At the establishment of a private limited liability company such company must have articles of association (AoA) and standard version of these containing minimal regulation required by the law can be easily and quickly be compiled online in the company registration portal. The standard AoA provided by the company registration portal can be substituted with a more thorough and elaborate AoA either already at the establishment of the company or after it with the respective shareholders’ decision.

AoA is a public document which must contain all the main data characterising the company, including the amount of share capital, rights and special rights deriving from the shares and the amount of board members and their authorities. So why bother with a separate shareholders’ agreement?

Shareholders’ agreement is binding only to its participants

Shareholders’ agreement (SHA) does not have include all shareholders of a company. However, it is advisable to include such shareholders who together have majority shareholding, otherwise the provisions agreed upon in the agreement might not be enforceable and it might not be possible to adopt the decisions referred to therein.

SHA is binding to its parties and it is possible to agree in the SHA that a contractual penalty is applied in case a party violates the agreement.

Although the AoA as a public document is binding also to third parties, in addition to the shareholders, the format of the AoA does not allow to stipulate penalties to the shareholders in case of violations of the AoA.

If a shareholder adopts a decision in conflict with the AoA then such decision can be disputed and requested to be declared invalid, in certain cases and in case of performance of a transaction or decision in conflict with the AoA, a compensation of any damage wrongfully caused to the private limited company, another shareholder or a third person by the violating shareholder can be claimed. (Supreme Court has made several rulings regarding the compensation claim against a violating shareholder, including decisions No 3-2-1-89-14, 3-2-1-133-11 and 3-2-1-7-10).

In SHA the parties can agree that in addition to the damage compensation claim deriving from law the injured party can claim a contractual penalty from the violating shareholder. While in case of damage compensation claim the injured party must prove that actual damage has occurred, then in case of contractual penalty the injured party does not have to prove the existence of damage – it is enough if the violation has occurred that provides the grounds for the penalty claim.

Shareholders’ agreement allows regulating the relations of the shareholders in more detail

Insofar as the AoA is a public document the shareholders often do not want to disclose all their agreements to third parties and therefore such relations can be conveniently regulated in the SHA.

In the SHA the shareholders can agree on everything that concerns the management and financing of the company, the principles of the business activities, competition, principles of profit distribution, the vesting of the shareholding, the transfer of shareholding (incl. pre-emption right, drag-along and tag along rights etc.).

It is more difficult to amend the shareholders’ agreement

Commercial Code provides that the majority of at least 2/3 votes is required for amendment of the AoA unless the AoA itself provides a higher majority requirement. It essentially means that if one shareholder acquires at least 2/3 of the share capital, then such shareholder will be able to amend the AoA by itself.

In order to amend the SHA, however, all the participating shareholders must agree to such amendments and therefore a single shareholder cannot amend the provisions of the SHA without the consent of the others.

In disputes between the shareholders the shareholders’ agreement prevails

The AoA and SHA should be in compliance with each other, which would help the company to smoothly carry out its business activities and avoid any disputes between the shareholders.

In case the AoA and SHA are in conflict with each other, then in disputes with a third party the AoA is applied, but in case of disputes between the shareholders the SHA is applied. In order to avoid potential contradictions and disputes it is strongly advisable to keep the AoA and SHA in compliance with each other, meaning that after the conclusion of the SHA the AoA should certainly be revised and amended if necessary.

 

In the light of the above we advise to always consider thoroughly the management structure, business activities and future plans of the company, to reflect these accordingly in the AoA and not to rely on the standard AoA that is automatically compiled in the company registration portal. Additionally, in case of at least two shareholders we advise to conclude a thought-out SHA in order to avoid potential misunderstandings or disputes between the shareholders.

In Avokaado you can create the documents mentioned above:

In Avokaado you can compose even the most complicated agreements within 10 to 15 minutes by answering questions, based on which the document is generated instantly in accordance with the needs of the user. If you do not know which agreement you should conclude, feel free to ask our helpdesk!

Avokaado 31.08.2017