A standard charter answers the wrong questions
Open the standard charter of a Ukrainian limited liability company (a TOV). It covers shares, governing bodies, how general meetings are called, quorum, a member’s exit, and profit distribution. All of it is correct and all of it is needed. Now try to find in it the answer to three questions.
What do you do when one partner believes they work more than the other, while profit is split fifty-fifty?
Which of you makes the decision when you disagree and waiting is not an option?
What happens to the business if one of you falls seriously ill?
The charter does not answer this, and it is not supposed to. It sets out how the company is structured: its bodies, its shares, voting at meetings. How the partners work together day to day is not in it.
A real partnership document contains provisions of three different natures. Let us call them the three layers of agreement:
- relational,
- governance,
- legal.
A layer is not a section of the document but the nature of a provision. A single section can hold clauses from all three layers. The answers to the three questions above lie in the two layers the charter does not have. Below we take each in turn.
The relational layer: what we actually agreed on
The relational layer covers the partners’ values, their expectations of each other, their ideas of a fair contribution and a fair share, and acceptable and unacceptable behavior.
A few typical provisions of this layer.
• “We do not argue in writing. Only in person, or by voice over the phone if we cannot meet in person within the next three days.”
• “We do not criticize each other in front of the team or clients. We discuss disagreements in private.”
• “We do not promise clients or the team anything we have not agreed on between ourselves.”
No court will enforce these clauses. Nor should it. Their force lies elsewhere: they make explicit what each partner already carries in their head. Organizational psychology calls this a psychological contract: a person’s belief about what they owe the other and what the other owes them. It always exists, written down or not. The only difference is whether the other partner knows about it.
There is a second force as well. The legal scholar Richard McAdams showed that even law does not work through the threat of sanctions alone: the very text of a rule tells people what others expect and gives them a point around which to coordinate their behavior. The relational layer works the same way, only inside the partnership. It compels nothing, but each partner knows what the other expects and can point to it. If one partner criticized the other in front of the team, the conversation starts not with who is right but with what they agreed on.
What breaks when the relational layer is missing. Each partner lives with their own idea of what is normal and takes it as self-evident. The differences may stay hidden for years, until some event brings them out in full. By the time it comes to a conversation, reaching agreement is usually harder.
The governance layer: how we act together
The governance layer covers authority and its limits, access to information and money, how decisions are made and deadlocks resolved, roles and their review, rules for admitting new partners and for leaving the joint business, and what happens in the event of a partner’s death, divorce, or incapacity.
Typical provisions.
• “Each partner may approve spending up to amount X on their own. Above that, only by joint decision, recorded in the chat.”
• “If we disagree, the decision is postponed for seven days and taken to a face-to-face meeting. If there is still no agreement after that, we bring in a third party chosen in advance.”
• “Each partner has access to the bank accounts and to the monthly management accounts. This access is not restricted under any circumstances.”
• “We review roles once a year. Who runs operations and who runs development is not fixed for good.”
• “If one of the partners is unable to work for an extended period because of illness, their current share of profit is kept for three months. After that, the following procedure applies: …”
This layer is the closest to the everyday life of a partnership. It is here that you see whether people can act together when their views diverge. And it is here that talking through scenarios at the outset does the most: having to formulate and sign a clause on illness or death makes each partner stop and picture what will happen to them and to the business.
What breaks when the layer is missing. Decisions stall because no one knows who has the final word. One partner spends money; the other finds out after the fact. When an event occurs that was never discussed, the decision has to be found at a time when there is little time left and interests have already diverged. The three co-owners from the previous article had a forty-page corporate agreement and not a single line on what to do if one of them fell seriously ill.
The legal layer: what the state will enforce
The legal layer covers rights and obligations, security, evidence, remedies, and enforceability. It is what gets translated into the language of the charter, the corporate agreement, and legal structures in general.
Typical provisions.
• Shares, voting procedure, veto rights on specific matters.
• The procedure and price for buying out the share of a departing partner: the valuation formula, the payment term and schedule.
• Security for obligations: a penalty, a pledge, a guarantee.
• The procedure for resolving disputes: negotiation and mediation before going to court.
The partners do not choose the court for a corporate dispute: the law assigns it according to the company’s registered location (Article 30(6) of the Commercial Procedure Code of Ukraine).
This layer is thin. Performance can be demanded through a court only under a provision that specifies who must do what, for whose benefit, or what they must refrain from doing (Article 509 of the Civil Code of Ukraine). To qualify, provisions must be aimed at rights and obligations (Article 202), have an agreed subject matter (Article 638), and not contradict the law (Article 203). “We value openness” creates no claim of its own. “By the 10th of each month, each partner sends the others a report on the state of affairs in their area for the previous month” is an obligation. “We review the terms once a year” is, at best, a duty to open negotiations, not a duty to reach agreement (Article 627 of the Civil Code of Ukraine).
Part of this layer requires a special form. A corporate agreement, the Ukrainian counterpart of a shareholders’ agreement, is concluded by the members of an already existing company, and only in writing; otherwise it is void (Article 7 of the Law of Ukraine “On Limited and Additional Liability Companies”). Putting agreements into a form the state will enforce is a lawyer’s work. Here the lawyer is irreplaceable.
This leads to an important point about timing. The document that partners produce at the start is often signed before the company is registered. It cannot be a corporate agreement: there is no company yet. It records the understandings and sets the brief, and the lawyer drafts the enforceable layer as separate documents at the next stage, once there is something to formalize.
One more thing. Any attempt to spell out everything in the legal layer runs into what the legal philosopher H. L. A. Hart called the open texture of legal language: every concept has a penumbra of unclear cases, and additional wording does not remove it but takes it on. A hundred pages of contract do not make it complete. Completeness comes not from the length of the text but from an exhaustive list of the questions that matter to each of the partners.
What breaks when the layer is missing. As long as the partners get along, nothing. When one of them chooses the legal route to settle a dispute, the law will fill the gaps: default rules on the time and place of performance (Articles 530 and 532 of the Civil Code of Ukraine), custom (Article 7), and interpretation (Article 213). Lawful, but under rules the partners never chose. An example. The partners agreed verbally that whoever leaves gets the “market price” for their share. There is no formula in the document. Then the law applies: the value of the share is calculated from the market value of all the shares as of the day before the exit application is filed, and as a general rule the company must pay it within a year (Article 24(6)–(8) of the Law of Ukraine “On Limited and Additional Liability Companies”). The partners see the market value of this particular business differently: the one leaving counts future profits, the one staying counts the assets on the balance sheet. The dispute will be settled by a valuer, not by them.
One topic, three layers
The difference is easiest to see on a single topic. Take a partner’s exit.
Relational layer: “If one of us decides to leave, we part ways without public conflict and do not poach the team.”
Governance layer: “A departing partner gives written notice no later than 90 days in advance and, during that period, hands over their responsibilities according to an agreed plan.”
Legal layer: “The share of a departing partner is bought out by the other members at a price determined by formula X, payable within Y months.”
All three sentences are about the same thing. The first says how we behave. The second, how we act. The third, what the state will compel if the first two fail. A document that has only the third resolves the conflict when the partners can no longer agree on their own. A document that has the first two often keeps the conflict from reaching the third.
Who is responsible for which layer
The partnership session, a meeting of the partners with a facilitator at which they work out their agreements, shapes the first two layers and sets the brief for the third. The lawyer is responsible for the third. This is a division of labor, not a hierarchy: the facilitator helps the partners work out their agreements; the lawyer formalizes the enforceable part.
Responsibility is spread along a spectrum, not divided into mutually exclusive boxes. A lawyer can take part in the first two layers, and a good lawyer often asks the partners exactly the questions they have been avoiding. But this is not the core of the profession, nor the usual economics of a lawyer’s service. And the other way round: partners may know what they want to see in the enforceable layer, but only a lawyer can put it in a form a court will enforce.
Hence a formula worth remembering: the partnership agreement is the ideal brief for a lawyer. Partners who arrive with the first two layers worked out bring the lawyer not wishes but substance.
[Figure 1. Three layers, four functions, and primary responsibility: file fig1-en.png]
Check your agreements
Three questions to see which layers are missing.
Is there at least one sentence in the document about what is unacceptable to you? If not, the relational layer is missing.
Does it describe who decides when you disagree, and what happens if someone falls ill, divorces, or wants to leave?If not, the governance layer is missing.
Can every provision on money and shares be enforced by a court: does it specify who must do what, and by when?If not, the enforceable layer is missing or exists only on paper.
