The expulsion of a shareholder from a limited liability company (LLC) is the main and most serious consequence resulting from the non-performance of his/her obligations – it is a severe sanction that should be used in exceptional cases only. This is also the understanding of the judicial practice, which is why courts very often grant statements of action filed on the grounds of Art. 74 of the Commerce Act – aimed at revoking the expulsion resolution of the General Meeting.
This is why it is very important that the expulsion procedure is conducted carefully, taking into account all legal requirements and prerequisites. This is even more necessary given the fact that in lawsuits pursuant to Art. 74 of the Commerce Act the respondent (and not the plaintiff) is the one to prove the relevant facts whose occurrence ensures the lawfulness of the resolutions adopted by the General Meeting of the company.
This article is aimed at outlining some of the most common omissions (according to the judicial practice as well) and suggesting some useful tips for their avoidance.
The most common grounds for revocation of adopted resolutions for expulsion could be divided into three groups.
A. The first group refers to the written notice required by the provision of Art. 126 of the Commerce Act.
In cases where expulsion follows non-performance of non-material obligations giving a written notice is mandatory and the failure to comply would be sufficient ground for the revocation of the expulsion. The purpose of the written notice is to inform the shareholder about the existence of violations found in connection with his participation or lack of participation in the company’s operations, as well as to notify the shareholder of the possible steps towards his expulsion; the notice also provides the shareholder with the opportunity to prepare for the General Meeting to be held especially with regard to his expulsion – the shareholder could put in written his objections to the alleged violations and correct his misconduct (if possible).
The notice may be drafted as a separate written document, materialized in the Minutes of a previously held General Meeting or included in the invitation for convening an upcoming General Meeting1 (respectively, it would be also permissible that the invitation and the notice are sent simultaneously). It is, however, mandatory that the respective actions or omissions of the shareholder that constitute grounds for his expulsion are stated clearly and specifically – otherwise the notice could be considered entirely formal and thus not be recognized as sufficient to fulfill its objective.
It is necessary that the notice reaches the shareholder prior to the General Meeting – the court has always held2 that there should be a certain appropriate period of time between the receipt of the written notice and the adoption of the resolution for expulsion. That requirement is aimed at providing the shareholder with an actual opportunity to prepare and present his/her defense before the General Meeting. However, such requirement should not be absolutized – in my opinion, when due to the specific nature of the alleged violation of the shareholder such violation may not be discontinued, additional time period for correction of the misconduct should not be required, regardless of the purpose and meaning of the notice.
B. The second group of grounds also has relevance to the procedural lawfulness of the resolution for expulsion – such grounds refer to the regularity of the convocation of the General Meeting. Observing the procedural rules set forth in the Commerce Act and the Articles of Association relating to the convocation of the General Meeting is an important guarantee for the lawful exercising of its powers.
The written invitation for convening the meeting should contain an accurate and exhaustive list of the items of the agenda – abstract formulations do not provide complete, accurate and timely information about the upcoming work of the General Meeting and thus they prevent the shareholder from preparing for the scheduled meeting. The law provides for a minimum 7 days period prior to the date of the meeting – the invitation needs to be delivered before such period commences.
Questions often arise as to how the invitation should be delivered and how such delivery is to be attested. The Commerce Act does not contain any explicit provisions relating to the method of delivery of the invitation. This is why it should be assumed that delivery could be carried out by various methods – personally to the shareholder (acknowledging the receipt by a handwritten signature), as well as by a notarial invitation, by fax, by postal or courier service (by letter with acknowledgement of receipt), etc. The company has the discretion to choose the preferable method but when shareholders have agreed on a particular delivery method, then such method is mandatory and should be considered when examining the regularity of the General Meeting’s convocation, i.e. such method has priority over any other possible methods.
In my opinion, it would be in the interest of the company and the shareholders to explicitly set out in the Articles of Association the procedure for delivery of the invitations – thus they will avoid possible disputes as to the regularity of the General Meeting’s convocation and the validity of the resolutions adopted by the General Meeting, respectively.
C. Judicial examination covers not only the observance of the procedural provisions regarding the calling and holding of the General Meeting, but also the substantive lawfulness of the adopted resolutions – whether or not the legal prerequisites for expelling a shareholder are available.
Firstly, it is very important that before initiating the expulsion procedure the company carefully assesses whether or not the respective actions or omissions of the shareholder actually constitute a violation of the obligations under the Commerce Act or the Articles of Association. This is not always as clear as it may seem at first glance.
For example, it could be assumed that the respective actions of the shareholder were in fact carried out by him only in connection with his functions as a director being exercised and, accordingly, such actions could not be used as a ground for his expulsion as a shareholder3. An action will not be deemed a violation if expressed in the conclusion of a contract for transfer of shares to a third person without obtaining the prior consent of the other shareholders. The same may be said in relation to actions aimed at setting up a separate company with a similar scope of activity – insofar as there is no explicitly set forth in the Articles of Association prohibition to that effect and there are no actual damages resulting from the material or non-material interests of the company having been affected.
Other similar cases from practice may be mentioned as well. For example, the unwillingness of a shareholder to participate in the preparation of the required documentation in connection with a future loan of the company, necessitating the provision of personal guarantees by the shareholders, will not constitute failure of that shareholder to provide assistance for the company’s activity within the meaning of the law. This is due to the fact that a shareholder in an LLC is only obligated to provide assistance which is not contradictive to his membership rights as per the law and the Articles of Association and which would not make him face personal liability towards the company’s creditors going beyond the limited risk of his holding in the limited liability company.
Secondly, companies very often underestimate the necessity to secure full evidence of the misconduct. The court will grant the statement of action under Art. 74 of the Commerce Act whenever there is no sufficient evidence to support that the violation has actually been carried out – even if the latter constitutes sufficient ground for expulsion.
This is why it is advisable to ensure that the expulsion procedure is backed with adequate evidence and not just based on hasty and often resulting from strained relations between the shareholders decisions.
1 E.g., Decision № 30/28.05.2012 on commercial case № 22/2012, Vratsa District Court
2 E.g., Decision № 1519/14.08.2012 on commercial case № 2913/2011, Sofia City Court
3 The controversial judicial practice on that issue was overcome with Interpretative Decision № 1/31.05.2023 of the Supreme Court of Cassation stating that the expulsion is also applicable for actions of a shareholder carried out in his capacity as a director when such actions can be qualified as a violation within the meaning of Art. 126, par. 3, items 1-3 of the Commerce Act.