Exit of a Shareholder from the LLC

When a shareholder exits, their involvement in the company and all related rights and obligations end.

Generally, the exit is associated with a valid reason for leaving, but a shareholder can also leave the company by selling their shares, provided there are no restrictions.

The Croatian Companies Act (HGG) provides two types of exit from the LLC.

One type is already included in the company’s Articles of Association. The second type allows a shareholder to request an exit through a lawsuit if the legal conditions are met.

Lawsuit for Exit from the LLC

If the Articles of Association do not provide an exit option, any shareholder can request an exit through a lawsuit, but only if there is a legally valid reason. A shareholder cannot waive this right in advance; any such waiver would be invalid.

Important components of the exit lawsuit include:

• Information on the valid reason for the exit.
• Determination of the compensation for the outgoing shareholder’s stake or proposals for its determination.
• A reasonable deadline for the payment of the compensation.

Since it is not necessary to regulate the transfer of the business share to the company in the lawsuit, the practical question arises of how to transfer the outgoing shareholder’s stake to the company if the exit lawsuit is accepted.

Therefore, it is recommended to address this question in the Articles of Association, even if the exit option is not provided in the contract.

The HGG lists important reasons for exit, such as when damage is caused to a shareholder by other shareholders or company organs, when a shareholder is hindered in exercising their rights, or when they are imposed with disproportionate obligations by a company organ.

These reasons are only examples, and if a shareholder provides another reason for their exit, the court will evaluate whether such a reason is justified in the specific case.

The Croatian High Commercial Court (HHG) holds the view: “The exiting shareholder is entitled to compensation based on the market value of their share at the time of exit, not at the time of the company’s founding.”

A shareholder whose contribution was in the form of property or rights is entitled to reimbursement of the contribution 3 months after the exit.

When determining the market value of the business share, the actual value of the company should be established, considering its assets and liabilities, the achieved and expected profits, the company’s condition, its requirements, etc., at the given time.

In practice, the market value of a company is determined by appropriate expert assessments. Since this is an expensive proof procedure, one should estimate in advance whether the value of the business share justifies initiating a court case.

The involvement in the company ends only when the compensation is paid to the exiting shareholder.

If the court accepts the lawsuit, it must also determine the amount of compensation according to the market value of the claimant’s business share and order the company to pay the compensation within the deadline specified in the judgment.

Exit from the LLC According to the Articles of Association

As mentioned earlier, exit from the company is only possible if it is provided for in the Articles of Association.

The Articles of Association should contain all essential elements for an exit to be valid. These include:

• Conditions for exit – The Articles of Association must provide the reasons a shareholder can exit.
• Exit procedure – The Articles of Association must define the necessary actions for exit, and it is recommended that certain actions, such as the exit declaration, be made in writing and via registered mail, to avoid the need for proving submission in case of a dispute.
• Legal consequences of exit – Apart from the primary consequence, the loss of membership in the company, other exit-related questions must also be addressed.
• In addition to mandatory provisions for exit according to the Articles of Association, other potentially contentious issues should also be regulated, such as the value of the business share, how it will be assessed, the timing and method of compensation, and the delivery method for the exit declaration.

It is also possible to agree that only some privileged shareholders have the right to exit.

The exit procedure according to the Articles of Association is initiated with a declaration of exit addressed to the shareholder meeting.

It is advisable to always send this declaration in writing and by registered mail to the shareholder meeting.

Regardless of the acceptance of the exit declaration, membership ends only when the company pays the compensation to the shareholder for their business share.

If the company does not pay the compensation within the agreed deadline, the exiting shareholder may file a lawsuit against the company.

If the exiting shareholder has caused the company damage or has an outstanding obligation to the company, the company can refuse to compensate the value of the business share until the damage is repaired or the obligation is fulfilled.