Share transfer notice
Changes in the ownership structure of limited liability companies are a common phenomenon. One of the key elements of this process is an existing shareholder giving notice to the company about the transfer of a share (e.g. when selling one or more shares to another entity) under Article 187 of the Commercial Companies Code. This procedure, although seemingly simple, carries a number of important legal and practical implications which it is worth addressing.
The main purpose of the standard set out in Article 187 of the Commercial Companies Code is to ensure the security of both the company and the participants in the share transfer. First and foremost, it is about clearly establishing who is the formal holder of the rights to the shares in the company. This clarity is crucial for the proper functioning of the company, especially in situations where disputes may arise as to who is actually the shareholder. The notice serves as a means for the company to determine who is formally entitled to the shares. It is intended to protect the company from potential damage that could arise from any uncertainty as to the status of a shareholder.
Effectiveness of the share transfer
It is crucial to understand the difference between the actual transfer of a share and the formal notification to the company about the transfer. Although a share must be transferred before notification is made, a failure to notify the company does not affect the validity of the transaction between the parties. This distinction has important legal consequences: the sale of a share becomes legally valid towards third parties regardless of whether and when the company was notified. However, from the perspective of the company and the shareholding rights, the change in ownership of the share only becomes binding upon receipt of official notification. In practice, this means that, until a new shareholder is properly notified, the company is required to recognise the original holder of the share as a shareholder, even if the selling shareholder no longer actually owns it.
Form and content of the notice
The Commercial Companies Code does not set out a specific form of notification. It may be given by any means, as long as it reaches the company. Given the importance of the legal effect of the notification and the possible difficulties in proving it, it is reasonable to use at least a documentary form. Importantly, the notification should also contain basic information about the event, such as the details of the participants (the seller and the buyer), the number and type of shares transferred and the date on which the shares were transferred to the buyer. This information is necessary because of the implications of the moment of the transfer with regard to the corporate rights of the shareholder and the obligations (liabilities) of the seller and the buyer.
An additional prerequisite for the effectiveness of the notification is the provision of proof of the share transfer. This requirement may be satisfied by presenting the original of the document constituting the basis for the share transfer, e.g. a share transfer agreement or a deed of donation. If the parties to the transaction do not wish to disclose certain details regarding the share transfer (e.g. the purchase price), an excerpt from the share purchase agreement drawn up by a notary public and containing the essential elements of the agreement is also acceptable.
Effect of the notification
The moment the company receives the correct notice with proof of the share transfer is of crucial legal importance. From that moment, the transfer of the share becomes effective against the company. This means that the existing shareholder loses its status and the buyer enters into all the rights and obligations of the seller.
It is worth emphasising that, until it receives the correct notification, the company must treat the seller of the share as a shareholder. This has far-reaching practical consequences. The buyer, despite actually acquiring the share, has no corporate rights concerning the company until the notification is made. In particular, the buyer cannot vote, claim dividends or exercise other shareholder rights.
Obligations of the management board upon receipt of the notification
Once it receives the notification, the management board of the company should exercise due diligence to verify the entirety of the notification to ensure it is effective. The scope of the management board’s examination should primarily cover formal issues, such as the origin of the notification from the shareholder concerned and verification of the proof of the action (i.e. the share sale agreement, for example). The management board should also take into account the required form of the share transfer transaction and the obligation to obtain any necessary consents.
Once the management board is satisfied that the notification is effective and the evidence of the transaction is unobjectionable, it will proceed to enter the new shareholder in the share register and, on that basis, draw up a new list of shareholders to be submitted to the registry court.
Summary
Notifying the company about a share transfer is a key element in the process of changing the ownership structure of a limited liability company. Although this procedure may appear to be a formality, it carries significant legal and practical consequences. A proper understanding of the mechanisms of this process is essential for all business participants – both shareholders and company managers.
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This article is part of the Newsletter No. 3 | 2024.