If corporate conflicts arise between the members of a company (LLC), they may even result in losing control over the business. The best way to protect the interests of the members is prevention rather than entering into disputes or litigation. If a conflict has already arisen, we recommend starting with an out-of-court settlement and going to court only as a last resort.
Corporate Dispute Prevention System
Based on our practical experience, we can confidently say that most corporate disputes can be prevented or resolved at the stage of company formation. The following key documents and measures can help prevent disputes from arising:
- Corporate Agreement (Article 7 of the Law of Ukraine “On Limited and Additional Liability Companies”). The agreement should clearly establish the decision-making procedure, mechanisms for a member to join or leave the company, pre-emptive rights, deadlock resolution mechanisms and liability for breaches.
- The Articles of Association must clearly reflect the actual agreements between the members and comply with applicable legislation.
- All decisions should be recorded in the minutes of the general meetings of members. If changes are required, they should be registered in the Unified State Register.
- All information concerning the distribution of profits should be accessible to every member.
If all possible aspects of the members’ relationship are clearly regulated from the outset, the likelihood of future corporate disputes can be significantly reduced.
If a Corporate Conflict Has Already Arisen
If the above measures have not helped and a dispute has already arisen, the first step should be to attempt to resolve the situation amicably rather than immediately taking the matter to court. This can save time and money and help preserve business relationships.
Pre-Litigation Stage. What to Do:
* document all violations in writing;
* send a proposal to negotiate or a formal claim;
* propose entering into an additional agreement if all members support this solution;
* offer the member a voluntary withdrawal from the company, with mandatory payment of the value of their share (Article 24 of the Law of Ukraine “On Limited and Additional Liability Companies”).
If all parties are willing to find a compromise, corporate disputes can often be resolved without litigation.
Judicial Protection
If the previous step has not produced the expected results and the dispute cannot be resolved amicably, the matter may be brought before a court. Corporate disputes generally fall within the jurisdiction of commercial courts (Clause 3, Part 1, Article 20 of the Commercial Procedure Code of Ukraine).
Claims That May Be Brought Before the Court:
- declaring a decision of the general meeting invalid;
- restoring corporate rights;
- protecting the pre-emptive right to purchase a share (Article 20 of the Law of Ukraine “On Limited and Additional Liability Companies”);
- recovering damages from the director;
- challenging unlawful registration actions.
If the dispute is brought before a court, the following issues should be taken into account:
1) the general limitation period is 3 years (Article 257 of the Civil Code of Ukraine);
2) shorter limitation periods apply to certain types of claims;
3) it is critically important to file a timely application for interim measures, such as prohibiting changes to the Unified State Register — Article 137 of the Commercial Procedure Code of Ukraine.
Please note that since 2018, the grounds for the compulsory exclusion of a member by a decision of the general meeting have been significantly restricted (Article 15 of the Law of Ukraine “On Limited and Additional Liability Companies”). In many cases, such matters can only be resolved through court proceedings.
Practical Tips from Corporate Lawyers
1. The simplest and most cost-effective way to protect your interests in a corporate dispute is to prepare a corporate agreement from the outset.
2. All violations should be documented immediately, and relevant evidence should be preserved, including documents and even screenshots.
3. Do not delay applying for interim measures, because once changes have been entered into the Unified State Register, restoring the previous situation can become significantly more difficult.
4. The procedure for convening and conducting general meetings should always be carefully checked (violations of quorum requirements or notification procedures are common grounds for challenging a decision).
5. Assess the prospects of each corporate dispute as early as possible, already at the pre-litigation stage. Reaching a settlement is often preferable to years of litigation.
Our Advice
For effective protection of the interests of company members, it is best to proceed from simple measures to more complex ones: start with prevention, then attempt an amicable settlement, and resort to professional legal support and judicial protection only when necessary. The earlier you involve a professional corporate lawyer in the company’s affairs, the greater the opportunity to prevent prolonged disputes and preserve control over the business.
This is precisely where the role of a corporate lawyer becomes important. A modern corporate lawyer is not simply a “legal department”, but one of the key elements of a company’s business security and development system. Their effectiveness should not be measured by the number of contracts reviewed, but by how consistently the business operates and how effectively it avoids unexpected legal and financial losses.
