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Shareholders’ agreements: theory and practical application in Ukraine

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Shareholders' agreement is one of the instruments that prevent corporate conflicts. It has been being widely used abroad for a long time. Such agreements may be concluded in theory between all shareholders or several ones as well as between shareholders (all or several ones) and joint stock company. They regulate a wide range of aspects related to the company’s management, share turnover, conflict resolution and others.

For example in matters related to company management a shareholders’ agreement may contain provisions about compulsory attendance of general meeting by shareholders that have signed the agreement; obligatory voting on certain issues; special procedure for nomination and election of supervisory and management board members and others. On matters related to the alienation of shares they may provide a preferential right to purchase the shares of other signatories of the agreement for shareholders who have signed the agreement; the ban on alienation of shares for a period of time; mandatory sale of shares in certain cases and others. Shareholders’ agreements may provide solutions to number of conflicts and "hopeless" situations. For example when no one shareholder has 60% of shares and while being in conflict with other shareholders he is unable hold a general meeting. In addition shareholders’ agreements may be related to the company’s financing matters, profit distribution and others.

Besides a possibility of self-regulation of relations between shareholders the benefits of shareholders’ agreements also include their feature of not being public and inability to change agreement conditions without consent of all its signatories (as opposed to a statute which can be changed by a qualified majority of shareholders). Major disadvantage is the optionality of agreement provisions for shareholders which are not signatories of the agreement (including new shareholders).

Ukrainian legislation also contains provisions about shareholders’ agreements. In particular according to Article 29 of the Law of Ukraine "On Joint Stock Companies" signing of an agreement between shareholders is possible in cases when it is directly stated in statute of a joint stock company. But some problems may appear during the execution of such agreements in Ukraine due to their complete rejection by the Judicial Branch.

The High Commercial Court of Ukraine provided Recommendations № 04-5/14 dated 28.12.2007 in which it concluded that corporate management issues can be resolved by an agreement between the shareholders only in cases directly stated by the legislation of Ukraine. Additionally these agreements must not contradict provisions of laws or statute of a company and limit rights of other shareholders. In case when these agreements are concluded on the matters that must be regulated by the law or a stature these contractual clauses may be declared invalid by the court.

Among the provisions of shareholders’ agreements which may be declared invalid the High Commercial Court of Ukraine in particular names the following:

  • establishment of a special voting procedure at the general meeting;
  • obligation of one or more shareholders to vote in a certain way;
  • obligation of all shareholders to participate and vote at general meeting;
  • special process of decision-making and voting in other bodies of a company (supervisory board, board of directors);
  • requirements for special voting procedure for shareholders at meetings of management or supervisory bodies;
  • obligation to ensure attendance and voting of members of management and supervisory bodies of a company in a specific way;
  • special formation procedure of an executive body of a company (including individual one) and a supervisory board;
  • submission of management relations to foreign jurisdiction.

According to the High Commercial Court of Ukraine legal acts that regulate the formation of company bodies and voting procedure at general meeting are imperative. Shareholders are not entitled to define rules other than those specified in these acts by their agreements. In addition they cannot subordinate company management relations to foreign law in compliance with of article 25 of the Law of Ukraine "On International Private Law" which states that legal entity falls under laws of a state where the entity is located which in this case is the law of Ukraine.

This point of view is also shared by the Plenum of the Supreme Court of Ukraine in its Resolution number 13 dated 24.10.2008. In particular it states that rules which regulate relations between founders (shareholders) of business entities related to its bodies formation, determination of their competence, general meeting convocation procedures and determination of decision-making order at general meeting are imperative and failure to comply them is a violation of imperative order. Moreover it ruled shareholders’ agreements to be void in cases when they subordinate company management relations to foreign law and prohibited to settle corporate disputes related to the activities of Ukrainian business entities in international commercial arbitration courts.

However there is still a possibility of conclusion and execution of shareholder’s agreements between shareholders of Ukrainian joint stock companies even in such circumstances. Especially when taking into consideration that these positions of courts were formed prior to the entry in force of the Law of Ukraine "On Joint Stock Companies".

First of all nothing prevents the conclusion of shareholders’ agreements between foreign shareholders of Ukrainian joint stock companies. In this case their discharges can be performed outside of Ukraine in accordance with the legislation of a country which is determined by the parties themselves. For example if two Cyprian shareholder of a Ukrainian joint stock company conclude a shareholders’ agreement and make it subordinated  to Cyprian legislation the shareholder whose rights are violated will be able to recover damages under Cyprian legislation.

Secondly, shareholders’ agreements concluded by Ukrainian shareholders may be narrowed to issues the settlement of which through agreement is directly or indirectly provided by law. In particular these may be issues related to mandatory attendance of a general meeting, a joint realization of rights to make proposals on agenda of general meeting, convening of an extraordinary general meeting and special audit appointment of the financial and economic activities of a company. Also such agreements may be related to matters the settlement of which by shareholders’ agreements is not directly prohibited by the courts (on restrictions and obligations related to alienation of shares).

Thirdly, especially brave shareholders may conclude shareholders’ agreements that contradict the opinion of the High Commercial Court of Ukraine and the Plenary of the Supreme Court of Ukraine but comply with the civil law and the Law of Ukraine "On Joint Stock Companies". The agreements based on the principle of freedom of contract can resolve any issues that are not settled by legal acts and / or by a statute. And if we go even deeper and mention that according to article 6 of the Civil Code of Ukraine parties of an agreement may derogate from the provisions of Civil law and regulate their relations at their own discretion the relations between shareholders may be actually regulated differently from various provisions of joint stock legislation.

It is quite possible that a new litigation practice which considers the Law of Ukraine "On Joint Stock Companies" and interprets corporate relations as a part of civil relations will be formed soon considering such bold shareholders’ agreements.

Shareholders' agreement is one of the instruments that prevent corporate conflicts. It has been being widely used abroad for a long time. Such agreements may be concluded in theory between all shareholders or several ones as well as between shareholders (all or several ones) and joint stock company. They regulate a wide range of aspects related to the company’s management, share turnover, conflict resolution and others.

For example in matters related to company management a shareholders’ agreement may contain provisions about compulsory attendance of general meeting by shareholders that have signed the agreement; obligatory voting on certain issues; special procedure for nomination and election of supervisory and management board members and others. On matters related to the alienation of shares they may provide a preferential right to purchase the shares of other signatories of the agreement for shareholders who have signed the agreement; the ban on alienation of shares for a period of time; mandatory sale of shares in certain cases and others. Shareholders’ agreements may provide solutions to number of conflicts and "hopeless" situations. For example when no one shareholder has 60% of shares and while being in conflict with other shareholders he is unable hold a general meeting. In addition shareholders’ agreements may be related to the company’s financing matters, profit distribution and others.

Besides a possibility of self-regulation of relations between shareholders the benefits of shareholders’ agreements also include their feature of not being public and inability to change agreement conditions without consent of all its signatories (as opposed to a statute which can be changed by a qualified majority of shareholders). Major disadvantage is the optionality of agreement provisions for shareholders which are not signatories of the agreement (including new shareholders).

Ukrainian legislation also contains provisions about shareholders’ agreements. In particular according to Article 29 of the Law of Ukraine "On Joint Stock Companies" signing of an agreement between shareholders is possible in cases when it is directly stated in statute of a joint stock company. But some problems may appear during the execution of such agreements in Ukraine due to their complete rejection by the Judicial Branch.

The High Commercial Court of Ukraine provided Recommendations № 04-5/14 dated 28.12.2007 in which it concluded that corporate management issues can be resolved by an agreement between the shareholders only in cases directly stated by the legislation of Ukraine. Additionally these agreements must not contradict provisions of laws or statute of a company and limit rights of other shareholders. In case when these agreements are concluded on the matters that must be regulated by the law or a stature these contractual clauses may be declared invalid by the court.

Among the provisions of shareholders’ agreements which may be declared invalid the High Commercial Court of Ukraine in particular names the following:

- establishment of a special voting procedure at the general meeting;

-  obligation of one or more shareholders to vote in a certain way;

- obligation of all shareholders to participate and vote at general meeting;

- special process of decision-making and voting in other bodies of a company (supervisory board, board of directors);

- requirements for special voting procedure for shareholders at meetings of management or supervisory bodies;

- obligation to ensure attendance and voting of members of management and supervisory bodies of a company in a specific way;

- special formation procedure of an executive body of a company (including individual one) and a supervisory board;

- submission of management relations to foreign jurisdiction.

According to the High Commercial Court of Ukraine legal acts that regulate the formation of company bodies and voting procedure at general meeting are imperative. Shareholders are not entitled to define rules other than those specified in these acts by their agreements. In addition they cannot subordinate company management relations to foreign law in compliance with of article 25 of the Law of Ukraine "On International Private Law" which states that legal entity falls under laws of a state where the entity is located which in this case is the law of Ukraine.

This point of view is also shared by the Plenum of the Supreme Court of Ukraine in its Resolution number 13 dated 24.10.2008. In particular it states that rules which regulate relations between founders (shareholders) of business entities related to its bodies formation, determination of their competence, general meeting convocation procedures and determination of decision-making order at general meeting are imperative and failure to comply them is a violation of imperative order. Moreover it ruled shareholders’ agreements to be void in cases when they subordinate company management relations to foreign law and prohibited to settle corporate disputes related to the activities of Ukrainian business entities in international commercial arbitration courts.

However there is still a possibility of conclusion and execution of shareholder’s agreements between shareholders of Ukrainian joint stock companies even in such circumstances. Especially when taking into consideration that these positions of courts were formed prior to the entry in force of the Law of Ukraine "On Joint Stock Companies".

First of all nothing prevents the conclusion of shareholders’ agreements between foreign shareholders of Ukrainian joint stock companies. In this case their discharges can be performed outside of Ukraine in accordance with the legislation of a country which is determined by the parties themselves. For example if two Cyprian shareholder of a Ukrainian joint stock company conclude a shareholders’ agreement and make it subordinated  to Cyprian legislation the shareholder whose rights are violated will be able to recover damages under Cyprian legislation.

Secondly, shareholders’ agreements concluded by Ukrainian shareholders may be narrowed to issues the settlement of which through agreement is directly or indirectly provided by law. In particular these may be issues related to mandatory attendance of a general meeting, a joint realization of rights to make proposals on agenda of general meeting, convening of an extraordinary general meeting and special audit appointment of the financial and economic activities of a company. Also such agreements may be related to matters the settlement of which by shareholders’ agreements is not directly prohibited by the courts (on restrictions and obligations related to alienation of shares).

Thirdly, especially brave shareholders may conclude shareholders’ agreements that contradict the opinion of the High Commercial Court of Ukraine and the Plenary of the Supreme Court of Ukraine but comply with the civil law and the Law of Ukraine "On Joint Stock Companies". The agreements based on the principle of freedom of contract can resolve any issues that are not settled by legal acts and / or by a statute. And if we go even deeper and mention that according to article 6 of the Civil Code of Ukraine parties of an agreement may derogate from the provisions of Civil law and regulate their relations at their own discretion the relations between shareholders may be actually regulated differently from various provisions of joint stock legislation.

It is quite possible that a new litigation practice which considers the Law of Ukraine "On Joint Stock Companies" and interprets corporate relations as a part of civil relations will be formed soon considering such bold shareholders’ agreements.

Our practice within Corporate law shows that shareholders’ agreement is one of effective tools to regulate corporate relations in Ukraine.


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