10 issues that should be wisely defined in the articles of association or partnership agreement

1.    Principles of the company’s (partnership’s) representation 

The principles of representation can be freely shaped in the articles of association or partnership agreement. A good example is the exclusion of the right to represent the partnership by a partner of a general partnership or a general partner in a limited partnership or a limited joint-stock partnership. Everything depends on the arrangements and needs of the partners. Similarly, in the case of companies (limited liability company, simple joint stock company and joint stock company), it is possible to determine contractually the number of members of the management board and to indicate in what configuration they will be entitled to represent the company.

2.    Right to conduct the partnership’s affairs

The principles of conducting the affairs of partnerships may also be determined in partnership agreement. In a general partnership, the rule is that each of the partners may conduct the partnership’s affairs, but on the basis of the partnership agreement, this right may be entrusted only to some of the partners. The partnership agreement of a limited partnership may also grant the right to conduct the partnership’s affairs to a limited partner who, in principle, does not have such a right.

3.    Manner of appointing the management board

According to the regulations, the management board of a limited liability company is appointed and dismissed by the shareholders’ meeting, the management board of a simple joint stock company – by the shareholders, while the management board of a joint stock company – by the supervisory board. However, the articles of association may provide for a different manner of appointing and dismissing the management board. For example, it is possible to grant a particular shareholder a personal authorisation to appoint and dismiss a member of the management board. It is important not only to determine the procedure for appointing managing persons, but also the term for which a given management board is appointed. The term of office of the management board may be defined strictly in the articles of association or the management board may be appointed for an indefinite period of time. If the general partner in a limited partnership is a legal person, it will result in the above procedure for determining the management board being of significant importance for the representation of the partnership.

4.    Principles of the ‘exit’ from a company (partnership)

The disposal of shares may be subject to additional requirements or guaranteed by appropriate options. The articles of association may stipulate, e.g., the obligation to obtain the consent of the management board or shareholders to the sales of shares. The other shareholders may have the preemptive right or priority right to purchase shares at a specified price. The above principles may also apply to transfer of all rights and obligations in partnerships.

5.    Succession in the case of a shareholder’s (partner’s) death

The articles of association (partnership agreement) may also exclude the succession of shares (all rights and obligations) and provide for the repayment of heirs not joining the company (partnership). This is important if the company’s (partnership’s) activities depend on the specific skills of one of the shareholders (partners), and the entry of third parties to the company (partnership) would destabilise it.

6.    Principles of taking decisions by shareholders (partners)

It is also worth considering the method of adopting resolutions in the company (partnership). In the case of companies (partnerships) with an extended shareholder (partner) composition, it is particularly important to indicate the appropriate majority of votes deciding on specific matters, and to establish a minimum quorum that allows key decisions to be made. Decisions should be made in a way that is as balanced as possible and in line with the interests of a specified majority.

7.    Ability to redeem shares

In the case of companies, the redemption of shares may take place only if it is provided for in the articles of association. In the case of partnerships, the partnership agreement may provide for partial reimbursement of contributions in specific situations. Sometimes it is a convenient way for a partner to withdraw from a partnership, and to make settlements with them or reduce their participation in the partnership. The inclusion of appropriate provisions on the compulsory redemption of shares in companies may also be a good tool to discipline shareholders if they undertake activities that are non-compliant with previous arrangements. The absence of the relevant provisions makes it impossible to use this method of settlement with a resigning or partially ‘withdrawing’ shareholder.

8.    Determination of the share in the partnership’s profit

The partnership agreement can specify in detail the partner’s share in the profit. A good example is a general partnership or limited partnership in which partners in principle participate in the profit in equal parts, regardless of the value of the contribution made to the partnership. However, the provisions of the partnership agreement of a general partnership or limited partnership may make the share in profit dependent on the value of the contribution. In companies, the share in profit is generally proportional to the number of shares held, although the articles of association can change this principle and give privileges to certain shareholders with respect to dividends. It is possible to grant shareholders the right to an advance payment towards the profit or to determine in advance the portion of profits that will be allocated for the payment to the shareholders each year.

9.    Additional obligations of the shareholder

As a rule, any recurrent non-pecuniary performances of a a shareholder in a limited liability company should be specified in the articles of association. Therefore, at the stage of signing the article of association, it is worth considering the possibility of charging the shareholder with additional obligations. A similar situation is in the case of additional contributions that may be imposed if the articles of association so provide.

10.  Financial year of a company  (partnership)

As a rule, the financial year of a company (partnership) is a calendar year. Often, for various reasons, e.g. concerning seasonality of the company’s (partnership’s) activity, the established company (partnership) should have a financial year other than a calendar year. If this is the will of shareholders (partners), it is necessary to include a relevant provision in the articles of association (partnership agreement) and to verify whether the financial year will be the tax year (in the case of some entities – e.g. natural persons – the tax year always has to be a calendar year). It is also worth remembering about a simplification according to which in the case of companies (partnerships) starting their business in the second half of the year, the first financial year may run from the date of the company’s (partnership’s) registration until the end of the following calendar year. To ensure this (and allow the preparation of the first financial statement at a later date), it is necessary to formulate an appropriate provision in the articles of association (partnership agreement).

Issues that should and should not be included in the articles of association (partnership agreement)

Finally, it is worth considering what should and what should not be included in the articles of association (partnership agreement). The determination between the shareholders (partners) of the conditions of cooperation does not have to be included in the articles of association or partnership agreement (disclosed and accessible to the public through the registration files – including partially on-line). It is a common practice to include certain principles in additional agreements which, if made in a specific form, may provide for similar guarantees as the articles of association or partnership agreement. The advantage of such a solution is keeping certain regulations in full confidentiality, with the full legal force of the agreements made.

When setting up a company (partnership) or introducing amendments to the articles of association (partnership agreement), it may be helpful to engage a professional advisor who will indicate the best solution in a specific case. If you are thinking of establishing a company or partnership and its best form, or if your business is developing and you are considering a change in the form of conducting activities – contact us!