LLC in a bag: how not to make a mistake while buying a business?

LLC in a bag: how not to make a mistake while buying a business? 150 150 Esquires

Uncertainty and risk are the key difficulty and the key opportunity for business.

David Hertz, American mathematician and analyst

We have already accustomed to hear that doing business in Ukraine is difficult, however, it is as much difficult as to acquire or alienate it. In addition to the unscrupulous party to the agreement, one can expect legislative obstacles, which we will consider further.

The secret life of company members

In fact, the seller of a business or a share in the charter capital may unintentionally add problems to the buyer by his ignorance of the legislation or statutory and any other internal documents. Currently, there are many company verification services that are able to identify such problematic issues that should be considered before concluding a deal:

– whether the bankruptcy procedure has been initiated;

– whether there are encumbrances on property, enforcement proceedings, litigation;

– whether the company or its officials appears on criminal cases or sanctions lists and etc.

However, there is information that cannot be found in the public domain (except for attachments to tender documents, if you’re lucky). It is about a charter or memorandum of association. Before acquiring a share in a business, you should carefully read the statutory documents to make sure that the procedure the share selling will be followed. However, even the charter can be misleading.[vcex_divider color=”#dddddd” width=”100%” height=”1px” margin_top=”20″ margin_bottom=”20″]

According to the ruling of the Supreme Court as a member of the panel of judges of the Cassation Commercial Court dated on June 10, 2020, in case No. 922/2200/19 it is impossible even in court to invalidate certain provisions of the charter if they do not comply with the Law of Ukraine “On limited and additional liability companies” (hereinafter – the Law) – according to this Law, they automatically became invalid one year after its adoption, if the participants did not make changes into the charter themself. That is, it is necessary to take into account the date of adoption of the latest edition of the charter and check with the provisions of the legislation, if such a charter is older then February 2019.

At the same time, let us note the points to which attention should be paid, taking into account, for example, the provisions of the Law:

  1.  Participants may agree to contribute to the charter capital of the company later (Articles 14-15 of the Law), but it is not clear where the buyer can check the fact of making / not making a contribution to the charter capital of the company. At the same time, the Law expressly state that a participant can sell only a paid share in the authorized capital or a part of it (part 3 of Article 21 of the Law). Therefore, in order not to pay twice for the acquired share, it is relevent to prescribe the seller’s guarantee in the contract, that he made a contribution to the authorized capital in full in accordance with the size of his share, and responsibility for false information in this regard.
  2.  It is necessary to control the compliance with of the preferential right of other participants to acquire a share, to make sure that other participants received written offers to acquire a share and did not exercise their right within a month (Article 20 of the Law) – this will help to avoid further litigation. At the same time, the charter may provide for the absence of a preferential right – that is why you need to get acquainted with it.
  3.  We will also speak separately about the corporate agreement. In accordance with the provisions of Art. 7 of the Law, such an agreement is confidential, unless otherwise provided by the same agreement or law. The content of the corporate agreement shall be of direct interest to the buyer, because it may provide for the conditions under which the participant is entitled or obliged to buy or sell a share in the charter capital, as well as determine the cases when such a right or obligation arises. There are no registers of corporate agreements of private companies, so it remains to rely only on the good faith of the alienator.

This is a merely shallow list of nuances that should be considered when acquiring a stake in a company. At the same time, additional nuances can be identified for acquiring corporate rights of legal entities of other organizational and legal forms. For example, even shareholders may have a preferential right to purchase if there are less than 100 people and such a right is provided by the charter of a private joint stock company (Part 2 of Article 7 of the Law of Ukraine “On joint stock companies”).

Registration obstacle course

If the seller and his share are not questionable, then the next problem arises – where to go to register your new right? Considering the formation of new regions in Ukraine, this issue has become even more relevant, because it is more convenient for the parties to contact a notary, because he certifies the facts and at the same time add the information into the register. However, the territorial competence of a notary is limited by the notary district. Without going into the problems of creating new notary districts in connection with the liquidation of old districts, we should pay attention to the inconvenience of registration legislation.

The territorial competence of a notary is directly provided by Art. 41 of the Law of Ukraine “On Notaries” and is mentioned in the Procedure for the performance of notarial acts by notaries of Ukraine. Over the past 20 years, the territorial competence of notaries has expanded, sometimes it is limited by other laws.

As a general rule, notarization of transactions in relation to property that requires state registration is possible only upon the registration of a party of the transaction or property.

The notarial legislation does not have specific instructions on the alienation of shares in charter capital. That means, the parties to such an agreement, in principle, shall not be limited in choosing a notary to whom they can apply.

However, if earlier, in the case of alienation of a share in the charter capital of a company, the parties certified by a notary the contract in accordance to which the part is alienated, then now – an act of acceptance and transfer (subparagraph “G”, paragraph 3 of part 5 of article 17 of the Law of Ukraine “On State Registration of legal entities, individuals – entrepreneurs and public associations. ”In other words, earlier it was possible to apply to a notary at the place of registration of one of the parties of the transaction, and now – at the place of registration of the company, which share is being alienated. If it is very inconvenient for the parties to get to the place of registration of the company to register the transfer and acceptance of a share, you can:

– empower other persons by powers of attorney to conclude an agreement;

– try to register changes in membership at the place of their registration by the notarization of the agreement.

It looks strange that the Law is already two years old, and the issue of “registration pilgrimages” at the addresses of the registration of enterprises has not yet been violated.

In any case, you should be prepared for such a “surprise”, as well as for the fact that the notary will send to complete the transaction before “his” registrar (such a scheme happens if the notary is temporarily disconnected from the registers for violation of the registration procedure or if the notary prefers not to take risks). Since the ownership right will arise from the moment of state registration, it is not worth delaying the completion of the procedure, because the previous owner of the share or the entire enterprise can finally take advantage of this.

Let’s summarize what has been written. We must admit that when buying a business, you are more likely to face the legislative obstacles than an unscrupulous seller. It is impossible to predict all possible situations, so we advise you to be attentive to the details and not neglect checking all the information.

Source: LIGA ZAKON

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