Share transfer restrictions in closely held corporations: shareholders' protection and exit strategies

The Slovak law on limited liability companies provides for different requirements for share transfers among the shareholders and the transfer to a person outside the company. While the transfer of a share to another shareholder is allowed with the consent of the general meeting, the transfer of a share to is prohibited by default provisions, unless explicitly allowed by the articles of association, while it may still be subject to the consent of the general meeting. Although the Slovak Commercial Code explicitly establishes (intracompany transfer) or admits (external transfer) a share transfer restriction by consent of the general meeting and articulates the consequences of a dissent (transfer not effective towards the company), it does not explicitly provide as to whether it is also possible to restrict the transfers by other means, or whether a transfer to another shareholder may be completely excluded. However, relying on the fundamental principle of the autonomy of shareholders' will, we assume that in a limited liability company, shareholders can stipulate a wide variety of terms and rules that either restrict any transfers, or even exclude them completely.

Although the only restriction the law provides with respect to a limited liability company is the consent of the general meeting (which will be discussed in more details further below), the default nature of Section 115 of the Slovak Commercial Code allows to draft various forms of share transfer restrictions. Individual methods of restricting share transfers include the , that both prohibit share transfers in general (transfer exclusion), or subject the transfer to certain (such as the articles of association providing that within five years from the company formation, the shareholder must not transfer its share to another shareholder or a third party), or on potential acquirers (such as transfer prohibition applying to all persons, except for relatives, the transfer is permitted to existing shareholders only, or the prospective acquiring shareholder is subject to other restrictions relating to education, expertise or kinship). Moreover, the transfer of a share might be subject to the provision of specific terms and rules (such as prohibition to donate the share, admissibility of transfer only upon the settlement of the entire shareholder's contribution, etc.). Shareholders may also be bound by certain conditions only on selected transfers (such as transfer for value to a person other than relatives). The articles of association may further stipulate the terms of transfers in the form of information obligations of the transferring shareholder with respect to other shareholders/company or as an obligation set for (each) acquirer to accede to the shareholders' agreement. Individual restrictions may be drafted as positive or negative requirements. Since a proof of having fulfilled the abovementioned terms of transfer may prove to be difficult in practice, it is recommended to leave the review of their fulfilment to a company body.

We further distinguish , namely clauses requiring the consent of the general meeting or other corporate boards, specific shareholders with the right to overrule the decision (shareholders with veto right), or of third parties. In our opinion, the transfer of a share in the company may also be restricted by requirement of the consent of a person outside the company (bank, father of a family whose sons are shareholders). The transferability of share may also be restricted by utilizing various forms of pre-emptive right, such as the right of first refusal, the right of first offer, or options (call option, put option). Other share transfer restrictions include the tag-along right, the drag-along right, and the sh