Legal perspective: Transfer and assignment of shares in LLCs

Each and every partner in a limited liability company (LLC) has the right to transfer or assign his shares, or part of them, to another partner. This could be a family transfer or a gift, or the transfer could be for pure commercial purposes, ie., selling the shares to another partner in the company.

All actions taken by a partner in this respect should be formally documented according to the Articles of Association (AoA) of the company. The transfer shall be properly recorded and be valid from the date of recording the transaction in the register of the company, as well as in the commercial register at the Ministry of Economy and Commerce.

This means the transaction, in whatever form, is of no legal value before formal and official registration. The management of the company can refrain from registration in case the transaction is inconsistent or violates the rules stipulated in the AoA of the company.

Otherwise, the management of the company is obliged to register the transaction as desired and concluded by the concerned partners. However, the law provides that the transfer or assignment shall not give a way to foreign partners to exceed the statutory limit of 49 per cent shareholding in the company. Also, the number of partners in the LLC shall not exceed at any time fifty partners.

This means the transfer shall not be accepted in case it makes the number of foreign partners exceed the ceiling nor shall it allow the number of partners exceed 50 .

Transfer or assignment of shares, being for financial consideration or otherwise, is allowed to third parties who are not partners in the company. However, existing partners have, according to the law, a pre-emptive right. This is a privilege given by the law due to their financial and other previous links with the company.

The procedure to be followed in this respect means that in case a partner wishes to give his shares to a non-partner, he should notify all partners through the management of the company about his intention before disposing off his shares.

Partners, after receiving the notice, shall inform the management and the concerned partner about their interest, if any, to acquire the shares. The price of the shares shall be agreed upon between the two partners.

They both have insider information about the company that gives them a better position to reach an acceptable compromise. In case of disagreement regarding the price for any reason, the law says that the auditor of the company shall evaluate the price of the shares at that particular time, ie. during the acquisition.

It goes without saying that the auditor shall act as a professional independent body and should perform his duty with all professionalism and required ethics while in the process of exercising this power.

The auditor, in this context, shall be guided by the market price and other surrounding circumstances related to the company and the shares. The exercise of the pre-emptive right is given to the existing partners, for a limited period. This grace period, if we could say, is only for thirty days wherein the partners could claim their right and deprive non-partners from coming in.

However, in case the partners did not exercise the pre-emption right within this period, or likewise if the parties did not reach an agreement regarding the price, then, the partner is free to dispose off his shares to any potential buyer.

A. Warsama Ghalib is legal advisor to the Central bank. The opinions expressed above are his own.