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New Rules of Corporate Agreements

Date of publication: 20 March 2018

Vyacheslav Sytyi, Attorney at Law

Source: Censor

The President signed the Law on Amendments to Certain Legislative Acts of Ukraine Regarding Corporate Agreements. What should the founders of limited liability companies expect?

On February 18 this year the Law of Ukraine on Amendments to Certain Legislative Acts of Ukraine Regarding Corporate Agreements came into force.

The amendments were introduced to the Civil Code of Ukraine, the Law of Ukraine on Business Associations, the Law of Ukraine on Securities and Stock Market, and the Law of Ukraine on Joint Stock Companies.

The business owners and investors highly anticipated the adoption of the aforementioned Law, since the relations concerning the so-called corporate agreements in Ukraine were not sufficiently regulated.

The businesses had no other choice but to build its corporate structure in a way to make possible the conclusion of a corporate agreement under the laws of the country where the institute of corporate agreements has already existed.

In certain cases when concluding corporate agreement the parties referred to the general provisions of the Civil Code of Ukraine concerning the freedom of agreement, according to which the parties are free to enter into any agreement and determine the terms and conditions thereof subject to the mandatory provisions of Ukrainian legislation.

However, the judicial practice was not well-established, which created additional risks and uncertainty in protecting the rights and interests of the parties to the corporate agreements in Ukrainian courts.

Since 2009 the only provision regulating the shareholders’ right to conclude the shareholders’ agreement was the paragraph 7 of part one of Article 29 of the Law of Ukraine on Joint Stock Companies.

However, the legislator later acknowledged the ineffectiveness of application of the said rule due to the insufficient legislative regulation of the procedures for concluding such agreements and the inconsistency with other legislative acts.

To this end and with a view to enhance the corporate governance in joint stock companies and limited liability companies, the considered Law was developed and adopted.

Regarding the limited liability companies (LLCs), the amendments were introduced to the Law of Ukraine on Business Associations, which was supplemented by two articles: the agreement on the exercise of rights of members (founders) of a limited liability company and the irrevocable power of attorney for equity rights.

It should be noted that the conclusion of a corporate agreement is a right, but not an obligation of the LLC founders, and the terms and conditions of the said agreement shall be mandatory only for the parties thereto.

The corporate agreement shall be executed in writing, and the signatures affixed by individuals shall be notarized. The LLC shall be duly notified of the conclusion of the said agreement.

Unless otherwise provided by the law or corporate agreement, the information about the content of the same shall not be subject to disclosure and shall remain confidential.

Among other things, the Law provides the LLC members with an opportunity to:
• agree on the voting procedure at the general meeting of the LLC members;
• agree on the acquisition or disposal of the equity rights of the LLC at a predetermined price;
• oblige the party to the corporate agreement to refrain from alienating the equity rights of the LLC before the occurrence of the circumstances provided for in the agreement;
• determine the conditions under which the LLC member (party to the corporate agreement) is entitled or obliged to acquire/sell the equity rights of the LLC, as well as the cases when such a right or duty arises;
• coordinate other activities related to the management of the LLC, its termination or the separation of a new legal entity therefrom.

In addition, the founders may agree on ways to ensure the fulfillment of obligations arising from the corporate agreement and on the liability for non-fulfillment or improper fulfillment of such obligations, as regulated by the general provisions of civil legislation on enforcement of obligation, the legal consequences of violation of the obligation and liability for such violation.

For example, the LLC member, who violated an obligation provided for in a corporate agreement, may be required to pay a fine to a non-breaching party.

In order to fulfill or ensure the fulfillment of the LLC members’ obligations, an irrevocable power of attorney may be issued, which shall not be revoked without prior consent of the company representative or may be revoked only in cases provided for in the said power of attorney.

The aforementioned power of attorney shall be notarized and terminated in the event of termination of the obligation for the fulfillment or enforcement of which the same was issued.

For example, an irrevocable power of attorney may be used by the company members to ensure the mandatory transfer of equity rights from one member to another.

The Law does not provide for an exhaustive list of issues that can be settled by the parties in a corporate agreement.

However, it is pointed out that the subject of the agreement shall not be the obligation of the party to such agreement to vote according to the instructions of the LLC management bodies, concerning the equity rights of which such an agreement is concluded, unless the party to the agreement is a person who is simultaneously a member of the management body of such a company.

The Law also provides for the right of the LLC members to enter into agreements with the company creditors to safeguard the interests of the latter.

The general provisions on the corporate agreement shall also apply to the aforementioned agreements, and the parties thereto may agree to exercise the equity rights of the LLC members in a certain way or refrain from their exercising, in particular to:

• vote at a general meeting of the LLC members in a certain way;
• coordinate actions related to the LLC management;
• acquire or sell equity rights of the LLC at a predetermined price or subject to the circumstances specified in the agreement;
• refrain from alienation of the equity rights of the LLC before the circumstances provided for in the agreement occur.

The conclusion of the aforementioned agreement gives the creditors of the LLC an opportunity to control the economic activities of the debtor and, thus, to safeguard their interests.

The rights and interests of the parties to a corporate agreement and the agreement with creditors shall be subject to judicial protection.

Thus, in order to harmonize and regulate the relations between the LLC members, the Law introduces the institute of a corporate agreement. This Law is progressive and reflects the world practice.

The introduction of new instruments should contribute to enhancing the investment attractiveness of Ukrainian companies, and should also provide business owners and investors with the flexibility to regulate corporate relations.