One company to rule them all…

Is it possible to take over a limited liability company in which the powers of two partners are completely symmetrical and each of them has the ability to block any actions of the other? As the following story shows, it is not easy, but it is definitely possible. All you need in such a situation is a lawyer whose creativity knows no bounds.

In this story, two partners entered into a partnership agreement under which they wanted to carry out a development project. Not anticipating that their relationship might one day deteriorate, they drafted the partnership agreement in such a way as to divide control of the company equally between the two parties. Each partner received half of the votes at the shareholders’ meeting and the personal right to appoint and dismiss a member of the management board, which had to consist of two people and be jointly represented. The members of the management board were appointed for a joint five-year term and could only be dismissed before the end of their term for important reasons. This balance of power worked well in peacetime, but, as it soon turned out, it was completely unsuitable for wartime. In accordance with the agreement, both partners were also to receive additional benefits from the investment. One of the partners was promised four flats in the development, which he was to purchase at a very attractive price (Partner A). The benefit for the other partner (Partner B) consisted in commissioning all construction works in the investment to a company with which he was friends.

For the first few months, the investment was carried out by both partners in accordance with the agreement and there were no signs of the conflict that was about to erupt. Funds received by the company under development agreements were deposited in bank accounts, and the partners granted each other several low-interest loans from the company’s assets. At some point, however, Partner A decided that a 50% share in the profits was not sufficient for him and began to demand additional benefits from the company’s assets, including, among other things, financing for his other, less successful business ventures. The other partner initially allowed this behaviour, but at some point he categorically opposed it, which, of course, was not understood by the other party. Resentful, Partner A decided to resort to blackmail in order to force the other party to make concessions. First, he blocked the possibility of making transfers from the company’s account. As the company was represented by two persons, the bank’s procedures required that one member of the management board enter the transfer order and the other confirm it by entering a text message code. Partner A simply stopped responding to the text messages he received. This, of course, had a number of consequences, primarily in terms of relations with the general contractor. In the absence of payment for the work performed, the contractor simply suspended the work.

At that point, the investment was already significantly delayed, and the consequences of this situation were also beginning to affect relations with the buyers of the premises, who regularly visited the investment sales office and demanded explanations from the company’s employees in no uncertain terms. It is hardly surprising that the tenants, who had signed loan agreements, had to pay instalments to the bank regardless of the condition of their premises. In order to calm the mood, Partner A allowed buyers to move into the premises before the construction procedure was completed. This action was, of course, not approved by Partner B, who feared the consequences of any accident on the construction site. Needless to say, this only deepened the existing rift in the company. Construction work came to a standstill, settlements were frozen, the company’s funds were frozen, and the partners, who were also members of the management board, stopped communicating with each other.

This was the situation we found when Partner B asked us for help – the company was in a complete mess, and our client was considering filing for dissolution. It should be added that several law firms had told him that nothing could be done in this case. We proceeded to analyse the documents and, after a few days, came to a surprising conclusion. The resolutions on the dismissal of management board members did not clearly specify which members they concerned. In other words, could only the member of the management board who had been appointed be dismissed, or did this power also apply to the other member? This was, of course, an editorial inaccuracy, but we decided to use it to cut the Gordian knot that existed in the company. Our client submitted a statement dismissing the second partner from the management board and appointed a professional to take his place, who was to lead the company to a successful conclusion. We completed the form, submitted it to the National Court Register and… after two weeks, we obtained the entry.

The new management immediately set about sorting out the mess. A settlement was reached with the general contractor, under which he waived part of his interest claim against the company but obtained all outstanding payments. Outstanding salaries were paid and the final phase of construction work was launched. In order to secure the funds, money was also deposited in bank accounts. Before Partner A realised what was happening, all his means of pressure were taken out of his hands. He found out about the whole matter at the bank when he was refused access to his account. At that point, however, he panicked and instead of going to a good lawyer, he went to… a member of parliament, who of course had only one piece of advice for him: go to the prosecutor’s office.

And so Partner A did, without using any civil law instruments that could have challenged our change in management. The prosecutor, of course, dismissed the case, although not without incident, which I will describe separately. Partner A, in turn, attempted to repeat our manoeuvre with the dismissal and submitted identical documents to the National Court Register. Meanwhile, our client, wishing to confirm the legitimacy of the new member of the management board, convened a shareholders’ meeting and invited Partner A to attend. And he showed up. Interestingly, he did not question the validity of the meeting (which, from his perspective, was not convened by the management board but by a single member of the management board and a person claiming to be a member of the management board), but participated normally, voted and submitted statements for the minutes. The entire meeting was recorded by a notary public, so all statements made by Partner A were immediately included in the files of the registration proceedings initiated by him, as a result of which the registry court dismissed his application. In its justification, the court indicated that the correctness of the appointment of management board members is a matter to be decided by a court of law, and that the effectiveness of the appointment of ‘our’ management board member is not in doubt, as it was confirmed by Partner A through his participation in the convened meeting.

Meanwhile, the company, which had claims against Partner A under loan agreements concluded during the ‘peaceful times’, commenced debt collection proceedings against its debtor. A payment order for over PLN 300,000 was issued in the case and served on the defendant, who, of course, lodged an objection. However, we were surprised to find that although the objection to the order was filed in its entirety, it did not contain any arguments other than an allegation of set-off of several thousand zlotys. In this situation, the company did not object, confirmed the defendant’s objections and obtained a judgment with immediate enforceability upon recognition of the claim. Just a few days later, a bailiff accompanied by the police knocked on Partner A’s door.

With all the cards in our hands, we offered our opponents a settlement on the following terms: they would withdraw from the company and in return receive the promised flats and two million zlotys. Faced with a bailiff seizing cash and shares in other companies, and with no influence whatsoever on the company’s operations, Partner A had no choice but to sit down at the table and accept our terms. The shares were sold, ownership of the flats was transferred, and two million zlotys were paid out.

This is how the dispute resulting from the completely symmetrical distribution of powers in the partnership agreement ended. It was not easy for the parties, including the one that ultimately prevailed, and if there is any lesson to be learned from it, it is the need to include worst-case scenarios in investment agreements, including potential differences of opinion between partners. The assumption that partners will always be friends and cooperate harmoniously belongs somewhere between fairy tales and the musings of flat-earthers.