The Companies Act comprehensively regulates the transfer of shares. As a fundamental principle, the law establishes the freedom to transfer shares. Article 160 stipulates that the transfer of shares is free unless otherwise specified by law or the memorandum of association. Thus, freedom of contract is the primary rule; legal restrictions may arise in the form of preemptive rights, while the memorandum of association can introduce additional limitations. 

How are shares transferred? 

Article 175 states that shares are transferred through a written agreement with certified signatures of the transferor and transferee. Other methods of transfer are also allowed, provided they comply with the law. 

The transfer of rights to shares can take place through various agreements, such as a sale agreement, an exchange agreement, or a gift agreement, i.e., any contract that enables the transfer of an absolute right. 

Regardless of the type of agreement chosen, it is essential to note the differences and consult a law firm specializing in corporate and commercial law when making this decision. 

A contract is one of the most common legal bases for the transfer of shares in a limited liability company (LLC). The law mandates a written form with notarized signatures of the parties. If this condition is not met, the contract cannot produce legal effects. 

This requirement has been confirmed in the Answers to Questions of Commercial Courts, adopted at the joint session of the Division for Commercial Disputes and the Division for Commercial Offenses of the Commercial Appellate Court, held on November 8–9, 2023. Specifically, considering the provisions of Article 175 of the Companies Act, a contract not concluded in written form and without notarized signatures of the transferor and transferee cannot produce legal effects. 

The transfer of shares is based on the agreement, but the transfer itself occurs only when the change of member is registered in the Register of Business Entities with the Business Registers Agency. 

Similarly, the law stipulates that in the case of a new member joining the LLC, the membership accession agreement must be concluded in written form with the notarized signatures of the person joining the company and the person authorized by a decision of the LLC’s assembly. 

The pre-emptive right as a legal restriction 

The Companies Act stipulates that members of a company have the pre-emptive right for shares being transferred to a third party, unless this right is excluded by the memorandum of association or law. 

It is important to note that the pre-emptive right, as the name suggests, applies in cases of share sales, i.e., when the legal basis for the transfer is a sale agreement. The pre-emptive right does not apply to legal actions such as share exchanges or gifts. 

If the members of a company wish to regulate their mutual rights and obligations regarding share transfers that do not fall under the pre-emptive right, they can do so through an agreement concerning the company as outlined in Article 15 of the Companies Act.  

In the Answers to Questions of Commercial Courts, adopted at the session of the Division for Commercial Disputes and the Division for Commercial Offenses of the Commercial Appellate Court held on November 8–9, 2023, it was explained that the pre-emptive righr authorizes other members to acquire the company’s share under the same conditions as those offered to third parties. Furthermore, it was confirmed that if a company member wishes to gift their share to a third party, the pre-emptive right does not apply. 

The same conclusion is stated in the Commercial Appellate Court Decision Pž 3817/20, noting that Articles 160–163 of the Law on Business Companies do not apply to gratuitous transfers of shares in an LLC, as these provisions regulate the pre-emptive right. 

Therefore, the pre-emptive right can only be invoked if another member of the company is selling their share. If you want to protect yourself from gratuitous share transfers (e.g., gifts), it would be wise to consider concluding an agreement regulating the mutual rights and obligations of LLC members or incorporating restrictions into the memorandum of association from the outset. 

Restrictions provided in the memorandum of association 

When establishing an LLC, a founding act is created (or an agreement on incorporation if there are multiple founders). If you and your partners wish to resolve the issue of possible share transfers at the outset, the Act allows for freedom of contract and provides several examples. 

It is possible to condition the transfer of shares on the company’s consent. Article 167 stipulates that the memorandum of association may require that shares can be transferred to a non-member only with the prior consent of the company. The transferor must submit a request for consent to the company, containing the identity of the transferee and key elements of the share transfer agreement. 

This restriction may apply to any form of transfer, not just sales. The decision on consent is made by the LLC assembly by a simple majority vote of all members unless the founding act specifies a different majority. 

Next, the Act provides the right of the company to designate a share purchaser. Article 168 of the Act states that instead of granting consent under Article 167, the company may designate a third party to whom the share can be transferred. The designated third party must enter into and notarize the share transfer agreement within 15 days of the date the transferor is notified of the company’s decision. If the third party fails to do so and the transferor is not at fault, the transferor has the right to sell their share to someone else of their choosing. 

Article 170 of the Companies Act confirms the broad scope of freedom of contract, stating that the founding act may also provide for other types of restrictions on share transfers. These restrictions must not conflict with mandatory legal norms or general rules. Considering these limitations, contracting parties have a wide range of provisions to regulate share transfers, such as restricting transfers to market competitors, related parties, and the like. 

From the acquirer’s perspective: Why is due diligence important? 

The Act regulates how ownership interests are transferred, as well as potential restrictions prescribed by law or established in the memorandum of association. However, it is up to the acquirer to verify what they are purchasing. For this reason, it is advisable to conduct due diligence, which can be translated as an in-depth analysis. 

The concept of due diligence dates back to the 15th century but became associated with business and finance in the 20th century. In the United States, a significant shift occurred after the adoption of the Securities Act of 1933, which introduced requirements for aligning relationships between investors and brokers in the securities market. In Anglo-Saxon law, the concept of due diligence is essential due to the principle of caveat emptor, or ‘let the buyer beware’.  

So, why is due diligence important for us in this part of Europe? Let’s say you are purchasing a share in a company as part of your business strategy. Naturally, you want to know what you are buying and whether there are any risks involved. This is precisely why it is advisable to conduct an in-depth analysis. 

Due diligence is a thorough investigation into the condition of the target company, carried out before concluding the share transfer agreement. By conducting this analysis, the target company is assessed from legal and financial perspectives, and existing or potential risks are identified. 

Simply put, due diligence protects you from unpleasant surprises. 

Note: This text does not constitute legal advice but reflects the author’s personal opinion.