Following the provisions of the Companies Act, a third party can become a new member of a limited liability company based on the transfer of shares by registered members of the limited liability company, as well as based on the accession of a new member with a simultaneous increase in the share capital.
Transfer of shares
The basic rule is that the transfer of shares is free unless otherwise determined by the Companies Act or the Articles of Association.
The Companies Act establishes the following restrictions on the transfer of shares:
- pre-emptive right
- share transfers with the consent of the company
- company’s right to designate the share purchaser and
- the obligation to buy shares.
The articles of association of a limited liability company may provide for other types of restrictions on the transfer of shares.
Pre-Emptive Right
Company shareholders are entitled to a pre-emptive right to purchase the share subject to transfer to a third party unless that right has been excluded by the memorandum of association or law.
If not a single company shareholder with pre-emptive rights has exercised this right pursuant to the provisions of the Companies Act and memorandum of association, the share transferor may conclude an agreement on share transfer with a third party within a deadline of 90 days from the day of expiration of the offer acceptance deadline under conditions that may not be more favourable than the conditions of the offer served to other company members, unless otherwise provided by the memorandum of association.
Unless otherwise provided for by the memorandum of association, if the share is sold by public tender, auction, or a similar procedure (public sale), the company member who wishes to exercise the pre-emptive right may do so only in that procedure.
Share Transfer with the Consent of the Company
The memorandum of association may envisage that the share in a company may be transferred to a person who is not the company’s member only with the company’s prior consent. A decision shall be adopted by the general meeting by a simple majority of votes of all company members unless the memorandum of association prescribes another majority.
In the case of a transfer to a person who is not the company’s member with the prior consent of the company, the share transferor is under an obligation to file a request for consent to the company, which, apart from the identity of the person to whom the share is transferred, contains all essential elements of the agreement on the transfer of shares that he intends to conclude.
If the company fails to inform the share transferor of the denial of consent within a period of 30 days from the day of receiving the request for consent, the share transferor is authorised to transfer the share in accordance with the conditions of that request.
The memorandum of association may regulate the transfer or share with the company’s consent in some other manner.
Company’s Right to Designate the Share Purchaser
Instead of giving consent that the share in the company can be transferred to a person who is not a member of the company, the company is authorised to designate a third party to whom the transferor may transfer the share under the same conditions, in which case the share transferor may transfer his share exclusively to that third party under those conditions.
The decision on the designation of the share purchaser shall be adopted by the general meeting by a simple majority of votes of all company members unless the memorandum of association prescribes another majority.
If the third party, which the company has determined, fails to proceed with the conclusion and certification of the share transfer agreement under the conditions indicated in the share transferor’s request within a period of 15 days from the day the share transferor was notified of such a company’s resolution, for reasons other than the fault of the share transferor, the share transferor is entitled to sell the share to a third party of his own choice under the same conditions.
The Obligation to Buy Shares
If the company denies the requested consent to the share transferor without designating a third party as a share purchaser under the provisions of the Companies Act, it must purchase the share from the transferor within 30 days after the expiration of the initial 30-day time limit for receiving the request for consent.
If the company fails to comply with the previously mentioned conditions, the share transferor is entitled to sell the share to a third party of his choice under the same conditions.
Conditions and Consequences of a Share Transfer
A share is transferred by written agreement with the certified signatures of the transferor and the transferee, but it may also be transferred in another way following the law.
The share transferor is jointly and severally liable with the share transferee for the obligations to the company on account of his unpaid, i.e., not entered contribution in the company’s share capital, as well as for the obligation of additional contributions in respect of that share, according to the actual status at the moment of share transfer.
Accession of a new member and increase of the company’s basic capital
In addition to the contract on the transfer of shares, the status of a member of the company can also be acquired based on the contract on the accession of a member to the company, which, unlike the usual transfer of shares, implies that the joining member introduces a new stake in the company, that is, as a result of this accession, a capital increase.
The provisions of Article 146, paragraph 1, point 1 and 3 of the Companies Act regulate two ways in which a new member can increase the share capital of a limited liability company:
- The new contributions of a member joining the company and
- Converting (conversion) of claims towards the company into share capital.
Converting claims towards the company into share capital
To convert the debt of a limited liability company into share capital, the assembly of that company must decide to increase the share capital by converting the debt into shares. In the decision, it should be stated that the share capital of the company is increased, and a specific claim of that creditor is converted into the share capital of the limited liability company, with the fact that the conversion parity should also be specified (whether the conversion is carried out in a ratio of 1:1 or in some other parity). Parity results from the size of the share that the creditor will acquire in the limited liability company after the conversion—the increase in the basic capital.
The decision refers to the entire debt of the limited liability company towards that creditor. It provides that the conversion extinguishes the creditor’s claim and that he acquires the status of a company member by registration.
In the decision, it is important to state how the creditor’s claim arose, especially whether he paid some money (e.g., based on a loan, an advance payment, etc.) or delivered goods or performed services. This is important to determine whether his contribution to the limited liability company will qualify as monetary or non-monetary.
Conditions and Consequences of a Share Transfer
If a new member joins the company, the contract on joining a new member to the company shall be concluded in writing with a certified signature of the person joining the company and the person authorised by the decision of the general meeting approving the new member to join the company. All registered members and the member who joins the company can conclude the contract without any legal obstacles.
The contract defines the contribution, the method of entry or payment, the percentage in the company that the new member will acquire, and the new percentages that the existing members will have after the entry of the new member.
Simultaneously with the conclusion of the mentioned contract, the assembly of the company should decide to increase the basic capital by a two-thirds majority. The decision to increase the basic capital also defines, following the provisions of the acquisition agreement, the amount of capital increase and the percentages of members in the company. The decision to increase the share capital is the basis for registering the share capital increase with the Business Entities Register of the Serbian Business Registers Agency.
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