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.
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Director for Corporate rights and Governance at Smart-Holding Andrey 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."