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One of the most popular ways to invest in small and mid-sized business in Ukraine is the acquisition of corporate rights of a legal entity. The purpose of this article is to provide the foreign investor with some pieces of practical advice from the lawyers of Legal Bureau "Garant" concerning the acquisition of share in the existing limited liability company, since this type of partnerships is one of the most common legal forms of legal entities in Ukraine.

 

Before making the decision to purchase the legal entity’s corporate rights, an upcoming investor usually examines the economic characteristics of the company (the presence of fixed assets, personnel qualification, market share, financial status, etc.). At the same time,legal assessment of the company and its activity is crucial as well.

In order to avoid legal problems in the future, it is appropriate for the potential investor to find out for certain who are the members (shareholders) of the company and whether there are no legal disputes regarding their participation in the company. This information can be checked in the respective state registers. Somewhat more complicated is verification of information on possible existing unfulfilled obligations of the company (to pay money, transfer product, perform work, or provide service) to the third parties (state, legal entities or individuals). Taking into account the afore-cited, before taking a final decision on the acquisition of the share it would be beneficial to get the background information concerning the company and its members, analyse the information and documents of the company, and obtain the appropriate guarantees both from the owner of the share, which is planned to be purchased and directly from the company.

Another issue to consider when deciding on investment through share acquisition of the limited liability company is the extent of entitlement rights which the shareholder receives depending on share size. In particular, the proportion of up to 20% of the statutory capital in a limited liability company gives its holder, in our opinion, the nominal rights to influence the activities of the company - the right to participate in the general meeting of the company members, including the right to know the time, place and agenda, demand consideration of certain matters at the general meeting of the Company members; to participate in the distribution of the company’s profit and to receive its share (dividends); to receive the information about the company’s activities, to check out certain documents of the company (statute, founding agreement (if available), annual balance sheets, company activity reports and minutes of general meetings of the company members); the right to withdraw from the company, receive the share of the company’s value at the date of withdrawal; to make alienation of ownedshare in the statutory capital of the company..

With the share of more than 20% of the statutory capital the member has the right todemand the extraordinary convocation of the general meeting of the company members at any time and for any reason which is related to the activity of the company. The share of 50% of the statutory capital of a limited liability company gives its owner an advantage to block any unwanted resolutions. 
Share of 50% + 1 vote (i.e. over 50%) allows its owner to make decisions on the main matters of the limited liability company at the general meeting of the company members, including determination of the principal ways of the company’s activities, introduction of amendments to the company statute, the question of the exclusion from the membership. Consequently, the share of not less than 61% of statutory capital of a limited liability company enables the owner to efficiently manage such company.

One should also take into consideration that according to the Civil Code of Ukraine only the owner (owners) of the share of not less than 75 % of the statutory capital has the right to take the decision on assessing the amount of fifty percent or more of the company’s value and liquidation of the company.

We deem essential verification of entitlement rightsof the person whose share is being acquired to the respective transfer of share. For instance, if the seller of share is an individual, it is necessary to check out the absence of restrictions on the disposal of property, and validity of spouse’s consent to the disposal ofthe share. In case the potential investor considers the acquisition of share from a legal person, they should find out for certain which body of the legal entity has the authority to make the required decision (director, board of directors, general meeting of the company members, supervisory board, etc.). In case a member (individual or legal entity) will act through a representative, the powers of attorney should also be verified.

According to the rules of the Civil Code of Ukraine and the Law of Ukraine "On Commercial Partnerships" the other members of limited liability company have a preferential right to purchase the member’s share (itspart) in proportion to the size of their shares before other persons (non-members). Therefore, the potential buyer of the share should make sure that the other members were proposed to buy the share and they did not realise their right; and obtain the written confirmation that the other members do not object to buying the share in the company by the other person.

Prior to conclusion the transaction on purchasing corporate rights, a foreigner should not forget to obtain the individual tax number at the body of the State Fiscal Service of Ukraine. Some particularities of acquisition of the share of a limited liability company may be established by the company’s statute, valid edition of which ought to be read by the potential investor. One of the most common and, in our opinion, the most correct way of purchase of theshare in a limited liability company is conclusion of purchase and sales contract of the share, as it is directly provided by Ukrainian law. Notarization ofsuch contract often allows for the buyers to avoid or minimize the risks of disputes related to the acquisition of the share in the company. After conclusion of the relevant transaction on acquisition of corporate rights, the investors should rememberthat the general meeting of the company members has to be convened with aim to adopt resolution, in particular, changes in the foundation documents of the company related with selling-purchasing of the share and, accordingly , change  in members.

It is vital to comply with (or maintain) all the formalities fixed by the Law of Ukraine "On Commercial Partnerships" and specified in the foundation documents of the company for convening and holding the general meeting of the company members, as committed violations may serve grounds for appeal and annulment of the resolutions adopted by the general meeting of the company members.
In the course of preparation to such a general meeting of the members, special attention ought to be devoted to the content of the draft of statute as the document containing the basic rules of the company. 
The considerable matters to be determined by the limited liability company members are, in particular: the extent of power of the director of the company concerning disposal of the company’s property, control over the activities of director, the rights of the company member’s heirs in case of member’s death, the procedure of convening and holding the general meeting of the company members, and other issues that the Ukrainian legislation allows the company members to settle at their discretion in the foundation documents of the company.

The resolutions of the general meeting of the company members are executed in writing by a respective protocol. Further, these resolutions together with the contract of purchase and sale of the share serve as basis for the state registration of the respective changes in the membership by the official state body (the state registrar). The mentioned state registration is carried out at the place ofthe company’s location and is the formal end of the procedure of acquisition of the share of a limited liability company.

Overall, in our opinion, the investing risks can be minimized if following the simple enough rules of acquisition of corporate rights of a limited liability company in Ukraine.


Lawyers of Legal Bureau "Garant"
KokhanSvіatoslava andVolodymyrBogoslavets

 



26 Dnistrovska St., office 12
Ivano-Frankivsk, 76018, Ukraine


+38 0342 504605

 

office@arpi.org.ua
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