The transfer of a business share is a routine process in corporate transactions. A share purchase agreement (SPA) must be in writing with notarized signatures. The transfer becomes effective upon the company's receipt of the SPA unless a later date is specified. However, if required by law or the memorandum of association (MoA), it cannot take effect before the general meeting grants approval. Each transfer must also be registered in the Slovak Commercial Register (“Commercial Register”). In practice, complications may arise when one party withdraws from an SPA.
CASE
Company A and Company B entered into an SPA under which Company A transferred a business share in Company C to Company B for a purchase price. However, Company B failed to pay, which led Company A to withdraw from the agreement and request the return of the share. Company B agreed to cooperate, including facilitating the required registration changes with the Commercial Register.
The key questions are: Is withdrawal from the SPA sufficient for de-registration in the Commercial Register? How can the original status be restored?
PRACTICE
When registering a change in the commercial register due to the withdrawal from the SPA, Commercial Register in practice often requires not only the submission of a document containing the declaration of intent to withdraw from the SPA and proof of its delivery to the other contracting party, but also the submission of the new SPA for the reverse transfer of the business share from the original acquirer (Company B) back to the original transferor (Company A). Is such a procedure correct?
In the Slovak legal system, withdrawal from an agreement constitutes a unilateral legal act (by Company A), which creates an obligation for the other party (Company B) to return what was provided (the business share). Since the consequence of withdrawal is the obligation to return the business share and not an automatic transfer of the business share, the registration of the shareholder change in the Commercial Register also requires the conclusion of the second “reverse” SPA. If Company B does not co-operate, the transfer of the business share will not occur. This formal requirement can present several practical obstacles, outlined below.
Since Company B did not pay the purchase price for the business share, the SPA concluded after the withdrawal should be without consideration. However, nothing prevents Company B from setting a different condition for the reverse transfer of the business share if the settlement is not amicable as in scenario above.
In reverse transfer, the original seller (Company A) may be interested in due diligence or receiving representations and warranties from the Company B. The process also involves additional costs, including preparation of the SPA, registration fees, and potentially due diligence expenses. Hence, it is advisable that in larger transactions, a scenario of reverse transfer should be captured in greater detail in the transaction documentation. Another viable solution is to always insist on escrow structure, here the purchase price is deposited beforehand. Even in the case of a reverse transfer, the approval of the general meeting is necessary if required by law or the MoA. This step prolongs the entire reverse transfer process and involves a third party that may have no interest in the reverse transfer, particularly if relations among shareholders were not amicable. The matter can become even more complex, if only part of shares was subject to transfer and reverse transfer in a setting with pre-emptive right of the remaining shareholders.
The absence of an automatic transfer of the business share in the event of withdrawal from the SPA brings numerous challenges that should be considered during the preparation of the SPA.
By David Kozak, Associate, Majernik & Mihalikova, PONTES
