Company-law exclusion and withdrawal as alternatives to civil-law liquidation

To ensure the orderly management of a divorce where the spouses are involved in a company, both the marital property consequences and the company law rules must be considered. The two areas of law must be applied in conjunction to both settle the divorce and protect the interests of the company.

1. A lengthy wait for civil-law liquidation and distribution

After the court has ordered the divorce, the distribution of the parties’ assets must be discussed. Not only the furniture and money, but the real property and the shares in the company have to be allocated to one of the former partners.

The first step is to determine the value of these assets.

For years, there was a long-running discussion about the appropriate time at which to value the assets. This discussion was resolved by the Court of Cassation: the value of the goods must be determined at the time of distribution.

However, the fact that a liquidation and distribution process often drags on for a long time is an obstacle to the practical operation of the company, and can lead to unfair consequences when the value of the company is assessed.

To speed up the liquidation and distribution process and avoid hampering the operation of the company (which is in the interests of all parties), there is an option available of using the dispute resolution mechanisms of exclusion and withdrawal provided in the Companies Code.

2. The company-law mechanisms of exclusion and withdrawal

If both spouses are partners in a company, the dispute resolution mechanisms of exclusion and withdrawal offer a solution so that the end of the relationship does not always mean the end or dysfunction of the company. Former life partners are often no longer capable of cooperating on financial matters, which can have harmful consequences for the company. The Companies Code offers the company’s partners (i.e. the former spouses) the possibility of withdrawing from the company or forcing the other partner to leave the company.

For this mechanism to be activated, there must be "reasonable grounds". It is not necessary for the other spouse/partner to have done anything wrong.

Exclusion

In an application for exclusion, one spouse applies for an order for the other spouse to transfer their shares to him/her.

This requires the requesting spouse/partner to possess shares representing at least 30% of the votes, or of which the nominal value or accounting par value represents at least 30% of the capital of the company.

There are "reasonable grounds" if a sufficiently serious and lasting disagreement exists which jeopardises or threatens to jeopardise the survival of the company.

So, for example, an application for exclusion was accepted by the Brussels Court of Appeal because the divorce of the company’s partners resulted in a series of legal proceedings and became an obstacle to decision-making in general meetings of shareholders.

Withdrawal

Withdrawal means that one spouse/partner applies, on reasonable grounds, for his or her shares to be transferred to the other spouse/partner to whom these reasonable grounds relate (Art. 340 Companies Code).

No majority conditions need be met for this mechanism to apply, but there must be a permanent inability to cooperate. The reasonable grounds must primarily be assessed with respect to the partner who is seeking to withdraw (the applicant), but the interests of the company must also be taken into account. The reasonable grounds must be attributable to the respondent partner.

The Ghent Court of Appeal held that there are grounds for a withdrawal if irreconcilable differences clearly exist between the former spouses, and if the interests of the company after the post-divorce transfer would be fully consistent with those of the respondent.

Timing of the valuation

The principle that the value of the shares must be estimated at the moment the court orders their transfer, is also applicable here. When performing this estimate, the court must disregard both the circumstances that led to the application for the transfer of the shares and the behaviour of the parties as a result of the application.

However, if the court specifically establishes that these circumstances had an influence on the price, it must exclude them from consideration and set the reference date at another moment in time, such as the moment at which relations between the former spouses/partners broke down. The court thus has the power to use a different reference date in order to exclude from consideration the influence of the reasonable grounds on the value of the shares as well as the behaviour of the parties as a result of the proceedings. The shares must be valued as if that influence did not exist.

For example, based on an assessment of the facts, the court may decide that the loss by the company of a number of orders is the result of the wrongful behaviour of the respondent, and does not form an objective element in the valuation of the company.

3. The interconnectedness of the civil-law procedure and the company-law mechanisms

An application for exclusion or withdrawal can also be made during divorce or liquidation proceedings. It is accepted in the case law that both exclusion and withdrawal are possible when the partners are spouses engaged in divorce proceedings. The interests of the company take precedence over the private interests of the partners/spouses. The Court of Cassation recently held that "The uncertain outcome of an often protracted liquidation and distribution process is at odds with the need for immediate legal certainty for a company as a separate legal and economic entity".

It is important to note that the exclusion and withdrawal proceedings relate solely to the company membership rights. The disputes procedure only affects "the position of the shareholder within the company and consequently only determines who can exercise the (exclusive) right of control over the shares in question." The position under matrimonial property law is left unchanged. "Indeed, a balance between company law and matrimonial property law requires that no compensation (in the context of the dispute resolution mechanism) is definitively won, since an unrestricted and mutually-acceptable settlement of the personal property and relationship property [in the context of the liquidation and distribution process] must still be possible." The shares are thus allocated to one spouse, the value of the shares is determined, and this amount then forms part of the ultimate liquidation and distribution settlement.

4. Conclusion

Divorces are often delicate matters, which are further complicated if the former spouses are both partners in a company. In such cases, the company law mechanisms of exclusion and withdrawal can limit the discussions between the former spouses concerning the determination of the position under matrimonial property law and the distribution of the relationship assets.

Author: Guy De Coen

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