May 10, 2018

Disagreements between partners with 50/50 distribution of shares

Starting from February this year, LLC shareholders can sign corporate contracts between themselves in Ukraine. This will significantly expand the opportunities for doing business in Ukraine and save a lot of companies.

Two business partners invest equal sums of money to open a fitness club. The business is registered as an LLC, with each of them owning 50% of shares. For a while everything is fine, but then their perspectives on business development begin to differ, and discussions of the company's future often turn into bickering. It is getting more and more difficult to agree on deals, especially important ones – it is impossible either to assemble the general meeting or gather enough votes to make a decision (one votes for the initiative, another one - against it). This makes it impossible to make any deal. Business suffers and the company's revenue declines.

If the owners are not open to negotiation, there is no solution, so one of them has to withdraw from the business. However, if a conflict is just beginning, it is possible to avoid negative consequences for the business. If the partners are wiling to talk, the new legislation offers adequate mechanisms for this.

Most problems associated with joint business ventures can be avoided with the help of a corporate contract. It can be used to establish the points that are critical for business and important to the partners and that require them to be present at the general meeting. These can be such issues as the increase of authorized capital, sale of real estate, business reorientation – anything at all, since corporate contracts allow it.

Moreover, it is even possible to determine how the owners vote, for instance, if the LLC needs additional funds to cover running costs. Under a corporate contract, in a situation like this, the owners must hold a general meeting within 10 days and decide on the increase of authorized capital through additional investment.

Alternatively, to provide another example, the CEO is abusing his authority and needs to be replaced. In such a situation, a corporate contact could contain a provision that would make participation and voting at the general meeting mandatory, as well as authorize the first partner to nominate the candidate for the position of a new CEO while obliging the second partner to support that candidate. Such control might seem excessive, but when there are two equal owners, it becomes an effective protection mechanism for the business.

You can also provide for sanctions (such as fines) for violating these requirements. To ensure the observance of the contract, the owners could exchange irrevocable letters of authority on corporate rights. For instance, both partners might decide that the CEO is abusing his powers and should be relieved of duty. However, one of the partners is unable to attend the general meeting, so the other one, thanks to the letter of authority, will be able to vote for the dismissal of the current CEO and appointment of a new one, and the business will proceed as usual.