ShareholdersShareholders’’ Agreements:Agreements:

common law vs. common law vs. Ukrainian lawUkrainian law

Ukrainian novelties, common law case study

By Elena BalbekovaVoropaev&Partners Law Firm, Kiev, Ukraine

Shareholders Agreements: AgendaShareholders Agreements: Agenda

Originality and usage of the SA

Types of SAs

SA & M&A: validity and interrelations of both

English law and BVI law controversy examples

Parties to the SA

Structure of the SA, recommendations on the coverage: management, deadlock

• New Ukrainian corporate legislation: changes, opportunities and shortcomings

Shareholders Agreements: Originality and Shareholders Agreements: Originality and usageusage

SA has originated from the common law jurisdictions, although now they are being widely used all-around the world.

Agreements between shareholders are a common feature of English company law.

They have several advantages compared to the regulation of an issue by provision in the company’s Articles. Informality and confidentiality are two obvious advantages.

Compared to altering or enforcing the company’s Articles, a shareholders’ agreement is a simple way to reach agreement and to provide for its enforcement.

It may be easy to identify who intends to reach an agreement with, for example a large shareholder.

Shareholders Agreements: Shareholders Agreements: Originality and usageOriginality and usage

Shareholder agreements as well as agreements which resemble certain structures of the SA are also used in the continental law countries.

In Germany the shareholders have a right to sign a so called „Stimmbindungsvereinbarung“ (voting agreement), under which the parties agree to vote on the general shareholders meeting in a certain way.

• For quite a long time the so called shareholder agreements (most commonly between the founders of the company) were executed in Ukraine.

Usually, no matter what type of structure you have, you may execute the Shareholders agreement

Does it matter on what stage the Does it matter on what stage the partners make an agreement partners make an agreement between them? If yes, what it may between them? If yes, what it may effect?effect?

Shareholders Agreements: Shareholders Agreements: Originality and usageOriginality and usage

Traditionally the Shareholders agreement is an agreement executed only between the shareholders (all of them or some of them) or between the company and the shareholders.

The agreement can be signed: On the stage of the company’s foundation; When the company exists and the shareholders feel like settling certain existing relations between them.

Shareholders Agreements: Shareholders Agreements: Originality and usageOriginality and usage

The choice between amending the Articles, or adopting any other formal resolution by the board or shareholders’ meeting, may

turn up at any point in the life of a company.

The agreement can serve many purposes, from guaranteeing the control of a majority or securing the rights of a

minority.

Types of Shareholder AgreementsTypes of Shareholder Agreements

Agreement of co-investors

Agreement of the minority shareholders

Agreement among all the shareholders and the company

Shareholder Agreement & M&A: Shareholder Agreement & M&A: advantages of SAadvantages of SA1. Privacy/Confidentiality (it should not be

registered with the State authorities on contrary to the Articles)

2. The wider scope of issues to be agreed3. Less complicated entering the

amendments4. Enforceability (due to contractual

character of the document)

Shareholder Agreement & M&A: Shareholder Agreement & M&A: disadvantages of SAdisadvantages of SA1. Conflicting regulations in certain jurisdictions in

respect of coverage and participants of the SA in the context of M&A mandatory provisions

2. Difficulties (impossibility) to make it binding for the new shareholders

3. Disclosure requirements for public companies

Interplay of SA and M&AInterplay of SA and M&AArticles do not constitute a contract between

the company and a member in respect of rights and liabilities which he has in a

capacity other than that of member, whether he was a member originally or later becomes one. Where such rights and liabilities are the subject of a written agreement, the Articles will not be imported unless they are referred

to. Thus the main purpose of the Articles is to

define the position of the shareholder as a shareholder, not to bind him in his

capacity as an individual.

Interplay of SA and M&AInterplay of SA and M&AThe contractual context within which shareholders’ agreements find their place:

Whether and how the rights and liabilities of members as members under the

Articles may be enforced by or against the members

Interplay of SA and M&A: Case lawInterplay of SA and M&A: Case lawIn a controversial Case of Scott v Frank F. Scott (London) Limited1, the court were in complete agreement with the first instance decision that “the court has no jurisdiction to rectify Articles of association of a company although they do not accord with what is proved to have been the concurrent intention of all signatories therein at the moment of signature.”

The judge went further when he said that “It seems plain that this section does not admit of any rectification of the memorandum and articles apart from alterations under the express powers of the [UK] Act, for the only contract is a statutory contract in which the company is included by reference to the registered documents and to no other documents.”

In the due course of corporate developments, the courts will grant orders to enforce shareholders’ agreements. In Puddephatt v Leith the court compelled a shareholder to vote as was agreed in a shareholders’ agreement.

SA in English & BVI lawSA in English & BVI law

For parties to a shareholders agreement where a BVI company is the joint venture vehicle, it means there are effectively two contracts (the M&A on the one hand and the shareholders agreement on the other) running parallel to each other and the task is to ensure they do not conflict.

SA in English & BVI lawSA in English & BVI law

A relatively common format is an English or New York law shareholders agreement and BVI JV Memorandum and Articles.

The important points to bear in mind are:(i) assuming all necessary steps have been taken, the shareholders agreement is valid, binding and enforceable like any other contract and a remedy for breach will flow in the normal way;(ii) the BVI JV M&A is a statutory contract separate from a shareholders agreement and as (unlike English law) amendments to the M&A are only effective when filed with the Registrar, the M&A should be amended, in keeping with the BVI statutory requirements, to reflect or to correspond/not conflict with the terms of the shareholders agreement.

Neither a shareholders agreement nor a resolution unanimous or otherwise will, without more, be

sufficient to amend the BVI M&A.

Parties to the Shareholder Parties to the Shareholder AgreementAgreement

Majority shareholders

Minority shareholders

The Company

The Subsidiaries

Company as a party to the SACompany as a party to the SA

Main pros:a company is a party to the regulations the shareholders set for its operations;

Main cons:A provision in a Shareholders agreement and/or company’s Articles of Association which restricts the company’s statutory power to alter the Articles or a formal undertaking by the company to that effect, would be invalid.

Structure of Shareholder Structure of Shareholder AgreementAgreement1. Definitions (parties to the Agreement, types of shares of the

Company, corporate bodies, deadlock, etc.)2. Subject of the Agreement3. Corporate governance (GSM, Supervisory board,

management, committees)4. Shares’ distribution restrictions and rules

4.1. pre-emptive rights4.2. tag-along rights4.3. drag-along4.4. put/call options

5. Deadlock6. Dispute resolutions, applicable law

Shareholder agreements : Shareholder agreements : Ukrainian noveltiesUkrainian novelties

September 17, 2008 – new long-awaited law of Ukraine

“On joint stock companies”have been adopted by the Supreme

Council of Ukraine

Took its effect in 6 month from the date of its approval

Shareholder agreements : Shareholder agreements : Ukrainian noveltiesUkrainian novelties

Article 29 of the Law “On JSC” allows the shareholders to execute the agreements in particular covering their obligations on participating in the general shareholder meetings and the liability for the breach of such obligations.

Unfortunately, due to the Decree of the Supreme Court, other than that most probably no other provisions may be covered by such an agreement.

“Relations between the founders (members) of the commercial entity in respect of the establishing its corporate bodies, determining their competence, procedure on convocation of the general shareholders meeting as well as regulations on decision –making process at the meetings are governed by the provisions of the Civil Code and Law on commercial entities. .., Members of the commercial entities, notwithstanding the composition of their members are not entitled to determine the international arbitration institutions as the institutions for resolving the corporate disputes among them”

Questions & AnswersQuestions & Answers