Affiliated Entities of LLC and Transactions with Them

Affiliation in corporate law means the existence of such a legal, property-related, managerial, or family connection between an entity (person) and a company that may influence the company’s will when entering into a transaction. In other words, an affiliated entity is an entity (person) who may potentially derive a personal benefit from a company transaction or influence its terms.

Under the new Law “On Limited Liability Companies” dated 21 April 2026, affiliated entities are recognized as entities (persons) interested in the company entering into a transaction. The Law expressly provides for a separate chapter — Chapter 7 “Affiliated Entities of the Company and the Conclusion of Transactions with Affiliated Entities” — which demonstrates the independent significance of this institution within the corporate governance system.

The legal significance of affiliation does not lie in prohibiting such transactions, but in establishing a special regime for their disclosure, review, approval, and possible challenge. The legislator proceeds from the premise that transactions with affiliated entities (persons) may be economically justified, but they require enhanced control due to the risk of a conflict of interest.

According to the new Law on LLCs, affiliated entities (persons) of a company include, in particular:

No.	Category of entity	Legal significance
1	A legal entity holding 20% or more of the company’s participatory interests (shares)	Presence of significant corporate influence
2	Participants of a legal entity holding 20% or more of the company’s participatory interests (shares), if their own interest (shares) exceeds 20%	Identification of indirect control
3	An individual holding 20% or more of the company’s participatory interests (shares) jointly with close relatives	Consideration of family control
4	A member of the supervisory board, director, or member of a collegial executive body	Managerial conflict of interest
5	A legal entity in which the company itself holds 20% or more of the charter fund	Reverse property-related connection
6	A subsidiary or another related subsidiary	Group corporate control

This list shows that the law uses not only the formal criterion of ownership of a participatory interest (shares), but also the functional criterion of influence: management, family ties, participation in a corporate group, and the ability to determine the terms of a transaction.

The threshold of 20% or more is particularly important, since it serves as the basic indicator of significant influence. At the same time, affiliation may arise not only through direct ownership of a participatory interest, but also through ownership via close relatives or related legal entities.

A transaction with an affiliated entity is a transaction involving a potential or actual conflict of interest between the company and an entity who has influence over the company or an interest in the outcome of the transaction.

Key features of such a transaction:

Feature	Content
Connection with the company	The entity is connected with the company through a participatory interest, management, family relations, or a corporate group
Interest	The entity may receive property-related or other benefit from the transaction
Potential conflict of interest	The company’s interest may not coincide with the personal interest of the affiliated entity
Need for disclosure	The affiliated entity must notify the company of their connection and of the terms of the transaction
Special approval procedure	The transaction is subject to review and approval by the competent body of the company
Possibility of challenge	If legal requirements are violated, the transaction may be challenged

Thus, a transaction with an affiliated entity is not unlawful in itself. It becomes unlawful or challengeable when the procedure for disclosure, review, or approval is violated, or when the transaction causes harm to the company.

Obligation to Disclose Information

One of the central elements of regulation is the obligation of the affiliated entity to disclose information about the forthcoming transaction. The Law requires that, when entering into a transaction with the company, the affiliated entity must notify the company in writing of their affiliation and of the forthcoming transaction. The notice must specify information about the entities participating in the transaction, the subject matter of the transaction, and its material terms. The notice may be posted on the company’s official website or sent by post or email.

This rule has important practical significance. It means that the affiliated entity must not passively wait for the company to independently identify the conflict of interest. On the contrary, the affiliated entity has an active obligation to disclose the relevant information.

In addition, information on transactions with affiliated entities, including written notices, adopted decisions, information on the entities who adopted the decisions, and data on conflicts of interest, forms part of the company’s annual report.

Procedure for Approving a Transaction with an Affiliated Entity

The new Law on LLCs provides for a special procedure for reviewing and approving a transaction with an affiliated entity. The company’s supervisory board reviews the information on the transaction and, no later than 15 days from the date of receipt of the written notice, adopts a decision on the transaction.

If two or more members of the supervisory board are affiliated entities, the decision on the transaction is adopted by the general meeting of participants of the company. This rule is aimed at preventing a situation where a transaction is approved by entities who are themselves interested in its conclusion.

The prohibition on the affiliated entity’s participation in discussion and voting is of particular importance. The Law expressly provides that an affiliated entity may not participate in the discussion and has no voting right when the supervisory board or the general meeting of participants adopts a decision on the relevant transaction.

Procedure for Approving a Transaction

Situation	Who adopts the decision	Voting procedure
The transaction is reviewed by the supervisory board	Supervisory board	Unanimously by the members participating in the meeting
Two or more members of the supervisory board are affiliated	General meeting of participants	Qualified majority — at least 2/3 of the votes of the participants attending the meeting
The affiliated entity participates in the body adopting the decision	Does not participate in discussion and voting	His/her vote is not counted
The transaction is also a major transaction	The rules on major transactions apply	The special regime of the chapter on major transactions is used

If a transaction with an affiliated entity is also a major transaction, the rules on major transactions established by Chapter 5 of the Law apply to the procedure for its conclusion.

Relationship Between Transactions with Affiliated Entities and Interested-Party Transactions

The institution of affiliated entities is closely connected with the concept of interest in a transaction. The Law establishes that certain entities, their spouses, parents, children, brothers, sisters and/or their affiliated entities are recognized as interested in the company entering into a transaction if they are a party to the transaction, represent the interests of third parties, hold 20% or more of the participatory interests in a legal entity that is a party to the transaction, or hold positions in the management bodies of such legal entity.

Therefore, the legislator links affiliation not only with formal corporate participation, but also with real economic interest. For example, a director of a company may be an interested entity if the company enters into an agreement with a company in which the director or his/her close relative holds a significant interest or occupies a managerial position.

Rights of Company Participants in Transactions with Affiliated Entities

Company participants are granted special information and protective rights. If a participant disagrees with a decision approving a transaction with an affiliated entity or did not participate in the adoption of such decision, he/she has the right to challenge the transaction.

Upon the request of a participant, the company must provide copies of the following documents within three business days:

Document	Significance
Written notice of the party to the proposed transaction	Confirms disclosure of affiliation
Minutes of the transaction review	Shows whether the terms were examined
Decision approving the transaction	Confirms compliance with the corporate procedure
Agreement, if already concluded	Allows verification of the actual terms of the transaction
Other information on the transaction	Allows assessment of the existence of damage or a conflict of interest

Such regulation strengthens the position of minority participants, since they obtain access to documents necessary to assess the legality of the transaction and prepare a possible claim.

Challenging a Transaction with an Affiliated Entity

A transaction with an affiliated entity may be declared invalid by a court if one or more of the following grounds exist:

Ground	Content
Violation of legal requirements	The procedure for disclosure, review, or approval was not complied with
Causing harm to the company	The transaction worsens the company’s financial position
Conflict of interest	The transaction was concluded in the presence of an unresolved conflict of interest
Other grounds provided by law	For example, general grounds for invalidity of transactions

The Law also provides that if a court establishes a violation of the requirements for concluding a transaction, the company must, within one month from the date the court decision enters into legal force, reimburse the participant for expenses incurred for engaging an audit organization in an amount not exceeding the market value of such services.

This provision has important procedural significance: a participant may use an audit as an evidentiary tool to prove the violation and subsequently recover the relevant expenses from the company.

When a Transaction Cannot Be Declared Invalid

The Law also limits the possibility of formally challenging a transaction. In particular, a transaction with an affiliated entity may not be declared invalid if the vote of the participant who filed the claim could not have affected the voting results on the issue of approving the transaction, regardless of whether such participant attended the meeting or not.

This rule is aimed at preventing abuse of the right to sue. In other words, if the violation was formal in nature and did not affect the corporate decision, the court may refuse to declare the transaction invalid. However, this does not exclude liability of entities who caused losses to the company.

Practical Risks of Transactions with Affiliated Entities

Transactions with affiliated entities are a sensitive area of corporate governance. In practice, they are often associated with the following risks:

Risk	Example
Asset stripping	Sale of the company’s property to an affiliated company at an undervalued price
Overstatement of expenses	Conclusion of a services agreement with a participant’s company at an inflated price
Hidden distribution of profit	Transfer of profit through fictitious or economically unjustified agreements
Prejudice to minority participants	Conclusion of a transaction in the interests of the majority participant
Tax risks	Application of non-market prices between related parties
Judicial challenge	Declaration of the transaction as invalid or recovery of losses
Reputational risks	Loss of trust of participants, investors, and creditors

 

Protection of Minority Participants

Transactions with affiliated entities are particularly dangerous for minority participants, since they often do not control the executive body and cannot independently prevent the conclusion of an unfavorable transaction. The new Law on LLCs strengthens their protection in several ways:

1. it introduces an obligation to disclose information;
2. it prohibits the affiliated entity from voting on the relevant transaction;
3. it provides the participant with the right to obtain documents relating to the transaction;
4. it allows the transaction to be challenged in court;
5. it provides for reimbursement of audit expenses if a violation is confirmed;
6. it links the affiliation regime with the company’s annual reporting.

It is particularly important that the new Law also establishes the institution of minority participants and the possibility of creating a committee of minority participants, which, together with the regime for transactions with affiliated entities, forms a more modern model of corporate control.

Recommendations for the Company Charter

For effective regulation of transactions with affiliated entities, it is recommended to include a separate section in the LLC charter. It is advisable to provide for the following:

Charter provision	Recommended drafting idea
Expanded list of affiliated entities	Specify not only the entities listed in the law, but also other entities capable of influencing the company’s decisions
Annual disclosure obligation	Require participants, the director, and members of the supervisory board to submit annual declarations of affiliation
Register of affiliated entities	Maintain an internal register of related entities and update it upon changes
Market assessment of the transaction	Establish an obligation to confirm the market nature of the terms through an independent valuation or commercial offers
Prohibition on voting	Expressly state that the interested entity does not participate in discussion and voting
Expanded package of documents	Prior to approval of the transaction, provide a draft agreement, financial justification, and comparative price analysis
Subsequent disclosure	Include information on the transaction in the annual report and provide it to participants upon request
Liability	Provide for an obligation to compensate losses in case of concealment of affiliation