Some shortcomings in the Corporate Law





In my practice I had cases, where it was vital to secure the transfer (sale) of shares, and the standard “special pledge” had to be established on them. I have faced then one of the shortcomings and defects in this type of security – even if the shares in transfer are pledged in favor of the transferor until these are paid in full, the other shareholders who hold majority in the JSC legally can initiate raising of the capital of the company, where to reduce the actual value of the transferred shares, respectively to affect the interests of the transferor, without him being able to react.

The second problem in obtaining good security for the transferor of shares was the fact that the seller of shares, once pulled out of the company, could not monitor any longer what future liabilities the company may undertake to third parties in its business practice. In simple words, it could take loans from third parties (banks) for lot of money and then due to unsuccessful repayment of its debts to lose its valuable assets. So at the end of the day it may turn out that the creditor of this empty company may hold pledged shares without actual value.

Another shortcoming of this part of the Corporate Law is related to the fact that a holder of minority of shares in Joint Stock Compan usually cannot react against rise of the capital, if it is performed in accordance to the Law and if unanimity has not been established as a necessary condition in the Articles of Association. In other words, raising the capital of a JSC very often represents a legal instrument of these who hold majority of shares, to attack the rights of the shareholders with minor participation.




In conclusion I need to point the fact that according to the provisions of the local Corporate Law, unfortunately it is legally possible to transfer all the shares of a corporate entity which has millions in debt towards creditors and/or the State, towards some poor person who has no assets; wherein this way to get rid of the company and to avoid holding liability for taxes, Capital Gains, VAT, etc. Unfortunately there have been many examples during the years where companies in huge debt have been transferred to homeless and poor people, so the owners of these companies could avoid and escape from liability towards creditors and Tax Authorities, after expiration of six-months shared liability with the new owner.

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