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V A S K O

CORPORATE AGREEMENT (SHAREHOLDERS‘ AGREEMENT). SECURITY ARRANGEMENTS.

CORPORATE AGREEMENT (SHAREHOLDERS‘ AGREEMENT). SECURITY ARRANGEMENTS.

For more than a year, a corporate agreement[1] is available to Ukrainian business as a legal instrument. Today, it can be used for harmonising relations between the participants of the company as well as the effective tool for structuring relations between the borrower and the debtor, the buyer and seller, the investor and the company. The most promising ways of using a corporate agreement will be discussed in our next article. The purpose of this Article is to disclose the accessible and most efficient ways to secure the actual performance under the corporate agreement.

Ukrainian businesses attempted to use corporate agreements before. For such purposes, foreign jurisdictions were used. However, it was not very much expedient in terms of its actual costs, enforcement efficiency, and timing, including case law. At the same time, our legal experience proves that business: (і) responds somewhat conservatively to the new opportunity for structuring these relations with such instrument, now provided by the Ukrainian legislation, and (ii) does not fully utilize such tool and advantages thereof.

We believe the reason for that are the following factors:

(i)   poor understanding of all of the benefits and opportunities available with the corporate agreement (shareholders‘ agreement);

(ii)  the traditional bias of the Ukrainian business in using the instruments that are not time-tested;

(iii) certain distrust of business to the law enforcement bodies, related to lack of confidence in the ability of the officials to properly interpret the provisions of the corporate agreement.

Taking into account the above, the VASKO Law Firm starts a series of publications aimed at clarifying the essence of the corporate agreement, its practical aspects, the main advantages and autonomy, i.e. the possibility of its use, regardless of the will or decisions of any parties: either contractors or official bodies.

Once a contract is signed, a formal document that describes certain relations, mutual rights and responsibilities is not an arrangement only desired by a fully pragmatic business. Having expressed the mutual obligations in the agreement, the business fairly expects that either party shall duly perform thereunder. In the event of a breach of the obligations, the existing instrument should ensure the restoration of the violated rights in the most effective way.

However, the unstable economic situation and a complex set of other factors, including the frivolous attitude of business to obligations and law, a high level of legal uncertainty, can make certain adjustments to the contractual relationships. In such a case, a party that has entered into legal relationships in good faith, and counting on the proper performance by the other party, may become adverse to a party that violated the agreement; such party may have to direct a part of its resources to secure the proper performance.

Our experience shows that the probability of proper performance under a contract is directly proportional to the measures taken to secure it.  A corporate agreement (shareholders‘ agreement) is not an exception in this matter. That is why we start our series of publications showing the tools available to ensure effective performance under an obligation.

In other words, the purpose of this Article is to provide business with certain understanding, that once duly secured, a performance under a corporate agreement may be actually ensured regardless of the will of the counteragent or other law enforcement parties. The positive effect may be achieved through securing the corporate agreement by the instruments that we will discuss below.

 

Irrevocable Power of Attorney.

We will start with an instrument that is most obvious and expressly provided by the Law to ensure effective performance under a corporate agreement: an irrevocable Power of Attorney.

According to the definition given in the Law, the key features of such Power of Attorney are the following:

(i)  it is issued for the purpose of performance or ensuring the performance of the obligations of the participants of the company as the parties to a corporate agreement (shareholders‘ agreement);

(ii)  the subject matter of such obligations shall be the right for a share in the charter capital or the authority of the participants;

(iii) it cannot be cancelled without the consent of the attorney thereunder until the expiration or can be cancelled only in cases determined in the Power of Attorney.

The irrevocable Power of Attorney provides for the avoidance of a situation when a party would be able to evade performance of the respective obligation since, in such a case, the obligation will be performed directly by an attorney that is controlled and de facto appointed by the other party. In this case, upon the issuance of such a Power of Attorney it may be cancelled only by court. A separate agreement with respective Attorneys under irrevocable Power of Attorney will be entered into by the parties to the corporate agreement (shareholders‘ agreement). 

Consequently, the existence of an irrevocable Power of Attorney can ensure effective fulfilment of the terms and conditions of corporate agreement notwithstanding the will of the person against whom such execution is directed.

How it works:

(i)   certain agreement regarding a sale of the shareholding interest under a price determined by the parties is signed;

(ii)  the counterparty refuses or evades signing of the sale and purchase agreement;

(iii) the SPA is to be signed by the Attorney (on behalf of the person who refused to sign the respective sale and purchase agreement) on the basis of the previously issued irrevocable Power of Attorney.

 

Contract in Favour of Third Party.

The definition of a corporate agreement enshrined in the Law indicates that such agreement may be entered into only between the participants of the company. Respectively, such an agreement may be amended or terminated by parties thereunder any time even if it secures the interests of a third party. Can a person that is not a participant of the company benefit from a corporate agreement (shareholders‘ agreement)? The answer to this question is "Yes", it can.

Let us address the concept of an agreement in favour of a third party. According to the Article 636 of the Civil Code of Ukraine, an agreement in favour of a third party is an agreement in which the debtor is obliged to perform an obligation in favour of a third party, which is determined or not determined in the agreement itself. At the same time, from the moment when the third party expressed the intention to utilize its right, the parties to an agreement cannot terminate or change such an agreement without the consent of such third party.

The specified provisions of the Civil Code, properly incorporated into a corporate agreement, actually work as certain legal basis to the provisions of the corporate agreement, and provide its beneficiary with the reasonable confidence that the corporate agreement will not be early terminated, and its provisions will not be changed without its consent.

 

Pledge of Shares in Charter Capital.

A traditional instrument to secure proper performance of an obligation is pledge of shareholding interest in the charter capital of the company.

The pledge itself is a traditional instrument to secure obligations and has existed since the Roman law. However, the practical enforcement of the improperly structured pledge of a shareholding interest in a charter capital may become extremely problematic, especially upon any slightest opposition of the debtor or other participants of a company.

The issue of effective enforcement of the pledged shareholding interest in the charter capital of a company under the the Law of Ukraine "On Limited Liability and Additional Liability Companies" still requires complicated and advanced structuring.

Summary.

Summarizing all of the above, current legislation provides businesses with an opportunity to:

(i)  use the corporate agreement (shareholders‘ agreement) to structure a wide range of legal relationships;

(ii) secure the effective and adequate performance of obligations under the corporate agreement (i.e. the irrevocable Power of Attorney, the Agreement in Favour of Third Party, Pledge of Shareholding Interest).

This Article deals with general overview of the issue in question. However, our professional experience offers to our Clients unique and bespoke corporate solutions in the light of recent legislative changes.

Sergiy Makarchuk, attorney for the Law Firm "VASKO".

[1] This article deals with a corporate agreement in the meaning of the Law of Ukraine "On Limited Liability and Additional Liability Companies"