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General Lawyers

Other participants have the right to pre-emptively sell shares in an LLC

Article 92 of the Civil Code of the Republic of Belarus, also known as the Civil Code of the Republic of Belarus, and Article 97 of the Law of the Republic of Belarus “On Business Companies”, which provide that a member of a limited-liability company can sell his share to any participant of the company or the company itself, respectively.

This is why it is common for a participant to sell his shares in an LLC to another member of the same company. He sends a notice to the participant only and then concludes a contract to sell a share of an LLC with the participant he chose and to whom he wants to sell his share. This is where the pre-emption right of other participants does not apply. The LLC share is sold to another participant and not an outsider. It is also fully in accordance with Article 92 of Civil Code of Republic of Belarus.

In practice, however, participants who are “deprived of attention” send lawsuits to courts demanding that they be transferred the rights and obligations to the participant who sold the share proportionally to the amount of participants’ shares in authorized fund of company. This is based on Article 98 OHS Law. These participants believe that all company members have the right to purchase the shares of other participants in proportion to their share sizes.

Participant cannot sell a share of an LLC to more than one participant, as per Article 92 of the Civil Code of the Republic of Belarus or Article 97 of the OHS Law.

What are my thoughts?

Their decisions were adopted by the courts of the first instance on the basis of the norms of Article 98 of the OHS Law regarding the pre-emptive rights to purchase shares in LLCs proportionately to their size. These norms are often placed above the norms of Article 92 of the Civil Code of the Republic of Belarus or Article 97 of the OHS Law. The courts of first instance stated that defendants’ argument that the preemptive right applies only if the intent to sell the share is not supported by the facts. This is because the Ohio Law and the Civil Code of the Republic of Belarus do not include this.

However, the courts do not seem to give a legal evaluation of Article 92 of the Civil Code of the Republic of Belarus or Article 97 of the OhIO Law. These laws indicate that a participant may sell his share of the entity to any number of participants. The circumstances in which a member of a business entity may exercise its mandatory right of selling a share to one participant is not considered by the courts. However, all participants are entitled to purchase the share of such a participant proportionately to their share.

Consider me to be of the opinion that such decisions are misinterpreted by courts of first instance and do not apply substantive law.

In fact, participants of the company have the right to buy a share (part of) in proportion to their share size, as per Article 92 of Civil Code of Republic of Belarus. This right is not granted by law or act of President of Republic of Belarus.

The legislator seems to be saying that all participants at the same level have a preference right to share relative to other. This is what the term “advantage” means, “pre-emptive rights”. This means that all participants have the right to purchase shares in a limited liability company directly from another participant, proportionately to their shares. Only then can third parties. This is reflected in the fact that the Civil Code of the Republic of Belarus, paragraph 2 of Article 92 , refers to the right of preemptive purchase. This paragraph regulates the alienation of the participant’s share to third parties.

This means that the participants cannot in principle have any pre-emptive right over one another .

The participants have the pre-emptive rights over other people and the company . However, they cannot sell their share to each other. Participants can also sell shares to other participants, but the other participants won’t be able to decide.

These conclusions are supported by Article 92 of Civil Code of Belarus and Article 97 of Law. According to Article 97 of Law, a member of a limited- liability company can sell or otherwise alienate a part of his share (part of his share) in the authorized funds of the company either to one or more participants of the company or the company.

This means that the legislation protects the participant’s freedom to contract and allows for the sale of shares to one or more participants.

We can see that participants have the right of pre-emptive buy before others. Therefore, the norm of Article 92 of Civil Code of Republic of Belarus is not applicable. The participant cannot sell his share to any participant he chooses or to other participants of the company he chooses.

In order to resolve such controversial issues in interpreting a legislative act(acts), it is essential to consider and take into consideration the explanations of scientists in the field jurisprudence and doctors of science, as well as the opinions and positions of developers of the OhIO Law. These explanations and opinions do not have binding effect on the courts.

In his book on limited liability companies, Dr. Law, Associate Professor at the FUND Yan Iosifovich stated the following:

“The Law “On Business Companies”, provides that any member of a limited liability company can sell or assign part of his share (or all of it) in the authorized funds to one or more of its participants. The Belarusian legislation makes it impossible to establish in the constituent documents any restrictions on the alienation of any share or part of any share by any participant to another participant. It is important to note that restrictions on the purchase of shares by a limited liability company are not possible if the individual concerned is already a member. According to our interpretation of the Civil Code of Belarus, a member of a limited- liability company can freely, and without restrictions, sell or assign part of his share to any participant of the company. However, this does not give rise to the right to pre-emptively purchase other participants (other compensatory alienation).

This conclusion can be explained by the nature of “right of preemptive purchase”, which was created in legislation to stop persons from entering the company and not to allow redistribution of share of participation among the participants. Article 92 of Civil Code of Republic of Belarus describes the right of preemptive buy of the participant’s share only in relation to the alienation of the company’s share by third parties. This conclusion is based upon the fact that the paragraph 1 of Article 92 of the Civil Code of the Republic of Belarus describes the relationships related to the alienation of the share or its part to only the participants of the company. No right of the participants to the preferred purchase is mentioned in this paragraph. The legislator describes in paragraph 2.article92 of the Civil Code of Belarus the procedure for the alienation of a company member’s share (its portion) to third parties. The second section of this paragraph describes the pre-emptive right to purchase shares (parts) of other company members. The above reveals that the civil legislator does not allow for pre-emptive buying of the share (its portion) if the participant sells his share(s) to third party.

I want to point out that Y.I. Funk uses phrases such as “in our opinion”, ‘we think’, ‘we believe’ and others in the book text. These pronouns can be understood by Funk’s reviewers: Funk, Doctor of Law, Professor and Honored Lawyer of Belarus Yurkevich N.G. ; Doctor of law, Professor, Honored Legal Counsel of the Republic of Belarus Kamenkov V.S.

This is Funk Y.I.’s opinion, as stated above. It is also the opinion of these respected lawyers of the Republic of Belarus.

In her 2016 article, the judge of the Minsk regional economic court Shpak Irina Nikolaevna stated that:

The essence of the preemptive right boils to the fact that all remaining company participants have the option to purchase the sale share at the terms it is being offered to them.

This conclusion is based on Part 2 of Paragraph 2 of Article 92 of the Civil Code of the Republic of Belarus (hereinafter referred as the Civil Code). This norm states that participants in the company have a preferential right to buy a share (part) of the share of the participant proportionately to their share size. Participants may also renounce or not use their preemptive rights within one month of notification, or another period as provided by the company’s charter, or agreement of its participants. The participant’s share (part) could be sold to a third party.

The Code provides the procedures for pre-emptive acquisition and the conditions in which shares can be sold. There are no restrictions on the sale of shares to members of the company.

Judge of Minsk’s Economic Court Catherine Denise Miguel Angel Drozdovskaya is a graduate student of civil and scientific law, Candidate of Legal Sciences Associate Professor E.V. Laevskaya wrote in her pre-emptive law work: “The right to pre-emptive buy does not apply sales contracts between the LLC participants themselves. This conclusion is based on the definition of “third parties” in civil law. A third party, according to the Civil Code is someone who participates in the legal relationship that is subject to this legal norm but has a legal interest or object. The exclusion of members of the LLC as well as the company from third party lists does not violate the principle that undesirable changes to the subject composition of the LLC are prevented and is compatible with the principle freedom of contract.

One of my clients also requested the right to pre-emptively purchase a share in an economically company from the Ministry of Justice of the Republic of Belarus. The Ministry of Justice informed me that the Ministry of Economics is the author of the Law “On Business Companies”, so a request should be made there.

In response to June 2017’s inquiry, the Ministry of Economy of Belarus stated the following:

The pre-emptive right of purchase of a part of a share of a member of a limited company is intended to protect the interests of these participants from being taken advantage of by third parties. As a rule, the legal provisions of any regulatory act must be applied according to the literal meaning of the words or expressions. Paragraph 1 of Article 92 of the Civil Code of the Republic of Belarus (Part One of Article 97 of the Law of the Republic of Belarus “On Business Companies”) regulates the relations between participants and a company concerning the alienation of the part of the share of a limited liability firm. It does not allow for the application of the institution of the preferred right to purchase the part of the share of the participant in the authorized funds of this company. Based on the meaning of this institution and the terminology of regulatory legal act, we believe that a company member who has alienated his share in whole to another company member does not have the right of pre-emptively purchasing a share from any other company participants.

In response to the request, the Council of the Republic of the National Assembly of the Republic of Belarus stated:

“According to the first section of Article 97 of the Law of the Republic of Belarus of Dec 9, 1992, as amended on July 15, 2015. “On Business Companies”, a member of a restricted liability company can sell or otherwise alienate part of his share (part of the shares) in the authorized funds of the company to one participant of the company or the company itself. In the event that a member or a subsidiary of a limited-liability company sells his share (part) in the authorized company fund, the legal norms applicable to the transaction will apply. We believe it is legal for one participant to sell a share of the authorized fund of a restricted liability company to another participant at its sole discretion. Other members of the limited liability firm cannot pre-emptively purchase the alienated share.

After conducting a thorough study on the issue of whether a participant can sell a share of an authorized fund of a limited- liability company to another participant, and having read numerous articles, books and legislation, and having received written responses from various ministries and departments with their position on the matter, we came to the conclusion that the pre-emptive buy right was created and included in the legislation to protect existing participants against unauthorized entry to the business. The LLC does not have a right to pre-emptive buy if a current participant sells his share to another participant. This is a matter for which I am not aware of any articles, books or opinions from ministries that would support a reverse view. All agree that participants have priority over unauthorized persons.

We conclude by noting that the courts are accustomed to asking the following questions when a participant sells his share to another participant.

1. “Why didn’t you send notices about the sale to other members of your company, even though the charter requires that notices be sent to all? Court decisions often favor the seller of the shares, even if the participant has violated the notification procedure. The courts claim that violating the notification procedure is a violation a pre-emptive rights.

What are my thoughts?

Pre-emptive legal disputes boil down to whether other participants had a right to purchase shares. A participant can request the transfer of rights and obligations under article 98 of OHCO Law only if they violate the pre-emptive purchase right. This does not mean that there were any violations of the procedures for sending notices or notices but rather violations of the pre-emptive purchase right. As there is no pre-emptive rights of participants over other participants, it is clear that there was no violation entails the emergence or infringement of another right, the right to transfer the rights, obligations, and rights of participants.

I’m certain that the notification procedure for selling shares in an LLC will not affect the emergence, modification or termination of the preemptive right. The notification procedure for the sale of shares in an LLC is not required. This does not give rise to a right of other participants to purchase shares. The legal outcome of the sale or purchase of shares cannot be affected if one participant fails to follow the procedures for notifying others participants.

2. “Article 92.1 of the Civil Code of the Republic of Belarus provides that participants may sell shares to other participants or the company. Your logic suggests that participants have a preference over third parties. Then, on the basis Article 92 of Civil Code, the participant may immediately sell his share to the company. The rule that a participant may sell his share to another participant , or to the company is not accepted by courts. This affects the final decision as to whether the seller can sell the share.

What are my thoughts?

Article 92 of the Civil Code of the Republic of Belarus, and 97 of the OhIO Law provide that participants may sell their shares to other participants or the company. These norms allow a participant to offer his share directly to the Company. These norms are not contradictory, as the company’s general meeting of participants decides whether to buy a share. If the participants want to purchase a share from the participant, they will vote against selling the share to the company. Aside from that, the company can buy the share of the participant and distribute the purchased shares among current participants during the year in proportion to the size of those shares. The fact that the participant can offer his share to the society directly is not a problem.

P.S.

There are many solutions. Some judges believe so, while others think otherwise. Others refuse to grant such claims. It is not possible to sue for such an issue in any event.

Therefore, I suggest that my colleagues create a protocol to prohibit other participants from purchasing shares in LLCs. They should also receive the appropriate notices even if one participant sells his share.

I hope the legislator will end this controversial issue in the near future by adding or changing the Civil Code of the Republic of Belarus to the OhIO Law.

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