Increase of the LLC authorized capital by the contribution of a new member

In the current practice of corporate relations, the issue about the possibility of increasing the size of the authorized capital of a limited liability company remains, in particular, by accepting a new member with a supplementary contribution into a partnership. On the one hand, such a way can be a convenient way to attract investmentand replenish its available capital. On the other hand, including a new member with an independent contribution causes the redistribution of the shares of existing company members and leads to their reduction. Due to such a mechanism is often applied in practice to seize control of the company and commit illegal actions to alienate a proper partnership property. This controversial situation is facilitated by the insufficiently clear position of Ukrainian legislation in regulating the issues. In accordance with Part 6 of the Article 144 of the Civil Code of Ukraine, an increase in the authorized capital of a limited liability company shall be allowed after all contributions of it’s members have been made in full. The procedure for making additional deposits is established by the law and the company charter. In accordance with the second part of Article 51 of the Law of Ukraine “On Business Associations”, changes in the value of the property made as a contribution and the additional contributions of members do not affect the size of their share in the authorized capital specified in the constituent documents of the company, unless otherwise prescribed by constituent documents.

Article 53 of the Law of Ukraine “On Business Associations”; contains an exhaustive list of grounds for the transfer of a share (part thereof) of a member of a limited liability company to another person: a member of a limited liability company has the right to sell or otherwise withdraw their share (their part) in the authorized capital to one or more company members. Alienation of their share (their part) by a member of a limited liability company to a third party is allowed, unless otherwise provided by the company charter. In accordance with Clause 10, Part 4 of the Article 17 of the Law of Ukraine “On the State Registration of Legal Entities, Individual Entrepreneurs and Public Bodies” for the state registration of changes to the information on a legal entity contained in the Unified State Register, including changes to the constituent documents of a legal entity related to the change in the number of the founders (members) of a legal entity, the following documents shall be filed: a copy of the original (notarized copy) of the decision of the authorized management body of the legal entity on the withdrawal from the founders (members) and / or statement of the natural person about an initiative from the founders (members) and / or the contract, another document on the transfer of the share of the founder (member) in the authorized (stock) capital (unit fund) of the legal entity, and / or the decision of the authorized body of management of the legal entity on the compulsory withdrawal of the founders (members) of the legal entity, or a photocopy of the death certificate of an individual, a judicial decision to recognize a natural person as missing. Based on the system analysis of the above-mentioned regulations of the Civil Code of Ukraine, the Law of Ukraine “On Business Associations”, the Law of Ukraine “On State Registration of Legal Entities, Individual Entrepreneurs and Public Bodies”, we come to the conclusion that the legislation provides for a procedure for changing the number of partnerships members in order to increase the size of the company’s fixed capital, only in the manner in which one of the members of the limited liability company transfers their share or a part of it to the third person in one way or another so that it can provided for the already existing members. After that, already existing members may increase the authorized capital of the company by making additional contributions to the members, while, unless otherwise specified in the charter, such additional contributions should not affect the size of the share of each of these members in the authorized capital of the company.

It is obvious that such a procedure can cause significant difficulties in practice. Therefore, if there is an interested investor who wants to invest in the company in exchange for a share in its authorized capital, first of all, it is necessary to co-opt such a person, alienate a share (or a part thereof) of the already existing member of the company to him. Then, it is necessary to increase the authorized capital of the company by making additional contributions of members. Taking into account the requirement of the legislation that such additional contributions should not affect the size of the member’s share, respectively, all members, together with the initial investor, should make additional contributions proportionate to their shares in order to maintain their size. However, in the event that the rest of the members do not intend to make additional funds to increase their share, the increase of the authorized capital of the company in the presence of the initiative of only one member becomes virtually impossible. In practice, company members often neglect this order, given that there is no direct prohibition on increasing the authorized capital by including a new member and raising funds in the authorized capital due to the increase of the authorized capital. A negative result of such a method of attracting additional funds may lie in the fact that due to the contribution of a new member there may be a significant reduction in the shares of existing members without their knowledge if the latter did not participate in the general meeting and were not informed about the general agenda for one reason or another.

Due to the above-mentioned issues, it is considered appropriate to include the following provision in the company charter: the changes in the value of the property made as a contribution and the additional contributions of the members may affect the size of their share in the authorized capital of the company. At the same time, in order to ensure extra guarantees and to protect the rights of the founders of a company, it is necessary to prescribe, for example, the greater number of votes required for approval of the decision on the acceptance of new members at the general meeting of the company.