When investing in a business, we expect it to yield profits in the form of dividends. However, sometimes it seems that a company is commercially successful and is turning a profit, yet you can’t feel that success and receive no dividends as a participant in a limited liability company (using LLC as the most popular and flexible form of business in Ukraine as an example).
If you are not an official business owner (that is, if your name is not indicated among the founders of the LLC in the company charter and in the state register), meaning that all you have is essentially oral agreements with other founders, then the law does not protect you and you will find it much harder to get your dividends .
However, if you have signed a corporate agreement with other owners and you are considered an official owner of your stake, then, under the law On Limited and Additional Liability Companies (LLC law), you are entitled to:
1. Initiating general meetings of participants and putting on the agenda the issue of payments to the founders
An extraordinary general meeting on this issue may only be convened by those with a 10%+ stake in the authorized capital. The CEO must either convene the meeting or reject the proposal. If he is not responding to your request letter, you can initiate the meeting yourself. For this, it is necessary to notify other LLC participants of the date and place of the meeting (at the place of its registration). Prior to the meeting, request the CEO in writing to provide information on the company’s financial activities, particularly the following:
- income report,
- profit and loss report as well as cash flow report,
- report on the use of funds,
- company balance sheet and tax returns.
Keep in mind that dividends are paid from previous year income, based on the results of the reporting financial period.
Sometimes the CEO, for some reason (for instance, when he’s acting in collusion with another participant or uses fraudulent schemes to make extra money), may attempt to withhold this information from you, since charters often fail to specify what documents exactly must be provided in a situation like this. The CEO can take advantage of this by providing documents that make it difficult to understand the company’s actual state of affairs.
Now that Ukrainian corporate legislation has changed (the aforementioned LLC law came into force only last year), many are choosing to amend the charter in order to specify what documents the participants have the right to receive in such a situation. This is best done before the first conflict between business partners.
2. Proposing to bring in an independent auditor.
If you still haven’t figured out whether the company had profits after studying the provided documents, go ahead and demand an independent audit. If the management tries to fight it, you, as a co-founder, can sign an independent agreement with an auditing company and tell the CEO to provide them with the required documents. If the CEO refuses to do this, you can go to court and have the CEO’s actions declared unlawful, forcing him to provide information and/or documents to the auditing company.
If the court finds that the company was indeed making a profit, it can force it to pay dividends to you, or it can collect the amount in question for you – it depends on what you were asking for in the lawsuit.
If you manage to establish that the company was making a profit without going to court, then demand your dividends, but keep in mind that this is not an easy task, and it can be outright impossible.
For instance, the CEO may be in collusion with another founder, who’s in control of the business (whose stake is over 50%). They could refuse to pay dividends with the excuse that all profits have been invested in current projects, which, according to them, should increase the company's future income. You can only revoke such a decision if it has been adopted in violation of your corporate rights – that is, if you were never invited to and informed of the meeting during which the decision was made. If your business partners refuse to cancel the decision, the issue should be taken to court.
However, if you were involved in the discussion and attended the relevant meeting, then even if you voted against it, you won’t be able to challenge the decision. Therefore, if you do not agree with the company’s direction and vision, the only rational option for you is to withdraw from the business and demand payment of your stake in cash.
If that’s what you were told yet you are unsure whether it’s true, you should proceed with an audit. However, don’t treat it as a panacea for all your troubles: the company might ignore a court order and refuse to provide the necessary documents.
In this case, a lawsuit against the CEO (or another executive responsible for business activities) on compensation for losses incurred by the company could provide leverage against the CEO as well as the founders involved in financial decisions. If you can prove to the court that the LLC’s current financial status is the result of bad decisions on the part of the CEO, that he has been knowingly making unprofitable deals and/or selling property at a lower cost, this could give grounds to collect damages from the CEO to the company.
Still, the best way to avoid future disputes between business owners is to agree on things before starting a business.
Of course, each business and each partnership have its own nuances when it comes to charters and corporate agreements, but there is universal advice relevant to any and all: be as specific as possible when writing the charter and corporate agreement, prescribe the mechanisms for adopting, launching and introducing changes to business strategy and for obtaining financial documents and reports, as well as the terms of withdrawing from business and getting your share of profits, etc.
Published at https://mind.ua/ru
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