Case law evidences that business owners increasingly become the victims of their personnel decisions and carelessness. How not to lose control of the situation and assets in the enterprise? Below we offer some tips, based on our last experience.

Rule 1. Do not ignore lawyer’s assistance

Any entrepreneur knows that relations with the partners in the company should be written in the charter to the smallest detail. “Pitfalls” root in much more matter-of-fact provisions of the constituent documents.

The first advice. At the stage of acquisition of shares or corporate rights of the company, ask the specialist in corporate law to analyze the constituent documents and key decisions of the management bodies. It is important because you will not be able to appeal against them if they were adopted before you joined the company (purchase of shares). It is referred to in resolution No. 4 of February 25, 2016 of the Plenum of the Supreme Economic Court of Ukraine (paragraph 2.4).

The second advice. If you found a new company, pay special attention to compliance of the constituent documents with the legislation: the contradictions can be used to cancel the constituent documents, cancellation of the company registration, and, consequently, the total liquidation of business. You can not trust conventional charters, which are not revised according to amendments to the legislation.

The third advice. Choose the notary with the best qualifications in corporate law as your state registrar and – necessarily – at the place of the company’s location. It is important as in case of litigations you will not have to go to a court in another region. Maintain communication with the notary, e.g. to know about submission to him of administrative lawsuits relating to your company.

The fourth advice. Register decisions of the company bodies with the assistance of a corporate lawyer. Procedural violations may be a cause for cancellation of such decisions. For example, failure to notify even a single shareholder, whose vote would not influence the decision making, matters. There is also no point in putting the issue “miscellaneous” on the agenda as it does not clarify the essence of the issue to a shareholder/member, which is the reason for cancellation of the relevant decision (paragraph 2.16-2.17 of the said resolution No. 4). These and other details are not specified in the legislation directly, but are contained in the case law, which must be known to the lawyer advising you.

Risks. In connection with the introduction of the principle of extraterritoriality, and the possibility to apply for registration in electronic form, there may be errors and abuse that ultimately may deprive the owner of his business.

For example, the registrar of the Transcarpathian region receives by email the falsified documents for registration of a company in Kharkiv. In the absence of a paper registration file with the entire history of the enterprise, and inability to even suspend the registration actions for additional verification of documents by law enforcement agencies, such state registrar will have to conduct a registration action. The injured owner will not even know about it, and when he finds it out – he has to sue 1,300 km far from the company location.

Extreme recipe. The state registrar will not be able to register any changes if in the state register there is a court decision on prohibition of registration action, arrest of corporate rights (Article 28(1) of the Law of Ukraine “On state registration of legal entities, individual entrepreneurs and public organizations). A qualified lawyer will suggest how to get this decision. In any case, visit the electronic portal of the Ministry of Justice more often and check your company details (https://kap.minjust.gov.ua/).

Rule 2. Control the director

The main restrictions of independence of the director (the executive body of the company) should be written in the constituent documents.

Danger. Director, having the right to sign agreements and accounting documents, being responsible for fiscal discipline, tax accounting and reporting, compliance with legislation by the company can increase tax and economic obligations of the company that can even bring it to bankruptcy.

For example, the director of a company concluded the construction agreement for a large amount with a related contractor, then he signed the acceptance report, although no works envisaged in the agreement were performed. For the commercial court, the duly signed acceptance report may be a sufficient ground for recovery of debt from such company. You have to compel the law enforcement agencies to bring such a director to criminal responsibility.

Extreme recipe. Hire a lawyer or other trusted person who will put a seal on the signature of the director only by agreement of the founder. It is necessary to specify a mandatory use of a seal in the charter, and to make a provision on the company seal. Think of the rules for work of such an attorney, which may be envisaged in the agreement with him.

Rule 3. Be interested in finance

The constituent documents may envisage the controlling bodies of the company, such as the audit commission, and financial results must be approved annually by the general meeting. However, such reports not always reflect the actual situation quickly and efficiently.

For a member/shareholder to get access to the necessary documents (that are not reportable), such a possibility should be provided by the charter (paragraph 2.33 of the said resolution No. 4). According to such documents, a company member may consult auditors, lawyers, tax consultants. The procedure for initiation of full-scale audit should be envisaged in the charter.

Rule 4. Control the appointment of key personnel

The key personnel means chief accountant, financial director, commercial director (chief engineer, chief agronomist, chief architect, etc. – the person who ex officio supervises execution of business contracts), lawyer (a hired firm).

The document flow procedures should assume signature of important documents by several employees, who will take responsibility for their compliance with the actual situation and the rule of law.

To permit an unfair director to hire such personnel at his discretion would be like to allow his accomplices in the company. Designate to these positions “your own people”, who will also be able to quickly and confidentially inform the founder on the suspicious activities within the company.

Rule 5. Diversify business

The rule itself is extreme, unnecessary in the countries with good business practice. In Ukraine, corporate structure is often adjusted to tax optimization. Many people provide for a legal entity with VAT, a legal entity on a single tax, and even individual entrepreneurs; distribute licenses and other permits according to financial flows.

However, do not forget that the rule “you should not keep all your eggs in one basket” is also true for the secure possession of corporate rights. There is no guarantee that one day you will not have to defend your company in court, because fraudsters get more and more devious. Therefore, distribute correctly fixed assets, contracts with clients (buyers), contracts with suppliers (of goods and works) among your companies. To deprive of such business, the lawbreakers will have to act on many fronts simultaneously, which will complicate their task greatly.

Another extreme way to protect fixed assets is to mortgage them (e.g. with the founder), especially as newly emerging risks associated with the registration of legal entities are also valid for the state registration of rights to real estate.