Redemption of shares in an LLC consists in a liquidation of the shares held by one or more partners. As a consequence of redemption, the shares cease to exist. Such a solution is often used to decrease share capital or to exclude a shareholder from the company. What are the types of redemption and how to proceed with them? You will find the answers in this article!
Table of Contents
- Types of redemption of shares
- General requirements
- Voluntary redemption of shares in a Polish limited liability company – what does it mean?
- Compulsory redemption of shares in a Polish limited liability company – what does it mean?
- What situations justify the compulsory redemption of shares in a limited liability company?
- Automatic redemption of shares in a Polish limited liability company – what does it mean?
- Payment for redeemed shares
- Redemption of shares in a Polish limited liability company and reduction of the company’s share capital
Types of redemption of shares
There are three types of share redemption:
- voluntary redemption – a share is redeemed with the consent of the shareholder who held it,
- compulsory redemption – a share is redeemed without the consent of the shareholder, in cases specified in the company’s contract
- automatic redemption – a share is redeemed without the consent of the shareholder in case of the occurrence of a specific event indicated in the company’s contract.
There are general requirements for the redemption of shares that apply to each type:
- entry in the National Court Register (it is not possible to redeem shares of a company in organization);
- the company’s contract allows for redemption (there must be a relevant contract clause).
Although the regulations don’t specify that directly, there is an assumption that one cannot redeem shares of a company in liquidation.
Voluntary redemption of shares in a Polish limited liability company – what does it mean?
Voluntary redemption means the acquisition of the partner’s shares by the company. Thus, the company concludes an agreement with a shareholder regarding his shares. It may concern all of them or only a part.
The conclusion of such an agreement should be preceded by:
- adopting a resolution by the shareholders’ meeting on the redemption of shares
- a separate statement by the shareholder with his consent to the redemption of shares.
Compulsory redemption of shares in a Polish limited liability company – what does it mean?
Compulsory redemption – as the name suggests – occurs without the shareholder’s consent. In voluntary redemption, it is enough to include in the agreement a general provision that allows for such procedure. Compulsory redemption, on the contrary, requires explicitly defined conditions and manner of redemption. So, the agreement should determine the reasons justifying the compulsory redemption of shares. These can be reasons relating to the company (e.g., events related to the company’s financial situation). They can also relate to the shareholder himself (being a reaction to his undesirable actions).
What situations justify the compulsory redemption of shares in a limited liability company?
Entrepreneurs in companies’ agreements often indicate the following reasons justifying compulsory redemption:
- violation of secrets of the company’s business by a shareholder,
- causing damage to the company by the shareholder,
- defects in the shareholder’s in-kind contribution to the company,
- shareholder’s delay in covering supplementary payments established by a separate resolution,
- undertaking by shareholder activities competitive to the company’s activities.
The reasons for compulsory redemption can take a form of an open catalogue of events. Yet, they cannot be formulated in the company’s agreement in a general manner. Shareholders adopting a redemption resolution must be sure that a given event occurred.
Only when the situation specified in the company’s contract occurs, is it possible to compulsorily redeem the shares. Such redemption also requires a resolution of the shareholders’ meeting. The resolution should:
- indicate the legal basis for redemption,
- state the amount of remuneration for the redeemed shares
- provide a justification (i.e. provide the reasons behind the decision to redeem shares).
Automatic redemption of shares in a Polish limited liability company – what does it mean?
Automatic redemption occurs when the event specified in the company’s contract comes in existence. It has to be an objectively ascertainable event, excluding any discretion. Thus, the provisions of the contract must precisely describe such an event.
In the case of automatic redemption, the company’s management board must adopt a resolution.
Payment for redeemed shares
As a rule, the redemption of shares comes together with payment. The payment in the case of voluntary redemption arises from an agreement between the company and the shareholder owning the shares.
In the case of compulsory or automatic redemption, the regulations impose a minimum value of payment for the redemption of shares. Such remuneration may not be lower than the value of net assets per share. It refers to assets shown in the financial statements for the last financial year, decreased by the amount allocated for distribution among shareholders.
Only with the consent of the shareholder, one may redeem the share without compensation.
Redemption of shares in a Polish limited liability company and reduction of the company’s share capital
The redemption of shares may result in a reduction of the company’s share capital. The number of shares in the company reduces. In such a situation, the redemption of shares requires the so-called convocation proceedings. It refers to announcing the reduction of share capital and summoning creditors to submit their claims. The creditors may object within 3 months from the publication of the announcement. Redemption of shares occurs only after the conclusion of the convocation proceedings.
Yet, instead of a capital reduction, you can redeem the shares from the company’s net profit. This can only happen if the company’s financial statements show a profit. Then, it is not necessary to reduce the share capital, and the effect of share redemption is much faster.
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