March 12, 2019

3 ways to control a director in Ukraine

Depending on the form of business in Ukraine (by the way, we will describe this in detail in our  video - subscribe to our channel), you can create a fairly flexible system of governing bodies. Let us consider the example of a limited liability company as the most popular form of company here.

We give 3 ways to control a director in an LLC: 2 legal ways - through documents - and 1 managerial.

What documents can be of help here:

  1. Company charter

The roles in managing business, people, finances and other assets can be transparently divided in the charter between the director(s) and the founders, and restrictions can be placed on the director (or board of directors).

Here are some examples of what could serve as such a restriction:

  • not to conduct transactions, including taking loans, for a certain amount without the founders’ consent. This will protect the company from unprofitable or fictitious transactions.
  • not to sell or buy real estate without the founders’ consent.
  • to dismiss\hire people for specific positions: financial director, accountant, lawyer.

There can also be other restrictions where the company's critical assets are concerned - with intellectual property, this could be a ban on entering into licensing agreements. If this is an agricultural company and its main assets are land and machinery, you can limit the director in appropriate transactions. At the same time, he will be free to hire and fire employees, buy seeds and sell agricultural produce.

  1. Contract with the director

We can sign a contract with the director, for instance, for a year, extending it every year, while evaluating the director’s efficiency. In the contract, you can specify the director’s duties and tasks, work schedule and vacations, bonuses and other payments.

The managerial or organizational method of controlling the director’s activities involves a collegial body (board of directors), supervisory body (supervisory board) or a deputy director, when you distribute authority in specific areas or give the same authority to someone else.

After all, it’s often the case that a founder of a Ukrainian company does not visit Ukraine often, while the director stays in Ukraine and enjoys unlimited powers, essentially without any kind of supervision on the founder’s part. This situation can be exploited by competitors and corporate raiders for hostile takeover. Such raids usually go like this:

  • In agribusiness, the director transfers all land to a newly created company and abandons the old and asset-less company.
  • Or, the director transfers the rights to intellectual property to another company.
  • Or steals the customer base/team in service business.

Sometimes the director simply is negligent, leaving the company with no other officer authorized to sign documents and handle finances. Such a company becomes a headless chicken with all operations essentially frozen.

In conclusion:

  1. It is possible to create a flexible and secure management system in a Ukrainian company.
  2. It is important to determine the critical aspects your company has, the vulnerabilities you need to eliminate. Sometimes it’s the assets, sometimes the employees or intellectual property.
  3. It is necessary to establish a system of checks and balances and find a person to watch the director. For a large company, a board of directors will work, having different executives be responsible for different areas.
  4. Transparently put all of this in the documents: the company charter, contract with the director, and internal regulations on governing bodies.
  5. If the director violates written agreements, this will help defend the company in court or legally dismiss the director.