Academic journal article Business: Theory and Practice

Pre-Emption Right of Shareholders to Purchase Shares for Sale in Private Limited Liability Companies: The Problematic Legal Remedies

Academic journal article Business: Theory and Practice

Pre-Emption Right of Shareholders to Purchase Shares for Sale in Private Limited Liability Companies: The Problematic Legal Remedies

Article excerpt

Introduction

The development of an entrepreneurship and the possibility to accumulate a bigger capital in commercial activities foster participants of the civil turnover to incorporate their capital and expertise when establishing companies. However, due to the existence of mutual fiduciary relationships and significant investments, it is simultaneously important to the participants who will be their business partners in result of the sale of the shares. Both Lithuanian (Tikniute 2008; Lauraityte 2014a) and foreign law scholars (Talbot 2008; Mantysaari 2012) have repeatedly analysed historical origins of company's formation and the need to constrain the change in the participants in business relationships. Global social changes in the business sector and the aspiration to minimise the risk of disputes when one or more participants decide to withdraw from the ongoing business, encourage for further investigation in this article in order to help to determine whether the current legislature and the case-law of the Supreme Court of Lithuania (hereinafter--SCL) ensure fair business practices and regulate adequately the legal relationships between the shareholders of a private limited liability company (Lith.--uzdaroji akcine bendrove, UAB; hereinafter--UAB), where one of the shareholders wishes by the pre-emption right to acquire the other shareholder's shares, and what legal remedies can be taken where the procedure of the implementation of the pre-emption right is violated. The article particularly analyses the problems of the breach of the pre-emption right of shareholders of UAB, as the latter is the most popular and attractive form of business in Lithuania. According to the data of the Register of Legal Entities, in the beginning of 2015, 114,738 UABs had been registered in Lithuania; that made 64 per cent of all registered private legal entities, i.e., 177,507 (VI "Registru centras" 2015).

1. General aspects of the right of pre-emption to acquire shares offered for sale in a private limited liability company

Although according to Article 23 of the Constitution of the Republic of Lithuania (hereinafter--the Constitution) a person is free to dispose of his property, in some cases, however, the legislature does not make this right an absolute one, as transferable shares does not necessarily mean freely tradable shares (Kraakman et al. 2009). In legal doctrine, the following several systems for the limitation of the transfer of a company's shares are usually mentioned: the so-called consent clause and the so-called proposal clause or pre-emption clause (Maitland-Walker 2008). Following the consent clause, a participant in the company has to get the consent of the specific body (general meeting of the participants or other management body, i.e., the board) or of all other participants in the company prior to transfering the shares to the third party. In the event the consent for the transfer is not granted, the transferor may apply to the court and to initiate judicial proceedings to determine whether the refusal is adequately grounded (such regulation is applied, for example, in Austria, Belgium, Germany) (Kalss 2004); otherwise, an obligation to the company to redeem such participant's shares shall be imposed (e.g., in Portugal, Italy, Norway, France) (ed. Dornseifer 2005; Maitland-Walker 2008). Meanwhile, under the proposal (pre-emption) clause the participant is obliged to offer his shares to other participants in the company before such shares could be sold to an outside third party, i.e., this system includes other participants' preferential rights to purchase shares being under the sale (ed. Dornseifer 2005; Maitland-Walker 2008). Similar regulation is being applied in England as well. However, it should be additionally mentioned that the Companies Act provides the companies' directors with the discretion right to decline to register the transfer of the shares if the requirement of pre-emption right has not been observed (Stamp 2001); and until 1980, there was a mandatory requirement to include into the articles of association of private entities the limitations to transfer the shares to the third parties (Companies Act 1948 (s 28), 1980 (Sch 4)). …

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