How do you terminate a shareholder’s participation in a limited liability company?

Quick Overview

A shareholder’s participation in a limited liability company (s.r.o.) most often ends with the transfer of their share to another shareholder or a third party. If all shareholders agree, a written agreement to terminate participation with notarized signatures may also be concluded. Unilateral withdrawal is possible only in specific cases under the Business Corporations Act. Expulsion of a shareholder against their will is primarily considered when they fail to meet their capital contribution or additional payment obligations, or when they commit a particularly gross breach of their duties.

Do you need to safely transfer a share, draft an agreement, or deal with a problematic partner? We’d be happy to help you with that.

If a shareholder’s participation in a limited liability company (s.r.o.) is to be terminated in any way, it is first and foremost essential to distinguish whether the termination is voluntary or involves some degree of “compulsion.”

In the case of a voluntary departure, the most common option is to transfer the share; alternatively, under certain conditions, it is also possible to arrange for the shareholder to withdraw and enter into an agreement to terminate their participation.

Transfer (Sale) of a Share in an s.r.o.

The most common way for a shareholder to terminate their participation is by transferring their share. This can occur either within the company, where the share is transferred to another shareholder or shareholders, or to a third party outside the company. The key factor is what rules the articles of association establish in this regard, but generally speaking, the sale of a business share to someone within the company tends to be significantly simpler. Formally, a written share transfer agreement is required to govern all essential matters. Given the serious implications of such an agreement, we always recommend consulting with an experienced attorney regarding its form and content.

When transferring a share, the parties often address not only the purchase price itself but also liability for debts, the transfer of documents, non-compete clauses, and the point at which the buyer actually begins to exercise the rights of a shareholder. We will draft or review the share transfer agreement for you to ensure it complies with the articles of association and the agreed-upon business plan.

As for a transfer to a person outside the company, this is generally only possible with the approval 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 share transfer agreement will not take effect until consent is granted. And if the general meeting does not approve the transfer within six months of the agreement’s execution, the transfer will not take place at all.

However, the transfer of a share does not necessarily result in the termination of a shareholder’s participation in the company, as the shareholder may hold multiple shares. If, however, the shareholder holds only a single share, the transfer also terminates their participation.

Agreement on the Transfer (Sale) of a Business Share in a Limited Liability Company (s.r.o.)

In the Agreement on the Transfer (Sale) of a Business Share in a Limited Liability Company (s.r.o.), it is important not to omit the following basic information:

• Details of the contracting parties: Names, addresses, and identification information (e.g., birth numbers) of the seller and the buyer.
• Company identification: Full name of the limited liability company (s.r.o.), identification number (IČO), and registered office.
• Subject matter of the contract: A description of the business share being transferred, including the size of the share (as a percentage or in another relevant form).
• Purchase price: Specification of the purchase price of the business share and the method of payment (lump sum, installments, etc.).
• Terms of the transfer: Specification of the conditions under which the transfer will take place (e.g., approval by the general meeting, settlement of assets, etc.).
• Date and Place of Execution of the Agreement: Specification of the date and place where the agreement on the transfer of the business share was executed.
• Additional Provisions: Other relevant provisions, such as procedures for exercising rights arising from the business share, compensation for the transfer of the share, etc.
• Legal Consequences of the Transfer: Information on how and when the rights and obligations arising from the business share will be transferred.

Withdrawal of a Partner and Agreement to Terminate Participation

A shareholder may decide to unilaterally withdraw from the company. This is possible only in specific cases permitted by the Business Corporations Act.

This typically occurs when a shareholder disagrees with a change in the predominant nature of the business or with an extension of the company’s duration, and did not vote in favor of these decisions at the general meeting. Another possibility is if the general meeting decides to impose a capital contribution obligation (specifically regarding the share to which the obligation is tied) and the decision to withdraw is made within one month of the imposition of the capital contribution obligation. However, the articles of association may set forth conditions for withdrawal that differ somewhat from those permitted by law.

All partners may also enter into a written agreement terminating the participation of one of the partners. By law, notarized signatures are required for such an agreement to be valid.

Before the partners agree to terminate a partner’s participation, they should clearly define the settlement of accounts, the handover of responsibilities, confidentiality, a prohibition on misusing contacts, and other obligations following departure from the company. We can help you draft the agreement to prevent future disputes over money, liability, or business relationships.

Expulsion of a Partner from a Limited Liability Company

Under certain circumstances, a shareholder may be expelled from the company even against their will, for example, if they fail to fulfill their obligation to make a capital contribution or additional payment. In such a case, the shareholder should first receive a written notice from the general meeting, along with an extension to fulfill their obligations. If they still fail to fulfill these obligations, the general meeting may expel them based on a vote of at least two-thirds of all shareholders (the defaulting shareholder may not vote in this matter). If a shareholder holds multiple shares, the expulsion does not apply to the shareholder personally, but only to the shares for which they are in default. The articles of association should permit the ownership of multiple shares. Individual shares are then identified, for example, by a number or a letter.

Expulsion of a Partner Through the Courts

A shareholder may be removed through court proceedings only under entirely exceptional circumstances, namely when the shareholder commits particularly gross breaches of duty. Here, too, there is an obligation to provide prior written notice, including information about the possibility of expulsion if the situation is not remedied. Examples of particularly gross breaches include damaging the company’s reputation and gross disloyalty toward it.

From Legal Practice

Two of the three partners in a company operating in the tourism sector turned to the Dostupný advokát law firm. Their third partner had a falling out with them for purely personal reasons unrelated to the company’s operations and, venting his frustration on social media, slandered the remaining partners and continuously questioned the company’s leadership. His attacks had an impact on client relationships, causing several of the largest clients to leave and others to reconsider their partnership.

Through our assistance, the remaining two partners therefore filed a petition with the court to terminate the third partner’s participation. Given that the negative impact of this unpleasant situation was clearly measurable and quantifiable, it was not particularly difficult to convince the court to approve the petition. In general, however, it is essential to have such a significant request to change the company’s operations very carefully argued and substantiated; therefore, it is recommended to work with an attorney when preparing it. From our experience, we know of many cases where partners had differing views on how the company should operate. For example, one of them persistently boycotted and blocked the proposals of the others. Such conduct, however, is not typically considered a valid reason for expelling a shareholder.

Other Reasons for the Termination of a Partner’s Interest in a Company

The law recognizes other circumstances under which a shareholder’s interest in the company may terminate. In the event of the death of a natural person or the dissolution of a legal entity, the interest may pass to the heirs or, as the case may be, the legal successor. However, the articles of association may also preclude the transfer of an interest.

A share may also be terminated due to specific decisions that the law links to the termination of a shareholder’s interest in the company. These include:

• dismissal of bankruptcy proceedings on the grounds that the assets are wholly insufficient,
• receipt of notice of an unsuccessful repeated auction in enforcement proceedings or in execution proceedings,
• a final order for enforcement of a judgment by attachment of the share,
• a final and binding writ of execution for the attachment of the share, or
• a final decision terminating proceedings to stay enforcement or rejecting or dismissing a motion to stay enforcement.

By its very nature, a partner’s participation ceases if the entire company is dissolved.

From everything stated above, it is clear that removing a partner against their will is by no means an easy matter. If there is even the slightest chance of reaching a mutual agreement on withdrawal, we strongly recommend pursuing this route. Although the negotiations may not be entirely straightforward, this approach is generally faster and more effective. With the help of an experienced attorney, you can then resolve the entire matter to the satisfaction of all parties involved.

Summary

A shareholder’s withdrawal from a limited liability company may be voluntary or involuntary. Most often, it takes the form of a transfer of the share to another shareholder or a third party, which typically requires the approval of the general meeting. An alternative is an agreement among all shareholders to terminate a shareholder’s participation, which requires notarized signatures.

A shareholder may withdraw only in specific cases, such as a change in the nature of the business or the imposition of an additional liability. A shareholder may be expelled by the general meeting if they fail to meet their financial obligations, or by a court in the event of a serious breach of duties, such as damaging the company’s reputation. A shareholder’s interest also terminates upon the shareholder’s death, the foreclosure of their share, or the dissolution of the company. Given the legal complexity involved, it is advisable to consult with an attorney regarding the procedure.