Partnerships are typically established when all stakeholders want to achieve a common goal, working together to achieve it. Unfortunately, sometimes the interests of partners conflict, and disputes become so serious and bitter that they threaten the company's interests. In such cases, it is possible to file a lawsuit for the exclusion of a partner, which is the topic of today's article. So, can a partner be expelled if they cannot reach an agreement?
What does a lawsuit for the exclusion of a partner from a limited liability company involve?
Simply put, You can try to exclude a shareholder when his or her continued presence in the company actually harms it or prevents it from functioning normally. If the partners of a limited liability company reach an agreement on the method of separation, they can sell their shares among themselves or conduct a share redemption procedure (if the partnership agreement provides for this, which can be amended for this purpose). In practice, it's worth seeking a common ground between the partners that will allow for a separation without a trial. This will save time and costs, and allow the company to focus on its operations. However, if the partners fail to reach an agreement, filing a lawsuit to exclude the partner should be considered. This is only possible by court order, which can be issued as a result of a lawsuit filed by the partners.
The basis for the claim for exclusion of a shareholder are, of course, the provisions of the Act of 15 September 2000, the Commercial Companies Code (consolidated text: Journal of Laws of 2024, item 18; hereinafter referred to as the Commercial Companies Code), in particular Article 266 of the Commercial Companies Code:
Article 266.
- 1. For important reasons concerning a given shareholder, the court may order his exclusion from the company at the request of all the remaining shareholders, if the shares of the shareholders requesting the exclusion constitute more than half of the share capital.
- 2. The partnership agreement may grant the right to bring an action as referred to in § 1, also to a smaller number of partners, if their shares constitute more than half of the share capital. In this case, all remaining partners should be sued.
- 3. The shares of the excluded shareholder must be acquired by the shareholders or third parties. The acquisition price is determined by the court based on their actual value on the date the lawsuit is served.
The Commercial Companies Code does not precisely define the concept of "important reasons." However, if these reasons are met, at the request of all other shareholders (who must represent more than 50% of the share capital), a court may request the exclusion of a shareholder.
The institution we are describing is in fact compulsory redemption of shares, enforced by the court in the event of objective obstacles to the shareholder's further participation in the company. If the court agrees with the will of the plaintiffs (plaintiffs), the shares of the problematic partner are sold to third parties or to the partners themselves.
In what situations is a lawsuit to exclude a partner justified?
The "compelling reasons" referred to in Article 266 of the Commercial Companies Code are an ambiguous concept that has been the subject of numerous disputes in commercial law doctrine. A literal analysis of the provision provides a list of three conditions that must be met cumulatively for a claim to be effective. These are:
- The importance of the cause – a contrario, it cannot be a small-scale problem,
- The reason should concern a specific partner,
- The reason should justify the significant interference with property rights, such as judicial enforcement of a sale.
In practice, when examining a case, the court should ask itself the question – Is it still possible to reconcile the continued presence of a partner in the company with the interests of this legal entity and its normal operation? If possible, the claim should be dismissed. A suit for exclusion should be considered a last resort, not a way to force out an inconvenient partner.
We certainly know that an important reason is not the quarrelsomeness, difficult character or advanced age of the partner, unless these characteristics result in specific difficulties, which we will mention later in the article.
Only when the conflict ceases to be a mere substantive and business dispute and begins to paralyze the company does a lawsuit for exclusion become justified. According to Supreme Court case law, grounds for filing a lawsuit may include, for example, a lack of trust and an inability to cooperate (II CSK 781/15). Whether these causes are culpable or not is irrelevant – what matters is the existence of an objective threat to the company's operation (II CSKP 686/22).
Problematic partner, what is it?
We already know that Article 266 of the Commercial Companies Code is a special provision, intended primarily for use in the event of serious, irresolvable disputes. Based on our experience, we can assume that if a partner:
- persistently blocks the adoption of key resolutions,
- uses its rights to destabilize the entity,
- conducts competitive activities that are incompatible with being a partner of the company,
- acts to the detriment of the company, its contractors or bodies,
- prevents the company from making important decisions and does not try to reach a compromise,
- conducts activities that damage the company's reputation or trust between shareholders,
The claim may have real grounds. As mentioned earlier, these actions are not assessed in terms of fault. Therefore, a situation may arise in which a shareholder harms the company due to illness or family circumstances.
The axiological basis of Article 266 of the Commercial Companies Code is not a moral condemnation of the actions of a problematic partner. In the opinion of BTTP lawyers, it is a tool that allows the company to continue its operations after the exclusion of the problematic partner. This institution actually stabilizes turnover because, instead of terminating the existence of a legal entity, it allows for an effective change in its personal basis.
When can we talk about decision-making paralysis in a company?
In business, there's a fine line between disputes and discussion and fierce fighting and disagreement. In companies where shares are held by several or a dozen people, and where shareholders actively decide on company matters, conflicts are commonplace.
In our opinion, the canonical example of decision-making paralysis is a situation in which a company is unable to adopt resolutions that are particularly important for its operations, such as those concerning the appointment of the management board, approval of the financial report, or distribution of profits. However, it is not the opposition itself that matters, but its chronicity, lack of willingness to cooperate, and attempts to force other decision-makers into actions that clearly do not serve the company's interests.
It's worth noting that the risk of dismissal of a claim decreases the longer the conflict and paralysis lasts. We don't rule out the possibility that a court could exclude a partner even in the event of a relatively short-lived conflict, but the duration of the dispute demonstrates that these are not temporary circumstances and that the underlying causes are important.
Loss of trust as a premise
Although a limited liability company is a capital company, in business practice, these entities are very dependent on a human resource. It is people, especially management board members and shareholders, who form the foundation of many small and medium-sized companies. In the vast majority of cases, the management board coincides with the shareholders' meeting, and each shareholder works operationally in the business, has access to know-how, and represents the legal entity they have created.
For this reason, a loss of trust in a partner constitutes a real and serious obstacle to further cooperation. It's difficult to expect other decision-makers to be willing to share secrets or pursue projects with someone who is simultaneously developing a competing company or acting recklessly.
A textbook example of a loss of trust would be proof or strong likelihood that one of the partners regularly forges documents, commits a tax crime or struggles with an addiction that affects the ability to make responsible decisions.
Action for exclusion of a partner who fails to fulfill his obligations
The particularly significant role of partners in small limited liability companies results in the widespread use of agreements with them that obligate them to perform specific duties. In business practice, we encounter situations such as:
- failure to make additional payments that have been properly approved,
- failure to provide the benefits to which a partner is obliged under Article 176 of the Commercial Companies Code,
- violation of the obligation of loyal cooperation derived from Article 3 of the Commercial Companies Code.
It is debatable whether a claim for exclusion of a shareholder would be justified if the shareholder failed to fulfill his or her duties as a management board member. In our opinion, in such a situation, it would be necessary to demonstrate that the failure resulted in a loss of trust from the shareholders.
Is it possible to file a lawsuit for exclusion in any company?
Unfortunately, the regulations directly and indirectly limit the possibility of a court forcing someone to leave the company.
Share proportion
Note that a lawsuit to exclude a shareholder from a limited liability company will be ineffective if the majority shareholder is problematic. For the same reason (missing more than half of the share value), a lawsuit to exclude a shareholder from a typical two-member company with equal share values will generally be groundless. Important – the partnership agreement may modify the requirement for all remaining partners to file a lawsuit, but the requirement to represent at least half of the capital remains unchanged.
Lack of a uniform position of the remaining partners
A claim for exclusion of a shareholder may be dismissed if it is not supported by all the remaining shareholders. However, as the Supreme Court ruled in its judgment of 5 February 2014 (ref. V CK 156/13), the withdrawal of a claim for exclusion of a shareholder of a limited liability company by one of the shareholders who filed the claim requires the consent of the other shareholders filing the claim to be effective.
The company's ability to be saved
It's crucial to remember that filing a lawsuit to exclude a shareholder is a special procedure that profoundly interferes with property rights. Therefore, it's generally accepted that any such action must be justified—not only by the underlying reasons but also by other interests. If excluding a shareholder results in the company's actual collapse, or malicious and persistent actions have already caused irreversible and extensive losses, liquidation of the company may be more appropriate.
Settlement between partners
Let's recall – the institution of a lawsuit for the exclusion of a shareholder results in a compulsory purchase of his shares, not in their free acquisition. As a consequence, the excluded shareholder sells his share in the company at the market price, and not at the amount of the share capital due to him.
Article 266 § 3 introduces the concept of the actual value of shares. In the opinion of the authors (e.g., A. Kidyba) and the BTTP team, there is no single universal method for estimating them, although in this process, the court will take into account the value of the enterprise (i.e., the sum of the book value of machinery, goods, commercial contracts), clientele, and market position. However, it is certainly not equivalent to the balance sheet value divided by the shareholder's share in the company. In simple terms, This refers to the amount for which a shareholder would sell his shares in the company under market conditions.
When is an action for exclusion of a partner not a good idea?
When considering filing a lawsuit to exclude a partner, a number of circumstances – both legal and factual – must be taken into account.
While this may seem obvious, it's worth considering the possibility of resolving the matter amicably. The priority for the partners should be to resolve the matter in a way that ensures the conflicting shareholder expresses a willingness to cooperate or voluntarily agrees to enter into a share purchase agreement.
In a situation where an amicable resolution is impossible, for example, due to a share price proposal that is completely unrealistic, litigation begins to become a legitimate option. Unfortunately, even here, there are several situations where filing a lawsuit is not a viable solution.
In the BTTP's opinion, a claim for exclusion of a partner will be unfounded, especially if the plaintiffs are unable to gather the appropriate evidence. If a party is unable to demonstrate that compelling reasons exist to justify the exclusion of a partner, the risk of losing the case is very high. Contrary to appearances, gathering evidence can prove to be a significant challenge, as it is important to remember the limitations imposed by applicable law.
In practice, it is also necessary to demonstrate the negative impact of a shareholder's behavior on the company, which should go beyond the exercise of their standard corporate rights. Consequently, even if one shareholder persistently demands a dividend payment that would weaken the company's investment potential, such action will not be considered sufficient justification for exclusion. It would be a different story if a shareholder disrupted the agenda at all meetings simply because they were in personal conflict with other members of the governing bodies.
It should also be noted that, pursuant to Article 278 § 1 of the Code of Civil Procedure, the court will generally conduct a share valuation with the assistance of an expert, as preparing a business valuation requires specialized knowledge. Exceptionally, the court may not appoint an expert if the value of the sole shareholder's shares is not in dispute between the parties. The cost of such an expert's services depends on the complexity of the company's situation, but in the case of a large entity, preparing an expert opinion can cost tens of thousands of zlotys. In addition, it is necessary to take into account the remuneration. a law firm specializing in civil proceedings.
Law firm fees vary significantly and almost never meet the minimum wage for attorneys. Filing a motion to dismiss requires complex evidence based on a large number of documents, which can take a significant amount of lawyer time to complete.
In practice, the cost of the entire proceedings for the exclusion of a shareholder often exceeds PLN 20 or 30, while in the case of larger entities and high-value disputes, the total costs may be several times higher.
It's worth noting that the actual duration of a first-instance dispute is often two years; an appeal can extend the proceedings by another year. Consequently, fighting a conflicted partner can paralyze the company for a long time.
The current structure of the institution of a claim for the exclusion of a partner is therefore unfortunate because in many truly justified cases, court proceedings are simply too expensive and too lengthy.
How to protect yourself from problems?
Although the company agreement cannot legally exclude the possibility of a shareholder's compulsory buyout, nor can the value of shares be determined in advance, shareholders can introduce several mechanisms to protect both themselves and the company.
First of all, the partnership agreement may grant the right to bring an action for the exclusion of a shareholder, even to a smaller number of shareholders, if their shares constitute more than half of the share capital. In this case, all remaining shareholders must be sued.
It would also be reasonable to introduce a clause restricting the sale of shares. The parties could, for example, introduce pre-emptive or priority rights for shareholders or their affiliates. Such provisions are permissible, although it should be clearly stated that they cannot constitute a de facto prohibition on the sale of shares.
A rare, yet very useful, form of protecting the interests of the parties is the so-called shareholders' agreement. This is a special form of agreement between shareholders that can include specific provisions. Such a contract may, among other things, grant options to purchase shares upon meeting certain conditions.
Another interesting solution, though requiring particular precision, is the introduction of a contractual provision providing for the compulsory or automatic redemption of shares. However, this construction cannot be used as a way to circumvent the procedure set out in Article 266 of the Commercial Companies Code – the Commercial Companies Code ruled. The Supreme Court in its judgment of 12 May 2005, reference number V CK 562/04So how can we introduce a safe clause authorizing compulsory redemption? Such a requirement should be based on factors such as loss of professional qualifications, failure to make additional payments despite a demand, and potentially even the death of a partner (provided the repayment is properly structured). However, invoking "important reasons" or "loss of trust" is unacceptable.
Summary
We hope you won't need the knowledge contained in this article to resolve a dispute with a troublesome shareholder. A shareholder exclusion lawsuit is an interesting, albeit difficult and expensive, means of saving a company. However, if you believe such a solution is necessary for your company, contact us – we have many years of experience in providing legal services to entrepreneurs.
