Exclusion of an associate

Associate working against the interests of the company / Cases in which an associate can be excluded from the company / Rights and obligations of the excluded associate / How we can help you

Associate working against the interests of the company

As a general rule, a person who is a partner/shareholder in a company has a vested interest in the company’s growth, profit and operation in the best possible way.

Company development, increasing turnover and profit levels are issues that are pursued by the vast majority of associates/shareholders of various companies.

However, pursuing a company’s best interests is a matter of good practice rather than a legal obligation. Romanian law does not impose any obligations on the partners/shareholders of a company with regard to the good functioning of the company. It is up to each partner/shareholder to decide whether to act in the best interests of the company and/or in their own interests.

What should be noted is that the law does not provide for any legal remedies if one of the partners/shareholders engages in behaviour that is detrimental to the company.

This lack of remedies is explained by the purely private nature of companies in Romania. One explanation could be that, since a commercial company is a private initiative concerning the rights and interests of certain individuals and not the interests of society in general, it is up to each partner/shareholder to decide how to manage their own business.

Where certain partners/shareholders wish to cause an economic decline of the company they own, under the principle of commercial freedom specific to a market economy, the law allows such a measure and does not penalise it.

However, the rules change radically when one of the partners is also a director of the company.

Unlike shareholders, the directors of a company have an obligation to act solely in the interests of the company, which means that they have a legal and statutory obligation to make the best decisions regarding the destiny of the company they manage.

In certain situations the capacity of shareholder may overlap with that of director, in which case the person concerned is obliged to act solely in the interests of the company and to refrain from any action/inaction that could be detrimental to the company.

Cases in which a partner can be excluded from the company

If a person who is both a shareholder and a director of a limited liability company acts against the interests of the company, either by his actions (e.g. concluding certain contracts which are unfavourable to the company) or by his inactions (e.g. not taking the necessary measures to maximise profits), the law imposes certain sanctions.

One of the sanctions provided for by law is the exclusion of the person in question from the company, which is equivalent to both loss of membership and loss of directorship.

According to the law, a person who is both a shareholder and a director of a limited liability company (LLC) can be excluded when he/she commits one or more frauds against the company (e.g. using the company’s assets for personal gain, employing unqualified staff, failing to meet the established performance parameters in bad faith, defaulting on payments, selling the company’s assets for ridiculous prices, initiating and supporting unfair competition, etc.).

In all these cases of abuse, the other partners can obtain a stop to it and hold the managing partner liable for the damage caused through the courts.

If abuses are proven, the courts order the exclusion of the person in question from the company, which entails the termination of the person’s status as a shareholder and director and the cessation of operations that are damaging the company.

The exclusion of a person from membership in a company is a genuine sanction provided by law to prevent unfair behaviour towards the company.

Depending on the type of damaging actions/operations carried out by the managing partner, he may also be subject to administrative and/or criminal sanctions.

Rights and obligations of the excluded partner

The managing partner excluded from the company is required by law to make good all damage caused to the company.

What should be emphasised is that the obligation of the managing partner to pay damages is another sanction provided by law for the improper attitude of the managing partner towards the company, distinct from exclusion from the company and/or other administrative/criminal sanctions.

In order for a managing partner to be liable for damage caused to the company, a claim to this effect must be brought before the court, separate from the claim for exclusion.

Even if the exclusion is a genuine sanction, it should not be forgotten that the person who is excluded held shares issued by the company until the moment of exclusion, in which case he was entitled to receive certain benefits from the company.

Loss of membership in a company, through exclusion, entitles the former member to obtain certain financial benefits from the company.

Financial benefits are amounts of money owed by the company to the former partner and are calculated using the following formula: ( value of all company assets – value of all company debts ) / percentage of shareholding (e.g. 30%, 45% etc.).

In other words, by exclusion, the person in question loses only the status of partner and director in the company, and not the right to receive the value of the shares held in the company.

Of course, there is nothing to prevent the level of benefits from being adjusted by the amount of damages due to the company for the harm caused.

How we can help you

Our lawyers can provide you with legal advice, legal assistance and representation before the courts in any process concerning the exclusion of one of your associates working to the detriment of the company in which you are a partner, thus ensuring that abuses are stopped and the normality of the company is restored.

Additional information on excluding an associate