Exclusion of a partner from a limited liability company. – when is it possible?

The purpose of proceedings to exclude a partner is to alter the composition of the partnership, whilst preserving its legal existence, by removing a partner whose continued presence in the partnership, due to their personal characteristics or individual conduct, would jeopardise the interests of the partnership or the legitimate interests of the other partners.

Exclusion of a partner from a partnership

The institution of a partner’s exclusion is characteristic primarily of partnerships, as determined by the presence of mutual trust and loyalty amongst the partners. The institution of a partner’s exclusion in a general partnership, professional partnership, limited partnership and limited joint-stock partnership is regulated by Article 63 of the Commercial Companies Code. This provision states that where there is a ‘valid reason’ on the part of a partner, the court may rule on the exclusion of that partner at the request of the remaining partners.

However, the determination of whether ‘good cause’ exists is left to the partners and the court, and its existence need not necessarily involve any fault on the part of the partner, as is the case, for example, where a partner is unable to make the agreed contribution due to unforeseeable circumstances.

Exclusion of a partner in a limited liability company

In the case of capital companies, the institution of a partner’s exclusion exists only in relation to limited liability companies (sp. z o.o.), which is justified primarily by the significance of the personal factor in the structure of this type of company. Although it falls within the category of capital companies, a limited liability company exhibits certain characteristics typical of partnerships, in which the personal qualities of the partners are decisive and the company’s operation is based on mutual trust and cooperation. A conflict in cooperation between the partners may therefore constitute grounds for excluding one of them from the company, particularly where the partner’s conduct hinders or thwarts the pursuit of the objective for which the company was formed.

The exclusion of an undesirable partner by court order is possible under Article 266 of the Commercial Companies Code. The solution applied in this provision is identical to that provided for partnerships, and apart from the form, they are also linked by the absence of a defined concept of ‘good cause’. This does not mean, however, that the definition will be identical in both cases. The interpretation of ‘valid grounds’ under Article 266 of the Commercial Companies Code must be carried out taking into account the structure of this company as a capital company. The capital nature of a limited liability company (sp. z o.o.) is also emphasised by the restriction on the group of shareholders to whom the exclusion mechanism may be applied. Minority shareholders cannot make a request for the exclusion of a shareholder due to the size of their shares, which means that in a situation where one shareholder holds 50% of the shares in the company, the others cannot effectively request his exclusion from the company, even if there is a valid reason on the part of the majority shareholder justifying such exclusion.

What are the valid grounds/reasons justifying the exclusion of a partner?

The absence of an exhaustive list of grounds for a partner’s exclusion means that they cannot be confined to a specific catalogue. In any case, the grounds must be assessed in relation to the specific, individual case. Nevertheless, certain general principles have become established in legal doctrine, on the basis of which the existence of such grounds/reasons might be identified. Firstly, following the Supreme Court, it should be recognised that valid grounds for the exclusion of a partner include not only the partner’s conduct towards the partnership, but also their personality traits affecting the proper atmosphere necessary to ensure the desired cooperation. With regard to a partner’s conduct, it should be recognised that it may be either culpable or non-culpable. The exclusion of a partner on the grounds of his or her non-culpable conduct may occur, for example, in the case of the partner’s long-term illness, if he or she is obliged under the partnership agreement to perform personal work in the partnership.

Other important causes/reasons could also include:

• Loss of trust in a partner, e.g. as a result of a preventive measure being imposed on them in the form of an order to refrain from specific activities
• Failure to fulfil obligations towards the company, including failure to make contributions or additional payments, or refusal to perform recurring services for the company
• Acting to the detriment of the company
• Breach of the duty of loyalty by supporting or directly participating in competitive activities, e.g. using the company to promote one’s own business
• Refusal to cooperate in the company’s decision-making process
• Exercising one’s own powers with the aim of disrupting or hindering the functioning of the company and its bodies (e.g. repeatedly submitting motions to convene a general meeting for the same purpose)

It should be borne in mind, however, that despite established views and patterns in case law, the exclusion of a partner must in each instance be justified by the disruptions that have arisen between the partners.

Exclusion of a partner or dissolution of the company?

It would not be reasonable to equate the ‘good cause’ justifying the exclusion of a partner with the ‘good cause’ justifying the dissolution of the company; however, in accordance with the Supreme Court’s judgment of 13 March 1991, it cannot be ruled out that the same good cause may, in certain factual circumstances, provide grounds for both the exclusion of a partner and the dissolution of the partnership. In such a situation, it should be recognised that the exclusion of a partner should precede the process of winding up the partnership, as it may turn out that there is no need for the partnership to cease operations entirely and it will continue to function successfully following the removal of the individual.

When is it possible to exclude a partner?

The effective exclusion of a partner is permissible only where all of the following conditions are met simultaneously:

• The existence of ‘valid grounds’ justifying the exclusion of a partner from the company
• In the case of partnerships, a claim for the exclusion of a partner must be brought by all the remaining partners; in the case of a limited liability company (sp. z o.o.), a claim for the exclusion of a partner must be brought by all partners holding in aggregate more than half of the share capital, or by a smaller number of partners where their shares constitute more than half of the share capital
• The grounds for the exclusion of a partner must still exist on the date of the conclusion of the hearing
• The issuance of a final judgment ordering the exclusion of the partner
• In the case of a limited liability company (sp. z o.o.), this also involves the acquisition of all the shares of the excluded partner and payment of the price for those shares by the remaining partners or third parties.

Contractual provisions and grounds for the exclusion of a partner

In attempting to clarify the impact of the company’s contractual provisions on the institution of a partner’s exclusion, it is worth beginning by noting that it is impermissible to specify the procedure for a partner’s exclusion in the articles of association. Disputes between partners are heard by the court, which means that not only can they not be resolved by a resolution of the partners, but also that the valid grounds for a partner’s exclusion set out in the articles of association are not binding on the adjudicating court. The list of such grounds, contained in the articles of association, may indeed indicate grounds for the exclusion of a partner that are valid from the perspective of the partners and the company, but it cannot be regarded as an exhaustive list. The court must, in each case, independently examine whether the conditions set out in Article 63 of the Commercial Companies Code or Article 266 of the Commercial Companies Code have been met in the specific case, as the provisions of the articles of association can never effectively preclude the application of the provisions of the Commercial Companies Code.

Exclusion of a shareholder from a limited liability company – summary

The exclusion of a shareholder from the company is, as a rule, justified by the impossibility of cooperating with that shareholder, though it cannot be based on trivial grounds. Arguments or differences of opinion that do not disrupt the company’s operations are irrelevant to this procedure, as it cannot be used as a pretext to remove an inconvenient person from the company. Only the demonstration of circumstances which make it plausible that the company’s operations with the current membership will be highly impeded or impossible provides the court with grounds to rule on the exclusion of a partner. If you require assistance regarding the exclusion of a partner from a limited liability company, please contact HWW Hewelt Wojnowski Lindner & Partners.