In early July, the Supreme Court ruled on how shares in corporations can be disposed of. Where the changes came about was based on an incidental dispute between two heirs. This case brought several important conclusions to the Czech judiciary that will have a far-reaching impact on shareholders and corporate law in general. What incidents led to the decision on changes in dispositions?
Before we get into the case itself, let’s clarify what an incidental dispute actually is. An incidental dispute is a type of lawsuit that arises as a side dispute in the course of some other, main proceeding. In the context of corporate law, these disputes can involve matters relating to the legal status of the parties in the company, i.e., for example, who can make what decisions, what the validity of a person’s legal actions in the company are, and so on.
In July this year, a case of two heirs came before the Supreme Court. They had acquired a 50% share in a limited company as part of the succession proceedings. This was a single joint shareholding in a company owned by the two heirs. They entered into an agreement with each other to settle the shareholding. However, over time, disputes arose between them as to the interpretation and validity of that agreement.
Consequently, the gentlemen decided to ask the court to approve the settlement. The proposal included a declaration that the original agreement was null and void and a confirmation that the share belonged to the two heirs in joint ownership.
However, the lower courts rejected this proposal for approval of the conciliation. The main reason, according to them, was that the original share settlement agreement had been approved by the company’s general meeting. According to the courts, the heirs could therefore only invoke the invalidity of this agreement in a separate proceeding to annul the resolution of the general meeting, not by way of conciliation.
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In this case, the Supreme Court departed from the decisions of the lower courts and reached several important conclusions:
The Supreme Court confirmed that the regulation of the distribution of shares in a limited liability company is dispositive. This means that under the articles of association, the owners of a share may completely exclude the possibility of the share being divided or, on the contrary, may allow the share to be divided without any connection to the transfer of the share.
The Supreme Court has also ruled that co-owners of a share in a limited liability company may also dissolve and settle their co-ownership by judicial conciliation. The legal regulation of the transferability of the share and the division of the share are not part of the so-called status issues. This means that the company does not have to participate in such proceedings.
According to the Supreme Court, the general rules of the Civil Code on the dissolution of co-ownership of a share in a limited liability company will apply to the dissolution of co-ownership. Thus, the heirs did not have to seek the approval of the general meeting for the settlement. The Corporations Act, which regulates the division of shares in connection with their transfer, does not apply to this case.
The Supreme Court’s decision is of fundamental importance for all partners in limited liability companies. Greater discretion is confirmed as to how the rules for the division of shares in the memorandum of association are to be regulated. They can decide whether to exclude the division of shares altogether or, on the contrary, to allow it under certain conditions.
This decision also provides a clear legal framework for future incidents of share ownership. Shareholders should consider modifying the articles of association to avoid ambiguity and potential legal conflicts.
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