Exclusion of a partner in a limited liability company

In companies, disputes may arise among shareholders due to differing opinions, mutual animosities, or matters of a financial nature, which negatively impact the development and operations of the business. There are also situations where one partner acts detrimentally to the interests of the company and the relationships within it. Sometimes the only solution to such an impasse is the exclusion of the unruly partner involved in the dispute. The institution of exclusion is regulated in the Commercial Companies Code under Article 266. This procedure allows, through a court decision, the exclusion of a troublesome shareholder and, in the longer term, the restoration of efficient and effective functioning within the company. The main purpose of this procedure is to protect the interests of the company, the relationships prevailing within it, as well as to extinguish growing conflicts among shareholders. Therefore, in this article, we will present what the procedure of excluding a shareholder from the company entails — namely who may initiate this procedure, for what reasons a shareholder can be excluded, and what the consequences of such exclusion are.

Who and on what grounds may request the exclusion of a shareholder?

The provisions regulating the institution of shareholder exclusion are of a mandatory nature, meaning that this procedure cannot be excluded in the company’s articles of association, nor can its mode or grounds be specified differently. According to Article 266(1) of the Commercial Companies Code, the request to exclude an unruly shareholder is submitted by the remaining shareholders if they represent more than half of the share capital. This means that in such a situation, all other members must act against the shareholder in question. Paragraph 2 of the same provision allows for some modification in this respect. The company’s articles of association may specify a smaller number of shareholders who can submit the request, provided they hold more than half of the share capital. In such a case, the defendants will be the other shareholders. It is worth noting that the request made by the shareholders is, in practice, a lawsuit filed with the court, containing a demand to exclude a specific shareholder or shareholders from the company. Article 266(1) states that the court may exclude a given shareholder for important reasons concerning them. Case law and doctrine indicate that grounds justifying exclusion include competitive activity, persistent and unjustified failure of a shareholder to attend meetings, the impossibility of conflict-free cooperation with the shareholder, or loss of trust. The reason supporting exclusion must relate to the shareholder personally, meaning it must be connected to their personal or financial sphere. It is also important to note that the shareholder’s fault is not relevant when determining the grounds for exclusion. Furthermore, the articles of association may, to clarify the procedure, contain an exemplary list of important reasons related to the shareholder that constitute grounds for exclusion.

Procedure and consequences of excluding a shareholder from the company

A case concerning the exclusion of a shareholder from a limited liability company is a matter of property rights. It proceeds under civil procedure, and the court’s decision is issued in the form of a judgment. Pursuant to Article 40 of the Civil Procedure Code, the competent court is that of the company’s registered office. It is worth noting that throughout the ongoing court proceedings, the defendant shareholder retains their shareholder rights. However, under Article 268 of the Commercial Companies Code, it is possible to suspend these rights if there are important reasons for doing so. When a court judgment on the exclusion of a given shareholder is issued, in order to become effective under Article 266(3), their shares must be taken over by the other shareholders or third parties. The purchase price is determined by the court based on the actual value of the shares on the day the lawsuit is served. According to Article 267(1), the court sets a deadline for the remaining shareholders within which the payment due to the excluded shareholder for the taken-over shares must be made. If the court-ordered payment is not made within the deadline, the court’s judgment on the exclusion becomes ineffective. The ineffectively excluded shareholder has the right to claim damages from the remaining shareholders. Therefore, it is crucial, following a favourable court ruling, to fulfil the obligations related to the takeover of shares from the excluded shareholder and payment of the court-specified amount within the stipulated timeframe. If all procedures connected to the payment for the taken-over shares are properly conducted, the shareholder is deemed excluded from the date the lawsuit was served. It is worth pointing out, however, that this does not affect the validity of acts in which the shareholder participated after the lawsuit was served.

Summary

In summary, the institution of exclusion from a limited liability company can serve as a lifeline in situations of escalating conflicts among shareholders or detrimental actions by one of them against the company. It allows for the judicial exclusion of an unruly shareholder from the company, which can help swiftly resolve internal conflicts or simply remove a shareholder acting against the company’s interests. The institution primarily aims to protect the company, its structure, and the relationships prevailing within it. At the same time, it should be noted that the regulations regarding this institution allow for a fair exclusion of a given shareholder, as the provisions guarantee the shareholder’s recovery of an appropriate monetary sum for the shares taken over. Additionally, the entire procedure is subject to court supervision. In case of doubts regarding the construction of the lawsuit or other procedural elements, it is advisable to seek professional legal advice.