LLC Digest: Shareholder Agreement

This instalment of our digest is devoted to another change introduced by the Law of Ukraine On Limited Liability Companies and Additional Liability (further “LLC Law”), i.e. the regulation of the relationships and activities of LLC shareholders under shareholder agreements. To be fair, it should be noted that shareholder agreements have been around for a while. Article 51-1 of the Law of Ukraine On Business Entities provides a comprehensive definition of shareholder agreement as a tool used by LLC shareholders to exercise their rights and powers. However, at this new stage of regulation of corporate relations, LLC Law provides a number of new changes as outlined below.

1. Less regulation – broad applicability. LLC Law contains a rather abstract and general definition of shareholder agreement as well as cases of use, allowing shareholders to include in such agreement a wide range of issues. Broadly speaking, the law and company charters set out the grounds and requirements for exercise of shareholder rights and powers, whereas shareholder agreements may contain provisions on the various forms and – naturally legal – ways of such exercise. Also, despite all the discretionary nature of shareholder agreements, they still need to comply with both the law and LLC charters, and any of their provisions contrary to the law and/or charter may be invalidated.
2. Requirements for agreement form and content. The law sets out certain requirements for shareholder agreements which may be deemed null and void if those requirements are not met. Shareholder agreements are made in simple written form and without consideration. This requirement stems from the very nature of shareholder agreements and is imposed to exclude any commercial aspect since the sole purpose of such agreements is to improve corporate governance rather than the monetary interest of LLC shareholders. Another reason provided by law for rendering a shareholder agreement null and void is when such agreement provides for the shareholders' obligation to vote as instructed by management bodies as such obligation is contrary to the principle of freedom of corporate governance.
3. Confidentiality. LLC Law provides that the content of LLC shareholder agreements is confidential and should not be disclosed unless otherwise provided by law or shareholder agreement. LLC Law has repealed the requirement for mandatory notification to LLC of conclusion of shareholder agreement (such notification must be done within 3 working days and is still required under the current Law of Ukraine On Business Entities). This change is overall rather progressive and has been positively received in the business community as the ability to regulate relationships in a way that is not subject to public disclosure is very attractive to company shareholders. LLC Law also contains provisions calling into question the possibility to apply the principle of confidentiality. In particular, LLC Law provides that an agreement concluded by a party to a shareholder agreement, resulting in breach of the shareholder agreement is void if the other party to the agreement knew or should have known about such breach. In this case, it is unclear how the party to the other agreement should have known of the shareholder agreement breach as such agreements are not subject to disclosure. It will therefore be difficult to prove in court the bad faith of the other party (counterparty) in breach of the shareholder agreement as it was unable to know its content. This may give rise to restrictions on the ability to perform shareholder agreements, and to all intents and purposes, this rule requires further revision and additional interpretation.

Like most amendments introduced by law, the introduction of shareholder agreements under LLC Law  as an effective instrument for exercise of LLC shareholder rights and powers is dependent on the future implementation of their provisions in practice. However, it is possible already now to see that the ability for self-determination of relationships supported by the right of confidentiality and the fairly broad discretionary nature of LLC Law give greater freedom for shareholders to exercise their rights in various ways while at the same time making them handling various moments related to the exercise of their rights more responsibly.

This piece is the next instalment in a series of informative articles – so-called LLC Digest – each of which is dedicated to certain changes or new amendments introduced by LLC Law. If you have any questions, please contact us. Our lawyers are always happy to provide individual consultations on LLC activity in light of these new changes to the law.

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