Legal aspects of the contract of the company members

The contract of the company’s members is a named corporate law contract. Unlike the founding act, a mandatory document of every company, the members’ agreement is optional. However, the absence of a legal obligation to conclude a contract for the members of a company, the complexity of relations in multi-member companies, and the great practicality of the members’ contract are reasons for it to be more prevalent in business practice in Serbia.

The contract of members of a company is defined by the provisions of Article 15 of the Companies Act as a contract that is concluded in writing with one or more members of the same company, which regulates issues of importance for their mutual relations in connection with the company, and which produces effect exclusively between the members of the company who concluded it.

The contract of the members of a company in the case of a general partnership is called a general partnership agreement; in the case of a limited partnership and a limited liability company, the members’ contract; and in the case of a joint-stock company, the shareholders’ contract.

Following the legal definition, the contract of company members can be concluded only in multi-member companies.

The Companies Act does not provide specific details about the content of the contract of the members of the company. However, this does not imply that this contract can govern every aspect of the members’ interpersonal interactions. The principle of autonomy of will is limited by the provisions of the Companies Act, which specify the mandatory content of the founding act and the issues that must be regulated by it, even if the solutions deviate from the provisions of the law.

The contract of members of a company shall be concluded only between those members of the company who, in addition to the provisions/rules defined in the Companies Act and the founding act of the company, want to regulate their mutual relations regarding the company additionally.

Most often, these are questions related to the rights and obligations of members in connection with the transfer of shares, the method of voting in the assembly, the method of distribution of profits, and the mechanism for resolving blockages in decision-making.

Unlike the founding act of the company, this contract does not require registration and publication at the Business Registers Agency. This unique aspect allows the company members to maintain the confidentiality of critical issues, preventing them from being publicly available to third parties. By arranging these matters through the company contract, potential problems can be avoided in advance, safeguarding the company’s interests.

As for the contract form, the Companies Act provides a written form as the constitutive form and condition for the validity of the agreement of the members of the company. Nevertheless, even though certification of signatures of such a contract is not a requirement for it to produce a legal effect in practice, the members of the company often insist that the contract of the members of the company be certified, that is, that a notary public approves the signatures of the members.

Certification of signatures by a public notary is generally done in cases where the members’ agreement, in one part, may represent a pre-contract of the agreement on the transfer of shares.

The members’ agreement often foresees (as a solution to member conflicts) the conclusion of a share transfer agreement (legally certified by a notary public), according to which one member transfers his share to another member under pre-agreed conditions. In this way, the conclusion of the members’ contract with a notary public achieves the parallelism of the forms prescribed by the Law on Obligations for the validity of the pre-contract.

Suppose one of the company’s members wants to avoid fulfilling the obligations assumed by the contract. In that case, the other member remains at his disposal to initiate court proceedings in which he has the right to demand the fulfilment of the contract.

To avoid the blockade of the regular business activities of the company due to the length of court and executive proceedings, as well as the various consequences that may result from the blockade of regular business activities (fall in income, loss of reputation, loss of employees, etc.), the contract of the company members can provide contractual penalty for a member who does not comply with his contractual obligations whereby the contractual penalty should be an additional motive for the member to be a faithful party to the contract.