Private Agreement Between the Owner and the Acting Director of an LLC as a Business Protection Tool

07/ 05/ 2025

Pavlo Kotenko. Legal Advisor of Accountor Ukraine As a rule, when appointing a director of a limited liability company, an employment contract is concluded with them, which contains most of the safeguards aimed at protecting the interests of the company’s participants. However, in the event of a temporary inability to perform their duties (for example, during vacation, business trip, or illness of the principal director), the company’s director may, by internal order, appoint another official to temporary perform the functions of the director (hereinafter referred to as the “Acting Director”). At the same time, such person continues to work in their primary position, and their employment contract remains unchanged. While performing the duties of the Acting Director, the individual is guided by the provisions of the company’s charter and their job description. Company owners and participants (hereinafter referred to as the “Owner”) often underestimate the risks associated with potentially negligent or bad-faith actions by individuals temporarily performing managerial functions. The company’s charter may contain limitations on the powers of the Acting Director, but amendments to the charter are public and bureaucratically complex. Instead, a flexible and confidential tool is the conclusion of a separate civil-law agreement between the Owner and the Acting Director (hereinafter referred to as the “Agreement”). Core Concept. This Agreement records private arrangements concerning company management during the period of temporary performance of duties and is not governed by labor legislation. Unlike the charter, which is a public incorporation document, the Agreement is not subject to state registration, and its content may be known only to the parties to the Agreement. The Law of Ukraine “On Limited and Additional Liability Companies” allows the formalization of relations with the Acting Director not only through an internal order and an employment contract, but also based on a civil-law agreement concluded pursuant to a resolution of the general meeting of participants. The Supreme Court of Ukraine also recognizes the permissibility of both formats — labor or civil-law — depending on the nature of the legal relationship between the parties. What the Agreement May Contain. The content of the Agreement with the Acting Director is limited only by the requirements of law and the parties’ arrangements. It is recommended that the Agreement include, in particular, the following provisions: restrictions on the authority to conclude transactions; procedures for reporting and access to internal information; confidentiality and non-compete obligations; financial liability; conditions for early termination of powers, etc. Advantages of the Agreement Compared to the Charter Alone. 1) Confidentiality Unlike the charter, the Agreement is not public. This allows for the introduction of internal restrictions that are not disclosed to third parties, in particular, competitors or counterparties. 2) Simplified Amendments Amending the charter requires convening a general meeting, notarization, and state registration. The Agreement, however, may be amended by signing an addendum or a new agreement by mutual consent without the involvement of a notary or registrar. 3) Enhanced Accountability and Incentives The charter is not a contract and does not envisage significant sanctions for its violation. The Agreement, on the other hand, may establish specific liability, bonuses, compensation for damages, etc. This ensures greater discipline and quality in the performance of the Acting Director’s assigned duties. 4) Direct Legal Relationship With the Owner The charter is a tool of indirect control, while the Agreement creates direct obligations between the Acting Director and the Owner. In case of a breach of the Agreement, the Owner has the right to directly apply to court to protect their interests as a party to the Agreement. Important Considerations. This Agreement must not contradict the provisions of the company’s charter or applicable law. If the charter provides for specific restrictions or procedures (e.g., approval of significant transactions), the Agreement may not override or ignore them. In case of conflict, the charter and applicable law shall prevail. The most effective approach is when the charter outlines general rules, while the Agreement provides detailed mechanisms for their implementation. Conclusion. A civil-law agreement with the Acting Director is an effective tool for protecting the Owner’s interests, allowing increased control over temporary company management without unnecessary formalities and disclosures. This approach is supported by both legislation and judicial practice. As a result, the Agreement with the Acting Director becomes not only a means of control but also a tool for reducing management risks and enhancing the accountability of the director, without impairing the company’s flexibility and operational efficiency. However, to achieve the intended effect, such an Agreement must be drafted in compliance with applicable law, tailored to the company’s operational specifics, and must not contradict the company’s corporate documents. Accountor Kyiv will prepare such an Agreement for you to ensure legal compliance, address potential disputes, and minimize any associated risks.

Pavlo Kotenko

Legal Advisor of Accountor Ukraine

As a rule, when appointing a director of a limited liability company, an employment contract is concluded with them, which contains most of the safeguards aimed at protecting the interests of the company’s participants. However, in the event of a temporary inability to perform their duties (for example, during vacation, business trip, or illness of the principal director), the company’s director may, by internal order, appoint another official to temporary perform the functions of the director (hereinafter referred to as the “Acting Director”). At the same time, such person continues to work in their primary position, and their employment contract remains unchanged. While performing the duties of the Acting Director, the individual is guided by the provisions of the company’s charter and their job description.

Company owners and participants (hereinafter referred to as the “Owner”) often underestimate the risks associated with potentially negligent or bad-faith actions by individuals temporarily performing managerial functions.

The company’s charter may contain limitations on the powers of the Acting Director, but amendments to the charter are public and bureaucratically complex. Instead, a flexible and confidential tool is the conclusion of a separate civil-law agreement between the Owner and the Acting Director (hereinafter referred to as the “Agreement”).

Core Concept

This Agreement records private arrangements concerning company management during the period of temporary performance of duties and is not governed by labor legislation. Unlike the charter, which is a public incorporation document, the Agreement is not subject to state registration, and its content may be known only to the parties to the Agreement.

The Law of Ukraine “On Limited and Additional Liability Companies” allows the formalization of relations with the Acting Director not only through an internal order and an employment contract, but also based on a civil-law agreement concluded pursuant to a resolution of the general meeting of participants. The Supreme Court of Ukraine also recognizes the permissibility of both formats — labor or civil-law — depending on the nature of the legal relationship between the parties.

What the Agreement May Contain

The content of the Agreement with the Acting Director is limited only by the requirements of law and the parties’ arrangements. It is recommended that the Agreement include, in particular, the following provisions:

restrictions on the authority to conclude transactions;
procedures for reporting and access to internal information;
confidentiality and non-compete obligations;
financial liability;
conditions for early termination of powers, etc.

Advantages of the Agreement Compared to the Charter Alone

1) Confidentiality

Unlike the charter, the Agreement is not public. This allows for the introduction of internal restrictions that are not disclosed to third parties, in particular, competitors or counterparties.

2) Simplified Amendments

Amending the charter requires convening a general meeting, notarization, and state registration. The Agreement, however, may be amended by signing an addendum or a new agreement by mutual consent without the involvement of a notary or registrar.

3) Enhanced Accountability and Incentives

The charter is not a contract and does not envisage significant sanctions for its violation. The Agreement, on the other hand, may establish specific liability, bonuses, compensation for damages, etc. This ensures greater discipline and quality in the performance of the Acting Director’s assigned duties.

4) Direct Legal Relationship With the Owner

The charter is a tool of indirect control, while the Agreement creates direct obligations between the Acting Director and the Owner. In case of a breach of the Agreement, the Owner has the right to directly apply to court to protect their interests as a party to the Agreement.

Important Considerations

This Agreement must not contradict the provisions of the company’s charter or applicable law. If the charter provides for specific restrictions or procedures (e.g., approval of significant transactions), the Agreement may not override or ignore them. In case of conflict, the charter and applicable law shall prevail.

The most effective approach is when the charter outlines general rules, while the Agreement provides detailed mechanisms for their implementation.

Conclusion

A civil-law agreement with the Acting Director is an effective tool for protecting the Owner’s interests, allowing increased control over temporary company management without unnecessary formalities and disclosures. This approach is supported by both legislation and judicial practice.

As a result, the Agreement with the Acting Director becomes not only a means of control but also a tool for reducing management risks and enhancing the accountability of the director, without impairing the company’s flexibility and operational efficiency.

However, to achieve the intended effect, such an Agreement must be drafted in compliance with applicable law, tailored to the company’s operational specifics, and must not contradict the company’s corporate documents.

Accountor Kyiv will prepare such an Agreement for you to ensure legal compliance, address potential disputes, and minimize any associated risks.