Prohibition on entering into the business of third parties: grounds, wording of the LLC charter

// Material was prepared by commercial practice

Based on the provisions of the Belarusian corporate legislation, in relation to LLC the entry into the business of third parties can be carried out as follows:

1) by accepting a third party as a shareholder of the LLC when this third party makes an additional contribution to the share capital;

2) as a result of alienation of the share (part of the share) by one of the shareholders to a third party;

3) as a result of foreclosure on the share by the creditor;

4) through the transfer of the share by inheritance and to legal successors.

Depending on the specific method of admission to the shareholders, the entry of third parties into the business may be completely prohibited or restricted.

Acceptance of a third party as a shareholder of the LLC upon making an additional contribution to the share capital

The share capital of the LLC can be increased due to:

“The share capital of the Company can be increased by:

Contributions to the share capital of the Company by third parties accepted as Shareholders of the Company are not allowed.”

It should also be noted that in the absence of a prohibition in the charter, this method of becoming a shareholder of the LLC is possible only in case of a unanimous vote of all shareholders of the company for accepting a third party as a shareholder <*>. Consequently, upon receipt of an application for joining the company from a third party, the refusal to accept such third party  is formalized by the decision of the general meeting of shareholders of the LLC or the decision of the sole shareholder, in which the shareholder (s) vote (s) “against” the acceptance of a new shareholder and increase of the share capital.

Alienation of the share (part of the share) by a shareholder to a third party

Alienation of the share (part of the share) in the share capital of the company by the LLC shareholder to third parties is allowed, unless otherwise provided by the charter of the company.

Thus, the charter of the LLC can set forth one of the following provisions:

 — the possibility of alienating the share (part of the share) by a shareholder only with the consent of all other shareholders:

 “Alienation of the share (part of the share) in the share capital of the Company by the Shareholder to third parties is allowed only with the consent of all Shareholders of the Company.

The consent of the Shareholders to alienate the share (part of the share) of the Shareholder in the share capital of the Company shall be deemed received if the written consent of the Shareholders is received or the written refusal is not received within ______ days from the date of receipt of the notice of sale”;

— a complete prohibition on the alienation of shares to third parties:

“Alienation of the share (part of the share) in the share capital of the Company by the Shareholder to third parties is not allowed.”

It should also be noted that the right of the shareholder to alienate the share in the share capital of the LLC can be established in more than one section of the charter: in the section about shareholders and their rights, as well as in the section regulating the alienation of shares. In this connection, it is necessary to exclude any provisions that contradict the established prohibition on the alienation of shares to third parties when agreeing on the final text of the charter.

Foreclosure on the share by the creditor

The creditors of the LLC’s shareholder have the right to demand that the share (part of the share) of this shareholder in the share capital of the LLC be foreclosed on the basis of a court decision if other property is insufficient to cover shareholder’s debts.

In order to exclude the possibility of transferring the rights to the share in the share capital of an LLC to the creditor, other shareholders of the company may use the right to pay the creditors the actual value of the share (part of the share) of the shareholder of the company. This right of shareholders is also set forth by the Law on Companies, therefore, there is no need to establish a similar right in the charter of the company.

In order to exercise this right, it is necessary to ensure that the decision of the general meeting of the shareholders of the company is unanimous without taking into account the votes of the shareholder, whose share (part of the share) is being foreclosed.

The actual value of the share (part of the share) of the shareholder in the share capital of the LLC, which is being foreclosed, is determined according to the balance sheet drawn up at the time the creditors filed a claim against this company.

By the agreement between the creditors and the company or its shareholders, the payment of the actual value of the share (part of the share), which is being foreclosed, can be replaced by the issuanceof property corresponding to this value in kind.

The term for the payment of the value of the share or for the transfer of property corresponding to the value of the share in kind is equal to three months from the date of presentation of the executive document to the company.

Transfer of the share by inheritance and to legal successors

Shares in the share capital of the LLC are transferred to the heirs of citizens and to the legal successors of legal entities that were shareholders on the company, if the charter of the LLC does not specify that such transfer is allowed only with the consent of other shareholders of the company <*>.

Thus, it is not possible to establish in the charter a complete prohibition on the transfer of the share in the share capital of the LLC to the heirs or legal successors. However, we suppose that the inclusion of the heirs and successors in the shareholders can be avoided if the following provision is provided in the charter of the company:

“Shares in the share capital of the Company are transferred to the heirs of citizens and to the legal successors of legal entities that were Shareholders of the Company only with the consent of the other Shareholders of the Company. Consent is deemed to be received if the written consent of all other Shareholders is received or a written refusal is not received from any of the other Shareholders within no more than 30 days from the moment when the heirs present a certificate of the right to inherit or the moment of legal succession of a legal entity.

In case when the heirs refuse to become shareholders of the Company, or the Shareholders of the Company refuse to agree on  the transfer of the share in the share capital of the Company to the heirs of citizens and to legal successors of legal entities that were the Shareholders of the Company, they are paid the actual value of the share in the share capital of the Company or, upon  their consent, are issued property corresponding to such value in kind. The actual value of the share in the share capital of the Company is determined according to the balance sheet (income and expense book) drawn up at the time of opening the inheritance or at the time of legal succession of a legal entity. The payment of the actual value of the share in the share capital of the Company or the issuance of property corresponding to such value in kind is made at the end of the financial year and after the approval of the report for the year in which the inheritance was opened or legal succession  a  legal entity took place, within twelve months from the date of refusal  to agree on  the transfer of the share to the heirs (successors)”.

Thus, it is obvious that the cases when third parties become shareholders of the LLC are not limited only to the purchase and sale of shares, but can also take other forms. To protect business from the risks of third-party’s entry, the founders of the LLC need to reach agreements on the procedure for the entry of third parties into the LLC as shareholders in each of the cases when the company is created and to establish these agreements in the charter. The decision of the general meeting of shareholders cannot exclude each of the above scenarios. That is why it is extremely important to determine in the charter in advance whether shareholders intend to allow, restrict, or even prohibit third parties from entering business.

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