Reform of payments upon the withdrawal of participants from a limited liability company: transition to market valuation of shares
The Government Commission has approved important amendments to the legislation on limited liability companies. The essence of the reform is to give LLC participants the right to receive payments for their shares at market value upon withdrawal from the company, rather than only at book value, as is currently the case.
Currently, the amount of payments upon withdrawal from an LLC is calculated solely on the basis of the book value of the company’s net assets. This approach often leads to a significant underestimation of the real value of the share, as the book value does not take into account many factors. Discrepancies are particularly noticeable when valuing real estate, expensive equipment, intangible assets (such as brand or goodwill), and intellectual property. This discrepancy has been the cause of numerous corporate conflicts and litigation.
Key provisions of the proposed changes
The new mechanism provides for several fundamental innovations:
- Firstly, the market value of a share may be determined by an independent appraiser.
- Secondly, the participant gets the right to initiate such valuation independently.
- Thirdly, the application of market valuation becomes obligatory in the presence of a corresponding application from the withdrawing participant.
Special attention is paid to guarantees of payments – even in case of a delay in determining the market value, the participant will not be left without compensation.
The payment procedure will be carried out according to the following algorithm. If the market value of the share is not determined within the period established by law, the company is obliged to pay the participant the amount calculated at book value. After the market value is finally determined, a recalculation is made: if the market value exceeds the amount paid, the company pays the difference, and in the reverse situation, the participant returns the excess funds received.
Potential difficulties in realisation
Experts draw attention to a number of controversial issues that may arise when applying the new rules:
- In particular, the issue of payment for appraiser’s services remains unclear – who should bear these costs.
- The possibility of engaging several appraisers by different parties may lead to contradictory appraisal results.
- Practical difficulties may also arise with the procedure for refunding overpaid amounts.
- Some experts even predict an increase in the number of legal disputes, albeit with a change in their subject matter.
Despite the possible difficulties of application, the new system of calculations has significant advantages. It will unify the methodology of valuation of shares and reduce opportunities for abuse by companies. In essence, the draft law consolidates the approaches already established in court practice, but makes them more accessible to all participants in corporate relations. This will give LLC participants more tools to protect their property interests.
The proposed reform is aimed at creating fairer and more transparent conditions for the withdrawal of participants from LLCs. However, its practical effectiveness will largely depend on the detailing of procedural issues, which should be reflected in bylaws and clarifications of regulatory bodies. An equally important role will be played by the formation of a uniform judicial practice of application of the new norms. In general, the amendments should be assessed as a positive step in the development of corporate legislation.