Chapters of the article
If a shareholder’s participation in a limited liability company (s.r.o.) is to be terminated in some way, it is essential to distinguish whether the termination is voluntary or with some degree of “compulsion”.
In the case of a voluntary exit, the most common option is to transfer the shareholding, or, under certain conditions, it may also be possible to arrange for the shareholder to withdraw and agree to terminate his or her participation.
Transfer of shares within an LLC.
The most common way of terminating a shareholder’s participation is the transfer of his/her share. This can take place either within the company, when it is transferred to another shareholder or shareholders, or to a third party outside the company. The key is what rules the articles of association set out in this respect, but in general it can be stated that the sale of a share to someone within the company is usually much easier. Formally, a written share transfer agreement is required, which sets out everything that is relevant. Given the seriousness of its effects, we always recommend consulting an experienced solicitor about its form and content.
As regards transfer to another person outside the company, this can generally only be done with the consent of the general meeting, unless the articles of association provide otherwise. This is understandable, as the entry of another person into the company can have a significant impact on it. In such a case, the transfer agreement will not become effective until the consent has been given. And if the general meeting does not approve the transfer within six months of the conclusion of the agreement, then the transfer will not take place at all.
However, the transfer of a share does not necessarily lead to the termination of the shareholder’s participation in the company, as the shareholder may have more shares. However, if he has only one, the transfer also extinguishes his participation.
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Withdrawal of a partner and agreement on termination of participation
A shareholder may decide to unilaterally withdraw from the company. This is only possible in specific cases allowed by the Companies Act.
This is typically a situation where a shareholder does not agree to a change in the predominant nature of the business or to an extension of the company’s duration, and has not voted in favour of these decisions at the general meeting. Another possibility is if the general meeting decides to impose a surcharge (and in respect of the share to which the surcharge is attached) and the decision to withdraw falls within one month of the surcharge being imposed. However, the articles of association may set the conditions for withdrawal somewhat differently than the law allows.
All partners may also enter into a written agreement in which the participation of one of the partners is terminated. Certified signatures are legally required for its validity.
Exclusion of a shareholder from a limited liability company
A shareholder may be expelled from the company against his or her will in certain circumstances, for example, if he or she fails to meet his or her deposit or surcharge obligation. In such a case, he should first receive a written notice from the general meeting, together with the provision of an additional period of time to fulfil his obligations. If he fails to comply even then, the general meeting may expel him on the basis of at least two-thirds of the votes of all shareholders (the defaulting shareholder may not vote). If a shareholder has more than one share, the exclusion does not apply to him as such, but only to the shares for which he is in default. The possibility of holding more than one share should be allowed by the articles of association. The individual shares are then identified, e.g. by a number or a letter.
Exclusion of a shareholder by judicial proceedings
A shareholder can only be disqualified by the courts in very exceptional circumstances where the shareholder has committed particularly serious breaches of duty. Again, prior written notice, including information about the possibility of expulsion if the situation is not remedied, is required. Particularly serious breaches are, for example, defamation of the company’s reputation and gross disloyalty to the company.
From law practice:
Two of the three partners in a tourism company contacted the firm of the Accessible Lawyer. Their third partner had a disagreement with them purely for personal reasons unrelated to the running and functioning of the company and took out his frustration on social media, where he slandered the other partners and continuously questioned the management of the company. His rants had an impact on client relationships, with several of the largest leaving and others considering further cooperation.
The remaining two partners therefore took the matter to court and sought to have the third partner’s participation revoked. As the negative impact of this unpleasant situation was clearly measurable and quantifiable, it was not too difficult to persuade the court to grant the motion. In general , however, it is essential to have such a serious request for a change in the operation of the company very carefully argued and substantiated, and it is therefore advisable to cooperate with a lawyer in its preparation. In practice, we know of many cases where the shareholders had different ideas about the operation of the company. For example, one of them persistently boycotted and blocked the proposals of the others. However, such behaviour is not found to be a valid reason for expulsion of one of the partners.
Tip: Have you started your start-up as a limited company? What are the most common legal mistakes that start-up entrepreneurs make and what should they focus on? We have covered this in our separate article.
Other reasons for termination of a shareholder’s participation in the company
The law allows for other circumstances in which a shareholder’s participation in the company may be terminated. In the event of death of a natural person or dissolution of a legal entity, the share may be transferred to an heir or legal successor. However, the articles of association may also exclude the transfer of the share.
Participation may also be terminated due to specific decisions with which the law links the termination of participation in the company. These are:
- annulment of bankruptcy on the grounds that the assets are insufficient,
- the receipt of a notice of unsuccessful reauction in enforcement or execution proceedings,
- a final order of enforcement by attachment of the share,
- a final execution order for the attachment of the share, or
- a final order staying the execution proceedings or dismissing or rejecting the application for stay of execution.
By definition, a shareholder’s participation is terminated if the entire company is dissolved.
It is clear from all of the above that getting rid of a shareholder against his will is no easy matter. If there is at least some chance of a joint agreement on withdrawal, then we strongly recommend going this route. Although the negotiations may not be entirely easy, this method is usually quicker and more efficient. With the help of an experienced solicitor, you can then conclude the whole matter to the satisfaction of everyone involved.