During the development and growth of any company, it is inevitable that differences in opinions, interests, and visions arise among shareholders on how the company should operate. It is also unavoidable that the interests of certain shareholders may conflict with the interests of the company itself, and in some cases, individual shareholders may cause harm to the company—or intend to do so.
In order to protect the interests of shareholders who share a common vision and business objective, as well as the interests of the company itself, the Companies Act (the “Law”) provides for the legal institute of exclusion of a shareholder from the company.
Although mentioned in several places in the Law, Articles 195-197 provide the most detailed regulation of the matter.
Before delving deeper into the essence of this legal institute, it is important to note that this text focuses on the exclusion of a shareholder from a limited liability company, as the most common form of company organization. Additionally, in single-member companies, exclusion is practically impossible because the company is managed—and the role of the assembly is performed—by the sole shareholder.
A shareholder can be excluded from a company in two ways:
- By decision of the company’s assembly (Article 195 of the Law), and
- By court decision (Articles 196–197 of the Law).
Exclusion of a Shareholder by Decision of the Company Assembly
A shareholder may be excluded by decision of the company assembly only in case of failure to pay (if the contribution is monetary) or failure to make a non-monetary contribution (contribution in kind). Such a decision requires a two-thirds majority vote of the remaining shareholders, unless a different majority is specified by the founding act.
Another important condition is that shareholders who, under the founding act, have such an obligation, or who have otherwise undertaken it, must have been sent a written notice by the company requesting that they fulfill the obligation. The subject notice must also provide an additional period of at least 30 days from the date the notice was sent for the obligation to be fulfilled.
The consequence of exclusion is that the share of the excluded shareholder becomes a treasury share of the company, and the excluded shareholder is not entitled to compensation for their share. The exclusion decision itself then serves as the basis for initiating deregistration of the excluded shareholder from the Register of Business Entities maintained by the Serbian Business Registers Agency.
Although excluded, this does not mean that the shareholder is released from their obligations towards the company – he is still required to pay or contribute the registered capital and fulfill any additional payments that he was obligated to make if necessary to satisfy the company’s creditors. Certainly, the company retains the right to claim damages from the excluded shareholder by filing a lawsuit with the competent court.
In cases where the share has been transferred, the rule of Law applies accordingly. The rule is that the transferor is jointly and severally liable with the acquirer for obligations towards the company based on their unpaid or unregistered contribution, as well as for any additional payment obligations related to that share, as of the date of the transfer.
The analogous application of the aforementioned rule in the context of exclusion means that the former owner of the shareholder’s share who has been excluded is also liable for fulfilling the obligation of additional payment or contribution to the company.
Exclusion by Court Decision
Exclusion of a shareholder by court decision is initiated by the company filing a lawsuit with the competent court.
The Law stipulates the grounds for filing a lawsuit, which range from more general reasons (such as reasons specified in the founding act or other justified causes) to three more specific ones. In this regard, a lawsuit for exclusion is filed particularly if a shareholder:
- intentionally or through gross negligence causes damage to the company;
- fails to perform specific duties towards the company prescribed by the Law or the founding act (such as breaching obligations of confidentiality or non-compete rules);
- by its actions or omissions, contrary to the founding act, the Law, or good business practices, obstructs or significantly hinders the company’s operations.
In order to file the exclusion lawsuit, the company’s assembly must first adopt a decision to initiate the lawsuit. The deadline for filing the lawsuit is six months from the day the reason for exclusion became known, and no later than five years after the occurrence of the reason for exclusion.
To protect the company from potential harmful actions by the defendant shareholder whose exclusion is sought during the ongoing court proceedings, the company has a protective measure at its disposal. Specifically, it can request the court to impose a temporary suspension of the voting rights and other membership rights of that shareholder, or a temporary measure of appointing forced management in the company. The court will impose such measure(s) only if it assesses that it is necessary and justified to prevent damage to the company.
A shareholder may also file a lawsuit against another shareholder he wishes to exclude, i.e. in their own name but on behalf of the company. For such a lawsuit to be admissible, certain conditions must be met.
First and foremost, the shareholder must hold at least a 5% stake in the company. Then, he must submit a request to the company assembly to adopt a decision on filing a lawsuit against the shareholder proposed for exclusion.
If the assembly doesn’t decide within two months from the date the request was submitted, rejects the request, or if the lawsuit is not filed within 30 days from the date of the assembly’s decision to file the lawsuit, then the shareholder who made the request can file the lawsuit himself within a subsequent period of 30 days.
The consequences of excluding a shareholder are the same as when exclusion occurs by decision of the assembly — the excluded shareholder’s share becomes the company’s treasury share. Additionally, if necessary to satisfy the company’s creditors, the excluded shareholder remains obliged to pay or contribute the registered stake and fulfill any additional payment obligations.
However, in case of exclusion by court decision, the excluded shareholder has one remedy available — a lawsuit against the company before the competent court to claim compensation for the value of their share. The deadline for filing is 180 days from the date the exclusion ruling becomes final.
If the judgment is favorable to the excluded shareholder, but the company fails to pay the awarded compensation within the deadline set by the judgment, the excluded shareholder can request enforcement—but only through the forced sale of their own share that the company acquired from them. If the proceeds from this enforcement sale are insufficient to cover the full amount owed to the excluded shareholder, the remaining claim unfortunately ceases to exist.
Either way, the company retains the right to claim damages from the excluded shareholder.
The Law even provides the court with instructions on how to determine the compensation amount. Unless otherwise specified in the founding act, the court will set compensation for the value of the excluded shareholder’s share equal to the portion of the liquidation surplus that would correspond to their share in the company, calculated as of the date the exclusion judgment becomes final. Interest is also calculated on this compensation at the discount rate of the National Bank of Serbia plus 2%, starting from the date the exclusion judgment becomes final.
A maximum deadline for payment of the awarded compensation is also prescribed. Specifically, the court will set a deadline for paying compensation to the excluded shareholder, considering the company’s financial situation and its expected income during regular operations. This deadline, however, cannot exceed two years from the date the exclusion judgment becomes final.
An exception to the above rule applies if the founding act sets a longer deadline; however, even then, the deadline cannot exceed five years.
Concluding remarks
In light of the above, it is noted that, although the company has only two mechanisms at its disposal—of which the first (exclusion by assembly decision) is limited to a strictly prescribed case, the broadest possibilities are provided by the institute of shareholder exclusion by court decision.
However, filing a lawsuit with the court requires meeting several conditions and involves a lengthy procedure with uncertain outcome, after which there is a possibility that the excluded shareholder will claim compensation for the value of their share.
Of course, there is always the possibility of an out-of-court settlement to resolve the dispute peacefully, but this is sometimes an unpopular solution that leaves no party fully satisfied due to the need for compromise. That is why it is crucial to regulate such situations as thoroughly as possible within the founding act, wherever feasible and within the limits allowed by Law.
Despite everything, these mechanisms remain effective tools to influence a shareholder’s behavior and protect the interests of the company and its remaining shareholders. However, to apply them properly, it is essential to consult with a legal expert.