Corporate agreement between the members of the LLC

Corporate Agreement Between LLC Participants

The Law of Ukraine “On Limited and Additional Liability Companies” expressly provides for this instrument for LLCs. A corporate agreement is gratuitous and must be concluded in writing.

Its main purpose is to answer in advance the questions that usually become problematic only after a conflict has already arisen:

• how participants vote on key issues;
• which decisions require the consent of several partners;
• who controls company management and to what extent;
• how a share may be sold or transferred;
• what happens when a participant exits the business;
• how a new investor enters the company;
• what to do in the event of a corporate conflict;
• how a deadlock is resolved;
• which mechanisms protect a minority participant;
• what happens if the agreed rules are breached.

A corporate agreement may be useful if:

• the LLC has two or more partners;
• the shares are divided 50/50;
• one participant holds a controlling share;
• a new investor is entering the company;
• the participants want to agree in advance on the procedure for selling shares;
• special voting rules need to be established;
• a minority participant needs additional protection;
• the participants want to define the procedure for exiting the business in advance;
• there is a risk of key corporate decisions being blocked;
• informal arrangements between partners are no longer sufficient.

The document allows informal arrangements between founders to be converted into legally structured rules of conduct.

Benefits of Working with Prikhodko & Partners

We help:

• analyze the current LLC charter;
• review the ownership structure and distribution of shares;
• identify key corporate risks;
• develop voting rules;
• establish procedures for the sale and purchase of shares;
• provide mechanisms for investor entry and exit;
• develop a deadlock mechanism;
• protect the interests of minority participants;
• define liability for breach of the agreement;
• coordinate the corporate agreement with other company documents.

Which Issues Can Be Regulated by a Corporate Agreement

For example:

• the voting procedure of the participants;
• a list of key corporate decisions;
• the required voting threshold for particular matters;
• mandatory prior approval of certain actions;
• appointment and replacement of the director;
• approval of major transactions;
• raising financing;
• distribution of profits;
• payment of dividends;
• entry of new participants;
• sale and purchase of shares;
• exit of a partner from the business;
• resolution of conflict situations.

This makes it possible to determine in advance which matters one partner cannot decide without the other.

Voting and Key Corporate Decisions

In practice, the parties may agree on:

• a list of matters requiring unanimous approval;
• an increased voting threshold for particular issues;
• an obligation of a participant to vote in a particular way;
• an obligation to refrain from certain actions;
• a procedure for prior approval of decisions;
• a mechanism for appointment of the director;
• rules for approval of the budget;
• approval of major expenditures;
• the procedure for approving related-party transactions;
• other special corporate rules.

Sale of a Share and Exit of a Participant from the Business

A corporate agreement may provide additional protection mechanisms, for example:

• conditions under which a participant may sell a share;
• the procedure for first offering the share to other partners;
• a mechanism for determining the share price;
• deadlines for completing the transaction;
• conditions for mandatory sale of a share;
• the right to join the sale of shares by other participants;
• rules for the sale of a controlling interest;
• conditions for investor exit;
• a buyout mechanism in the event of a conflict;
• other methods of regulating business exit.

Such terms are particularly important in startups, investment projects, and companies where one of the partners holds a controlling interest.

Protection of a Minority Participant

A corporate agreement may provide additional guarantees for a participant who does not have enough votes to independently influence key decisions.

The absence of such mechanisms may result in:

• the minority participant’s position being ignored;
• key decisions being adopted without their participation;
• limited access to information;
• dilution of the participant’s economic interest;
• difficulties in selling the share;
• conflicts over profit distribution;
• a weaker position when a new investor enters the company.

The agreement may provide:

• veto rights on certain matters;
• increased voting requirements;
• information rights;
• the right to receive specific reports;
• special conditions for the sale of a share;
• protection mechanisms in the event of a sale of a controlling interest;
• additional approval requirements for major transactions.

Deadlock in a 50/50 LLC

If a company has two participants with equal shares, a corporate conflict may lead to a situation where neither party can approve a key decision.

The corporate agreement can establish an algorithm in advance for:

• mandatory negotiations;
• involving a mediator;
• referring the issue to a designated person or body;
• one participant buying out the other’s share;
• simultaneous offers to buy or sell a share;
• involving an independent appraiser;
• a phased exit of one of the partners;
• another pre-agreed deadlock resolution mechanism.

The specific mechanism should be selected based on the company’s financial model and the distribution of shares.

A deadlock mechanism should be developed before the conflict arises. Once partners are no longer able to negotiate, agreeing on fair exit rules becomes significantly more difficult.

Corporate Agreement and LLC Charter

The charter establishes the basic rules of the company’s activities, the structure of its governing bodies, and other corporate provisions.

A corporate agreement, in turn, regulates how specific participants have agreed to exercise their corporate rights.

Therefore, before preparing the agreement, it is necessary to review:

• the current version of the charter;
• the powers of the general meeting;
• the director’s authority;
• the decision-making procedure;
• the procedure for transfer of shares;
• rules for withdrawal of a participant;
• restrictions already provided by the charter;
• whether the proposed arrangements comply with applicable law.

If the charter and the corporate agreement are drafted without taking each other into account, practical difficulties may arise when implementing the arrangements.

Does a Corporate Agreement Require Notarization?

The Law on LLCs does not establish a general requirement for mandatory notarization of the corporate agreement itself.

Under the Civil Code, a written transaction must be notarized only when this is expressly required by law or when the parties themselves agree on such a form.

Therefore, the need for notarial actions should be distinguished from:

• the written form of the corporate agreement itself;
• notarization of individual transactions involving shares;
• notarial certification of signatures where required by law;
• other notarial actions that may be necessary to implement the corporate arrangements.

Confidentiality of a Corporate Agreement

The document may contain:

• internal arrangements between partners;
• the financial model of the business;
• exit mechanisms;
• rules for the sale of shares;
• investment terms;
• voting rules;
• liability of the parties;
• other commercially sensitive provisions.

However, confidentiality does not mean that the agreement may conceal from public registers information that must legally be public or registered.

Corporate Agreement When Attracting an Investor

It is important to determine in advance:

• the size of the investor’s share;
• the scope of the investor’s corporate rights;
• which matters require the investor’s approval;
• the procedure for further financing;
• conditions for increasing the charter capital;
• rules concerning dilution of shares;
• the investor’s information rights;
• conditions for the sale of the business;
• the investor’s exit mechanism;
• the founders’ liability for key obligations.

That is why a corporate agreement is often used together with investment and other corporate documents.

Liability for Breach of a Corporate Agreement

Depending on the permissible legal structure, the parties may agree on:

• an obligation to cease the breach;
• compensation for losses;
• contractual sanctions within the limits permitted by law;
• consequences of violating voting obligations;
• consequences of violating share sale conditions;
• special exit mechanisms;
• other consequences provided by the agreement.

The wording of such provisions should be reviewed particularly carefully so that the mechanism is not only strict on paper but also legally enforceable in practice.

Cost of Drafting a Corporate Agreement

The cost is affected by:

• the number of LLC participants;
• the distribution of shares;
• the complexity of the ownership structure;
• the presence of an investor;
• the number of special corporate mechanisms;
• the need to develop deadlock provisions;
• share sale mechanisms;
• the need to protect a minority participant;
• coordination of the agreement with the charter;
• the scope of negotiations between partners;
• the need to prepare additional corporate documents.

For a small LLC with two partners, the agreement may be relatively compact. An investment project with several participants requires a significantly more detailed corporate model.

Common Situations for a Corporate Agreement

Conclusion

A corporate agreement allows LLC participants to define in advance the rules for business management, voting, share transfers, investor entry and exit, and resolution of corporate conflicts. Such a document is most effective when it is drafted before a dispute arises and coordinated with the actual business structure, the charter, and other corporate documents.

Want to establish clear rules between business partners in advance and reduce the risk of a corporate conflict? Submit a request on the Prikhodko & Partners Law Firm website. A lawyer will analyze the LLC structure and corporate risks and prepare an agreement tailored to the participants’ actual arrangements.