Business share in a limited liability company

Are you a shareholder in a limited liability company? What does the share represent, what rights and obligations are associated with it and how can the share be transferred or otherwise disposed of? We have looked at this in our article.

továrna, společnost s ručením omezeným, podíl ve společnosti
8 minutes of reading

Chapters of the article

Business share

A business share represents the participation of individual shareholders in the company in the form of a set of mutual rights and obligations between them and the company. It can be said that it is essentially the main conceptual feature of a limited liability company (s.r.o.), thanks to which the shareholder exercises all the rights associated with it. A shareholder may also own more than one share in a business corporation. When the contribution is increased, the amount of his share increases, but it can also decrease. However, its value is essentially independent of the amount of the contribution.

From a quantitative point of view, the share is characterised primarily by its size, which expresses its legal position in relation to the other shareholders, and its value, i.e. its valuation in money, which is of particular importance in the case of dispositions of the share, such as sale, donation, etc.

Valuation of the value of the share

It must be said that the value of a share is not a stable number and can change significantly from year to year or even from minute to minute. The basic contribution of an individual shareholder is not essential for determining the value. What it does affect is:

  • the amount of the company’s assets,
  • the economic stability of the company,
  • the number of votes attached to the shareholding for voting at the general meeting,
  • in some cases, the type of share, if the articles of association allow for different types of shares.

Negative factors such as debts of the company, criminal proceedings against the company or execution proceedings against the company also have an impact on the calculation of the value of the share.

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Transfer of business share

Mr David, who had a construction company in the form of a limited company, contacted the office of an Accessible Solicitor. His intention was to somehow gift the company or his shareholding to his son Prokop, but he was unsure what form the gift should take.

In the present case, the procedure is clear. There will be a (gratuitous) transfer of the shareholding even though Mr David was the sole shareholder at the time. In the first place, a contract (in writing, with certified signatures) must be concluded for the transfer of the shareholding. If there was another shareholder, the general meeting would also have to approve the transfer of the shareholding.

The aforementioned consent is usually not the only one to be obtained. It is often forgotten that a business share acquired during the marriage becomes part of the community property (however the spouse of the partner does not attend general meetings or otherwise participate in the operation of the company). For this reason, the spouse’s consent is also required for the transfer of a business share (as well as for any other disposition).

As Mr David also wanted to transfer the role of managing director to his son, we drew up an affidavit for his son, in which he agreed to act as managing director and to comply with the conditions attached to it.

We also helped Mr. David with the registration in the Commercial Register, where all changes in the management of the company must be reported. The change will take place within five working days and involves the payment of a fee of CZK 2,000.

The Commercial Corporations Act does not expressly provide for the possibility of contractually negotiating a pre-emption right to a business share, but such a possibility is generally allowed. As a rule, it is a negotiation of the pre-emption right of the other shareholders to the share. In the event that more than one shareholder would exercise his/her right, it would be necessary to first divide the share and then transfer its individual parts (newly created shares) to the existing shareholders. In the case before us, this option was irrelevant.

Tip: Further, the transfer of shares can generally occur in situations where one of several partners leaves. We have dealt with the resignation and exclusion of a shareholder in our separate article.

Share released

A share shall be deemed to be released if the shareholder’s participation in the company is terminated otherwise than by transfer of his share.

The Companies Act provides that the company should attempt to sell the released share at a reasonable price and without undue delay (for example, at auction), bearing in mind that the other shareholders have a statutory pre-emption right to the released share. If the released share is sold in this way, the settlement share is the proceeds of the sale after deduction of reasonable expenses and set-off against claims against the shareholder.

Settlement share and share of the liquidation balance

On the termination of a shareholder’s participation in the company during its existence without a legal successor, a right to a settlement (i.e. a settlement share) arises. The settlement share is thus typically the proceeds from the sale of the released share.

In the event of liquidation of the company, the shareholder is entitled to a share of the liquidation balance. The liquidation balance is first distributed to the shareholders to the extent that they have fulfilled their contribution obligation. If the liquidation balance is not sufficient for this distribution, the shareholders shall share in the liquidation balance in proportion to the amount of their paid-up or paid-in contributions.

Tip: Are you considering setting up a company and don’t know what form to choose? Apart from the financial and administrative complexity, the liability of the individual partners or the company in general can be an important aspect of the decision. Therefore, read on to find out how an LLC and its partners are liable for debts.

Inheritance of a business share

Another situation where the owner of a business share changes is when the original owner dies. The share then passes to the heir or successor in title. The articles of association may also prohibit or restrict the transfer of the share (unless it is a sole proprietorship).

However, if nothing is prohibited by the contract, the heir of the deceased becomes the holder of the rights and obligations attached to the share. In the case of multiple heirs, they must agree among themselves which of them will exercise the rights of the shareholding or appoint a common trustee.

Pledge of the business share

Recently, the conditions for pledging a business share have changed so that de facto the same procedure applies as for the transfer of a share. However, each company has the additional possibility to modify the pledge of the share by limiting it to a greater extent than the transfer of the share or even prohibiting it altogether.

Enforcement of the shareholding

If one of the shareholders is in long-term debt, then creditors can be satisfied from various parts of his assets, including, but not limited to, the business share he owns. The executor must rely exclusively on the memorandum of association, which describes how the share can be disposed of and, in particular, whether it is transferable or non-transferable.

If the share is non-transferable, he must first try to auction it. In the case of a non-transferable share, the procedure is to go through the so-called settlement share, which will then be sent back to the bailiff’s account.

The method of calculating the value of the settlement share may be contained in the memorandum of association at the time of incorporation. If this is not the case, then the settlement share is determined by the ratio of the shareholder’s equity or net assets to those of the other shareholders. The amount of the settlement share shall be calculated on the equity of the company as determined from the interim, ordinary or extraordinary accounts drawn up at the date of the termination of the shareholder’s participation in the company. However, the memorandum of association may provide that the settlement share shall be determined from the net assets of the business as ascertained by an expert’s report.

Tip: We have described how to avoid foreclosure and how to defend yourself if foreclosure occurs in our article.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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