Corporate Agreement under the New LLC Law

On June 17, 2018, the Law of Ukraine "On Limited and Additional Liability Companies" dated 06.02.2018 No. 2275-VIII (hereinafter – the LLC Law) entered into force, which not only introduced fundamental changes to the operation of LLCs but also introduced several important legislative novelties. One of these is the introduction of the concept of a corporate agreement at the legislative level, which has long been known in practice but had not been previously established at the legislative level.

What is a Corporate Agreement

According to Part 1, Article 7 of the LLC Law, a corporate agreement is a gratuitous agreement, concluded in writing, according to which the participants of the company undertake to exercise their rights and powers in a certain way, or to refrain from exercising them. The parties to the agreement may independently determine the date of conclusion and the term of validity of the corporate agreement.

Essentially, a corporate agreement is a set of "rules of the game" for LLC participants, which are binding on such participants from the moment the corporate agreement is concluded, and allow participants to regulate the management of the LLC at their own discretion.

An important point that LLC participants should remember is that a corporate agreement must be gratuitous; otherwise, such an agreement will be considered void. This provision emphasizes that the purpose of concluding a corporate agreement is to agree on the management procedure of the LLC, and not to trade participants' votes.

Is it Possible to Balance the Interests of Majority and Minority Participants with an Agreement?

Part 3, Article 7 of the LLC Law stipulates that a corporate agreement may establish the conditions or the procedure for their determination, under which a participant has the right or is obliged to buy/sell a share in the authorized capital (or a part thereof), and also define the cases when such a right or obligation arises.

This provision is intended, in particular, to balance the interests of majority and minority participants. For example, in a situation where a minority participant is generally not interested in selling their share, but the company can offer them something that potentially interests them (the right to lease a land plot, transfer of a certain part of property, etc.), a corporate agreement may provide for the obligation of the minority participant to sell (assign) their share upon the fulfillment of certain conditions by another participant (transfer of the lease right to such a minority participant, etc.).

Based on the content of Parts 1 and 2, Article 7 of the LLC Law, a corporate agreement may concern any matters of LLC management, but it cannot establish an obligation for participants to vote at general meetings according to the instructions of the LLC's management bodies.

Also, according to Part 6, Article 7 of the LLC Law, a corporate agreement is deemed void if it is concluded by at least one of the parties in violation of such an agreement, provided that the other party knew or should have known about such a violation.

Confidentiality of a Corporate Agreement

The establishment of confidentiality for corporate agreements in Part 5, Article 7 of the LLC Law has sparked considerable debate (except in cases where the state, a state or municipal enterprise, a territorial community, or a legal entity, 25 percent or more of whose authorized capital directly or indirectly belongs to the state or a territorial community, is a party to the agreement).

On the one hand, for LLC participants, this provision is positive and allows protecting the LLC from state interference in the company's internal affairs.

On the other hand, concerns are raised regarding potential abuses by participants of the confidentiality of a corporate agreement, as it will be difficult to prove, for example, that a party to the agreement – the buyer of a share – is acting in bad faith and knew that the acquisition of the share violates the corporate agreement.

In conclusion, we can state that despite certain potential shortcomings or gaps, the establishment of the concept of a corporate agreement in the LLC Law is unequivocally a positive novelty that will help participants to effectively, quickly, and at their own discretion regulate important issues concerning the activities of limited and additional liability companies.

If you need legal consultations regarding the drafting of a corporate agreement for an LLC, please contact us; we will be happy to assist you.