Settlement among partners

End of Partnership in a Company: What Are Your Options?

In principle, there are three main scenarios that lead to the termination of a partnership:

• Voluntary and planned departure: A shareholder decides to terminate their active involvement and leave the company by mutual agreement.

• Transfer of share: A shareholder sells their share, either to an existing partner or to a third party entering the company.

• Forced departure: Relations between shareholders escalate to the point where further cooperation is impossible, leading to disputes and often the forced exclusion of one of them.

With the exception of a direct sale of the share, the central point of the entire process is the settlement share. This is a property right and financial compensation due to a shareholder whose participation in the company has terminated other than by a transfer of the share. Its correct determination and taxation is the alpha and omega of a successful settlement.

Paths to Terminating Participation: Agreement or Fight?

The Business Corporations Act (BCA) offers several mechanisms for a shareholder to terminate their participation in a company. Choosing the right path is a strategic decision that fundamentally affects not only the speed and cost of the entire process, but above all the financial outcome for everyone involved.

Transfer of Share (Section 207 of the BCA): The Fastest, but Not Always Possible Path

The most common and usually the simplest way is the sale (transfer) of the share. A shareholder can transfer their share to one of the existing shareholders or to a third party outside the company. Crucially, in this case, the outgoing shareholder does not receive a settlement share from the company, but rather the purchase price from the transferee of the share.

However, this path has its pitfalls. Transferring a share to a non-shareholder usually requires the consent of the general meeting, unless the articles of association state otherwise. Obtaining this consent can be difficult in a tense atmosphere and can block the entire process.

Agreement of All Shareholders (Section 203 of the BCA): The Gold Standard That Requires Consensus

The ideal solution, especially in smaller companies, is a written agreement of all shareholders to terminate the participation of one of them. Such an agreement must have certified signatures and provides maximum flexibility in setting the conditions. In practice, however, reaching a consensus, especially if the departure was preceded by disputes, is the greatest obstacle.

The Prague-based legal team at ARROWS has extensive experience in mediating and negotiating participation termination agreements that protect the client's interests while allowing the company to continue operating.

Withdrawal from the Company (Section 202 of the BCA): When Can You Unilaterally Leave?

A shareholder cannot leave the company whenever they please. Under Czech legislation, the law gives them the right to unilateral withdrawal only in strictly defined cases. Typically, this is a situation where the shareholder did not agree with a fundamental change in the nature of the business or with the imposition of an additional contribution obligation (surcharge) and voted against it at the general meeting.

Exclusion of a Shareholder (Caducity): An Extreme Solution for Breach of Obligations

If a shareholder seriously breaches their obligations, the others can defend themselves by excluding them. This process has two basic forms:

• Exclusion by the general meeting (Section 151 of the BCA): This applies exclusively to cases where a shareholder is in default with fulfilling their contribution obligation or additional contribution obligation. The process requires compliance with strict formal steps, including a written notice and the provision of an additional grace period.

• Exclusion by court (Section 204 of the BCA): The company may petition the court to exclude a shareholder who breaches their obligations in a "particularly serious manner". This could include damaging the company's reputation or breaching the duty of loyalty. However, this is a time-consuming and evidence-intensive lawsuit.

Cancellation of Participation by Court upon Shareholder's Petition (Section 205 of the BCA): An Escape Route from "Imprisonment"

In situations where there are insurmountable conflicts in the company that paralyze its operation, and it is not possible to reach an agreement or sell the share, a shareholder may petition the court to cancel their participation. The condition is that they "cannot reasonably be required to remain in the company". This is an extreme solution for deadlocks.

Risk Table I: Choosing the Wrong Path and Its Consequences

Choosing the incorrect procedure can lead to serious complications. The following table summarizes the main risks associated with individual methods of terminating participation and shows how they can be prevented with the help of experts.

Settlement Share: How Much Will You Actually Get and When?

Determining the amount of the settlement share is the financial core of the entire process and the most common source of disputes. It is crucial to understand how the law regulates this calculation and what options you have to influence it.

How Is Its Amount Determined? Two Main Methods

The Business Corporations Act establishes a two-phase procedure for determining the amount of the settlement share:

1. Primary method (Section 213 of the BCA): The company is first obliged to attempt to sell the so-called released share without undue delay for a reasonable price. The proceeds from this sale, after deducting reasonably incurred costs and offsetting any claims against the shareholder, constitute the settlement share.

2. Secondary method (Section 214 of the BCA): If the share cannot be sold within a 3-month period, or if the articles of association directly provide so, a calculation is performed. In such a case, the amount of the settlement share is determined from the value of equity capital established from extraordinary financial statements prepared as of the date of termination of the shareholder's participation.

What Is a "Reasonable Price"? A Key Source of Disputes

The law does not define what is meant by a "reasonable price" when selling a released share. It is precisely the unclear value of the company and the share that provides fertile ground for protracted and costly disputes. In practice, it is often necessary to have an expert opinion prepared to determine the market value of the share, which is the only objective way to prevent future disagreements.

The Role of the Articles of Association: Prevention Is the Best Medicine

The articles of association are not just a document required to establish a company. They are a fundamental risk management tool. They allow shareholders to set the method for calculating the settlement share differently from the law. A well-drafted agreement can contain a precise formula or valuation procedure, thereby eliminating uncertainty and room for future conflicts.

Our Prague-based legal team at ARROWS specializes in the preparation and review of articles of association containing clear and indisputable mechanisms for calculating the settlement share, thereby protecting your investment and minimizing the risk of future litigation.

Payout Deadlines: When Will You Get Your Money?

The law also sets deadlines for payment. If the share is sold, the company pays out the proceeds without undue delay after the sale. If the share is not sold and the amount is calculated from equity, the company is obliged to pay out the share within one month from the expiry of the three-month period for sale.

Tax Impacts of Settlement: Who Pays What and How Much?

Tax aspects are often underestimated but are an absolutely crucial part of the settlement. Ignorance of the rules can lead to significant financial losses both for the outgoing shareholder and for the company and its management.

Taxation on the Part of the Outgoing Shareholder (Individual and Legal Entity)

Income from a settlement share is subject to a 15% withholding tax for the shareholder (whether an individual or a legal entity). The most important rule that can significantly reduce the tax liability is the option to reduce the tax base.

The base for calculating the 15% tax is reduced by the acquisition cost of the share, provided the shareholder credibly proves it to the company. If the shareholder does not document the acquisition cost, the tax is withheld from the entire amount of the settlement share.

The lawyers and tax advisors at ARROWS will help you prepare all the documentation to prove the acquisition cost of the share, ensuring that you do not pay more tax than is absolutely necessary.

Obligations on the Part of the Paying Company

The company acts as the tax payer (withholding agent). This means that it is legally obliged to calculate, withhold, and remit the tax on the settlement share to the relevant tax authority, and pay the outgoing shareholder the net amount after tax. This obligation places considerable responsibility on the managing directors, who are liable for the correctness of the procedure.

Is the Payout of a Share a Tax-Deductible Expense for the Company?

The clear answer is: no. The payout of a settlement share is not a tax-deductible expense for the company. It is not an operating expense, but a disposition of equity capital, which does not reduce the corporate income tax base. Therefore, the company receives no tax relief from this transaction.

When Agreement Fails: How to Resolve Disputes and Protect Your Rights?

If negotiations fail and the situation escalates into an open conflict, it is necessary to know your legal options and be able to use them effectively. Most often, disputes revolve around the value of the company and the amount of the settlement share, but often the fight is also over the very validity of the steps that led to the shareholder's departure.

Invalidity of General Meeting Resolutions: How to Defend Against Exclusion?

If your participation was terminated by a decision of the general meeting (e.g., on exclusion), and you believe that this decision is unlawful, you can defend yourself by filing a lawsuit for the invalidity of the resolution. The grounds for invalidity can be conflict with the law, the articles of association, or good morals. Often, these are formal errors, such as defects in convening the general meeting.

However, to successfully challenge a resolution, it is crucial to follow two formal steps. First, the shareholder must raise a reasoned protest against the adopted resolution directly at the general meeting. Second, the lawsuit must be filed in court within strict deadlines – within 3 months from the day they learned of the reason for invalidity, but no later than 1 year from the adoption of the resolution.

Our Czech legal team at ARROWS has rich experience with these disputes and will guide you through the entire process of challenging an invalid resolution, from raising a protest to the final court decision.

Protection of Minority Shareholders

The law also provides protection to minority shareholders against abusive behavior by the majority. If it is clear that the exclusion is merely a pretext to get rid of an inconvenient partner, the court will not grant such a petition. ARROWS effectively represents minority shareholders and protects their rights against the abuse of power by the majority.

Settlement with an International Element: What If a Shareholder or the Company Operates Abroad?

In today's global economy, it is not uncommon for a shareholder of a Czech company to be a foreigner, or for a Czech company to own assets abroad. Such an international element introduces another layer of complexity into the settlement process.

It is necessary to address fundamental questions, such as which legal system will govern the entire process, which is regulated by the Act on Private International Law. Even more important is the correct application of international double taxation treaties. These treaties can modify the standard 15% withholding tax and determine which state has the right to tax the income.

Thanks to our ARROWS International network, built over ten years, we handle cases with an international element on a daily basis. We ensure for our clients not only the application of the correct law and tax treaties, but also communication with foreign authorities and partners, thereby saving their time and protecting them from the risk of double taxation.

Conclusion: Why Is Professional Legal Assistance Crucial in a Settlement?

Settling with a shareholder is one of the most complex and risky processes in a company's lifecycle. It involves not only complex legal steps but also demanding financial calculations, tax obligations, and often strong emotions. The risks are substantial: financial losses due to an incorrectly determined share, lengthy litigation, tax sanctions, and last but not least, the personal liability of managing directors for procedural errors.

Professional legal and tax advisory is not a luxury in this case, but a necessity. An experienced team will ensure that the entire process runs efficiently, in compliance with the law, and with minimal stress for everyone involved. Our experience from the long-term care of more than 150 joint-stock companies and 250 LLCs (s.r.o.) allows us to anticipate problems before they arise. At ARROWS, we provide comprehensive services ranging from the preparation of contracts and internal guidelines, through representation in courts and administrative bodies, to tax advisory and professional training for management.

We are also happy to hear your new business ideas and connect you with relevant partners from our network.

Do not leave such crucial life and business decisions to chance. Contact us to arrange a consultation where we will discuss your situation and propose the best course of action to protect your assets and the future of your company.