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A group of 3 acquaintances jointly established 4 group companies. Each of the three partners held equally 34 shares of the 102 shares in each of the 4 companies. All partners jointly served on the companies’ boards of directors. Of the group companies, only company Y had profit-making operations. An additional fourth shareholder of company Y was another group company, company X, which held 3 shares. The only income and profit of company X was the dividend paid by company Y.
The disputed Company X was established in order to carry out the procedure of converting Company Y into a limited partnership, but the conversion did not take place. Company X did not carry out any operational activities, did not employ any staff, and only bore the costs of maintaining the office and paying the board members’ salaries.
Zmienne sojusze
A conflict arose between the partners. Shareholders 1 and 2 entered into an agreement against Shareholder 3. Using the advantage of their votes, they removed Shareholder 3 from management in all group companies. On the other hand, after a period of time, there was a change of alliances and it was Shareholder No. 2 who was removed from management by the votes of Shareholders 1 and 3.
To safeguard against another change of alliances, Shareholders 1 and 3 entered into an agreement formalising their understanding. Among other things, the agreement stipulated: unanimous voting on corporate matters, no action to change the shareholding structure and the removal of Shareholder No. 2 from the board of directors in all group companies. The shareholders also stipulated a contractual penalty for each breach of the agreement of PLN 10 million. In order to secure the performance of the agreement, Partners 1 and 3 created registered pledges for each other to secure claims for payment of the contractual penalty.
Przebieg sporu
Company X, by votes of Shareholders 1 and 3, passed a resolution to allocate the profit of PLN 546,000 to the company’s reserve capital. Justifying the necessity of retaining the profit, the management indicated that the company, after eight years of stagnation, plans to start intensive operations based on a new financial strategy for the next four years.
The resolutions were challenged by Shareholder No. 2, indicating that they were contrary to good morals and intended to harm him as shareholder X. Company X defended itself by arguing that given the fact that all shareholders had been deprived of dividends, there could be no harm to Shareholder No. 2. It also argued that the resolution was not contrary to morality, as the funds were needed for further development of the company. In the course of the court proceedings, Partners 1 and 3 refused to disclose the full content of the agreement entered into against Partner No. 2, presenting in court a version that obscured certain parts of the agreement.
Stanowiska Sądów
The Regional Court in Warsaw upheld the claim for revocation of the contested resolution, and the Court of Appeal in Warsaw upheld the judgment of the first instance. In the justification of the judgment under case no. VII AGa 253/19, the Court of Appeal pointed to the ostensible nature of the declarations of intent to develop operations. Company X had been established in order to transform company Y into a limited partnership and was to be its general partner. In view of the failure of the conversion plan, the continued existence of X was economically meaningless since the purpose of forming the partnership had fallen away. The court further pointed out that there were no economic events or asset transfers in the respondent company that would prove that there was an economic rationale for retaining the company’s profits and that the development strategy was a framework and applied to the entire group. The Court of Appeal further pointed out:
The majority shareholders had deliberately decided to use the defendant company as a vehicle to disadvantage the plaintiff as a shareholder, that it had only been created to keep the dividend in the company in such a way that only the other two shareholders could benefit from the money by drawing a salary as board members. Hence, the argument that there was no disadvantage to the shareholder if all shareholders were equally deprived of the opportunity to receive dividends could not succeed. The equality in this respect with respect to all three shareholders is apparent. The majority shareholders have secured such a financial position for themselves that they are able to "deprive" themselves of the dividend in X, given that they receive from the Group companies a substantial financial benefit each year in the form of remuneration in all four companies for serving on the boards of directors, which shareholder No. 2 is deprived of on this account
In justifying its finding of a conflict with good morals, the Court of Appeal pointed out that since the visible part of the agreement of Shareholders 1 and 3 had provisions directed against Shareholder 2, provisions of the same kind could also be found in the parts obscured by them, and the circumstances of the shareholders’ conflict support the conclusion that the resolution is contrary to good morals.
As is apparent from the judgment in question, the Court of Appeal saw the contrary to good morals and the disadvantage to the minority shareholder in a situation where the majority shareholders vote in favour of a resolution resulting in the retention of profit in the company, while they themselves derive income from the company from the pairing of a function to which they themselves have referred.
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