Suspension of a Partner’s share rights and personal rights

In limited liability companies, one important mechanism for resolving conflicts between shareholders remains the action to exclude a shareholder. However, the exclusion of a shareholder can only take place after a final court judgment and the payment of the takeover price by the other shareholders to the excluded shareholder. These processes often take years, which is unfortunately fostered by the current regulation, which favours the excluded partner. This is because the takeover price is set on the basis of the value of the excluded shareholder’s shares at the time of service of the lawsuit and interest is calculated from the time of service of the lawsuit. It therefore pays for the excluded shareholder to drag out the process.

In limited liability companies, the articles of association are most often drafted in such a way that resolutions necessary for the normal functioning of the company cannot be adopted without the excluded shareholder. In addition, usually the minority shareholder(s) also very often sit on the board of the company, and it is not uncommon – especially in venture capital companies, where the majority shareholder is usually a passive capital donor – for such shareholders to have a majority in these bodies.
Where a conflict arises between shareholders which the provisions of the articles of association alone cannot easily remove, the only means left to the majority shareholder, apart from a radical demand for dissolution of the company, is an action to exclude the shareholder.
However, in order for such an action to make any sense (inevitably, the resolution of such a case may take place even after several years), the legislator has provided for the possibility to request security for this action by suspending the excluded shareholder from exercising his shareholding rights. Article 268 of the Companies Act speaks of the suspension of share rights, but what about the personal rights of the excluded shareholder, e.g. to appoint a member of the Management Board?
And here, as in many areas of the Companies Act where there is an opportunity to put a needle in a haystack there and commentators will find ten, each with the opposite opinion. Here, too, the scope of the security of the claim for the exclusion of a shareholder is proving – at least in the eyes of the representatives of the doctrine – contentious. Some take the view that only shareholding rights are subject to suspension, with personal rights granted by the articles of association remaining outside their scope, while other commentators hold that the provision of Article 268 of the Companies Act covers the suspension of all rights of the excluded shareholder.
Personal rights are corporate rights It so happens that in recent months we have had the opportunity to conduct two independent shareholder exclusion cases in which our clients have obtained security in the form of suspension of all shareholder rights. In two independent cases, the Wrocław and Warsaw registry courts held that the suspension of the shareholding rights of excluded partners from limited liability companies automatically results in the suspension of the personal rights of the excluded partners (in this particular case, their appointment as members of the Management Board). The Wrocław Court dismissed the application for the entry of the member of the Management Board appointed by the suspended shareholder (who, nota bene, reappointed herself as President of the Management Board after the resolution of her dismissal had already been adopted). The Warsaw Court, on the other hand, registered the Vice-President of the Management Board appointed by the shareholders requesting the exclusion of the shareholder who, under the articles of association, was entitled to appoint the Vice-President of the Management Board.
These rulings are fully justified despite the doubts of some doctrine as to such a possibility. Indeed, it would be unreasonable to conclude that shareholders may demand the suspension of an excluded shareholder from exercising the right to vote, but not, for example, to appoint a member of the management board or supervisory board. Indeed, personal rights, including the right to appoint members of bodies, are often more far-reaching than the right to vote. To hold that only the shareholder’s corporate rights, but not his personal rights, may be suspended pending the outcome of a shareholder exclusion case would only be an apparent protection of the majority shareholders and would only prolong the decision-making paralysis in the company. Such a solution would allow the excluded shareholder to blackmail the company as well as in many cases lead to the bankruptcy of a thriving company. (The principle: “I will not have a company, but neither will you” is often applied in corporate disputes, which often end in the bankruptcy of companies that were prosperous before the conflict). In our opinion, the view adopted in the rulings of the Wrocław and Warsaw courts should be fully shared, as they aim to protect first and foremost the company (its employees, contractors) by allowing it to function normally, in a situation of a deep conflict between shareholders.
It is also worth noting that in the few court decisions to date, the Supreme Court has taken the view that the suspension of a shareholder’s shareholding rights is tantamount to as if the shareholder in question “did not exist” in the company during that period (Supreme Court judgment of 26 March 2002, Case No. III CKN 1238/99). Since this is the case, it is necessarily the case that a partner who is not present cannot use his personal powers to appoint and dismiss members of the bodies. In another more recent judgment, the Supreme Court stated that (Supreme Court Judgment of 13 March 2013, ref. IV CSK 228/12) the application of this provision (Article 268 of the Companies Act – author’s note) does not deprive the shareholder of those rights, the exercise of which is merely the realisation of the active legitimacy to initiate legal proceedings, the conclusion of which through an appropriate judgment constitutes the legitimacy of the exercise of the right. This applies in particular to such proceedings in which the shareholder defends his rights of participation in the company. A claim for dissolution of a limited liability company belongs to them, if it is based on the basis of Article 271(1) of the Code of Commercial Companies and the prerequisites contained in this provision prove to be met. The judgment of the Supreme Court of 26 March 2002, III CKN 1238/99 (OSNC 2003, No. 5, item 61), cited in the complaint, concerns a different type of situation, i.e. the suspension of a shareholder from such corporate rights as the right to vote and minority rights, i.e. those resulting from the right to vote at the shareholders’ meeting, influencing the company’s decisions, and not the shareholder himself, having rights individually granted to him by statute and of an exceptional nature, such as a claim for dissolution of the company. This view of the Supreme Court, is arguably behind the flawed views of the doctrine in favour of limiting the scope of a shareholder’s suspension solely to his rights as a shareholder. However, when given a careful reading, not only is it impossible to conclude from it that the suspension of shareholder rights does not extend to personal rights, but this conclusion can even be confirmed. The Supreme Court clearly indicates, with which one must agree, that the suspension does not apply to rights individually granted by law and of an exceptional nature, but does not state that the suspension of all shareholding rights does not apply to personal rights of the shareholder granted by the articles of association. Indeed, it may be reasonably assumed a contrario that, since under Article 268 of the Companies Act a shareholder may not be suspended in rights arising directly from the Act and of an exceptional nature, a suspension in all other rights, including personal rights arising from the articles of association, is most justifiable and possible under that provision.
In conclusion, it is worth recalling that the instrument in the form of securing a claim by suspending shareholding rights serves to secure a claim for exclusion of a shareholder based on that shareholder’s conduct not only as a strictly shareholder, but e.g. as a member of the management board. The catalogue of so-called valid reasons for the exclusion of a shareholder is not limited to the manner in which he exercised his rights at shareholders’ meetings, but to all of his activities in the company. Since the reasons for exclusion are therefore to be understood broadly, the instrument of securing the claim should also be understood in such a way as to stop or prevent further conduct that formed the basis of the action for exclusion of the shareholder. This is further supported by the fact that the acquisition price of the shares is calculated as of the date of service of the claim, and therefore allowing the minority shareholder – if the security were to be understood narrowly – to retain influence over the company after that period could lead to a further loss of its value and thus to the nullification of the primary objective of the shareholder’s exclusion claim.