How to Challenge Illegal Redistribution of Shares in the Capital Stock
Understand the process of contesting invalid share transfers, legal implications, and how to restore rightful ownership.
The owners and former owners of the company have the right to challenge the decisions of the general meeting on the redistribution of shares of the company. In the case of a controversial redistribution of shares, not only the interests of certain owners (shareholders) suffer, but also the interests of the company. It is necessary to spend financial and human resources on resolving controversial issues, correspondence and often on participating in court sessions. Our experienced lawyers can understand the redistribution of shares of the company and give an opinion on the legality or illegality of their redistribution.
Pre-emptive right to purchase a share (part of a share) in the authorized capital of an LLC
When a participant in a limited liability company wants to sell his share or part of it, he must first offer this transaction to other owners of the company. They have the pre-emptive right to purchase a share (part of a share) of this participant in proportion to the size of their shares in the authorized capital. Another procedure for the owners to exercise the right of pre-emptive purchase may be contained in the company’s articles of association.
The procedure for selling a share must be outlined in the company’s articles of association and include specific information. Our experienced lawyers can assess compliance with pre-emptive rights requirements and the legality of share sale transactions. Typically, the pre-emptive right must be exercised within 30 days from the date the sale notice is sent.
The assignment of the pre-emptive right to purchase a share (part of it) is prohibited. When the pre-emptive right to purchase a share is violated, any owner of the company or the company itself has the right to request the transfer of the buyer’s status to them within three months. Such claims are considered by the court.
Pre-emptive right to purchase shares of a joint-stock company
The pre-emptive right of shareholders to purchase additional issue shares may be provided for in the articles of association of the joint-stock company. In this case, the charter should contain a number of mandatory information. In particular, this is the validity period of the pre-emptive right to purchase shares and the procedure for shareholders who want to exercise their right of pre-emptive purchase of shares. Violation of the right of pre-emptive purchase of shares of an additional issue gives grounds for challenging the decision to refuse to exercise the pre-emptive right.
Features of Establishing the Nullity of a Transaction in Belarus
One of the most common ways to terminate participation in a Limited Liability Company (LLC) is by selling shares. However, if the transaction violates current legislation, it may be declared invalid. In such cases, each party must return everything received under the transaction. If returning the items in kind is impossible, monetary compensation is required. Belarusian law does not allow for other options.
A key issue is assessing the legality of decisions made at general meetings where participants, whose membership resulted from an invalid transaction, took part.
Decisions of the General Meeting of LLC Members
The issue of invalid decisions made at general meetings of participants in LLCs is critical, but it is not explicitly regulated by the legislation, unlike property-related matters, which are addressed in legal acts.
The central concern here is the influence of votes cast by members who obtained their status through an invalid transaction. It is likely that these votes played a decisive role in the decisions made at the meeting. However, these decisions should not always be annulled automatically, as doing so could destabilize business operations over time. There are legal provisions that help ensure stability in such cases, even when an invalid transaction has occurred.
Recognizing the Illegal Removal of a Member from an LLC
The illegality of a member’s exit due to the invalidation of a share sale in an LLC may arise from actions influenced by fraud, threats, or unfortunate circumstances. This situation is not governed by Chapter 9 of the Civil Code of Belarus, as it does not qualify as a transaction under its definitions. The law treats the termination of participation, such as a member’s exit or exclusion, differently, focusing on the company’s internal operations rather than property turnover. The lack of regulation in legal acts regarding the consequences of a member’s invalid exit requires interpretation through analogies in court.
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Redistribution of Shares in the Charter Capital by Company Decision
Increasing the Charter Capital
When the company decides to increase its charter capital, shares are redistributed among the existing participants, leading to changes in ownership proportions and the issuance of additional shares.
Decreasing the Charter Capital
In cases of a decrease in the charter capital, shares may be redistributed or canceled, impacting shareholders’ rights and ownership distribution within the company.
Changing the Number of Participants (Shareholders)
When the number of participants or shareholders in the company changes, shares are redistributed, reflecting new ownership structures based on the decisions made at the general meeting.
Company Buyback of Shares
If the company buys back shares from its participants or shareholders, either partially or completely, it affects the distribution and ownership of shares within the company.
Participants Buying Back Shares
Other participants or shareholders may buy back shares from their fellow members, redistributing ownership stakes, either in part or in full, according to the company’s decision.
Transferring or Selling Shares to Management
Shares may be transferred or sold to members of the board of directors, executive bodies, or employees, either for free or for a fee, altering the distribution of shares within the company.
Participant Selling Their Share
When a participant decides to sell their share or a portion of their share in the company, it leads to the redistribution of shares among the remaining participants or external buyers.
Main Causes of Disputes in Share Redistribution
The interested parties did not study the legislation and the company’s articles of association, which establish the procedure for selling a share (or part of it).
Violating the procedure for selling a share (or stock) can lead to the annulment of the decision on the redistribution of shares (or stocks). For example, it is not permitted to sell a share in a limited liability company (LLC) or additional liability company directly to a third party. The share must first be offered to the other participants of the company. If they refuse, the share should then be offered to the company itself. Only after both have declined may the participant sell their share to a third party. When this order is violated, an interested party may challenge the redistribution of shares in court.
Sale of an Unpaid Share
A participant can only sell fully paid shares or portions of shares. The sale of an unpaid share violates legal requirements and can be contested in court. If a buyer acquires an unpaid share, the transaction may be deemed unlawful, and the court could annul the sale, restoring the rights of the original owner and ensuring the company’s regulations are followed.
Sale of Shares to Third Parties When Prohibited by the Charter
If the company’s charter prohibits the sale of shares to third parties, such a transaction may lead to legal disputes. Any contract made in violation of this restriction can be deemed invalid by the court. In this case, the sale is reversed, and the share remains with the original owner or the remaining participants, in accordance with the company’s bylaws.
Violation of the procedure for holding the general meeting at which the issue of share redistribution is decided.
In such cases, participants whose shares have been sold or redistributed without their notification often challenge the decisions of the general meeting. Violating the procedure for convening and conducting the general meeting is grounds for contesting any decision made at such a meeting.
Shares were redistributed, but changes were not made to the company’s articles of association.
After a general meeting decision on the redistribution of shares, amendments must be made to the articles of association and registered with the state authorities. This must be done within two months after the decision is made by the general meeting. If a decision exists but the articles of association remain unchanged, participants whose rights have been violated may demand through the court that the company be required to amend its articles of association. It is common for a participant who sold their share but is still officially listed in the articles as a company owner to take legal action.
Shares of certain companies were sold to third parties without first offering them to the Regional Executive Committee or the Minsk City Executive Committee.
In relation to some companies, government authorities have a pre-emptive right to purchase shares. This applies to companies included in special lists and companies established on the basis of agricultural product processing organizations. When the government’s pre-emptive right to purchase shares is violated, the relevant authorities may demand through the court the transfer of ownership of the shares to them.
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LawyerLegal assistance is provided by advocate Anton Grinewich, Specialized Legal Bar No. 2 in Minsk.
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