantages are:
a civil law legal system;
continual approximation and adaptation to EU law and standards; the fast and simple registration of joint ventures;
transparency and easy access to public databases with relevant information on companies, their assets and beneficiaries; and
open tendering procedures in public procurement.
Requirements and restrictions
Are there any particular requirements or restrictions relating to joint ventures in your jurisdiction that could deter international investors?
Certain spheres of business activities are bureau cratically regulated, requiring substantial paperwork and matching formalistic requirements. Any Russian/Belorussian participation in or control of an international investor is also a red flag for Ukrainian authorities, and such investor will not be able to set up and operate a joint venture in Ukraine.
Key developments of the past year
What are the current trends affecting joint ventures in your jurisdiction? What recent developments in legislation and case law have had an impact on joint ventures?
Ukraine adopted a number of laws aimed at improving conditions for potential investors.
The Law of Ukraine on State Support of Investment Projects with Large Investments , dated 17 December 2020, offers state support and tax preferences for investment over €20 million in strategic industries such as processing, mining, transportation and education. The law sets the amount in euros and the amount in hryvnia is calculated according to the official exchange rate of the National Bank of Ukraine on certaindates, such as the date of factual investment.
The Law of Ukraine on Encouraging the Development of Digital Economy in Ukraine , dated 15 July 2021, intends to createa preferential legal regime for not less than 25 years for companies engagedin the IT industry in Ukraine.
As of 2021, joint ventures in the form of a limited liability company and third parties (such as creditors) can become parties of a shareholder agreement alongside shareholders. Disputes arising from corporate (shareholder) agreements can be referred to arbitration if all shareholders and the company itself have consented there to and signed a respective arbitration agreement (covenant).
A restated version of the Law of Ukraine on Joint Stock Companies is expected to be enacted starting 2023. It will further adapt the Ukrainian corporate legislation to European standards and introduce new (simplified) corporate governance mechanisms for joint stock companies.
The Russia-Ukraine war, which started on 24 February 2022, has had a profound negative effect on joint ventures and the overallactivity of international investors in the country. Many large foreign investors have suspended the operation of their subsidiaries and joint ventures. The assets of numerous businesses have been either damaged or completely destroyed due to active combat operations or deliberate Russian targeting.
A compensation mechanism for those who suffered damage due to the war is being discussed. Although the chances of receiving any compensation from Russia look rather unrealistic at the moment, it is expected that seized and expropriated Russian assets (both in Ukraine and in other countries) could be utilised for this purpose. To make this happen, Ukraine has approved legislation and taken legal measures in order to expropriate assets belonging to Russia as well as businesses owned or controlled by Russia or its residents and to ban financial transactions with such businesses. Therefore, potential foreign investors are strongly advised,while setting up subsidiaries and joint ventures in Ukraine, to make sure that their shareholding structures do not have any Russian participation or ultimate beneficial owners.
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Reproduced with permission from Law Business Research Ltd. Lexology Getting the Deal Through: Joint Ventures 2023, (generated 28 October 2022; contributing editors: Kai Bitter and Emily Tanji) For further information please visit gettingthedealthrough.com