Caught on our radar
a way of getting
rid of co-owners?
Following disagreements between co-owners in an IT Company, the majority, despite the existence of a shareholder agreement, decided to liquidate the Company before then going on to continue the business themselves in a new company. The Court of Appeal found this process acceptable.
In the case in question, there was disagreement between the majority owners and one minority owner regarding the valuation of the IT Company’s shares in connection with entry to and exit from the company. The parties discussed various solutions, but the disagreement eventually led to a conflict that escalated so far that the majority owners wanted to get rid of the co-owner.
The minority owner claimed that the co-owners were obliged to accept his proposal to allow an independent official valuer to assess the value of the shares. However, the Court decided that there was no such liability according to Swedish law. Certainly, the parties had entered into a shareholders’ agreement, but the co-owner did not claim such a liability under the agreement.
Decision on liquidation
The majority owners decided at a general meeting that the company would enter into liquidation, even though its business situation was generally good. According to the co-owners belonging to the majority group, the plan was for them to terminate the company and continue in a new organisation with a view to continuing the business under similar forms.
The appointed liquidator sold the company’s business at a public auction to a newly formed company for only SEK 100 000. The reason for the relatively low price in relation to the company’s profitability was that the people active in the company were not involved. The purchase price did not even cover the cost of the liquidation, and so there was no surplus to allocate to the shareholders. Thus the shares became of no value as a result of the liquidation.
In contravention of the Swedish Companies Act?
The disagreeing co-owner who voted against the proposal at the general meeting later brought an action against the other shareholders and directors and claimed damages. According to the co-owner, the decision to liquidate was in contravention of, among other things, the Swedish Companies Acts regulations for protection of minority owners; what are known as the general clauses in Chap. 7, Section 47 and Chap. 8, Section 41 respectively.
According to invoked provisions, the general meeting cannot make any decision which is likely to give an undue advantage to one shareholder or any other party and which is also to the detriment of the company or other shareholders. The same applies to legal acts and other measures decided upon by the Board.
The co-owner claimed that the decision to liquidate was equivalent to sale of the company’s net assets at a loss and that, as a consequence, values in the company from which the other co-owners were been able to benefit were withheld from him. However, the court did not agree. Although it was concluded that the actual purpose was not to close the business, but to continue to run it in another form, which was made possible by the liquidation, it was, with regard to the purpose of the liquidation institute, not considered that the decision to liquidate the company should be covered by the minority protection rules.
The right to voluntary liquidation by dissolving a company therefore took precedence over minority protection. If the issue is not clearly regulated in a shareholder agreement, therefore, minority owners getting tough in order to receive a decent payment for their shares are quite risky.