THE EXCLUSION OF A COMPANY MEMBER
Company members and the company have the right to protect one another from the conduct of a member whose actions threaten the achievement of the company objective, and thus protect the company itself. Should a company member lose interest in the company, the easiest option is to pay them their share. If there is no agreement amongst the members regarding the payment, then members have the possibility to apply the institute of excluding a member.
The exclusion of a member means the forcible removal of a member from the company so that they lose membership in the company. The difference between exclusion and the withdrawal of a share, which also terminates membership in the company, is that exclusion affects the member, and not their share in the company. Therefore, exclusion does not affect the share of the excluded member which continues to exist after the company member has been excluded.
It is possible to exclude a member as a measure of protection defined by the company’s articles of association, and when the articles of association do not stipulate exclusion as a possibility, then it can still be undertaken based on certain legal regulations.
The articles of association have to define the necessary requirements under which a member can be excluded from the company, the reasons for exclusion, the process that should be performed to exclude a member from the company, as well as to determine who will participate in the decision-making process and how a decision will be reached. A member who is excluded may file a lawsuit to refute the exclusion or to determine if it was void or voidable.
If the exclusion is carried out based on legal regulations, two requirements must be fulfilled: there have to be serious grounds for exclusion connected to the member being excluded, i.e. their behaviour within the company, and the excluded member has to be fully reimbursed for the value of their share of the company.
Serious grounds for the exclusion of a company member exist if their behavior prevents or significantly hinders the attainment of the company objective and therefore makes their stay in the company inadmissible. This refers to personal characteristics and relationships, such as lack of trust, serious violations of obligations, undertaking criminal activity, abuse of trust, severe disruption of relationships between company members. Another reason could be when the conduct of a company member indicates grounds for filing a claim for dissolution of the company according to Art. 468 of the Companies Act because it has been rendered impossible for the company to attain its objectives or the actions of a company member have created serious grounds for the dissolution of the company. The inability to attain company objectives may consist of the inability to carry out the main activities of the company or its line of business.
A constitutive decision orders the exclusion of a company member under the condition that his company compensate the market value of his company share within a period specified by the decision. The court must determine the market value of a share in the company while keeping in mind the state of the company and business needs. The value of the company itself should be estimated, as well as the company’s assets, its obligations, its contracts, anticipated profits, the state of the market, etc. An expert opinion has to be obtained in order to determine the value of the company and of a business share. When determining the compensation, the company member’s right in the assets and rights should be taken into account. If the company has claim for damages or any other claim towards the company member in question, then the member will not be compensated for the value of their share in the company so long as the company has not settled the damages or the existing obligations, whereby the institute of offsetting can be applied.
Exclusion ends the membership in the company, and the share belongs to the company which then decides how to cash it. The company may decide to sell the share to a company member or to any third party, to withdraw it or, if the share has been paid in full, the company can choose to acquire the share itself.