Shares in an LLC can generally be traded fairly freely. In the context of transferring such shares, the most common case is their sale. Shares can also, for example, be pledged or gifted. However, before any such transaction, it is necessary to check whether legal regulations or the company’s articles of association impose any restrictions in this regard.
Can the Articles of Association Restrict the Transfer of LLC Shares?
A primary limitation on a shareholder’s ability to transfer shares may be the company’s articles of association themselves. According to Article 182 of the Polish Commercial Companies Code (KSH), it is possible to include a mechanism in the articles that obliges a shareholder to obtain the company’s prior consent to transfer (or pledge) their shares. Unless the articles of association specify otherwise, such consent is granted by the management board. In practice, however, most LLC articles require that this consent be granted by the shareholders’ meeting.
What Are Pre-Emption and First-Refusal Rights for LLC Shares?
The aforementioned Article 182 KSH also allows for other mechanisms that can limit the freedom to dispose of shares.
Relatively common is the right of first refusal to acquire shares, reserved in favor of the other shareholders. What does this mean? A shareholder planning to sell their shares must first inform the company about the intended transaction. The other shareholders then have a specified period (e.g., 2 weeks or 1 month) to exercise their right of first refusal. In other words, they can declare that they wish to purchase those shares—in such a case, the selling shareholder cannot offer the shares to a third party and must sell them to the interested shareholders. Of course, this is a very basic description of the first-refusal mechanism; it usually involves a number of additional requirements set out in the company’s articles of association.
Due to its more complex nature, the pre-emption right of shares by other shareholders is used quite rarely. Its purpose is similar to the right of first refusal in that it gives the other shareholders control over the sale of shares to a third party. The main difference is that, in the case of a pre-emption right, the selling shareholder must first sign a conditional share sale agreement with the potential buyer before a notary (the shares can only be finally sold if the other shareholders do not exercise their pre-emption right). The shareholder then informs the company, and the other shareholders have the opportunity to exercise their pre-emption right. If they do, they become the owners of the shares, rather than the third party who signed the conditional agreement.
What Do “Drag Along,” “Tag Along,” and Lock-Up Mean in the Sale of LLC Shares?
Depending on the specific needs of the shareholders forming a company, its articles of association may introduce special mechanisms regarding the transfer of shares. Although these are not explicitly regulated by law, they are fairly common in the market. Examples include: Drag-along (allows a majority shareholder to compel minority shareholders to sell their shares if the majority shareholder is selling their own shares), Tag-along (allows minority shareholders to join in the sale of shares when the majority shareholder sells theirs), Lock-up (prohibits the sale of shares for a specified period).
In the case of an LLC, the possibilities for restricting share transfers are quite broad. Therefore, when planning such a transaction, the first step should be to carefully review the company’s articles of association. In most cases, they will include provisions concerning the rules or limitations on the sale of shares.
When concluding a contract for the sale of shares in a limited liability company, it is not uncommon to overlook legal provisions operating outside the regime of the Commercial Companies Code and the Civil Code. Wrongly.
The share capital of a limited liability company does not have to be covered solely by cash contributions. It sometimes happens that a shareholder, instead of money, wishes to offer the company, for example, real estate, a vehicle, know-how, or the right to a trademark. Such a solution is possible, although not in every case.
