Having left the escrow accounts under the holiday tree, the parliamentarians continue to delight with the useful instruments, this time those, who work with the corporate law. Speech on the amendments provided for by the Law of Ukraine “On amendments to particular legislative acts of Ukraine concerning corporate agreement”.
The law introduces a number of new institutions successfully operating in international corporate practice, namely: an agreement on the enforcement of the rights of the participants (founders) of the limited liability company, an agreement between shareholders and the irrevocable power of attorney on the corporate rights of the joint-stock company and the limited liability company.
In this article we will try to analyze the practical aspects of applying the agreement on the enforcement of the rights of the participants (founders) of the limited liability company (hereinafter referred to as “the agreement”), study its terms and conditions and distinctive features, assess the risks and develop the recommendations for the implementation of such instrument.
Law analysis
The issues of application of the agreement on the enforcement of the rights of the participants of the limited liability company are written out in sufficient detail. It can be concluded between the participants or the founders of such company, while not necessarily between all participants. It is also possible to conclude such several agreements between the different participants, which make it quite flexible and practical.
The agreement may provide for both positive (to do something) and negative obligations (to refrain from doing something). For example: vote in the certain way; purchase or sell a share at the predetermined cost; in the event of the certain circumstances to refrain from purchasing the share until the occurrence of other circumstances, specified in the agreement, and others.
The design of the norm allows you to set other obligations individually for each case.
The parties may independently determine the conditions (the procedure for the determining,) under which the right or obligation arises to purchase (sell) the share in the company. Such conditions may be depend or may not be depend on the parties.
The form of the agreement is written, there are no requirements for the notarial form. However, the authenticity of the signatures of the participants (founders) of the company – individuals in such agreement is certified in the prescribed manner by the notary, local governments, consulates, etc.
The legislator has imposed a ban on the voting by the participants in accordance with the instructions of the management, except in cases when one of the participants is the management body. The clause violating this prohibition is void.
The agreement can be either fixed or termless. The parties may independently establish the date of its entry into the force; however, within three days from the date of its conclusion, they are obliged to notify the company of such agreement.
It is worth mentioning that the terms of the agreement are confidential, unless it provides otherwise.
The terms of the agreement on the enforcement of the rights of the participants of the limited liability company are obligatory only for its parties. At the same time, the law allows the conclusion of the agreement on management of corporate rights between the participant of the company and the creditor. To such agreement, the norms of the agreement on the enforcement of the rights of the participants of the limited liability company are applied.
If the agreement provides for the right (obligation) to sell the share, the interested party may apply to the court with the requirement to sell (purchase) it. This provision is rather trivial and in no way expands the existing methods of the protection of rights, in particular the fulfillment of obligation in kind.
The agreement may determine the liability for violation of the obligations provided for therein and ways of securing them, which, together with other means of securing obligations (pledge, charge, mortgage, surety), provides the good set of the instruments.
Terms and conditions of the agreement
The law does not provide for the essential terms of agreement on the enforcement of the rights of the participants of the limited liability company. But given that it is not new, there are many possible conditions and ways to structure the agreement.
Although in each case the parties are free to determine independently the structure of the agreement, we recommend the following sections.
Key functions of the parties and the purpose of the agreement
The agreement should not duplicate the memorandum of association or the charter; the parties should clearly understand the purpose of its conclusion. In this section, they can define the basic functions of their obligations. All that was previously drawn up by the heads of agreement and memorandums can be settled in the agreement.
Now, if the partner expects from the other party the customer acquisition, performing certain works or provide services, you can write about this in the agreement and even establish sanctions for the non-fulfillment of such obligations.
Ethical relationship
The ethical relationship between the partners can also be settled with the help of agreement on the enforcement of the rights of the participants of the limited liability company. The agreement may provide for measures of responsibility or the obligation not to perform the certain actions.
Using the same section, cases of conflict of the interest, non-attendance of meetings, and disclosure of the confidential information can be resolved. It also includes provisions to prevent the undue intervention of the participants in the affairs of the company.
Another example is the provisions on the attitude of participants to the settlement of relationships with suppliers and / or customers. In particular, the participants may refuse to negotiate deals with the companies, which do not comply with the certain environmental standards, and others.
Employee and management poaching
If the company’s participants are its direct competitors, in order to remain the competitive capability it is acceptable to include some restrictions regarding the key employees and management poaching. Such restrictions may consist in the obligation not to hire the former employees and management for the certain period.
Work with counterparties that are related with the participants
In other cases, the participant of the limited liability company may be its key partner. The agreement can fix the obligations regarding the delivery of goods, the performance of works or services under certain conditions and others.
Also, do not forget about anticompetitive norms and concerted actions for which responsibility is provided. Although such agreement is confidential, the disclosure of its terms and conditions may be interpreted as the violation.
Dispute resolution procedures
In addition to the classical procedure for the dispute resolution in court, this section may include the arbitration or mediation (including with the participation of other participants). If the participant of the company is the non-resident, the parties may also determine the law applicable to such agreement.
Decision making in case of deadlock
Perhaps one of the most useful sections. Often in the limited liability company there are two partners and also the ratio of shares between them is 50/50. In fact, this means the mandatory coordination of key decisions between them.
In practice, often there are situations, where the key decision (coordination of the necessary transaction / deal, director change) cannot be made due to the corporate conflict, named “deadlock”. The share of each partner is enough to block the decision of the second partner.
Possible exits: the liquidation of the company; the exclusion of one of the participants; compulsory redemption of shares on the conditions specified in the agreement. It allows you to get out of the uncomfortable partnership and, in some cases, to preserve the company or its assets.
Access to information
In addition to the basic provisions of the charter, an agreement on the enforcement of the rights of the participants of the limited liability company may provide for the access to more information or access of participants to information about each other. Here you can provide for the responsibility for withholding of the information.
Voting on the key decisions
The charter of any company contains a list of issues that are decided by the majority. By supplementing the charter, the provisions of the agreement may expand such list; often such issues include the following: the asset management, coordination of the debt relations, the management change.
Considering that an agreement on the enforcement of the rights of the participants of the limited liability company may be concluded between the part of participants (group), the latter can settle the relationship, how to vote according to the acceptable ways to such group.
Another interesting option is to give the participant, who not owning a significant share, a veto right. It works like this: in the event that such participant voted against or abstained, the decision is considered to be not adopted, even if it received the majority of votes.
However, in this case, the agreement must be concluded between all participants, since the consequences of such right affect all participants.
Relationship with management
The agreement may also provide for the right of certain participants to offer a candidate to the company’s management or to limit this right. The right can be exclusive (the candidates can only be offered by this participant) or preferential (his candidate will be prioritized).
The same may apply to the recall of the management.
Share sale
Of course, the owner of the majority share of powers has much more rights and competences. In most cases, the transfer of rights of such share actually means the transfer of ownership to the company.
At the same time, the fate of minority shareholders is not very bright - the sale of share by its holder of the main share threatens them with a new and unpredictable, and possibly, unprofitable partnership.
The agreement may include several scenarios for the sale of the limited liability company:
In addition, the agreement may provide for the priority right to purchase a share in the event of sale. Such right differs from the last scenario in that the purchaser is not exist yet and the initiative to sell the share does not come from outside - from the purchaser of the share, but from the participant of the company.
The charter of the company gives similar powers, but such right may not be granted to all of its participants, but to the party - a party to the agreement, and / or on the certain conditions.
The prohibition on the sale of shares is another way to regulate the relationship of participants of the company. Such prohibition may be either fixed or termless for the whole effective period of the agreement.
Securing obligations
Given that the agreement on the enforcement of the rights of the participants of the limited liability company is fully covered by the rules on ensuring the fulfillment of obligations, the obligations provided for them can also be ensured.
Liability
In our contractual culture, the obligations not backed by the sanctions unfortunately work poorly. Therefore, the key conditions for the parties should be supported by measures of the liability for lack of performance (or the performance) of the certain actions.
In addition to the classical sanctions, an agreement can contain such specific type of liability as transferring the purchaser’s rights to the party to agreement.
Representation
To fulfill certain conditions of the agreement, the parties may provide for the issuance of the irrevocable power of attorney for corporate rights. By the way, this instrument is so interesting and self-sufficient that it deserves a separate study.
Management of the share in case of unforeseen circumstances
The parties may also determine the procedure for managing the corporate rights (their share) in the event of unforeseen circumstances (recognition of the participant as missing, dead or dying).
For example, in this case, before the heir of the rights is registered, the payment of dividends can be sent to the relevant person (family members).
But, as already mentioned, each case is individual, and therefore the agreement can be completed and adapted haphazardly.
Law enforcement tips
The agreement as an instrument for regulating relations between the partners is universal and can be used in the variety of cases: to protect the rights of the minority shareholders; setting a stalemate partnership; additional regulation of the procedure for making key decisions in cases, where there are 3 or more founders of the company and there is no right understanding between them; the registration of partnership purposes and additional obligations of the partners in business; formalizing arrangements while retaining the confidentiality; flexible settlement of relations between the participants with the possibility of the rapid change; the descriptions of the methods of divergence of partners, if the dispute or the conflict arose, as well as detailed description of methods of the arbitration, mediation, redemption of shares, others; the application of contractual law to the corporate relations.
Once again pay attention to the fact that the agreement related to management of the corporate rights between the participant and the creditor is the subject to the provisions of the agreement on the enforcement of the rights of the participants of the limited liability company.
It makes such agreement an extremely interesting instrument. In debt relations, the investment projects and other cases, where the reliability and duration of the relationship is very important, it can be used to make the relationship with the counterparty more predictable.
Comparative analysis
For a better understanding of the nature of the agreement, we will conduct a small comparison with the similar instruments.
|
|
The charter |
An joint-cooperation agreement |
An agreement on the enforcement of the rights of participants |
The memorandum or heads of agreement |
|
Legal force |
Is legally effective |
Is legally effective |
Is legally effective |
Has limited legal force (applicable either for the interpretation of other documents or as a legally significant document in some foreign jurisdictions |
|
Signatories |
All participants |
Contracting parties interested in the project |
May be all participants, may be partially |
Contracting parties interested in the project |
|
Tax implications |
Does not require any accounting, as it does not give rise to the rights and obligations |
Gives rise to the rights and obligations, requires separate special accounting |
Gives rise to the rights and obligations, it does not give rise to the rights and obligations |
No tax implications |
|
Legal nature |
An organizational document |
An agreement |
An agreement / organizational document |
The heads of agreement, precontractual work |
|
Limited access mode (confidentiality) |
No 1 |
May be |
Yes, unless the otherwise provided by an agreement |
According to the Resolution of the Cabinet of Ministers of Ukraine dated August 09, 1993 under No. 611 “On the list of information that is not commercial secret.”
Instead of conclusion
In some cases, the application of the agreement on the enforcement of the rights of participants of the limited liability company will improve the management of the company; increase the security of participants and the reliability of the partnership (project). And therefore, instead of the usual conclusions, we offer the checklist, which will help you to decide whether you need such agreement.
So, the agreement is not needed if there is only one participant in the limited liability company, and also if you or your client are the majority participant of the limited liability company.
It is recommended if you or your client: a) is the minority shareholder; b) the majority shareholder, but it is important to retain the minority shareholders as the part of the company (including management with the minority stake); c) signed the heads of agreement, but there is a desire to legalize such document, to give it legal significance; d) want to determine the fate of the company (your share) in the event of the unforeseen events; e) be in the company with several participants and want to determine the scope of responsibility of each participant, the procedure for termination of such relations, as well as to make the meeting of the founders more predictable; f) you want to keep the management; g) need the access to information about the activities of the company.
It is mandatory if you or your client: a) in the project with complex participant is not the majority shareholder; b) the minority shareholder and you expect to profitably sell your share to the main shareholder; c) strive to prevent competition between the company and its participant; d) want to prevent the employee attrition in the company; e) be in the company with 50/50 distribution of shares; f) you are the creditor of such company.
Based on: Lawyer & Law. The analytical edition
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