The Partner Exclusion in the Private Equity Company (PC)

Legal Insight

June 2022

Daphne Sfyri, LL.M

Summary: The Private Equity Company (PC), having now completed ten years since its introduction in Greek law by Law 4072/2012, is undoubtedly the new protagonist of the various corporate forms for small and medium-sized enterprises. This article discusses how and when a partner can legally request the exclusion of another partner from an PC  in which both are members.

The Private Equity Company (PC), having now completed ten years since its introduction into Greek law by Law 4072/2012, is undoubtedly the new protagonist of the various corporate forms for small and medium-sized enterprises. 

However, both its small size (which is usually the case) and the close personal relationships that develop during its operation, result in quite frequent disputes and conflict situations, which disrupt the smooth operation of the company and quite often even threaten its uninterrupted continuation.

This article discusses how and when a partner can legally request the exclusion of another partner from the PC in which they are both members.

The legislator regulated the above case in article 93 of Law 4072/2012: 'If there is an important reason, the court, at the request of any manager or partner, may exclude a partner from the company, if there has been a decision of the other partners in accordance with article 72 paragraph 4. The application must be filed within sixty (60) days of the receipt of the decision of the partners. The court may issue a temporary injunction ordering the necessary provisional measures, which may include the temporary suspension of the voting rights of the excluded partner. From the finality of the judgment and the payment to the excluded partner of the full value of his shares, determined as specified in paragraph 3 of the preceding Article, the partnership shall continue among the other partners. In any event, the firm may claim compensation in accordance with Article 78(4). For the rest, Article 92(4) shall apply mutatis mutandis".

First of all, let us clarify that a partner can be excluded from the company (PC) of which he is a member whether it is in productive operation or in liquidation. However, the following conditions must be fulfilled in order to be excluded:

1.  First, a petition for the exclusion of the partner in question must be filed before the locally competent Court, i.e. the Magistrate's Court of the company's seat. Therefore, it is not sufficient for the other partners to simply decide to request the exclusion of another partner, since they must apply to the courts.

2. There must be a good reason for which (good reason) the exclusion of the partner is requested at the time of the discussion of the request for exclusion of the partner. The existence of a good reason for the exclusion of the partner is not sufficient to exist only at the filing of the request for exclusion but should also exist during the discussion of the request (CC 207/2019, 1085/2018, Monomial Court of First Instance of Chalkida 43/2018, Monomial Court of First Instance of Thessaloniki 18918/2014).

With regard to the vague legal concept of good cause, which justifies the premature termination of perpetual obligation contracts and partnership forms, case law, together with theory, has established the rule that good cause exists when the continuation of the company with the excluded partner is to such an extent unbearable for objective or subjective reasons and in view of good faith and commercial morals that the smooth operation of the company is endangered.

However, it must always be borne in mind that the existence or otherwise of a good reason cannot be judged in a way that is completely divorced from the particularities of the case. It must be decided by the competent judge on an ad hoc basis. In making that assessment, all the circumstances surrounding each case must be evaluated and the conflicting interests of the company, the excluded partner and the other partners must be weighed up. In particular, the following should be taken into account: The position of the excluded partner, his influence, the nature and amount of his contribution, the way the company is organised, the capital or non-capital nature of the company, together with the nature and extent of the partnership, the permanence of the factual circumstance relied upon, the fault of the excluded partner, the consequences of the exit for the partner and the company. The ultimate limit to the judge's discretion is the safeguarding of the ultima ratio principle. In other words, it becomes necessary for the judge, if he or she finds that there is an alternative solution to the problem and the possibility of removing the deadlock that has been created, to reject the partner's application for exclusion. In fact, the judge will investigate whether the measure of exclusion of the partner in question is a measure that is not only appropriate but also necessary to serve and protect the rights of the applicants for exclusion.

According to the Supreme Court decision no. 473/2019: "The important reason is judged in the circumstances and in relation to the general organization of the company in question, which will be the main guide for assessing the seriousness of the situation created by the invoked important reason, the existence or otherwise of which is assessed according to objective criteria (para. see AP 459/2011). However, its existence must be of particular importance and have a significant impact on the normal functioning of the company. These effects must have an element of permanence and must not be of a temporary nature. Moreover, the important reason must, in principle, relate to the relations between the partnership and not to the partners themselves, unless, in this particular case, personal circumstances play a predominant role".

The delimitation of this vague legal concept is particularly difficult and, for this reason, the following are case examples of the existence of good cause for the exclusion of a partner: 

a. The inability of the excluded partner to fulfill the corporate obligations due to illness, physical or mental. In any case, the inability to fulfil the partnership obligations must be permanent and not limited in time.

b.The inability to fulfill the corporate obligations due to retirement, military service, or military service of the excluded partner.

c. The inability to communicate between the partners and the excluded partner and the resulting inability to make decisions and achieve the corporate purpose (decision of the Agrinio Single Member Court of First Instance No. 129/2020). 

d. The breach of the duty of loyalty and the performance of anticompetitive acts by the excluded partner.

e. Administrative inactivity and indifference to the corporate affairs on the part of the excluded partner.

f. The breakdown of relations between the partners and the constant disputes and friction (Athens Court of Appeal 9131/2005 CJEU 2006/388, Athens Court of Appeal 1715/2005 Eld 2005/1726).

g. Exploitation and abuse of power by the excluded partner.

h. The breach of material corporate obligations by the disqualified partner.

i.  Non-payment of the contribution.

j. the disruption of the relations between the partners due to the breakdown of the marital bond between them (decision no. 731/2020 of the Athens Court of First Instance).

In brief, it will be assessed whether the continuation of the company with the excluded partner would become unbearable for the other partners so as to jeopardise the proper functioning of the company. It should be noted at this point that the excluded partner has the right to deny the existence of a good reason for his exclusion and also to raise an objection to the improper exercise of a right, provided that the statutory conditions are met. 

3. A decision of the partners' meeting is required for the exclusion of the partner and the filing of a petition with the competent court.

It is worth mentioning that the disqualified partner is not entitled to participate and vote in the partners' meeting that decides on the issue in question, nor will his/her share in the partnership be counted for the purpose of forming a quorum and majority. 

For example, suppose that in the Private Capital Company with the name (XXX) the following persons have partnership shares: A with 60% share in the partnership capital, B with 30% share in the partnership capital and C with 10% share in the partnership capital. Therefore, if B and C jointly decide to request the exclusion of partner A from the company "XXX", they can legitimately obtain the decision of the partners' meeting to that effect, since they jointly hold only 40% of the shares. Mr A is not entitled to participate in the meeting, let alone to vote at the meeting on his exclusion from the firm in which he is a partner.

4. A decision is required, and a final one at that. As already mentioned above, a decision requires the filing of a petition before the competent local Magistrate's Court, which will hear the case on a voluntary basis. The application must be filed within 60 days of the date on which the partners received the relevant decision of the partners' meeting.

In any case, the court may - upon specific request - issue an interim order granting the appropriate provisional measure of interim relief. For example, the Court may order - before the partner's disqualification has become final - that the disqualified partner's voting rights in certain types of decisions be excluded, depending on the problems and the particularities of each case. The Court may also, if provided for in the company's articles of association, order the acquisition of the shares by a third party designated by the company. Otherwise, the company shall continue with the other partners.

However, after the finality of the decision ordering the exclusion of the partner, the person excluded from the company has a claim for payment of the value of his/her shares regardless of the reason for which he/she was expelled from the company and his/her fault. The value of the partnership interest shall either be agreed between the firm and the outgoing partner, where possible, or determined by the court. In this way, the adverse consequences of the expulsion, which occur in the person of the expelled partner, are 'discharged' from the claim to receive the value of his partnership interest. It should be noted that, while the voluntary withdrawal of a partner from the PC is not conditional on the payment to the partner of the value of his participation in accordance with Article 92(1)(b) of the Directive. 3 ν. 4072/2012 (unless there is a contrary statutory provision), the condition for the exclusion of the partner from the company is, on the one hand, the finality of the court decision ordering the removal of the partner and, on the other hand, the payment to the excluded partner of the full value of his shares, as a result of which the partner is removed from the partnership and the company continues among the other partners (Thessaloniki Single-Member Court of First Instance 2215/2017).

Finally, after the exclusion of the partner, article 92 § 4 of Law 4072/2012 will be applied by analogy. That is, the administrator shall cancel the shares of the excluded partner without delay and adjust the total number of shares by registering them in the G.E.MI.(GENERAL COMMERCIAL REGISTRY). If the shares represent capital contributions, he shall also reduce the capital of the company.