Ukraine has moved to a hybrid corporate governance model. For years, businesses could only use the two-tier model, with the management and the supervisory boards strictly separated. Now companies can take advantage of the one-tier model with its flexibility and dynamics. There are several cases when a business operating in Ukraine can benefit from the one-tier model. In this article, we focus on the one relevant for foreign companies and international groups with subsidiaries in Ukraine.
Pursuing the balance
Businesses strive to balance delegation and control. In a Ukrainian subsidiary of a foreign company, the powers of the local management need to be in line with the group’s approval policies to avoid misuse of corporate powers. The solution lies in a practical corporate governance framework described in the bylaws.
Such a framework is challenging to implement in a subsidiary of a foreign company compared to a local Ukrainian company without foreign roots. The reason is that the responsible people are often on different levels of corporate structure and in different countries. The case of an international group is even more complicated when the approval procedure and the actors involved differ depending on a type of matter, such as investments, procurement, key personnel employment, etc. Because of the differentiation, the time to get approvals increases.
Law-based standard vs trust-based reality
To ensure legally effective corporate approvals, a Ukrainian company must describe in detail the relevant procedure in its bylaws and make necessary appointments to governing bodies. Until recently, Ukrainian companies could use the two-tier board model only. It required creating a separate governing body responsible for overseeing the management’s actions and approving corporate actions. In that case, a foreign company would need to choose the people responsible for controlling a Ukrainian subsidiary, and then the subsidiary would appoint them to the supervisory board for oversight and approvals.
A negative side of this approach is that it requires creating a separate governing body with the sole purpose of giving corporate approvals. Sometimes this complicates the organisational structure, and the game is not worth the candle. Without a flexible alternative, some companies prefer keeping corporate approval procedures rather informal and based on trust, not law. In such an informal setting, the approval powers are given to people employed outside a Ukrainian company, such as managers of a parent or sister company. They may approve corporate actions of the Ukrainian company, for example, by emailing or countersigning a contract copy.
No matter how convenient it looks, this trust-based approach has no legal force because no one in a parent or sister company has the power to approve the Ukrainian company’s corporate actions. This means that the procedure works as long as there are trust and mutual understanding. As long as a business process works, people tend not to pay attention to what underlies it, be it law or trust. If it works, do not touch it, as the saying goes.
When something goes wrong (in the case of corporate approvals, misuse of corporate powers would be the ‘wrong’), neither a Ukrainian company nor its parent or sister company has effective legal remedies to use. As long as there are no legal provisions underlying the corporate approval procedure, the directors of a Ukrainian company are deemed to act within their powers without any breach of duties. Consequently, it is impossible to hold the directors liable for misusing their powers or to recover any losses.
How a one-tier board can help
Incorporating the corporate approval procedure into a one-tier board can make it legally binding and enforceable. In addition, a one-tier board is a flexible alternative to a two-tier model, where a company must create an additional governing body. A company can do without it and appoint the responsible managers of a foreign company to a one-tier board. This would allow them to sit at the same table (real or virtual) with the director of the Ukrainian company and determine the corporate approval procedure however they want. Besides, the one-tier model preserves the decision-making dynamics and keeps the distance between the Ukrainian manager and the group’s representatives close enough to overcome information asymmetry.
To become members of the one-tier board in a Ukrainian company, some legal arrangements need to be made, such as amending bylaws and signing contracts between board members and the Ukrainian company. The procedures described in bylaws and contractual obligations will make each corporate approval legally binding and enforceable against the director or in some cases even against counterparties of a company.
Call to action
As the famous saying attributed to Albert Einstein goes, everything should be made as simple as possible, but not simpler. This perfectly illustrates the use of a trust-based (instead of a law-based) approach to corporate approvals. While a trust-based approach may be more straightforward, the lack of legal effect can make it unworthy. Instead, it could be reasonable to balance simplicity and efficiency by switching to the one-tier board model, which is a good opportunity to meet both of the objectives.
Anyway, a decision to use a one-tier board cannot be based on legal concerns only. A company should also consider if a one-tier board is a suitable option in terms of communication, information sharing, and expertise, and if it fits into the group’s organisational structure and culture in general.
The author appreciates the contribution of Volodymyr Igonin, Partner at Vasil Kisil & Partners, to this article
Author: Artem Shmatov, senior associate