Shareholders’ Agreements:

common law vs. Ukrainian law

Ukrainian novelties, common law case study

By Elena Balbekova Voropaev&Partners Law Firm, Kiev, Ukraine

Shareholders 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 usage

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: Originality 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

„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) are executed in Ukraine.

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

Shareholders Agreements: Originality 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: Originality 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 Agreements

Agreement of co-investors

Agreement of the minority shareholders

Agreement among all the shareholders and the company

Shareholder Agreement & M&A: advantages of SA

1. Privacy/Confidentiality (it should not be registered with the State authorities on contrary to the Articles)

2. The wider scope of issues to be agreed

3. Easier entering the amendments

4. Enforceability (due to contractual character of the document)

Shareholder Agreement & M&A: disadvantages of SA

1. 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&A

Articles 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&A

The 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 law

In 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.

Interplay of SA and M&A: Case law

Duomatic principle: This principle takes it name from the decision of Buckley J. in Re Duomatic Ltd. [1969] 2 Ch 365, in which his Lordship stated (p. 373):

“Where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be".

Cane v Jones: where a shareholders agreement had been

entered into, it was held that it was a basic principle of company law that all corporators of a company acting together could do anything which was intra vires the company.

SA 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 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 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 Agreement

Majority shareholders

Minority shareholders

The Company

The Subsidiaries

Company 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 Agreement 1. Definitions (parties to the Agreement, types of shares of the

Company, corporate bodies, deadlock, etc.)

2. Subject of the Agreement

3. Corporate governance (GSM, Supervisory board, management, committees)

4. Shares’ distribution restrictions and rules

4.1. pre-emptive rights

4.2. tag-along rights

4.3. drag-along

4.4. put/call options

5. Deadlock

6. Dispute resolutions, applicable law

Shareholder agreements : Ukrainian 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 : Ukrainian 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”

Shareholder agreements : Law “On JSC” novelties Public and Private joint stock companies Non-documentary form of the shares Pre-emptive right of the shareholders (shall be

directly stated in the Articles of the private JSC) Options on decrease of the statutory capital

(decrease of the nominal value or buy-out and further cancellation of the shares)

A rather detailed procedure for organization of the GSM

Cumulative/proportional election of the SB; flexible system of voting thresholds at the GSM; voting ballots

Determination of the “market value” term Broad competence of the Supervisory board

Questions & Answers