Compulsory redemption of shares in a limited liability company

2 February 2023 | Knowledge, News

The running of a company involves the risk of disagreements between shareholders at various levels. For example, situations may arise in which a shareholder fails to fulfil their obligations, thus hindering or even threatening the operation of the company. It is therefore important to guard against such risks from the outset.

However, there are some remedies available. Shareholders who obstruct cooperation or do not fulfil their obligations may be excluded from company operations by an internal decision of the remaining shareholders, e.g. through the compulsory redemption of shares under Article 199 of the Commercial Companies Code.

How shareholders can use the compulsory redemption mechanism

The compulsory redemption of shares takes place without the consent of the troublesome shareholder.

However, in order for the other shareholders to be able to make use of such an option, it is necessary to include relevant provisions to that effect in the articles of association. This can be done either at the time of the company’s formation or later via an amendment to the articles of association.

It is important that the conditions for the compulsory redemption of shares are described in a precise and unambiguous manner in the articles of association. The most common conditions for a decision on the compulsory redemption of a shareholder’s shares include:

A shareholder engaging in an activity that competes with company operations
A shareholder causing damage to the company
A shareholder failing to comply with their obligations under the articles of association (e.g. to make additional contributions).

Procedure for the compulsory redemption of a shareholder’s shares

The compulsory redemption of shares may take place after a condition laid down in the articles of association has been met. The general meeting then adopts a resolution to that effect, which must state the legal and factual grounds for the redemption, the redemption price, the number of shares to be redeemed and the reasons justifying this action.

The Code sets out in detail the amount of the redemption price, which may not be lower than the value of net assets per share, demonstrated in the financial statements for the last financial year, less the amount to be distributed among the shareholders.

It should be noted that the redemption price is paid by the Company and not by the other shareholders.

When the shareholder may claim payment of the redemption price

Depending on how the redemption of shares is financed, the time at which the right to claim payment of the redemption price arises and the time at which the claim becomes due will differ.

If the redemption is financed from profits, the shareholder’s right to claim payment of the redemption price arises and the claim becomes due when a resolution to redeem the shares is passed. The situation differs if the redemption is financed by a reduction in the share capital. In this case, the right to claim payment of the redemption price also arises when the resolution is passed, but the claim becomes due when the reduction in the company’s share capital is registered.

Source: Rzeczpospolita

Date: 19.01.2023

Any questions? Contact us for more information:

Karol Połosak

Magdalena Smolińska

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