Corporate agreements for IT-companies: why it’s worth the effort

Congratulations, together with friends/partners/brother you entered IT-business: clients stand in line, codes are written, designs are discussed and products are tested. In your head, there is a myriad of issues: hiring, loans, marketing and growth at last. On the waves of success, it is unlikely you think about corporate agreement. But you should: almost 62% of world start-ups fail because of founders’ conflicts. There is no such statistics in Ukraine, but averagely 52% of marriage couples divorce each year, – you know what point we are driving at.

If arguments over “I make decisions here”, “My embodiment is awesome, your idea is not worth a rush” or “I’m tired of cleaning up your mess and don’t want to see you ever again” came up to the point of no return, it is a corporate agreement, who will save your business.

In the Great Britain, they are being used for the companies and shareholders protection for more than 150 years. Finally in 2018, when Elon Musk colonizes Mars, artificial intellect has created own language and drones deliver pizza, corporate agreements are reasonably defined on the legislative level in Ukraine. We may discuss pros and cons of the new law “On limited liability companies and additional liability companies” (active from June 17, 2018) for a long while. But one of the unquestioned victories is the unprecedented flexibility in the issue of corporate agreements.

There is no obligation to conclude them, however the main aim of this instrument is the shareholders protection and the company’s consistency. The clear scenario what to do if “things go wrong” is a great alternative to disputes, long lasting court hearings, stratospheric expenses and broken relations.

When shareholders are in conflict, there is not much hope that articles of incorporation may deal with it. Often companies are registered with a one-size-fits-all statute: it’s time- and cost-efficiently. And not efficiently at all when troubles in the shareholders ranks are brewing. Actually, articles of association are not to fix such issues: this document defines company’s day-to-day business. Moreover: even the most faultless and well-laid-out statute may be changed on the 75% share capital holders will – a bit of bad news for minority stockholders.

The corporate agreement, on the other hand, assigns the relations among the company founders and future shareholders, minimizes hazards of conflicts. They act as an umbrella protecting company from shareholders personal problems, like divorce, leaving abroad, lengthy illness or simply wish to quit the business for no reason.

Another nuance: banks and other creditors while evaluating risks pay attention whether the company has the corporate agreement. In their eyes it confirms that you are reliable, farsighted and predictable – i.e. your serious attitude to business.

If love is gone, what shall we do?

Properly prepared corporate agreement helps to stay friends under any circumstances. If shareholder wants to leave the company and live to a ripe old age on some Tahiti island, his colleagues will not experience any inconveniences. His share will not fall into the wrong hands and the downshifter will not compete with them or disclose confidential information – remaining shareholders may sleep easily.

In the corporate agreement you are free to agree on a desirable scheme of the withdraw from the company. For instance, the share may be sold only to remaining shareholders at the previously defined price. In this case, they will be obliged to buy it. Shareholders have some financial problems at that time? – No big deal: in the corporate agreement, you may define a payment by instalments – even for 20 years. But it’s better to dig a hole carefully: curses come home to roost.

We will rock’n roll forever. Or not

Just think, what may happen if one of shareholders dies? Other will try to buy his share, but the heirs will not agree; the widow/widower will interfere in the company life, for instance through a proxy-director. Or vice versa: heirs will demand to buy their share, but the remaining shareholders will have no money. Or successors will sale their share to the first who comes along and you will have to split your cherished business with him.

The corporate agreement minimizes such risks. You may oblige all shareholders to insure their life. And should there happen the worst thing, the remaining shareholders will get a payout and buy the deceased’s share for those money. The company is unimpaired, heirs have their money and shareholders have no additional expanses: benefit! In other words: shareholder is dead, long live the shareholder!

Saving private Ryan

The minority shareholders’ nightmare: the general meeting increased the share capital 1000% over, their share became miserable and useless. In the corporate agreement you may foresee an efficient safeguard from the dilution of interest – an unanimous consent for some decisions, like share capital increase or making of an additional contribution to the capital.

Or let us assume, you’ve been removed from the company governing: directors are unaccountable, the vote at the general meeting doesn’t make a difference. The first idea spring on mind – to get a rid of this share. But other shareholders don’t have an opportunity (or desire) to purchase it. Penny stock in a tiny company is not a much tempting offer for potential buyers. There is the way out: bring other shareholders to purchase the share at a reasonable price. Of course, if you have envisaged it in the corporate agreement.

Another situation: you own 95% of shares and repugnant minority shareholder blocks some important transactions, for instance the company sale at extra high price. The problem will be fixed rapidly, if under the corporate agreement provisions the minority shareholder is obliged to vote for all decisions, proposed by his majority colleague.

Don’t you believe in the justice in the Ukrainian style?

And you don’t have to: in the corporate agreement you may agree on alternative ways to solve the conflicts. Negotiations, mediation, commercial arbitrage or toss a coin: chose your weapon.

 

If you read as far to this point, you should be already convinced that the corporate agreement is not a pure formality, but an efficient tool to protect your business. Now welcome for consultation, so as to evaluate all risks together with professionals, chose the most indolent scheme for the stalemate situation moving out and conclude a well-judged corporate agreement that will safeguard your serenity for many years.

 

Oksana Dankevych (Pavlish)

Associate at IT-law practice

+38 (096) 965 0139