UAB articles of association and shareholders’ agreement: what differs

Articles of association are mandatory; a shareholders’ agreement is not. The articles can be short: where the rules on the general meeting, the other bodies and amending the articles do not differ from the law, it is enough to say so in the articles themselves. The model articles suit a simple company and let you file the incorporation documents with the register electronically and directly. You can limit the manager’s powers in the articles, but for third parties usually only one limit counts – joint representation recorded in the register. A shareholders’ agreement binds only the shareholders who sign it. It holds what the shareholders want to agree among themselves and do not want to publish in the register.

What the articles must contain

Article 4(1) of the Law on Companies of the Republic of Lithuania (ABĮ) defines the articles as the document by which the company is guided in its activities. The mandatory content is set by Article 4(2) ABĮ. It includes, among other things:

• the name, legal form and objects of the company;
• the amount of the share capital and the shares;
• the powers of the general meeting of shareholders and how it is convened;
• the other bodies of the company, their powers, and how their members are elected and removed;
• how notices are published and the source in which public notices appear;
• how the articles are amended, and the date they were signed.

The articles contain no list of shareholders. So a change of shareholder does not require the articles to be amended. We explain this in Changing a company’s name or articles: who to notify, when it takes effect. You will also find there how to choose the source for public notices.

Detailed or short articles?

Short articles are not worse. Article 4(7) ABĮ allows the articles to leave out the powers of the general meeting, how it is convened, the powers of the other bodies, how their members are elected and removed, and how the articles are amended, if these do not differ from the law and the articles say so. Article 2.47(3) of the Civil Code of the Republic of Lithuania (CK) sets the same rule for all legal entities.

So the choice is simple. If shareholders’ rights and the work of the bodies will be as the law provides, one short sentence saying that they are governed by the Law on Companies is enough. There is no need to copy out the law. Such a text does not go out of date when the law changes.

Write in detail only what will be different in your company from the law. The articles may contain other provisions that do not contradict the law (Article 4(6) ABĮ). In our practice we most often include:

• whether the company will have a board. It is not mandatory: a UAB may form a collegial management body – a board (Article 19(2) ABĮ);
• **who grants a commercial power of attorney (prokūra).** It is granted by the relevant management body or owner of the legal entity, or by their authorised representative, in the manner set by the legal entity’s incorporation documents (Article 2.177(1) CK). So if you may need a prokuristas in future, it is worth writing this procedure in from the start. What a prokūra allows is explained on our company law FAQ page (in Lithuanian);
• limits on the manager’s powers – see below.

Model articles

The model articles of a private limited company (UAB) are approved by the Government or an institution it authorises (Article 4(5) ABĮ). Their advantage is the route to incorporation. Where the incorporation documents follow the model forms, the name does not use the word “Lietuva”, the objects are chosen from the Classification of Economic Activities, and the shares are paid for with a cash contribution, the documents can be filed with the register electronically and directly (point 46 of the Regulations of the Register of Legal Entities (JARN)).

The model articles do not work when you want to depart from the law – for example, to limit the manager or set your own decision-making rules. Individual articles are then drafted. How incorporation works in that case is described in UAB formation: documents, signatories, power of attorney and notary.

Can the articles limit the manager’s powers?

Yes, but you need to know how it works. As a general rule, the manager acts alone on behalf of the company in its dealings with others (Article 19(6) ABĮ). The manager has the right to conclude transactions alone, except where the articles provide for joint representation (Article 37(10) ABĮ).

The articles can limit the manager in three ways.

1. A board and its decisions. If there is a board, the manager may conclude larger transactions only with a board decision (Article 37(10) ABĮ). These are decisions on investing, transferring, leasing, pledging or acquiring long-term assets, and on guaranteeing or securing other persons’ obligations (Article 34(4) ABĮ). The statutory threshold is 1/20 of the share capital, unless the articles set a different figure (Article 34(4)(3)–(6) ABĮ). So you can set the threshold yourself in the articles.

2. Shareholders’ approval. The articles may provide that, before taking these decisions, the board must obtain the approval of the general meeting or the supervisory board (Article 34(5) ABĮ). If there is no board, the manager takes these decisions: Article 37(10) ABĮ then also passes to the manager the actions set in Article 34(5) ABĮ. So shareholders’ approval can be written into the articles of a company without a board too. Approval by the general meeting or the supervisory board does not remove the board’s liability for the decisions taken (Article 34(5) ABĮ).

3. Joint representation. The articles may provide that several persons act on behalf of the company together. The articles must then set a specific rule under which the manager always acts together with the members of the management bodies (Article 19(7) ABĮ). Two equal directors acting separately are not possible: the manager is a single-person management body (Article 37(1) ABĮ).

More detailed duties of the manager can also be set outside the articles. The body that elects the manager – the board or, if there is none, the supervisory board or the general meeting – approves the manager’s job description (Article 37(3) ABĮ). The manager is guided by the articles as well as by those bodies’ decisions and the job description (Article 37(7) ABĮ).

What a limit means for third parties

This is where the most common mistake lies. Transactions concluded by a management body in breach of its powers still create obligations for the company. The exception is where it is proved that the other party knew that a body without such a right concluded the transaction, or could not have been unaware of it in the circumstances (Article 2.83(1) CK). Such a transaction can be declared invalid only if the other party acted in bad faith, and the fact that the articles were published is not enough to prove its bad faith (Article 1.82(1) CK).

Joint representation works differently. The rule above does not apply where joint representation has been established. It must be provided for in the incorporation documents, entered in the register and published in the prescribed way (Article 2.83(2) CK). The register records the members of management bodies who have the right to conclude transactions on behalf of the company, and the limits of their rights (Article 2.66(1)(8) CK).

So an internal limit protects mainly through the manager’s liability. Management bodies must follow the company’s articles (Article 19(8) ABĮ). A member of a management body who fails to perform, or improperly performs, their duties must compensate the legal entity for the damage in full, unless the law, the incorporation documents or a contract provide otherwise (Article 2.87(7) CK). If the person who concluded the transaction exceeded their powers, they are subsidiarily liable to the third party where the company does not fully satisfy its claim (Article 2.83(3) CK).

Do you need a shareholders’ agreement?

The law does not require one. A company is registered once, among other things, the memorandum or deed of incorporation has been concluded and the articles have been signed (Article 11(2) ABĮ). A shareholders’ agreement is not among these conditions.

With a single shareholder, a shareholders’ agreement makes no sense. With two or more, in our practice it is usually needed where the shareholders contribute differently – one money, another work or an idea – or where one of them is an investor. It typically covers:

• who proposes or appoints the manager and board members;
• which decisions need the consent of all shareholders;
• how a shareholder may sell shares, and what happens when a shareholder leaves;
• what to do when the shareholders cannot agree;
• whether a shareholder may engage in competing business.

Some of these arrangements are voting agreements. Members of a legal entity may agree to vote together at the members’ meeting, but such an agreement is invalid if it commits them to vote on the instructions of the management bodies, for all their proposals, or for payment (Article 2.88(1) CK). What happens when a shareholder breaches such an agreement is explained on our shareholder disputes page (in Lithuanian).

How a shareholders’ agreement differs from the articles

• Whom it binds. The company itself is guided by its articles (Article 4(1) ABĮ), and its management bodies must follow them (Article 19(8) ABĮ). A shareholders’ agreement has the force of law only for its parties (Article 6.189(1) CK). A new shareholder is bound by it only on joining it.
• Publicity. When incorporation documents are amended, the full text of the amended document is filed with the register (Article 2.66(3) CK). Amendments to incorporation documents take effect only from their registration, except where the law provides otherwise (Article 2.66(6) CK). A shareholders’ agreement is not an incorporation document, so in our practice it stays confidential between its parties.
• Amendment. The articles are amended by the general meeting of shareholders, except where the law provides otherwise (Article 20(1)(1) ABĮ), by a qualified majority of at least 2/3 of the votes of the shareholders attending (Article 28(1)(1) ABĮ). A shareholders’ agreement is amended by agreement of the parties (Article 6.223(1) CK). The agreement itself may also set a different procedure for its amendment. At one party’s request, a court can amend it only where the other party has materially breached it, or in other cases set by the agreement or the law (Article 6.223(2) CK). So a minority shareholder may be unable to stop an amendment to the articles, but the agreement usually cannot be changed without their consent.

Our advice is to prepare both documents together and keep them consistent. What must apply to everyone, including future shareholders and third parties, goes into the articles. What you want to keep among yourselves goes into the shareholders’ agreement.

How to start

Tell us how many shareholders there will be, whether there will be a board, and which decisions the manager should not take alone. If you already have articles, send them to us. We will tell you whether the model articles are enough and whether you need a shareholders’ agreement.

Phone +370 5 212 1506, email info@linden.lt

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