Resolution of the Supreme Court of 29 November 2023, Case No. 27 Cdo 1306/2023

Legal opinion: "The financial statements for 2019 were not an eligible basis for the general meeting's decision on the distribution of profits in 2021 (among other things, the company could not assess whether the so-called balance sheet test had been met). If the general meeting decided on the distribution of profits on the basis of ineligible financial statements, this decision has no legal effect"

In its recent decision, the Supreme Court addressed two issues in the field of corporate law related to the payment of profit shares in a limited liability company.

Firstly, the Supreme Court examined whether the general meeting of a limited liability company must decide to pay out a share of profits among the shareholders in the maximum amount possible, if there are no important reasons on the part of the company. It also interpreted the consequence of a decision by the general meeting of a limited liability company to pay out a share of profits without a proper basis for such a decision.

Summary of the facts

On 8 January 2021, the general meeting of a limited liability company with two shareholders (67% and 33%) decided to revoke the previous decision of the general meeting approving the company's financial statements for 2019 and by which no profit was distributed to the shareholders. On the same day, the General Meeting decided to revise the decision approving the 2019 financial statements and deciding on the distribution of part of the profits to the shareholders.

The decision of the General Meeting of 8 January 2021 was challenged by the minority shareholder by way of a lawsuit. The Court of First Instance partially upheld the action, declaring the resolution partially invalid as regards the non-payment of the remaining part of the profit to the shareholders.

Subsequently, on the basis of the company's appeal, the Court of Second Instance amended the decision of the Court of First Instance by dismissing the application for annulment of the part of the resolution concerning the non-distribution of the remaining part of the profit, on the grounds that there was no serious reason for judicial interference in the internal affairs of the company.

An appeal was brought by the minority shareholder against the decision of the court of second instance, which was dealt with by the Supreme Court as follows.

Restriction of the general meeting in deciding on (non-)distribution of profits

In the appeal, it was argued, among other grounds, that the decision of the Court of Appeal was contrary to the constant case law of the Supreme Court, according to which "if a company makes a profit, the general meeting may decide not to distribute the profit to the shareholders only for important reasons and while respecting the prohibition of abuse of the majority of votes."

However, the case under review was a limited liability company and the Supreme Court concluded that, due to the partly different nature of a limited liability company and a public limited company, the above case law conclusions cannot be automatically transferred to limited liability companies.

Thus, the general meeting of a limited liability company is not restricted in deciding on the (non-)payment of profits, as is the general meeting of a public limited company. It can be concluded that the general meeting of a limited liability company can decide not to distribute part of the profit to the shareholders without having an important reason for doing so.

However, considering the facts of the case, in our view, the above conclusion cannot be applied without any further consideration to situations where the general meeting of a limited liability company would decide that no profit would be paid out (without good reason).

Eligible basis for the decision to pay a profit share

However, the Supreme Court first examined the question of whether the decision of the general meeting was in accordance with the law. After all, as the Supreme Court itself stated, the General Meeting, by the contested resolution, decided on 8 January 2021 to distribute the profit on the basis of the financial statements prepared for the financial year 2019, which was not dealt with by the Court of Appeal in the previous proceedings.

The basis for the decision on the payment of the profit share is the approved ordinary or extraordinary financial statements, on the basis of which the profit can be distributed up to the end of the financial year following the financial year for which the financial statements were drawn up. If the financial statements were prepared as at 31 December 2019, the profit distribution could only be decided on the basis of the financial statements until the end of the following financial year (i.e. 31 December 2020).

The financial statements are therefore not a valid basis for the General Meeting's decision on the distribution of profits in 2021, as they do not reflect the company's current financial situation and cannot serve the company to properly assess compliance with the balance sheet test.

The Supreme Court confirmed this conclusion in its decision in which it ruled that the resolution of the general meeting of 8 January 2021 on the distribution of profits on the basis of the outdated financial statements was not made on the basis of an eligible basis. As such, it has no legal effect and is not a resolution of the general meeting.

Conclusion

From the point of view of legal practice, it is necessary to pay due attention to the above-mentioned conclusions of the Supreme Court, especially in cases where a decision of the general meeting is made with a certain time lag, which cancels the previous decision on the distribution of profits and which is replaced by a new decision of the general meeting.

In such a case, the timeframe defined by the financial statements drawn up as at a certain date for the preceding financial year must be clearly perceived.

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