Amending the Shareholders List of an LLC

In this article, we are going to tell you about the primary difficulties and pitfalls to be aware of in amending an LLC's shareholders list.

How does one change an LLC's shareholders list?

There are two methods of changing the participants in an LLC:

• by way of alienating a share in the reserve capital via a sales-purchase, gift, trade, settlement agreement, or legal succession (for instance, in inheritance or surviving spouse proceedings);
• via consecutive actions: the entry of a shareholder into and the exit of another shareholder out of an LLC.

A separate method that could be stated is the exclusion from the LLC of a shareholder who is sabotaging the company's operations, but using it to change the list of shareholders specifically is not especially convenient or particularly simple.

Where should one begin when it comes to amending an LLC's shareholders list?

Regardless of the method in which the list of shareholders is amended, one must first and foremost begin by studying the company's articles of association. As a rule, when registering an LLC, none of the future shareholders ever read their articles of association and most likely don't even suspect that there may be various types of restrictions or prohibitions in it. For instance, an articles of association may contain a prohibition on alienating shares or accepting new persons into the list of shareholders and exiting the LLC may be prohibited. One must also remember that other shareholders have a privileged right to purchase the shares of their fellow shareholders.

Remember! If necessary provisions do not yet exist in an articles of association, they will need to be entered first. By default, at least a 2/3 vote among the participants will be required to approve new amendments to an articles of association. The exact portion of votes for approving amendments must be indicated in the articles of association. After that, the necessary amendments must be registered in the tax office. 

By the way, regardless of the method in which the list of shareholders is changed, whether by alienation of the shares or by entry and exit, the notary will require that the company’s documents be provided. Company documents include any and all adopted decisions, records, record pages, certificates (if any exist), and editions of the articles of association. Sometimes a company can avoid having to deal with a notary if they submit their documents in electronic form: this case will require an additional software program and an electronic signature.

Alienating shares through sales-purchases

Alienation of shares via sales-purchases can only be done in the presence of a notary. Meanwhile, notarization will be required whether this transaction is taking pace between current shareholders of an LLC or a share is being sold to a third party.

The notary must check the articles of association as to whether there are any prohibitions on sales-purchases of shares, prohibitions of changes within the ratios of participant shares or the lack of restrictions on the size of shares, as well as check whether or not there is any necessity to obtain the LLC’s consent for said alienation to take place.

In the event that shares in the reserve capital are sold to third parties, one must remember about privileged right and the right to first refusal (processed at a notary) as well as the necessity to obtain the consent of the other participants and the company itself to the transaction. These aspects must be reflected in the company's articles of association.

Thus, in advance, before visiting the notary office, these legal details need to be clarified and well understood.

If one plans to alienate shares by way of a gift agreement, settlement agreement, or trade, the same rules and restrictions shall apply to them as in the case of a sales-purchase agreement.

Participant entry and exit

The entry of a new shareholder that does not entail the alienation of shares must be accompanied by the enlargement of the reserve capital at the expense of the third party's investment. This procedure features an array of characteristics:

• a decision by a shareholders meeting or a decision by a sole shareholder must be notarized;
• the shareholders can only unanimously adopt the decision;
• there mustn’t be any prohibition of this procedure in the articles of association;
• if the shareholders want to enlarge the reserve capital with something other than money, say, by way of property, an independent evaluation of that property will be required.

Remember! When a shareholder intends to exit, the permission to do so must be provided for in the articles of association.

In the event that a shareholder exits an LLC, they will have to have the current value of the share paid out to them. This value may greatly differ from the nominal value indicated in the USRLE.

Inheritance and Other Methods of Inheritance

If heirs have received shares in an LLC as part of an inheritance, that does not at all mean that they will immediately become shareholders. In the case that the articles of association contains a prohibition on alienation of shares, the inheritors will only be able to receive the current value of the shares.

In the case that the agreement of the current shareholders or the LLC itself is required in order for new participants to enter into an LLC and they do not approve of the heirs doing so, the only possibility after that point is that they will receive the current value of the shares and will not be allowed to join the ranks of the company's shareholders.

These rules also apply to surviving spouses.

Exclusion from an LLC

Shareholders can only be excluded from an LLC via court procedure and only in the case that the others are able to prove that the shareholder is evading his obligations in managing the company. For instance, it may be the case that he fails to come to a shareholders meeting where unanimous adoption of decisions is required and this is paralyzing the operation of the LLC.

Exclusion from an LLC by way of court procedure is quite a lengthy procedure and a positive outcome is definitely not guaranteed, so it’s unwise to use it as an alternative to alienating a share or an entry and an exit.

You can always get in touch with us and request help on any issue related to amending an LLC's shareholders list.