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Experts share top pitfalls to avoid when separating tech business. Part 2

Thursday, May 27, 2021

Startup Jedi

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Every third entrepreneur out of 746 admitted that they had to part with a partner. More than a year ago, such a result of joint research was published by ReserchMe and VKontakte for business. And it seems that there is little good in this, but “divorce” is sometimes the best solution for all parties.

Lilit Yeritsyan, a lawyer (Belarus), talks about how to competently separate your tech business:

Lilit Yeritsyan, a lawyer (Belarus)

— First, let’s try to understand the concept of “tech business”. In simple terms, “tech business” means a business that is built around the latest technologies.

How easy it is to divide a business has a lot to do with how it was created, or rather registered. When it comes to a small start-up, it happens that one of the partners is registered as an individual entrepreneur, and an employment contract is concluded with the other. But this is a fundamentally wrong decision since the business itself will belong to the partner who registered as an individual entrepreneur. The second partner will not have any rights to this business, that is, he will not be able to participate in the distribution of profits, but will only receive remuneration under an employment contract. In most cases, the second partner will also not have rights to the results of intellectual activity, for example, to software developed under an employment contract.

The thing is that a work of science (which is, among other things, software), created by the author on the instructions of the employer or in the order of performance of labor duties, is recognized as an official work. The exclusive right to a work of service from the moment of its creation shall pass to the employer unless otherwise provided by the agreement between them. Accordingly, the second partner can count on using the software developed by him only if his relationship with the employer is incorrectly formalized. For example, the development of this software is not covered by the employment contract with the employer.

Now let’s consider the most classic situation when partners at the stage of business creation registered a limited liability company (LLC). The number of partners does not matter: there can be two, three, or more of them. The separation of business can be understood as the following legal actions:

  • reorganization in the form of spin-off or separation;
  • redemption of the share of one partner by another partner;
  • submission by one of the partners of an application to leave the company.

...

Reorganization in the form of separation or spin-off

Reorganization in the form of separation or spin-off

In case of reorganization in the form of separation, the old company ceases to operate and transfers its rights and obligations to the newly emerging companies. The algorithm of actions for the separation of the company is as follows:

  • a decision is made by the general meeting of participants on the reorganization of the company in the form of division, where the procedure and conditions for division are mentioned;

  • the company being reorganized or the body that made the decision to reorganize shall notify creditors, the tax body, the Federal Social Security Fund, the bank, and employees about this in writing;

  • a general meeting of participants of each of the newly emerging legal entities is held;

  • the names of each newly emerging legal entity are coordinated;

  • the authorized capital of each newly emerging legal entity is formed;

  • an inventory of the company’s assets and liabilities is carried out;

  • a separation balance sheet is drawn up and approved;

  • drafts of constituent documents of newly emerging legal entities are prepared and approved;

  • documents for state registration of newly emerging legal entities are submitted to the registering authority;

  • changes are made to labor contracts and employments record books of employees;

  • newly emerged legal entities notify interested parties about the reorganization that has taken place;

  • newly emerged legal entities open current (settlement) bank accounts.

When reorganizing in the form of a spin-off, one or several new legal entities are separated, but the old legal entity continues to exist. The algorithm of actions is similar to the one given above.

At the same time, if the reorganized legal entity is a resident of the High-Tech Park (HTP), the reorganization entails certain consequences. Recall that legal entities registered as HTP residents operate with significant benefits relative to other business entities. The status of an HTP resident is retained during a reorganization in the form of a spin-off but is lost during a reorganization in the form of separation. Accordingly, in the event of reorganization in the form of separation, the legal entity is deprived of the right to benefits provided for HTP residents. In the case of reorganization in the form of a spin-off, the HTP resident status is retained for the old, reorganized legal entity. In addition, the HTP resident must notify the Park administration of the reorganization within 10 working days from the date of the reorganization.

It is important to note that decisions on the reorganization of an LLC must be taken by all members of the company unanimously.

...

Buyout of a share of one partner by another partner

Buyout of a share of one partner by another partner

The algorithm of actions when buying out a share of one partner by another partner is as follows:

  • a member of the company makes a decision to sell a share and notifies other members of this;

  • a member of the company sells his share to another member on the basis of a sale and purchase agreement for a share in the authorized capital;

  • the company is notified of the completed purchase and sale;

  • a general meeting of participants is held, and a decision is made to amend the charter;

  • the company makes changes to the charter and registers such changes.

In this case, the amount of payment for the share is agreed between the seller and the buyer in the sales contract. The seller can himself determine the amount of the share.

...

Submission by one of the partners of an application to leave the company

Submission by one of the partners of an application to leave the company

The member can withdraw from the entity at any time. To leave the company, he does not need to obtain the consent of other members. The algorithm is as follows:

  • a member of the company submits an application for withdrawal;

  • the company decides to hold a general meeting in connection with the withdrawal of a member from the company;

  • a meeting is held on the withdrawal of a member of the company;

  • changes to the charter of the company are registered;

  • the exited member is paid the actual value of the share;

  • the company distributes this share between the remaining participants or sells it.

In practice, this option is rarely used, since the company pays the exiting participant the actual value of his share — a part of the value of net assets, in proportion to the size of the share. And the value of net assets in most cases does not coincide with the real value of the business.

With regard to HTP residents, it should be noted that if the owner of the property or the composition of the founders’ changes, if this is not related to the reorganization, the status of the HTP resident is retained.

The main normative legal acts that regulate the separation of the technology business in Belarus are the Law of the Republic of Belarus dated 09.12.1992 №2020-XII “On Business Entities” and the Decree of the President of the Republic of Belarus dated 22.09.2005 №12 “On the Hi-Tech Park”.

27 May 2021

 

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