The new Code of companies and associations (hereafter “CCA”) offers for the first time in the private limited company (hereafter “BV/SRL”) a possibility of withdrawal and exclusion at the expense of the company’s assets, whereby a shareholder can voluntarily sell his shares or be forced to sell them without going to court. In this article, Deminor gives you a brief overview of this new regime within the BV/SRL.
Today, many companies are organised as cooperatives because of the flexible mechanism of entry and exit of partners. An example of this are the numerous professional companies of liberal professions, such as lawyers.
However, with the introduction of the CCA, the cooperative form of company will again be reserved for cooperative purposes as defined by law. The CCA thus returns to the original image of the ‘real cooperatives’ as it was established in the 19th and 20th centuries by farmers and laborers, among others. Under the new law, many existing cooperatives will therefore have to convert into BVs/SRLs. But do not worry: an essential characteristic of the cooperative society (hereafter ‘CV/SC’), which includes a major advantage for many entrepreneurs, will be transferred to the new BV/SRL with the introduction of the CCA. The possibility of withdrawal and exclusion at the expense of the company’s assets will thus also become a reality in the BV/SRL. Note that the flexible system whereby partners can easily enter into the current CV/SC was not transferred to the BV/SRL in the CCA.
In essence, this exit option means that the shares of the partner who wishes to exit (or is excluded) are not transferred to another partner, but to the company itself, which also bears the cost.
The possibility of withdrawal and exclusion are systems that need to be implemented through the articles of association. They are regulated by a number of mandatory provisions and a number of rules from which it is possible to derogate under the articles of association (the so-called ‘defaults’ in the law). In essence, this exit option means that the shares of the partner who wishes to exit (or is excluded) are not transferred to another partner, but to the company itself, which also bears the cost. In what follows, the main features of the new regime are set out.
Withdrawal at the expense of the company’s assets
- Founders cannot make use of the withdrawal during the first three financial years of the company, as the founder’s liability continues during this period
- Withdrawing partners are entitled to the payment of a ‘separation share’, which qualifies as a ‘distribution’ for which the net asset and liquidity tests must be carried out. If the separation share due exceeds the limits of the distribution margin, its payment will be suspended (without the right to interest) until such time as distributions are again possible. Payment of the separation share is then made in priority to all other distributions
- Partners may only withdraw with the total amount of their shares, and this only during the first six months of the financial year. The shares of the withdrawing partner will be destroyed
- The withdrawal will take effect on the last day of the sixth month of the financial year
- The amount of the separation share will be paid out at the latest one month later and corresponds to the original contribution of the partner, on the understanding that the net asset value of the shares as determined in the last approved annual accounts, may not be exceeded
Note : The initial contribution is most likely lower than the real economic value of the shares (the market price). It is therefore recommended to include a different valuation formula in the articles of association. Since the withdrawal at the expense of the company’s assets takes place outside the court, there is no judicial discretion in determining the amount of the separation share. The new Code does, however, make the latter possible in the case of the classic withdrawal and exclusion claims within the framework of the dispute settlement procedure, where the court can decide on a fair price increase or reduction for the shares.
The general assembly is not consulted in the case of a request for withdrawal, so that the administrative body is obliged to report to the next general assembly on the requests for withdrawal during the past financial year. All relevant information on the permitted withdrawals must be included in this report, with the aim of providing the other shareholders with sufficient information.
Exclusion at the expense of the company’s assets
- The company may exclude a shareholder for lawful reasons, or for a reason stated in the articles of association. To this end, it must notify the shareholder of a reasoned proposal for exclusion
- The general assembly pronounces the exclusion in a reasoned manner. No other body has the authority to do so
- The shareholder whose exclusion is requested has the right to submit his remarks to the general assembly. He also has the right to be heard by them
- The board shall ensure that the motivated decision to exclude is notified to the shareholder concerned within fifteen days
- The excluded partner is entitled to the payment of a separation share. To this end, the same rules apply as for withdrawal. The exclusion of founders is additionally possible at any time, as opposed to the withdrawal
Note : It is recommended to include a different valuation formula in the articles of association, which differs depending on whether it concerns a voluntary withdrawal (good leaver) or a forced exclusion (bad leaver).
Advantages and disadvantages of the new exit mechanisms
The major advantage of both the withdrawal and the exclusion at the expense of the company’s assets is that a flexible exit mechanism can be created under the articles of association, which avoids (possibly time-consuming, uncertain and expensive) court proceedings. All shareholders know in advance what they can expect, which can only benefit the rapid resolution of conflicts.
Even shareholders who are unable to demonstrate any valid reasons justifying recourse to the traditional dispute resolution procedure, can still leave the company with this exit option, and thus do not remain ‘imprisoned’ against their will. In this sense, shareholders have every interest in the statutory implementation of this option.
The major advantage of both the withdrawal and the exclusion at the expense of the company's assets is that a flexible exit mechanism can be created under the articles of association, which avoids (possibly time-consuming, uncertain and expensive) court proceedings.
However, there are two sides to the coin: majority shareholders who wish to exclude a minority shareholder for well-founded reasons will probably be more inclined to opt for an exclusion at the expense of the company’s assets than for an exclusion claim under the dispute resolution procedure. This way, the price (the separation share) that they will have to pay to the excluded partner will most likely be lower.
The exit option described in this article concerns one of the many statutory opt-in’s that will become possible under the new company law. Deminor will be happy to assist you with drafting your articles of association and/or a shareholders’ agreement.
Please contact Jan Baptist Cooreman for further information.