Accounting for Shares in LLCs/ALCs in the Depository System

We continue a series of reviews in respect of major new developments of the Law of Ukraine “On Joint Stock Companies” (the “Law”). This time, we offer to go in more details regarding the issue of accounting for shares in LLCs/ALCs (“LLC”) in the accounting system of shares.

Currently, the only form of accounting for shares in LLCs is a record in the Unified State Register (the “USR”). The Law offers an alternative: effective from 1 January 2023, participants of LLCs will be able to account their shares in the system of the Central Depository of Securities. Please be reminded that the role of the Central Depository is performed by PJSC “National Depository of Ukraine” (the “Central Depository”).

Among peculiarities of such method of accounting, we can distinguish the following:

1. Accounting for shares in the system of the Central Depository is voluntary and depends on the will of participants of LLCs who, at any time, may take a decision to account their shares in the accounting system or cease to account for them this way;
2. In the event participants of LLCs decide to account for their shares in the system, the relevant information should be specified in the Charter and the USR. In addition, LLCs should enter into an agreement on accounting for shares with the Central Depository;
3. LLCs will be able to pay dividends and hold general participants’ meetings via the share accounting system;
4. Encumbrances of shares will be carried out in the accounting system of shares, rather than in the State Register of Encumbrances over the Movable Properties;
   
5. The fact of acquisition, termination, and restriction of rights to shares will be recorded in the share accounting system;
6. Simultaneously with entering data into the USR about accounting for shares in the share accounting system, information about participants of LLCs shall be excluded from the USR, and, from the moment such accounting is terminated, information about LLC participants shall be returned to the USR effective from the date of such termination.
7. A possibility of opening escrow accounts for LLC shares. This tool will allow the Central Depository to make changes in the accounting system regarding the title of ownership to shares in the event a corresponding reason arises. In addition, the Central Depository may be entrusted with the duty to verify the occurrence of grounds for making changes.

We believe that these new developments will strengthen the protection of ownership rights of LLC participants and decrease risks of illegal takeover of businesses and illegitimate transactions with shares conducted by unscrupulous state registrars. Given a limited range of entities that may enter data into the accounting system of the Central Depository, this system should be more secure than the USR. In addition, one of the advantages of accounting for shares this way will be the availability of an electronic form of servicing corporate events, such as electronic meetings of participants and payment of dividends, escrow accounts for safe calculations when buying and selling shares.

At the same time, it is difficult to assess the convenience of new opportunities for LLC participants due to the lack of a significant number of procedural by-laws, in particular, the procedures for concluding agreements on accounting for shares, paying dividends through the accounting system, holding general participants’ meetings, functioning of escrow accounts, maintaining and making changes to the share accounting system, issuing information from it, etc.

Also, there is an uncertainty as to when the share accounting system will start working: some amendments, e.g. to the Law of Ukraine “On LLCs”, will become effective from 1 January 2023, whereas the amendments to the profile Law of Ukraine “On Depository System of Ukraine” – from 1 January 2024. In addition, due to preparation of by-laws and creation of technical capabilities for functioning of the share accounting system, we assume that it may become operational even later.

We will continue monitoring further adoption of by-laws and sharing useful information with you.

How Deloitte Experts Can Help?

Our team offers a broad range of services on corporate issues, in particular:

• Advice on the provisions of the new Law;
• Updating charters;
• Preparing corporate decisions, minutes of general meetings;
• Representing interest of participants;
• Advice on other issues of corporate law.

If you have any questions or need advice, please do not hesitate to contact our team of experts who will be happy to provide answers to all your questions.

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