A drop drills the rock, or patience in corporate disputes

Paul and Gaweł acquired a 99% stake in Kamień S.A., formerly a state-owned company, in the crazy 1990s. The remaining shares remained in the hands of a few dozen employees who said they would not sell them at the time. Paul had the idea and the money, but he invited his brother-in-law, Gawl, to join the joint venture. As a result, Paweł held 65% of the shares and Gaweł 34%. The articles of association allowed Pawel to manage the company virtually single-handedly. Although Gaweł divided his shareholding into his other companies, this was for other reasons. For years, Gaweł functioned as a minority shareholder, held a minor position in the company, drew a salary and did not interfere in Paul’s business. Instead, Paul sat on the Supervisory Board, hired trusted managers to manage the business and built the market position of the company, which generated significant profits year on year. Profits were divided as required to pay dividends, employee awards, reserves and capital reserves. When Paul said there would be no dividend this year, Gaweł just nodded and lived on the salary paid to him by the company or by other group companies. Such was the internal peace for years, business went on, everyone was happy. However, any corporate dispute usually starts quite mundanely, usually about money or family issues and money. In the case of Paul and Gawl, it was about a difference of opinion within the family, although supposedly the brother-in-law is not family. Paul, having accumulated majority capital, therefore decided to settle accounts with his brother-in-law in the way he thought most appropriate, namely to cut him off from any funds. He made many efforts to do so, the companies from which Gaweł derived his income terminated their contracts with him, and the Stone company stopped paying dividends due to its planned “investments”. Gaweł’s situation was, to put it lightly, not the best, he from a big city and a local company whose management claimed it needed to invest to adapt the company to changing economic conditions and wanted to increase employment. Gaweł was fortunate, as it turned out that he needed to make significant investments in the company to ensure its viability, which unfortunately was common knowledge in the region, including for the court. Gaweł, unable to come to terms with Paul’s actions, therefore went on the counter-attack, requested general meetings at which he elected his board members, tried to prevent a capital increase and did everything possible to find out about the company’s actual financial condition and cash flow. After each of the general meetings, which as a rule proceeded tumultuously, Gaweł complained about the successive resolutions infringing his interests as a minority shareholder and demonstrated to the court that Paul’s actions were contrary to good morals and intended to disadvantage him as a shareholder. Gaweł did not want much, he wanted either to participate in the company’s profit or to sell his shares, which he could not do without the company’s consent and no one in such conditions would buy his stake anyway. Gaweł was in a stalemate because he had a shareholding of significant value, but could not do anything with it and the shares did not generate any income for him. At the time, Pawe³ was using the company’s capital through a dozen or so related parties, which was noticed by everyone, except, of course, the court, which ruled on successive resolutions to allocate profit to reserve capital, considering that the company was planning investments and had the right to accumulate capital. Paul acted very prudently and succeeded in creating the right image of a local businessman looking after the interests of the company, and he also had the support of his employees as he allocated a portion of the profit each year to rewards for them. He also had the support of his employees, as he allocated part of his profit each year to rewards for them. The planned investment was also conducive to the possibility of drawing up an appropriate story to present in court. All these actions made Gaweł and his attorneys persona non grata throughout the area. With each successive resolution and each successive ruling leaving profit in the company, Gaweł ceased to have the will to continue fighting. However, as it turned out, Gaweł’s tactics were not entirely well thought out, for in order to defend the arguments of profit accumulation in the first year a professional and reliable valuation of the necessary investments to be made had been prepared, the only problem being that the plan at the time had been drawn up honestly and its assumptions did not presuppose a corporate fight for many years. So Gaweł undertook the same battle every July and demonstrated to the court that the company should share at least some part of the profit with the shareholders, but the court stood every year on the view that the investment was necessary as confirmed by all the circumstances presented by the company.

It was not until three years later, after another dismissal of the claim by the Regional Court, as a result of an appeal filed, that the Court of Appeal took a proper look at the case, changed the appealed verdict and revoked the resolution on profit appropriation. In its ruling, the Court of Appeal made it clear that the entirety of the case should be examined, including in particular the redistribution of profit in the company, as there cannot be a situation in which a minority shareholder is excluded from the possibility of drawing profit in the company, while the majority shareholder(s) obtains benefits from the company outside of the distribution of profit by entities related to them which are contractors of the company. Such a ruling by the Court opened the way for talks and unlocked Gawl’s access to funds in the following months. The ruling also changed Paul’s perspective on the matter, as he had to come to terms with the fact that from now on he would have to share in the profit, as further resolutions excluding Gawl’s participation in the company’s profit would already meet with the court’s disapproval.

The moral of the story is that despite the fact that we sometimes take quick action to resolve a corporate conflict within a company, we sometimes need to be patient and prepare ourselves for a longer battle, despite the fact that we have all the arguments in favour of the correctness of our position.