January 30, 2015
HOW TO PREPARE THE DOCUMENTS, TO PREVENT THE FLAKE-OUT IN BUSINESS
And, unexpectedly this day will come, as a blow by butt on a drunk head. You are standing at a threshold of your company, but you cannot open the door and enter with wide master's step any more. Because, even if it is so hurtful to admit, you are not the owner of this company anymore, and the other people are running your business. But, all is nothing, but the business is everything, they grab but not of your own will, by lawful and legal way, your former partners enjoying your confidence and poor awareness of terms and provisions of legal documents.
Let's go back to past, how this all happened? Was that impossible to avoid this? Probably, it was possible. You have to read the provisions of drafts of foundation documents more carefully, before signing and to prepare the main documents of the charter fund of the company in a proper way.
For today, the great majority of companies and organizations are being established in the form of LLC - Limited Liability Companies. Unusual popularity of this form of business of the legal entity can be easily explained by its self-explanatory name - the maximum liability of the company, within the amounts of contributions of founders of the company. And, talking about contributions, it is needed to be very attentive to that, how much you contribute to the charter fund of re-created company. Because, thereon will depend: the size of company and profit of company that belongs to you, a priority or a parity of the decisions made by you, as well as the important one, the amount of your expenses and contributions on development of company. That is, actually, all your after life in the activity of company will depend on the amount of your contribution specified in foundation documents.
In strive to establish the company as quick as possible, and to run a business, unfortunately we pay a few attention to a question of determination of compliance of contribution of real cost. It is possible to observe the cases of overestimate of contribution assets’ cost, for achievement of minimum threshold of the charter capital amount on registration of company. For instance, the vehicle with a market price of 2 million Soums can be estimated as a contribution at the amount of 10 million Soums, regardless the long-term consequences of this snap decision.
Despite the fact that, Article 15 of Law of the Republic of Uzbekistan “On Companies with limited and supplementary liabilities” (hereafter referred to as - the Law) the company shareholders (participants) have a right of monetary assessment not of the monetary contributions to charter fund of company, made by the company shareholders (participants), the par value of a share of the participant who brought once the car with artificially overstated price of 10 million Soums, and equated to a half of amount of the charter fund, can cost too much upon distribution of the actual price of company participant’s share that corresponds to a part of costs of net assets of company.
In other words, the worthless thing which really does not cost that price awarded by the participants of company by developing and increasing of the fixed property assets of company, according to Article 14 of the Law may cost in tens and hundreds times more, in proportion to the amount of share of awarded thing, during creation of company. If this lucky man were you, you have to be glad and shake your hands, but if not you? In particular, when division of shares of founders? You have to shake the hands of others.
Therefore, when making non-monetary contributions (equipment, building, premise, land property, vehicles, etc.) into the charter fund the company, you have to specify the real market price of it, without overpricing and understating. Then it won't be offensive, to admit that deserved amount of the actual share of the founder that is equal to a half of property of company. But, it is not the most cunning to what you have to be ready.
The main risk in establishing the company, collapsed up to the certain time, is lying in the contract concluded between the partners – founders of company. More precisely is in the foundation documents of the company. And as any contract, the text of foundation documents is rich not only with imperative – the obligatory rules that are established by the legislation, but also with dispositive – disjunctive provisions, requiring special attention and final endorsement of participants of the foundation agreement. If to keep the content of charter and foundation agreement in the initial version of the draft, elaborated by consulting or other companies it may not consider the specific features of work of your future organization and lead to unexpected consequences. So, what are these ambiguous moments?
The first question, which shall be highlighted as the final point, is the issue of period of use of the Company, not the monetary contribution of one of the founders. Such contributions could be such essential things for the work of company, as: building, premises or equipment and manufacturing machines. Just imagine that, what to be happened, if in the charter of Company by the corresponding founder was prescribed that, the founder will transfer his property contribution to the company for 5 or 7 years, that is for a specified period? As soon as this term ends, the owner of property of company can turn the life of company and the other participants of company into an absolute hell, demanding back his building and equipment within a month, or equivalent monetary compensation for them. We were the witnesses of similar cases when the same unreasonable terms in the foundation documents of the companies became as the fatal reason of bankruptcy of the whole factories and plants.
In order to avoid participation in the vital play of similar business drama, it is recommended according to Article 15 of the Law; fairly prescribe in the foundation documents the property contribution of the participant of company that represents the production basis of community is transferred to the entire period of company validity. In case of withdrawal of company’s participant, he needs a monetary compensation, which is equally payable during a certain term, for example, 2-3 years. The company will be preserved, and the founder, even later, but shall get his property, but taking into account some inflationary expenses.
No less important issue, in the charter is the transition conditions of participant’s share of the company to the other persons. In Article 20 of Law, specified, that if in the charter of company is not prescribed unless otherwise, the participant of company has the right to sell or otherwise to concede the share in the charter fund of company, or its part to the company’s participants or third party. If you can accept the transfer of share between participants inside the company, but how to be with the third parties outside? Don't you want, once coming to your office in the morning, to see an unfamiliar person instead of your former partner, unfamiliar person representing himself as a new owner of a part of your business? Therefore, in the charter it is needed strictly agree between the founders, that if any of the participants, is impatient to slip off the business, to agree this transfer with all founders at first, based on the unanimous decision of General Meeting of Participants, and preferential right to purchase of the share by other participants, and afterwards he can act. Moreover, in order to avoid the motive to contrive with ostensibly sent notices on intention of transfer of participant’s share, it is required to fix in the charter that notices on intention of transfer of share, should be sent by the participant through the joint company itself to the founders of the company. Otherwise, in a month after sending the letter, directly – in contravention of the company, to other participants, withdrawing founder, shall have a full legal authority to make the transaction on transfer of company’s share in the firm to any third party, whereas, he didn’t receive the objections from other participants, who in real situation can be not aware about sent letter and about activities made on their mutual business.
The same actions for getting the consent of all participants should be prescribed in the charter, concerning with procedure of pledge of share in the company. Because the pledge is the hidden form of the delayed action, on sale of a share in business. Moreover, as earlier this form is neutralized, as it will be better for business, according to Article 21 of Law.
You’ll be surprised, probably, to know that in certain cases, the company established by the participants may acquire the shares of its owners. Actually, it turns out to be a business bursting itself. Nevertheless, it seems like that. However, in fact, the company not even can, but according to Article 22 of the Law, shall be obliged to acquire the share of withdrawing participant, if the charter of company specified exactly that what we advised you above. That is, transfer of participant’s share to the third parties is forbidden, and other participants do not agree to acquire the share at the offered price by the withdrawing partner. And, note that, here is hidden a very delicate, but tight like a tightened rope, the financial and legal moment of business. The company shall be obliged to acquire a share of withdrawing participant, but by paying to the withdrawing participant of the company the real price of its share or its part, or with the consent of the participant of company will give him a real property for the same price. Thus, the real price of share will be determined, as it was specified above, from the cost of assets of company, in proportion to piece or percent of share of participant that is specified in the charter. What does that mean? It means, that depending on the amount of liquid assets of company, the other participants may lose much more, if they do not make a detailed comparative analysis of the offered price of acquiring share of the participant with the cost of his proportional asset, before refusing the acquisition of a part of company’s share, declared by the withdrawing company. As they say, it is hit or miss (neck or nothing), in the mathematical context.
After acquiring the participants share by the company, the share does not become a property of the company, and the company does not become the participant of company in itself. Within a year, the acquired share of company shall be distributed between the other participants with covering by the participants of the compensated share by the company of withdrawn partner or corresponding decrease in charter fund. Everything comes full circle.
To the last item, in this article, and one of the most important issues in our opinion, the issue that could destroy or grab your business, is definition in the charter of the issues that are to be resolved by the highest authorized body - General Meeting of Participants, by unanimously or by the majority of votes, not less than two thirds of voices of total number of voices of company participants. In the Article 34 of the Law, is defined that about 70% of questions determined by the Law, being included into the authority of General Meeting of Participants are to be accepted by the majority of votes and only the small part of issues are to be resolved unanimously. It turns out, that if you have a few percent of votes in your company, even with a difference in one tenth of percent (fraction), but on such serious questions, as follows:
definition of the main directions of company’s activities, and making decision on participation in other associations of the commercial organizations;
change of the size or amount of charter fund (charter capital) of the company;
making amendments and additions in to the foundation documents;
establishing the executive bodies of company and early termination of their powers;
election and early termination of powers of audit commission (auditor) of company;
election and early termination of powers of the supervisory board, if its establishment is specified by the charter of company;
approval of annual reports and annual balance statements;
making decision on distribution of net profit of company between participants of the company;
approval (acceptance) of documents regulating the activity of organs of the community;
making decision on audit inspection, identifying the audit company and the maximum amount of payments for audit services.
You will be get around or as the phrase goes “you get hosed”. Certainly, in case, if by the majority of votes of opponents are to be against of yours. But, what will prevent it when the money is on stake?
We suppose that, such situation is “a little” unfair, therefore, on the basis of provisional rule of Article 34 of the Law, we strongly recommend you to prescribe and highlight in the charter of your company all the issues related with finance of the company, as well as the issues related with the changes in foundation documents, questions significantly influencing on company’s activity, and that are to be solved unanimously by the decision of General Meeting of Participants of the company. It will help you to protect yourself from false actions and abuse of other participants of unequal position of minority of participants in the company. Besides, you also can list in the charter the issues that are to be solved by the General Meeting unanimously, in connection with production or professional feature of the activity of your company. No need for kick over the traces, some of current economic issues could be solved by the majority of votes. Otherwise, all your partners can run away from you.
That is all! As the main sign of a good work is brevity and statement in essence, without additional noise. We undoubtedly will come back to the issue of protection of business in our further articles. In the meantime, you may take a note of available recommendations that are provided in this article, and the days when you get hosed will never came.
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