Contesting the purchase/sale of a share. The procedure and methods of cancellation of the contract. Nuances of the procedure

Sep, 01 2022

Contents:

The share in the authorized capital of the LLC is equal to the value of the founder’s rights to conduct business, which is expressed in a certain proportion of his participation in the LLC. In fact, the share gives the subject the right to manage the company’s affairs in proportion to the share of his participation in the business.

Any share in the authorized capital can become the object of an order: the owner can sell, donate, or bequeath an asset in accordance with the legislation of the Russian Federation and the company’s charter.

In general, there are several mechanisms for canceling the transaction:

  • Recognition of the agreement as null and void. This is possible if it is drawn up in violation of the legislation of the Russian Federation. Thus, such a contract will not be legitimate initially. Recognition of any transactions as void occurs through the court with reference to the grounds of Articles 168-172 of the Civil Code of the Russian Federation. The conditions include signing a contract with minors, the presence of forged or forged documents.
  • Termination of the purchase/sale agreement. The agreement can be terminated by mutual consent of the participants or at the request of only one party: the seller or the buyer. In the second case, the injured party must file an application to the court and, in accordance with Article 451 of the Civil Code of the Russian Federation, demand to terminate the purchase/sale agreement. The reasons for such actions may be the refusal to transfer the payment or the delay in paying the required amount to the former owner of the shares from the buyer.
  • Challenging the share purchase/sale agreement. The mechanism assumes the recognition of the agreement as invalid, provided that the rights of subjects related to the signed agreement are violated. The contesting procedure is notable for the fact that not only the seller or buyer, but also third parties from among the heirs or creditors can initiate the filing of a claim to the court.

In this article, we will tell you in detail about the procedure for challenging purchase/sale agreements.

Nuances of challenging the share purchase/sale agreement

As we noted earlier, a transaction for the purchase or sale of assets related to the management of a limited liability company may be challenged, and in fact invalidated, by the claim of any of the parties or third parties. It depends on whose rights have been violated in this situation. The contesting of purchase/sale transactions is regulated by Article 166 of the Civil Code of the Russian Federation, which says about the violation of the rights and legitimate interests of citizens, including those related to the occurrence of adverse consequences.

It is important to note that there are quite a lot of conditions and legal grounds for filing a claim for cancellation of a transaction through contesting. Among them there are both imaginary and real grounds that are somehow connected with the abuse of authority by one of the parties. However, the court will accept any claim for consideration since detailed cases are considered at the court session.

Among the main conditions under which the contract can be canceled should be highlighted:

  • Violation of the procedure for alienation of a share in the company’s capital by sale. Here it would be logical to demand the transfer of rights under such an agreement (according to paragraph 18 of Article 21 of the law “On Limited Liability Companies”), but the courts also accept applications to challenge the transaction.
  • Challenging the agreement by declaring it null and void. It is important to keep in mind the different deadlines for filing an application to the court. So, if the purpose of the transaction was to withdraw assets from foreclosure, which violates the rights of creditors, then a three-year period is applied. In case of violation of the mechanism of alienation of the share through sale, the affected party has a year to file a claim. To understand whether the order of sale has been violated or not, you need to familiarize yourself with the purchase and sale agreement, the company’s charter, and the corporate agreement, if any.
  • Violation of the company’s charter is one of the most common reasons for canceling a transaction.
  • Challenging purchase/sale agreements in bankruptcy proceedings. On the basis of Article 61.2 of the Law “On Insolvency (Bankruptcy)”, the contract may be cancelled by creditors if the asset was sold at a much-reduced value compared to the market value. Then the transaction will have signs of suspicious.
  • In the absence of the consent of one of the spouses to sell a share in the authorized capital of the LLC, if it is a jointly acquired asset.
  • The buyer’s misconception about the subject of the transaction.

When deciding, the court will take into account all the evidence collected, on the basis of which it is possible to make a specific decision: to satisfy the plaintiff’s claims or to refuse to satisfy them. For example, if the cancelled share purchase and sale agreement was concluded in violation of the provisions of the law “On Limited Liability Companies”, then the probability of challenging it is quite high. Also, a violation may be considered a situation when the pre-emptive right to purchase a share in an LLC was violated, or the procedure for holding a meeting that was organized with violations was challenged.

Lawsuit challenging the share purchase/sale agreement

Challenging transactions by going to court is a difficult task, but doable. To achieve a positive result, it is necessary to provide the court with evidence of their rightness, namely, to confirm the fact of violation of rights. Why is this happening? The fact is that it is possible to recognize the purchase/sale agreement as invalid only if its existence violates the rights of the plaintiff. In the case of a challenge, the case is complicated by the presence of imaginary conditions and the expansion of the circle of third parties who have the right to challenge the agreement. Corporate affairs are always complicated by the presence of hereditary, business, and other factors.

Who can challenge the transaction by filing an appropriate statement of claim?

  • A seller represented by an LLC or a member of the company.
  • The buyer is represented by an LLC or an individual.
  • Heirs of the deceased holder of the share, who sold it shortly before his death.
  • The company and its founders who did not participate in the purchase/sale but believe that the transaction violates their rights. It is important to keep in mind here that the director and other managers from among the management do not have the right to file a lawsuit.
  • Bankruptcy trustee and bankruptcy creditors in case of bankruptcy of the company.
  • State bodies, for example, the prosecutor’s office, if there are legal grounds.

The statement of claim must necessarily include:

  • Personal data of the plaintiff and the defendant – full name or name of the organization, addresses and contact phone numbers.
  • Full name of the court that will consider the claim.
  • Correctly and competently formulated plot of the case – where and when the transaction was concluded, the subject of the purchase / sale agreement, the value of the transaction.
  • Claims made against the defendant. In this case, we are talking about the recognition of the agreement as invalid.
  • A list of attached official papers, including the examinations carried out.

In general, cases of contesting transactions of an agreement for the purchase/sale of a share in the authorized capital of a limited liability company relate to corporate disputes, the outcome of which depends on a carefully collected evidence base. VALEN’s lawyers have extensive experience in handling such cases, including consulting services and representing clients in the courtroom.

Question and answer

The founder of the LLC withdrew from the membership of the company without the notarial consent of the spouse, considering that the share is joint property. The woman wants to challenge the transaction based on violation of her rights. In what time frame is it necessary to file an application to the court in this case?

The limitation period for applying to the court is one year from the date when the spouse learned or should have learned about her husband’s withdrawal from the founders.
 
In this case, the share in the authorized capital of the company, which was issued during the marriage, is the jointly acquired property of the spouses. Paragraph 3 of Article 35 of the Family Code states that it is possible to dispose of such property after obtaining the notarial consent of the second spouse to dispose of the asset. Given the circumstances of the case, the spouse has a great chance to challenge the transaction.

What are the risks of selling a share in the authorized capital of an LLC that is under arrest?

In this case, a bailiff may apply to the court to challenge the transaction.
However, it is important to remember that in this case the subject abuses his rights during enforcement proceedings and acts in circumvention of the law.
 
Here the debtor may face two types of consequences. The first is the recognition of the transaction as invalid based on the existence of a sale purpose other than the one that the parties usually pursue when signing the agreement. The second consequence is the seizure of the sold asset based on clause 2 of Article 174.1 of the Civil Code of the Russian Federation. In the latter case, the buyer can file a claim with the court.

Author of the article
Contesting the purchase/sale of a share. The procedure and methods of cancellation of the contract. Nuances of the procedure
Valentina Khlavich
Managing Partner
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