A corporate contract is a document signed by the participants of a joint-stock company or a limited liability company and enshrining their rights and obligations in the framework of solving business and financial issues in business management.
In many companies, the company’s corporate agreement is an additional agreement to the charter of an LLC, which does not contradict the main points laid down in the document, but supplements the charter with new rights and obligations, and also gives specific rules to relationships within the company.
There may be a lot of reasons to conclude a corporate agreement between the participants of an LLC. As a rule, the main ones are:
- The opinion of one participant that he works more, but receives less when distributing profits.
- Conflicts on the basis of methods, forms or frequency of distribution of material benefits.
- Excessive control and lobbying of decisions of one business participant bypassing the opinions of others.
- The presence of different opinions regarding the conduct of business, the economic development of the enterprise and the solution of financial issues. As a rule, the lack of compromise in such matters leads to stagnation in the development of the enterprise.
- Joining the corporation of third parties without the knowledge of other participants. This can happen in case of sale, donation or inheritance of a share in the company.
In the presence of any of these reasons, the conclusion of an agreement on the exercise of corporate rights is a good opportunity to reduce the risks of occurrence or resolve disputes that have already arisen within the enterprise. The corporate agreement assumes not only the rights and obligations of the company’s participants, but also ready-made algorithms for overcoming conflict situations that lead to undermining the economic and production activities of the LLC.
In this article, we will take a detailed look at important aspects when working with a corporate contract.
The parties to the corporate agreement
A corporate agreement can be signed between all members of the company (LLC or JSC) or some of them. In some cases, third parties from among creditors or investors may also be involved in a corporate contract. In any of these cases, the signing of such an agreement has a specific purpose:
- Reducing the risks of a forceful takeover, takeover or merger of the company by competitors or a member of the company.
- Approval of rules and regulations for the interaction of LLC members or shareholders among themselves to ensure the normal functioning of the company’s economic activities, as well as to determine the voting procedure at the general meeting of owners.
- Competent and lawful exercise of their rights related to the purchase or sale of shares/ shares when a number of necessary conditions are met.
- The establishment of a ban on the alienation of shares in the company to undesirable partners or third parties.
- Establishment of rules on the special procedure for the issuance and circulation of the company’s securities.
- The need for a rule on the simultaneous alienation of shares/shares by all or several members of the company.
- Creation of a basis for resolving corporate disputes and reducing the risks of their occurrence.
- Creating a favorable environment for future entry into the company of investors or other third parties.
Content of the corporate agreement
A corporate agreement may contain those provisions that are most relevant for a particular joint-stock or limited liability company. In general, such an agreement provides for broad rights and opportunities for the participants of the company, which can create a basis for effective management.
In particular, a corporate agreement may contain a non-standard procedure for voting on various issues to exclude disputes around doing business. This concerns the introduction of a separate paragraph of the agreement prior approval of votes to form the same opinion on a number of issues.
Another popular item that the members of the society prefer to include in the contract is the coordination of issues related to the welfare of the company. Thus, the agreement may contain a clause on the terms and amount of funds contributed to the authorized capital of the company or on the impossibility of voting on the distribution of profits for the payment of dividends for a certain period of time.
A frequently occurring provision of the agreement states the method of alienation (sale, donation, inheritance) of shares / shares of the company. The participants of the company can veto the change of ownership or the alienation of a share to a certain person or in a certain period of time. In the same paragraph, you can set the maximum and minimum value of shares / shares.
Also, a corporate agreement may address the following issues:
- Rules for changing owners in the company.
- Attracting investments: the procedure and requirements for investors.
- Issues of concluding agreements with high value.
- Rules for involving close relatives or friends in the affairs of the society in order to reduce the risks of conflict of interest.
- Reorganization or liquidation of the enterprise.
It is important to keep in mind that the regulatory legal acts of the Russian Federation do not contain provisions on the conditions that should be included in the corporate contract. This means that the members of the society can form a document based on their own interests.
However, it is worth considering the list of items that cannot be included in the corporate agreement. This applies to forcing the adoption of a certain issue on the ballot, as well as to the alienation of a share or shares. If there are such clauses in the contract, the court recognizes them as null and void when challenging the provisions by the participant/ participants of the company. Also, the clauses of the agreement cannot become binding on third parties.
Rights of a participant in a corporate agreement
As we noted earlier, a corporate agreement often does not create new rights for a participant or shareholder of a company, but only specifies those that are already spelled out in the charter.
Clause 3 of Article 8 of the Federal Law “On Limited Liability Companies” states that participants have the right to draw up an agreement on the exercise of their rights in order to fully exercise them. Of course, this applies to the main corporate rights, which include:
- The right to leave your vote at the general meeting of LLC participants.
- The right to initiate and hold a general meeting of LLC participants.
- The right to donate or sell a share in an LLC or shares in a joint-stock company at a set price and or waive this right until a specific situation occurs.
- The right to receive distributed profits in the form of dividends.
- The right to manage the company, including to decide on its reorganization or liquidation.
How to conclude a corporate contract
The procedure for preparing and signing a corporate agreement takes several stages, among which the following can be distinguished.
Stage No. 1. The issues that will be regulated by the contract are determined.
After agreeing on the points of the future agreement, the competent persons can proceed to the formation of the text of the future agreement.
Stage No. 2. Elaboration of annexes to the contract.
Since the Civil Code of the Russian Federation does not limit the contract to the main document, the members of the company have the opportunity to add additional items, which can be issued in the form of an appendix.
Stage No. 3. Consideration of restrictions when forming an agreement.
It is important to know that the corporate contract is concluded strictly in writing and does not contain conditions that can be invalidated in court.
Stage No. 4. Notification of the company’s participants.
Before entering into such an agreement, the company must notify its participants of the fact of the future signing of the contract.
Stage No. 5. Signing of the agreement.
Registration of a corporate agreement
Information about the presence of a corporate agreement in the organization is entered into the Unified State Register of Legal Entities. To do this, it is necessary to submit to the registration authority at the company’s legal address an application for state registration in form No. P13014 within 7 working days from the date of signing the contract.
Page 002 in paragraph No. 7 of the application must contain all the necessary data on the corporate agreement indicating the personal data of the participants/founders of the company, including the number of votes that each of the participants of the LLC has.
The submitted application must contain a notarized signature of the director of the company. If an application is sent using electronic services, it is signed with an electronic digital signature (EDS).
It is important to know that entering information about a corporate agreement is not subject to state duty.
Execution of the corporate agreement
An irrevocable power of attorney can ensure the execution of a corporate agreement, which is consistent with clause 1 of Article 188.1 of the Civil Code of the Russian Federation. In this case, the irrevocable power of attorney will also work with respect to third parties who are not members of the board of directors or shareholders of the company. According to clause 4 of Article 185 of the Civil Code of the Russian Federation, the text of the contract may contain a clause on the existence of an irrevocable power of attorney as a guarantor of the fulfillment of its provisions.
It should be noted that the practice of ensuring the execution of a corporate contract is very important for the functioning and development of a business, as it helps to avoid corporate conflict and or not to bring the disagreements that have arisen to court.
For example, fixing in the corporate agreement the obligation of the majority owner to vote in accordance with the will of the minority owner allows you to resolve the issue of decision-making within the company without redistribution of shares in the authorized capital. Size revision is a complex and labor–intensive matter, while a corporate contract helps to distribute responsibilities and profits in accordance with the actual level of management of the company’s affairs, and not by the volume of shares.