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Current Challenges Regarding the Exclusion of Shareholders in Limited Liability Companies

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The exclusion of shareholders has been seen over the years as a specific procedure aimed at safeguarding companies, in case of a serious breach of the legal and contractual obligations of the shareholders or in case of events with legal effects on some shareholders – resulting in the loss of the “unanimous” consent expressed as affectio societatis (consisting in the shareholders’ intention to cooperate in running the business to achieve and share the benefits).

The judicial practice has recognized over the years several well-founded reasons for exclusion – disruptive activities, refusals to actively take part in the management of the business, misunderstandings caused by shareholders, without limiting the cases of exclusion to the ones regulated by the Law no. 31/1990 with respect to companies (the “Companies Law”).

Thus, when the courts observed the absence of trust and support between a shareholder of the company and the other shareholders/the company, which is the cornerstone of the affectio societatis required in order for the company to continue to operate effectively, the courts ruled in favor of excluding the shareholder.

How the practice of excluding shareholders evolved in time

On May 10, 2021, the panel for preliminary rulings on questions of law of the High Court of Cassation and Justice issued the Ruling no. 28/2021 (the “Preliminary Ruling No. 28/2021”) establishing, with binding force, that the only exclusion scenarios are those provided in Art. 222 of Companies Law, which set out only four limitative exclusion cases that are not supplemented by the provisions of Art. 1928 of the Civil Code, which covered a much broader range of cases falling within the notion of “well-founded reasons”.

The challenges triggered by the Preliminary Ruling No. 28/2021 in the exclusion of shareholders of limited liability companies

Prior to the Preliminary Ruling No. 28/2021, the courts allowed the exclusion of bad-faith shareholders for various reasons, not limited to the provisions of the Companies Law, considering the non-restrictive provisions of Art. 1.928 of the Civil Code regarding the existence of “well-founded reasons”, and obviously the generally accepted principle of safeguarding companies.

In the case of limited liability companies, the immediate effect of enforcing Preliminary Ruling no. 28/2021, without taking into account the primacy of the Community law, as we intend to show below, is the automatic limitation of the cases in which a shareholder may be excluded to the four cases regulated by Art. 222 para. (1) of the Companies Law: “The following may be excluded from a general partnership, a limited partnership or a limited liability company: a) the shareholder who, after being notified of their default of payment, fails to make the share capital contribution to which they committed; b) the shareholder with unlimited liability who is bankrupt or became legally incapacitated; c) the shareholder with unlimited liability who interferes without right in the administration or violates the provisions of Art. 80 and 82; d) the shareholder who is also a director and commits fraud against the company or uses the company’s signature or share capital for their own benefit or for the benefit of others. (…)”.

In practice, the main reason for exclusion used in the case of limited liability companies is the one provided in Art. 222 para. (1) item d) of the Companies Law (“the shareholder who is also a director and commits fraud against the company or uses the company’s signature or share capital for their own benefit or for the benefit of others”).

However, considering the legal content of the aforementioned exclusion case, one can see that this too is extremely restrictive, requiring to prove not only the existence of a fraud or the use of the company’s signature or share capital for the benefit of the shareholder to be excluded or for the benefit of others, but also the double capacity of shareholder and director.

In practice, however, shareholders do not usually collectively appoint all shareholders as directors for this scenario to have a significant impact.

Considering the above, companies facing difficulties in excluding shareholders who disrupt business operations are exposed to a significant risk – dissolution.

The exclusion measure, as a remedy for safeguarding companies, should help avoid this last resort “remedy” and, thus, enable the exclusion for “well-founded reasons”, which cannot be limited to the four scenarios outlined in the Companies Law.

In practice, if the case involves a minority shareholder, and business operations remain unaffected by the respective shareholder’s position, by applying remedies other than the exclusion, the risk of the company being dissolved may be limited. However, we have also seen in practice that many  partnerships with a limited number of shareholders have established in the articles of incorporation equal stakes in the share capital (50%, 50%), which creates, in the situation of a shareholder affecting the corporate activity (or of an equal number of shareholders affecting the corporate activity versus shareholders who wish to continue it):

  • serious problems in adopting resolutions in the general meetings of the shareholders (especially since bad-faith shareholders often do not admit they are in a conflict-of-interest situation and resort to an abuse of equal rights) and
  • considerable obstacles in the effective conduct of business operations.

Preliminary Ruling No. 28/2021 creates, in this case, an undesirable change, already reflected in the practice of the courts, which have accepted fewer requests for exclusion and, in some cases, explicitly led the company/bona fide shareholders to the harshest “remedy”, i.e. the dissolution of the company, which, as we will show below, is nothing else than a de facto expropriation.

Does Preliminary Ruling No. 28/2021 comply with the European Convention on Human Rights in limiting the cases of exclusion to the ones provided in the Companies Law?

Preliminary Ruling No. 28/2021 raises important concerns in terms of its compliance with the European Convention on Human Rights (the "Convention").

Right of ownership

The company, as well as the rights of the bona fide shareholders, considered individually, in the company - the shares, constitute elements with economic value and qualify as asset within the meaning of the Convention, an aspect confirmed by the case law of the European Court of Human Rights, and are subject to both national (Article 44 in conjunction with Article 136 of the Constitution) and European (Protocol No. 1 to the European Convention on Human Rights - "Protocol No. 1") legal protection.

Considering the constitutional and European provisions mentioned above, there are serious reasons to consider that the Preliminary Ruling No. 28/2021 interprets the provisions of the Companies Law in a manner that affects the protection of the property rights over the company, and over the company's shares, since maintaining bad-faith shareholders in the company / rejecting the request for their exclusion is likely to eventually lead to the dissolution of the company, in other words, a de facto expropriation - an unlawful interference with the right guaranteed by Art. 1 of Protocol No. 1, which cannot be accepted in a democratic society.

Economic freedom and freedom of association

In view of the principles of freedom of association and economic freedom (guaranteed both by the provisions of Art. 45 in conjunction with Art. 135 para. (2) letter a) of the Constitution, and by the provisions of international conventions, including the Charter of Fundamental Rights of the European Union), we can consider that the shareholder who wishes to continue the activity of the company cannot remain blocked in a detrimental situation, when another shareholder no longer meets the initial conditions of association on which the former shareholder once relied - affectio societatis.

If the shareholder who wishes to continue the activity of the company cannot exclude another shareholder whose participation in the company proves to be against the company's interests, as it currently happens following Preliminary Ruling No. 28/2021, then, for the former, being forced to remain in a partnership with another shareholder whose participation in the company no longer corresponds to the will/current interests of the company, is an infringement of economic freedom. Thus, it is worth recalling the rulings of the Court of Justice of the European Union on the matter - Joined Cases C-90/90 and C-91/90 Jean Neu and Others v. Secretary of State for Agriculture and Viticulture, in the sense that the “freedom to pursue a trade or profession” also implies the “freedom to choose whom to do business with”

Therefore, it can be said that the Preliminary Ruling No. 28/2021 creates the preconditions for a violation of the principle of economic freedom and thus allows, by restricting the cases of exclusion:

  • formal associations which no longer correspond to the will of the shareholders / current corporate interest,
  • the dissolution of companies (such a situation being likely to constitute a de facto expropriation able to give rise to the liability of the State).

Right to a fair trial

Another cause for concern regarding the compliance of the Preliminary Ruling No. 28/2021 with the provisions of the Convention is in relation to the right to a fair trial, regulated by Article 6 of the Convention, which imposes on the Member States of the European Union the obligation of result to ensure the effective right of defense (namely, that the guaranteed rights are concrete and effective, not theoretical and illusory).

From this perspective, the right of defense of the shareholders who wish to continue the company's activity implies the possibility of using all the rights and procedural guarantees in an effective and concrete way to defend their rights in relation to the company established, therefore not only in a limited way, as some courts have held in the context of the Preliminary Ruling No. 28/2021.

In such a context, the role of the national judge as a Convention judge is essential in this process of applying national legislation while giving priority to the application of the Convention and respecting fundamental rights and principles.

Even if the courts have been reluctant to give priority to the application of the Community law after the delivery of Preliminary Ruling No. 28/2021, in our view, considering the provisions of Articles 11, 20 and 148 of the Constitution, the national judge, who is also the judge applying the Convention, has the power and the duty to apply the national legal provisions in accordance with the Convention and with the recognition of the primacy of the interpretation given by the Convention, any legal interpretation contrary to the Convention being removed by the judge of the case from application.

Conclusions

Considering the above legislative context, as well as the provisions of the Community law, the legislator's task is an obvious one and requires proper and coherent legislation of the exclusion measure, with companies having access to this remedy for serious, non-restrictive reasons.

Pending the adoption of the current proposals of lege ferenda, which have already been transmitted to the legislator, the national judge has the important task of fully exercising the role of judge of the Convention and of allowing the exclusion of shareholders where there are well-founded reasons which disrupt the proper functioning of the company, whether in the cases expressly covered by the Companies Law (applicable to very few requests for exclusion due to the restrictive conditions laid down) or in other well-founded cases of exclusion (disruption of activity not covered by the Companies Law, absence of affectio societatis, etc.)

Conventionally speaking, the company is the product of the expressed will of several persons, and if the creation of the company requires consensus and harmony among the shareholders, the cessation of this state of convergence of the interests of the shareholders makes it impossible to maintain the same associative structure and requires the exclusion of the shareholders whose presence is disruptive to the company's activity.

Therefore, some courts’ view of "referring" to solutions such as the dissolution of companies cannot be accepted when such judicial solutions are contrary to Community law, as we have shown above.

Considering the above aspects, the role of the national court as a Convention judge is essential in order to prevent the forced dissolution of companies, which is relevant not only for its shareholders but also for the entire community - the State, employees, suppliers, clients, banks or creditors - the company must be seen as the nodal center of a network of legal relationships and economic and social interests.

By Marius Ezer, Partner, and Elena Triscariu, Senior Associate, NNDKP