Major Transactions and Interested-Party Transactions in an LLC in Uzbekistan

What a major transaction is

A major transaction is a transaction, or several related transactions, to acquire, dispose of or possibly dispose of property worth more than twenty-five percent of the company’s net assets according to the financial statements for the last reporting period before the decision (Article 50). The charter may set a higher threshold.

Transactions in the ordinary course of business are not major transactions (Article 50). Property being disposed of is valued according to the accounting records, and property being acquired at the offered price.

Who approves a major transaction

• As a general rule, the general meeting of participants (Article 50).
• If the company has a supervisory board, the charter may give it the power to approve major transactions involving property worth twenty-five to fifty percent of the value of the company’s property (Article 50).
• The supervisory board is liable to the general meeting for losses from a major transaction concluded through its fault (Article 50).
• If a major transaction is also a transaction with an affiliated person, the rules on major transactions apply (Article 58).

Interested-party transactions

The company may not, without the consent of the general meeting, conclude transactions in which a supervisory board member, the director, a member of the collegial executive body or a participant holding, together with its affiliates, twenty percent or more of the votes is interested (Article 49). These persons, their spouses, parents, children, brothers and sisters and their affiliates are interested if they:

• are a party to the transaction or represent third parties in dealings with the company;
• hold twenty percent or more of the shares (units, stakes) of a legal entity that is a party;
• hold positions in the management bodies of a legal entity that is a party;
• the charter may provide for other cases of interest (Article 49).

How an interested-party transaction is approved

• Interested persons must inform the general meeting of legal entities in which they or their relatives hold twenty percent or more or hold positions, and of intended transactions (Article 49).
• The general meeting decides by a majority of the votes of participants not interested in the transaction (Article 49).
• If the transaction was concluded in the ordinary course of business before the person became interested, no meeting decision is needed until the next general meeting (Article 49).
• Where there is a supervisory board, the charter may give it this power, except for transactions exceeding five percent of the value of the company’s property under the latest financial statements (Article 49).

Transactions with affiliated persons

The law treats as affiliated persons, in particular, a legal entity or an individual together with close relatives holding twenty percent or more of the stakes, the director and members of the governing bodies, subsidiaries and legal entities in the same business group (Article 55). The procedure for transactions with them is as follows:

• the affiliated person notifies the company in writing of the intended transaction and its material terms (Article 56);
• the executive body and the internal audit service (if any) review the transaction within three working days and record the results in minutes (Article 57);
• the supervisory board decides no later than fifteen days after receiving the notice; if two or more board members are affiliated, the general meeting decides (Article 58);
• the affiliated person does not take part in the discussion or vote; the decision is taken unanimously by the board members present or by a qualified majority of at least two thirds of votes at the meeting (Article 58);
• for transactions worth ten percent or more of net assets, the decision must take into account the market value set by an appraiser and a review of the terms by an independent external audit firm (Article 58);
• information on transactions with affiliated persons is an integral part of the company’s annual report (Article 56).

Consequences of a breach

• A major or interested-party transaction concluded in breach of the procedure may be declared invalid by a court on a claim by the company or a participant (Articles 49, 50).
• The interested person is liable to the company for the loss caused; if several persons are liable, liability is joint and several (Article 49).
• If the loss resulted from the director’s breach of the procedure for major or affiliated-party transactions and the director’s fault is proven, the director bears subsidiary liability for the company’s obligations to creditors when its property is insufficient (Article 46).
• A participant holding at least five percent may independently engage an audit firm to look into signs of a breach; if a court confirms the breach, the company reimburses the costs up to the market value of the services (Article 59).
• A court will not invalidate a transaction with an affiliated person if, for example, the claimant’s vote could not have affected the result or the transaction was subsequently approved in the established manner (Article 59).

What to check in LLC due diligence

• the register of transactions for the review period and the 25% net assets test for each significant transaction;
• minutes of general meetings and supervisory board meetings approving them;
• information on the interests and affiliations of the director and major participants;
• review minutes for affiliated-party transactions, and appraisal and audit reports for transactions of 10% of net assets or more;
• disclosure of affiliated-party transactions in the annual report.