Exclusion of a shareholder in a limited liability company on the basis of
art. 266 of the Polish Commercial Companies Code

Sometimes, in the occurrence of a situation preventing further cooperation between the shareholders of a limited liability company, caused by a shareholder or shareholders possessing shares representing nominal value of less than half of the share capital in the company, it may be necessary for the shareholders possessing shares with a nominal value exceeding half of the value of the share capital, to bring an action for the exclusion of the shareholder(s).

The request to exclude a minority shareholder[1] is executed by filing a lawsuit in which all other shareholders (i.e. other than the shareholder whose exclusion they request) should indicate “important reasons relating to a given shareholder” that are to constitute the basis for his exclusion from the company[2]. The legislation itself does not specify in any way what the “important reasons” are, however, the views adopted by the courts allow for the conclusion that these reasons should, inter alia:

1. make the further activity of the company in the current “personal composition” of shareholders highly difficult or even impossible;
2. be of an objective nature (and not limited only to causing dislike of other shareholders), and thus endanger or harm the interests of the company;
3. be of a permanent nature, i.e. existing not only on the date of filing the lawsuit, but also at the time of adjudication[3];

Does not constitute, in particular, “important reasons” within the meaning of Art. 266 of the Commercial Companies Code, an existing conflict of shareholders, if the reason for its occurrence lies on part of the shareholders requesting exclusion (or the reason remains common to all shareholders), and in such a case it may be possible to effectively bring an action for dissolution of the company pursuant to Art. 271 of the Commercial Companies Code.

If an action for the exclusion of shareholders is upheld, the court in its judgment sets a date within which the excluded shareholder is to be paid the acquisition price along with interest, counting from the date of service of statement of claim to the defendant(s). If the amount is not paid or deposited within the prescribed period, the ruling on the exclusion becomes ineffective (Art. 267 § 1 of the Commercial Companies Code).

It should be noted that the take-over price is determined on the basis of the “actual value on the day of service of statement of claim” (Art. 266 § 3 of the Commercial Companies Code). Also in this respect, there is no statutory definition, but it is assumed that the “actual value” is the market value. In order to establish it, in the course of the trial, as a rule, expert evidence is taken. There is no single, universal method for measuring the market value, and therefore it is possible to carry out the valuation, e.g. based on the DCF (discounted cash flow) methods, and – purely theoretically – based on the carrying amounts, taking into account appropriate adjustments (aimed at, for example, eliminating the effects of depreciation of fixed assets, as a result of which the value of some assets may be completely omitted or significantly underestimated).

As the valuation for the purposes of the trial for the exclusion of shareholders from a limited liability company may sometimes take many years (if both parties to the dispute are active, one should take into account the need for an expert witness to prepare supplementary opinions and discuss its results in numerous pleadings), it may be necessary to apply – along with an action for the exclusion of shareholders – to secure the action, pursuant to art. 268 of the Code of Commercial Companies, which allows the court to suspend a shareholder from exercising his shareholding rights in the company.

The prerequisite for obtaining a security under the aforementioned procedure are also “important causes” (which should not be confused with “important reasons” justifying an action for the exclusion of a shareholder), justifying the security of an action. This reason is most often the activity of a shareholder that violates the legitimate interest of the company or other shareholders.

Summing up, bringing an action for the exclusion of shareholders is a complex task, requiring not only the correct formulation of the statement of claim, but also – if it is to fulfill its purpose – it should be preceded by a thorough economic calculation, allowing for the assessment whether the shareholders bringing the action have the means necessary to comply with the court judgment by purchasing the shares of the defendant shareholder. As such, it should rather constitute one of the last-resort actions (before the action for dissolution of the company), also due to its non-legal aspects – after it has been brought, it is difficult to normalize further cooperation between shareholders, and this state may persist for many years from initiating the process.

If you are interested in this subject, as well as other issues related to legal complexities resulting from running a business, feel free to contact us.

[1] Whenever the text refers to a “shareholder” (in singular), it should also be construed as referring jointly to minority shareholders (whose shares represent less than half of the share capital in the Company).
[2] The articles of association may grant the right to bring an action for the exclusion of a shareholder also to a smaller number of shareholders, if their shares constitute more than half of the share capital. In such a case, all the remaining partners should be the defendants (art.266 § 2 of the Commercial Companies Code).
[3] The court adjudicates on the basis of the facts on the day of the judgment, therefore, the disappearance of “important reasons” in the course of the trial will result in the dismissal of the claim.

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