Limited Liability Company is the most prevalent form of business in Ukraine – there are about 600 thousand companies, which is half of all legal entities. In order to be competitive on the market, it is necessary for any company to look for modern solutions to internal problems.
In 2018 the Law of Ukraine “On Limited and Additional Liability Companies” was passed. It introduced the new category for the Ukrainian business – the “shareholder agreements”.
However, despite its reputation abroad, this definition is unclear for Ukrainians. The law describes the mechanism of management in the company with this agreement very shortly, so it’s no wonder that businessmen don’t know how to answer the question:”what do the shareholder agreements mean and why should I use them?” and continue working with typical provisions of the contract which are not effective when the company is developing or has specialization in innovative areas.
Let’s understand everything.
What is it?
The shareholder agreement is an agreement between the shareholders whereby the shareholders undertake to carry out their rights in certain manner or refrain from carrying out them. It can be the additional way of protection the shareholder’s rights. Also it is more flexible and detailed compared to charter and founding agreement.
Who can enter into the contract?
Shareholders can enter into a contract. There are no limits: the agreement can be entered between all shareholders as well as between few of them. The shareholder is allowed to be a part of two or more agreements if these agreements are not contradictory.
What relationships can be regulated by the contract?
- the order of making decisions by General meeting: the shareholders are not allowed to block the decisions which should be made unanimously; they should issue a power of attorney if they are absent on meeting;
- conflict resolution strategies: the shareholder who has more than 50% can demand sharing buybacks in such cases: disagreement, absence at the meeting, conditions which complicate management (the list of cases can be extended);
- sanctions for shareholders if they refuse to sell the buyback (fine (penalty) for every day of delaying);
- additional conditions about privacy;
- non disclosure agreement (NDA) about Limited Liability Company;
- obligation to sign the contract for new shareholders;
- transfer of rights and obligations under the contract in case of transfer of rights to the share buybacks;
- refusal of selling buybacks during the few years (for example, 5 years);
- obligation to inform about signing other shareholder agreements.
Are there any limits?
The shareholder agreement can’t contradict the charter of Limited Liability Company and the Ukrainian legislation. But it can otherway regulate the order of realization different rights of the shareholder in comparison with the charter.
YOU CAN’T force the shareholders to vote in accordance with the instructions of the director.
What advantages are the contract gives?
- Flexible and detailed regulation
Very often the charter consists of standardized conditions which can’t consider all nuances of management. But, to succeed in business today, you need to use not only typical mechanisms. There is the need to regulate all disadvantages. Shareholder agreement regulates different ways of realization shareholder’s rights and obligations and answers the question: «How the management can be organized?».
The charter needs the state registration, it is available for the counterparties and located in the registration case. The shareholder agreement is confidential. It is important because very often company is not interested in public disclosure of internal information. Only the shareholder of the contract can reаd the contract (for example, the director, employees, creditors and other persons can’t do this). So this agreement must be in writing and it is confidential, except when one of its parties is public person (state, local community, state company, municipal enterprise).
- Guarantees in the court
Other agreements, which are entered by the shareholder and breached the contract are illegal from the moment them are made. It provides the priority of shareholder agreement over other acts and guarantees that in case of conflict the court will analyze the shareholder agreement.
- Guarantees about liabilities
The agreement contains different sanctions for shareholders such as fine or penalty. It encourages the shareholders to perform a particular contract and protects their rights and interests.
- Securing from conflicts
Very often companies are established by the partners with equel shares. This mechanism is not very reliable because of the occurrence of conflicts which can block the management or
make it impossible. In this contract the shareholders can regulate the order of solving problems.
The shareholder agreement is not very costly way, but it effectively helps to avoide the conflicts between shareholders about the order of management and secures them from litigation.
- Protection of shareholder’s interests
You can make changes or additions to the contract only if all shareholders give their permission.
We recommend for business partners to use this contract because it gives a lot of opportunities for regulation relationships inside the company. But we draw Your attention that signing the contract is not enough to develop Your business, it is important to make this contract detailed, accurate, thoughtful. In addition, there are no standardized shareholder agreements – the individual orientation is their main characteristic.