Acquisition of business shares – legal transaction

Business shares in a limited liability company (LLC) can be acquired in several ways. One of them is the acquisition of business shares in a limited liability company (LLC) on the basis of a legal transaction. For such acquisition of business shares in an LLC, it is decisive that the legal transaction must be directed to the transfer of the business shares.

The legal transaction of the transfer of shares implies the conclusion of a contract in the appropriate form. Namely, such a contract must:

  1. contain a clear definition of the business share or shares that is going to be transferred (its nominal amount, as determined in the book of business shares of the company);
  2. contain provisions that clearly indicate the fact that the share or shares are being transferred (in any way that unequivocally indicates a will aimed at the transfer of shares);
  3. be concluded in a strictly formal form as is prescribed by the law.

Thus, as stated, the business share or shares transferred / acquired by contract must be clearly defined in order to avoid confusion as to the share or shares transferred. The impossibility of unambiguously determining the business share to which the legal transaction of transfer (contract) refers entails the consequence of the nullity of the legal transaction in question.

The fact of the transfer of shares does not necessarily have to be defined in the contract by the term transfer of shares, but it is sufficient that the contract contains contractual provisions from which it is clearly and unequivocally visible that the legal transaction is concluded for the transfer of shares. For example, the transfer of a business share would be indicated by contractual provisions which would show that a fee has been paid for it or that the buyer is buying a business share or shares.

When it comes to the transfer of business shares by legal transaction, it is most often a transfer based on the purchase and sale of shares, i.e. a toll transfer. In this case, the existence of legal basis of the transfer (with nature of the law of obbligations basis) is necessary. Consequently, it is common to stipulate two contracts – a share purchase agreement (contract of a law of obligations nature) and a share transfer agreement.

As a condition for the validity of the contract and the occurrence of a legal transaction of transfer of shares in a limited liability company, the law prescribes a special form in which the contract must be concluded – a notarial deed or a private solemnized document. In other words, the contract that was not concluded in the previously starwd form has no legal effect, therefore it is null and void.

The contract can also be concluded through a proxy, in which case the power of attorney must be issued in the form in which the contract must be concluded (confirmed by a notary public).

The Companies Act does not prescribe the language in which the contract should be concluded, however, it is clear from the provisions of the Court Register Act that for the purposes of implementing the contract in the court register (because entry in the court register changes in membership are prescribed by the Companies Act) the contract must be either drawn up in Croatian or translated into Croatian by a certified court interpreter. Also, it is important to note that in case of discrepancy between the content and data of the contract in Croatian and those in a foreign language, the contract in Croatian will be considered valid, even when the contracting parties agree otherwise.

The transfer of business shares on the basis of such legal transaction is in effect to everyone (erga omnes) .

The transfer of business shares in relation to the company takes effect with the entry of the transfer in the book of business shares, because such entry acquires membership in the company (in accordance with the provisions of the Companies Act , only a person registered in the book of business shares is a member of the company) .

As for the entry of the change of membership in the company in the court register, it is pointed out that it is of a declarative nature. The management board of the company is obliged to submit to the court registry of the competent commercial court  a list of members of the company from which it follows that a change has occurred (Article 410., paragraph 2. and 3. of the Companies Act), i.e. after each change the board needs to inform the court registry of the change without any delay. The notary public who participated in the change is also obliged to do so.

Members of the management board (Directors) are obliged to submit an application for entry of the change in the court register.

In conclusion, it is noted that before concluding a legal transaction aimed at the transfer of business shares in the company, it is always necessary to verify whether there are any restrictions on the transfer of shares. These restrictions are most often defined by the company’s articles of association. These can be:

  1. prohibition to dispose of the business share at all or for some time after the conclusion of the partnership agreement;
  2. prohibition of disposing of shares in favor of certain persons (existence of certain conditions in relation to the acquirer);
  3. prior consent of the company, certain members of the company, all members of the company, a certain body of the company for the transfer of business share;
  4. a pre-emption right and the right of priority in the acquisition of business shares in the company in case of their alienation;
  5. a special form of transfer of business shares.

For these reasons, it is always a good idea to consult a lawyer before proceeding with the realization of a legal transaction aimed at the transfer of business shares, who will check all the conditions and possible restrictions on the transfer of shares in the company.