A legal dispute between the participants of LLC

Disputes Between LLC Participants

In practice, corporate disputes may concern:

• ownership of a share in the charter capital;
• sale or transfer of a share to another person;
• violation of the pre-emptive right to acquire a share;
• the size of participants’ shares;
• the amount of charter capital;
• decisions of the general meeting;
• appointment or replacement of the director;
• actions of the company’s management;
• access to corporate information;
• allocation of control between partners;
• exit of one of the participants from the business;
• other issues relating to the exercise of corporate rights.

Court practice includes, in particular, disputes concerning recovery of a share, determination of the amount of charter capital and participants’ shares, invalidation of share transfer agreements, recovery of the value of a share, transfer of the buyer’s rights, and challenges to decisions of the general meeting.

Benefits of Working with Prikhodko & Partners

We help:

• analyze the charter and corporate structure;
• review the history of changes in participants’ shares;
• analyze minutes of the general meeting;
• review information in the Unified State Register;
• assess the legality of share-related transactions;
• identify the violated corporate right;
• select an effective method of protection;
• prepare a formal claim or lawsuit;
• represent the client before the commercial court;
• support negotiations between participants.

Dispute Over the Sale of a Share in an LLC

The Law on LLCs provides participants with a pre-emptive right to acquire another participant’s share when it is sold to a third party, unless otherwise follows from lawful corporate arrangements.

Before the sale, the seller must properly notify the other participants of the intention to transfer the share and the terms of the sale.

If the pre-emptive right has been violated, an appropriate method of protection may be a claim for transfer of the buyer’s rights and obligations. The Supreme Court has expressly noted that a simple claim to “recognize a pre-emptive right” is declarative and does not restore it in the same way as transfer of the buyer’s rights.

It is necessary to check:

• whether the participant had a pre-emptive right;
• how the seller notified the other participants;
• what price and sale terms were offered;
• to whom the share was actually sold;
• whether the terms of the actual transaction differed from those offered to the participants;
• whether the participant waived the pre-emptive right;
• how the participant behaved after learning about the sale;
• what corporate arrangements were in effect between the parties.

The Supreme Court has indicated that a breach of the formal notification procedure does not in every case automatically mean a violation of the pre-emptive right — the court also evaluates the participant’s actual conduct and possible waiver of that right.

In such cases, choosing the proper method of protection is especially important.

Disputes Over Shares and Charter Capital

Depending on the specific circumstances, this may include:

• recovery of a share from unlawful possession;
• determination of the size of a participant’s share;
• determination of the amount of charter capital;
• challenging changes in the composition of participants;
• challenging a transaction involving transfer of a share;
• recovery of the value of a share;
• restoration of corporate control;
• other claims relating to rights to a corporate share.

The Supreme Court has confirmed that determination of the amount of charter capital and participants’ shares may itself be an appropriate method of protection in certain corporate disputes and is not necessarily an interference with the exclusive competence of the general meeting.

Challenging Decisions of the LLC General Meeting

Grounds for a dispute may include:

• the participant was not notified about the meeting;
• the procedure for convening the general meeting was violated;
• the participant was not provided with information about the agenda;
• the decision was adopted without the required number of votes;
• participants’ votes were counted incorrectly;
• the meeting adopted a decision outside its competence;
• the decision contradicts the charter or applicable law;
• the procedural violation affected the participant’s corporate rights;
• the minutes do not reflect what actually occurred at the meeting.

At the same time, not every formal procedural violation automatically results in invalidity of the decision.

During the analysis, it is necessary to establish:

• which specific violation occurred;
• whether it could have affected the voting result;
• whether the participant was deprived of the opportunity to participate in management;
• which specific corporate right was violated;
• whether the chosen claim corresponds to the nature of the violation;
• what legal consequences were created by the disputed decision.

Important evidence for the court may include:

• the text of the charter;
• the notice of the meeting;
• proof that it was sent;
• the agenda;
• minutes of the general meeting;
• voting results;
• corporate correspondence;
• subsequent registration actions;
• the actual impact of the decision on the participant’s rights.

Therefore, a statement such as “I was not invited” may not be sufficient on its own — the court evaluates the entire corporate context and the effect of the violation on the participant’s rights.

Disputes Concerning Company Management and the Director

Participants may dispute:

• appointment of the director;
• early termination of the director’s powers;
• limitations on the director’s authority;
• conclusion of major transactions;
• use of company funds;
• obtaining loans and financing;
• disposal of assets;
• payment of dividends;
• participants’ access to documents;
• related-party transactions.

If the charter or corporate agreement contains a special procedure for approving such decisions, it is of key importance when developing the legal position.

For example:

• certain actions of the director may require prior approval of the general meeting;
• certain transactions may require an increased voting threshold;
• participants may have agreed on veto rights;
• the corporate agreement may establish a special voting procedure;
• internal restrictions may apply to disposal of assets.

Disputes Over Corporate Rights and Registration Actions

In such disputes, it is necessary to distinguish between:

• the right to a share;
• information entered in the Unified State Register;
• the corporate decision on which the registration was based;
• the transaction as a result of which the owner of the share changed;
• actions of the state registrar;
• actions of other participants or company officers.

Possible consequences may include:

• changes in the composition of participants in the Unified State Register;
• loss of corporate control;
• change in the size of a share;
• replacement of the director;
• restriction of access to the company;
• amendment of the charter;
• other registration consequences.

It is important to determine not only which result must be reversed, but also which initial legal action became the basis for the change in corporate rights.

Deadlock and Conflict Between 50/50 Partners

If two participants have equal shares and cannot agree on key decisions, the company may effectively lose the ability to operate normally.

In such a situation, court proceedings are not always the only or the best solution.

Possible options may include:

• negotiations between the partners;
• mediation;
• buyout of one participant’s share by the other;
• sale of a share to a third party;
• change of the corporate governance model;
• a new corporate agreement;
• agreement on an exit mechanism for one of the partners;
• court protection of a specific violated right.

If a corporate agreement containing a deadlock mechanism was concluded in advance, its provisions may significantly affect the possible conflict resolution scenario.

Which Documents Should Be Reviewed in a Corporate Dispute

The lawyer analyzes:

• the current and previous versions of the charter;
• information from the Unified State Register;
• minutes of the general meeting;
• resolutions of the sole participant;
• sale and purchase or gift agreements relating to shares;
• share transfer acceptance acts;
• the corporate agreement;
• investment agreements;
• notices concerning the sale of shares;
• corporate correspondence;
• documents concerning the director;
• registration documents;
• banking and financial materials where necessary;
• other evidence of corporate relations.

The chronology of the documents often makes it possible to establish the moment of violation and determine the correct legal structure of the claim.

Can a Corporate Dispute Be Resolved Without Court?

Negotiations may be appropriate if the parties are still willing to:

• discuss a buyout or sale of a share;
• change the distribution of authority;
• agree on a new management procedure;
• sign a corporate agreement;
• revise investment terms;
• appoint a new director;
• agree on the exit of one of the participants;
• terminate mutual claims on agreed terms.

A lawyer can develop a negotiation position while simultaneously preparing a litigation strategy in case no agreement is reached.

In a corporate conflict, it is important not only to win a particular lawsuit, but also to understand how the court decision will affect further company management and relations between the participants.

Cost of Legal Support for a Corporate Dispute

The cost is affected by:

• the nature of the corporate conflict;
• the number of participants;
• the size and structure of shares;
• the volume of corporate documents;
• the number of disputed general meeting decisions;
• the existence of share-related agreements;
• the need to analyze registration actions;
• the existence of a corporate agreement;
• the need for negotiations;
• the complexity of the court claims;
• the number of court hearings;
• the need for appellate or cassation support.

In one case, document analysis and negotiations between participants may be sufficient. In another, a comprehensive court dispute involving shares, general meeting decisions, and registration actions may be required.

Common Corporate Disputes Between LLC Participants

Conclusion

Disputes between LLC participants require precise identification of the violated corporate right and the appropriate method of protecting it. Depending on the circumstances, the conflict may concern a share, pre-emptive rights, decisions of the general meeting, actions of the director, or registration changes. Before applying to court, it is necessary to reconstruct the corporate history, review the documents, and determine exactly which result must be achieved in order to genuinely restore the participant’s rights.

Has a conflict arisen between LLC participants over shares, management, or decisions of the general meeting? Submit a request on the Prikhodko & Partners Law Firm website. A lawyer will analyze the corporate documents, determine an effective method of protection, and prepare a negotiation or litigation strategy.