With the ambitious plan to create in Ukraine the most powerful IT hub in Central and Eastern Europe, the Government of Ukraine has established Diia City – a special legal framework for the IT industry, in summer 2021. Currently, the legal and organizational basis for the operation of Diia City is being developed and improved. It is expected that the project will be fully launched already in the first quarter of 2022.
In addition to special tax benefits, efficient employment set-ups, and IP rights protection mechanisms, the Diia City Law introduced a number of important corporate novelties.
Professional Management Companies
For the first time in Ukrainian corporate laws history, it is allowed to appoint a legal entity as an executive body of a company. Diia City residents (i.e. companies that meet certain criteria and are included in the Diia City registry), which are organized in the form of limited or additional liability companies (LLCs and ALCs), may hire a legal entity to perform functions of an executive body (i.e. a professional management company). Such a management company must be incorporated in Ukraine and perform management functions as its primary activity. The management company will be hired based on an agreement, the terms of which require pre-approval of the supreme governing body of the Diia City resident. The representative(s) of the management company will act on behalf of the Diia City resident without proxies. The management company will bear full liability towards the Diia City resident for damages caused by its wrongful acts or omissions. It is expected that the novelty will allow the Diia City residents to benefit from the services of professional management companies securing effective operational management.
Ukrainian law-governed shareholders’ agreements (SHAs) have recently become a popular instrument in M&As involving Ukrainian targets. The innovations suggested by the Diia City Law will make this instrument even more practical and useful for structuring M&A transactions with foreign investors. In particular, it has been allowed to subject SHAs to foreign law in relation to Ukrainian companies with at least one foreign shareholder. Such a novelty contributes to the discretion of investors to choose the most preferable jurisdiction for governing their relations.
In addition, the Ukrainian company itself or third parties (i.e. creditors or contemplated investors) may join SHAs for LLCs or ALCs. Indeed, such a possibility creates additional leverages for third parties to control the company’s activities and safeguard their investments or assets.
Another important corporate instrument, which has been often used in practice recently, is the option agreement. Such an agreement provides the option holder with the possibility to purchase company shares at a pre-agreed price in the future. The requirements introduced by the Diia City Law relate to the option agreements for LLCs and ALCs and concern the form of option agreements (only in writing) and the mandatory clauses for the option agreements to be valid (i.e. the option shares, their price, option trigger events, and term of option agreements). It is now also possible for LLCs and ALCs to become parties to option agreements in relation to the company shares held by them. Such a novelty opens the possibility to introduce stock option plans for the top management of LLCs and ALCs, which would be beneficial not only for Diia City residents but for many other businesses operating in Ukraine.
There are many other interesting developments suggested by the Diia City Law, which would positively impact the conduct of business in Ukraine, including non-compete, non-solicitation and non-disclosure agreements, convertible loan agreements, etc.
It is expected that Ukrainian, foreign entrepreneurs, and investors from all over the world will highly benefit from the Diia City project and will avail themselves of the opportunities to implement quickly and effectively the most ambitious and innovative business ideas in Ukraine.
Maria Orlyk, Managing Partner, and Oleksandra Prysiazhniuk, Senior Associate, CMS RRH
This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.