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Joanna Jurasz

Attorney at law (Poland)
Associate Partner
Phone: +48 61 624 49 31
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Shareholders who want to establish a limited liability company (Polish: sp. z o.o.) often want to secure a good position already at the time of drafting the articles of association. This can be achieved by granting special shareholding or personal rights to shareholders. Well drafted articles of association may help the company survive disputes among shareholders, while poorly drafted articles may lead to long and devastating litigations. Moreover, overprotection of a shareholder's interests may make certain provisions of articles of association invalid.

One of the fundamental rights of shareholders in a limited liability company is the right to adopt resolutions on the management board composition. According to the statute, the management board is appointed by a resolution of the meeting of shareholders. Such resolutions require a simple majority of votes and usually one share gives one vote at the meeting of shareholders. This means that a minority shareholder may generally always be outvoted (this is the essence of a limited liability company which is based on equity), unless the articles of association stipulate otherwise.

Special right of a shareholder to appoint and remove a management board member

We have recently looked into implications of the articles of association of X sp. z o.o. ("company X") containing the following provisions:

Article 1 Every shareholder holding at least 10% share in the share capital may appoint one management board member and if the shareholder is a natural person he may appoint himself.
Article 2 The management board member appointed pursuant to Article 1 may be removed only by the shareholder who appointed him.
Article 3 Article 203(1) of the Code of Commercial Companies is excluded. (a management board member may be removed at any time by a shareholders' resolutions).

The company had two shareholders: one held 10% and the other held 90% of shares. The majority shareholder wanted to know if the management board member appointed by the minority shareholder could be somehow removed. 

In the first place, we have wondered about the effectiveness of Article 3 of the articles of association which excludes the right of the meeting of shareholders to remove management board members.  This issue is currently debated – some commentators and courts claim that the meeting of shareholders' right to remove board members cannot be excluded. Opponents claim that the exclusion is effective. It is important to note that even if we choose the concept that favours the majority shareholder (saying that despite the articles of association the majority shareholder may remove a management board member at the meeting of shareholders), this does not exclude the minority shareholder's right to appoint him again. Therefore, company X faced a deadlock where the majority shareholder could resolve by majority to remove a management board member appointed by the other shareholder, but the latter could appoint him again.

Amendments to articles of association and the undermining of shareholding rights

In our case the majority shareholder began to consider amending the articles of association to put him in a position adequate for his share – to be able to e.g. appoint management board members The articles of association did not include any special rules for amending the articles, so the 2/3 majority of votes cast at a meeting of shareholders would normally suffice – as a reminder, the majority shareholder had 90% of votes. Therefore, the amendment of the articles of association seemed a viable and simple option. However, the lawmakers who formulated the Code of Commercial Companies anticipated such a situation in which the majority shareholder would try to deprive other shareholders of their rights under the articles of association by modifying the articles. As such an amendment to the articles would undermine the shareholding rights, it required the consent of all shareholders whose rights would be undermined – including the minority shareholder who held only 10% of shares. 

Importantly, those rules cannot be relaxed in the articles of association. Every attempt to undermine rights originally granted in the articles of association personally to any of the shareholders or their shareholding rights would each time require the shareholder's consent. This means that such a shareholder's failure to show up at a meeting of shareholders and, thus, a failure to vote against such an amendment (resolution) would not suffice – he must expressly consent to the deprivation of his rights

Expulsion of a shareholder or forced redemption of shares

If a dispute among the shareholders escalates, they sometimes attempt to take over full control of the company. Yet, the minority shareholder may be impossible to buy out as he does not want to sell his shares. Then, the only option for the majority shareholder may be to file an action for expulsion of the minority shareholder or to force the redemption of shares. Both options eventually lead to a removal of one of the shareholders, but the procedures are different. 

The above issues are beyond the scope of this article, but we would like to draw your attention to the forced redemption of shares in the context of the undermining of shareholding or personal rights of a shareholder. The forced redemption of shares is possible only if the articles of association allow for it, and the articles of company X did not. Interestingly, an amendment to the articles of association by introducing a forced redemption clause is currently not regarded as an undermining of the shareholding rights (albeit this approach is criticised despite several Supreme Court rulings on the matter). 

Company X could also try to increase its share capital. An increase in the share capital authorises shareholders to buy new shares (if the share capital is increased by issuing new shares) in proportion to the number of shares already held. If the minority shareholder has no money to buy the new shares or does not exercise his right to buy them for some other reasonsthe increase in the share capital would reduce his percentage share and, consequently, deprive him of the right to appoint and remove a management board member. An increase in the share capital (whether by amending the articles of association or not) does not require unanimity of the shareholders as it does not undermine directly the shareholding or personal rights of shareholders.

A careful review of the articles of association is a must

Please remember that the right to appoint and remove management board members is only an example of a shareholding right. Articles of association may grant other rights (attached to persons or shares), e.g. a dividend or voting preference, and may require unanimity for resolutions of a certain kind. Articles of association should be drafted in such a way as to ensure balance among all contracting parties, meaning that they should not allow deadlocks disrupting the company operations in the case of a dispute. In this context, articles of association must be reviewed before a company is established or before buying shares in an existing company, and the review should cover the shareholding and personal rights granted to the shareholders. Without such a review the company may struggle to function and shareholders may suffer losses in the future.

If you would like to know more on this topic or need help in reviewing articles of association, please contact Rödl & Partner's experts in Cracow, Gdansk, Gliwice, Poznan, Warsaw or Wroclaw, who will be glad to help you.

2.07.2018