- May 11, 2023
“Call ” and “Buyback” Options for Ownership in a Company. Why These Instruments Might Be of Interest to Russian and Foreign Businesses.
What are the options, and why are they needed?
Under Russian corporate law, it is possible to conclude “call” and “buyback” options for ownership in a limited liability company (LLC). These transactions represent a fast and convenient way to transfer ownership in an LLC and can significantly reduce legal and economic risks. Currently, options are increasingly being used to structure partnerships in investment deals.
The call option provides a potential investor or key employee of the company with the right to acquire a share in the LLC upon the occurrence of a certain event. This option allows for the acquisition of a new share or an increase in the size of the current ownership. The call option for ownership in an LLC is widely used, for example, to allow key employees to acquire shares in the LLC upon achieving KPIs.
The buyback option provides its holder with the ability to get back or buy out the share in the LLC that they previously owned. A “buyback” option allows for the return of a share in the LLC from an investor who fails to fulfill their obligations or from a business partner who fails to perform the tasks that are the basis of their participation in the company.
Options can become an important risk management tool in business; however, there may be certain difficulties in the formulation and implementation of an option. One of these difficulties is related to the correctness of the condition that triggers the option. This condition should be formulated in such a way that its occurrence can be easily confirmed before a notary, without requesting evidence that may be impossible to obtain, is contrary to the law, or is dependent on the will of third parties. For example, a bank is required to provide the company’s CEO with an account statement, which is a correct way to form evidence of the occurrence of a certain condition. However, some evidence may be unavailable. For instance, a bank cannot issue an account statement to a person who does not have the corresponding authority. Another example is that a competing company is not obligated to provide information about the number of its clients to third parties. The correctness of the formulation of the condition that triggers the option and the correct choice of evidence are important aspects to consider when drafting an option.
Examples of options application
A foreign company enters the Russian market. A representative of the foreign parent company (for example, a regional director) can receive a stake in the corresponding subsidiary created in the target market. For this purpose, a call option for a stake in the Russian company may be issued to them, which will be triggered upon achieving certain performance indicators.
A foreign participant plans to exit the ownership of a Russian subsidiary, but still hopes to return to the current business under certain favorable conditions. For this purpose, shares in the local company are transferred to a new owner, such as local management or business partners, with the possibility of a buyback.
Please contact us if you have any questions about options for ownership in Russian LLC or if you need interim management services.