Division of a share in a limited liability company in the settlement of Co-Ownership and the competence of the general meeting

Two shareholders of a limited liability company, who held a joint share in co-ownership, terminated and settled their co-ownership by mutual agreement, resulting in each of them receiving a new share formed by the division of the original share. This settlement was approved by the company's general meeting. Subsequently, both shareholders sought to annul the agreement by proposing to the court a settlement approval. The proposed settlement declared the invalidity of the mentioned agreement and the restoration of the original co-ownership. Is it possible to reject the proposed settlement on the grounds that it allegedly pertains to the status-related matters of legal entities? And is the general meeting even competent to decide on such a settlement and share division? I will address these questions in this article.

The Outcomes of Proceedings in Lower Courts

Both the court of first instance and the appellate court in the given case refused to approve the settlement proposed by the parties. The courts primarily based their decisions on the following arguments:

• The proposed settlement pertains to the "status-related matter" of a legal entity, where the approval of a settlement is inherently excluded.
• Approving the settlement would allegedly circumvent the legal provisions on declaring the invalidity of a general meeting resolution, as the parties, agreeing on the invalidity of the co-ownership settlement, should primarily file a lawsuit for the invalidity of the general meeting resolution that approved the division of the share.

According to the lower courts, this was considered a "status-related matter" of a legal entity, meaning it concerned the fundamental structural and organizational aspects of the company, and the involvement of the general meeting was necessary for the settlement of co-ownership shares. In this case, the company’s general meeting indeed passed a resolution approving the division of the share between the participants in the proceedings.

An appeal was lodged against the appellate court's decision, and the Supreme Court ruled on it in a resolution dated July 9, 2024, case no. 27 Cdo 2853/2023.

Supreme Court's Decision

The Supreme Court did not agree with the interpretation of the lower courts. It emphasized that the division of a share is not a matter falling within the status-related affairs of the company. Such a division does not change the status of the company itself nor does it alter its organizational structure or the rights and obligations of other shareholders. In its resolution, the Supreme Court stated: “Just as the legal regulation of share transferability in a limited liability company is not part of the law concerning the legal status of persons under Section 1, paragraph 2 of Act No. 89/2012 Coll., the Civil Code, neither is the legal regulation of share division part of such law [see R 152/2018, paragraph 29 of the reasoning]. Therefore, the appellate court’s conclusion that this case involves a settlement in a 'status-related matter' of a legal entity and that the company should have been a party to the proceedings is incorrect.”

Moreover, the Supreme Court made a critical distinction, as noted in the cited resolution, between:

• The division of a share in connection with its transfer or inheritance under Section 43, paragraph 2 of the Business Corporations Act,

and

• The dissolution and settlement of co-ownership of a share under Section 1140 and subsequent provisions of the Civil Code.

According to Section 43, paragraph 3 of the Business Corporations Act, the division of a share in connection with its transfer or inheritance requires the approval of the company’s general meeting. This is a default provision, and in the company's articles of association, the shareholders may agree that a share can be divided without the general meeting’s approval or that division of the share is impossible. In the case at hand, however, the company's articles of association did not regulate this, so it was necessary to follow the statutory provisions.

Crucially, in this case, the share was not divided in connection with its transfer or inheritance. This essential fact was entirely overlooked by the lower courts. The shareholders merely dissolved their co-ownership of the share in the company and settled the dissolved co-ownership by dividing the jointly owned share between themselves. All this was done in accordance with Section 1140 and subsequent provisions of the Civil Code.

Thus, the provisions of Section 43 of the Business Corporations Act could not apply to the case, according to the Supreme Court. Therefore, the shareholders did not need any approval from the general meeting for the settlement of their co-ownership (division of the share between themselves).

The Supreme Court concluded that "even though the general meeting granted approval for the division of the share, it was a resolution passed on a matter over which the general meeting did not have the authority to decide. Such a resolution, under Section 245 of the Civil Code in conjunction with Section 45, paragraph 1 of the Business Corporations Act, is considered as though it was never passed. Therefore, it is impossible to argue that the approval of the settlement concluded between the participants in the proceedings would circumvent the statutory provisions on the invalidation of the resolution of the general meeting of a limited liability company."

Thus, the Supreme Court concludes that the reasons for which the appellate court refused to approve the settlement between the parties cannot stand.

General Commentary on Similar Cases Concerning the Validity of Legal Acts

It is essential to highlight the incorrect approach taken by the lower courts, particularly in their assessment of the validity of the agreement (or any other legal act in general) in relation to the validity of a general meeting resolution.

The courts, from the outset, assumed that if the legal act approved by the general meeting was invalid, the general meeting resolution must also be automatically invalid, indirectly directing the parties to file a motion for the annulment of the general meeting resolution.

A general meeting resolution is a legal act distinct from the approved legal act. If a relatively invalid legal act is approved by the general meeting, it does not necessarily mean that the resolution of the general meeting is also invalid, provided that all statutory and corporate requirements for its adoption were met.

Conversely, the invalidity of a general meeting resolution does not automatically result in the invalidity of the approved legal act.

Conclusion

The Supreme Court’s resolution is significant, especially for shareholders of limited liability companies, as it underscores their ability to settle co-ownership of shares among themselves without the need for approval from the general meeting, provided that the share is not being transferred to a third party.