What a foreign investor should know about financing in Belarusian companies?
Generally, Belarusian law allows the application of all standard instruments both for cash-in and for cash-out financing. At the same time, there are certain legal nuances that must be taken into account when structuring the transaction. Here we propose to consider some of them with respect to limited liability company that is the most common entity form in Belarus.
In particular, before concluding a share purchase agreement between the investor and shareholders of the target company it should be noted that the other shareholders have the preemptive right to purchase the shares. If the shareholders do not exercise the preemptive right, the company itself may acquire the shares (articles 98-99 of Law on Companies of the Republic of Belarus). Thus, in order to enter into a transaction in a short time, the shareholder must receive refusals from the purchase of the share from the other shareholders and the company itself. Otherwise the transaction may be challenged.
Further, to complete the transaction, only the performance of the share purchase agreement is not formally enough in Belarus. The investor exercises the rights and bears the obligations of the shareholder from the moment the company receives a written notification about the share acquisition. (article 101 of Law on Companies). Then a new edition of company’s charter indicating the new list of company’s shareholders should be adopted by general meeting and be registered within registering authority.
The investor has an option to provide funds directly to the target company. Here it should be noted that additional issue of shares is not applied to limited liability companies. Instead, the procedure of making an additional contribution to the statutory fund is applied. It is not necessary that the share amount reflects the size of contribution: disproportionate distribution is possible.
In accordance with Law on Companies an investor shall send an application for additional contribution to the target company. The decision to accept the additional contribution by the target company shall be taken at the general meeting by all participants unanimously (article 105 of Law on Companies).
A convertible loan instrument made available for all Belarusian entities by the new edition of Law on Companies effective from April 28, 2021 allows the investor to convert the target company’s debt into the investor's share in its statutory fund (article 105 of Law on Companies).
Additionally, the new edition of Law on Companies also provides the possibility to finance the company by means of contributions to its property not leading to the statutory fund increase and shares allocation change (article 105 of Law on Companies). However, such a contribution is the object of taxation by profit tax and VAT. This calls into question the convenience of such a mechanism for the time being (subparagraph 3.7 article 174 of Tax Code of the Republic of Belarus).