Decorative page background

H&P corporate case law: Obligation to distribute profits in a limited liability company (January 2024)

H&P corporate case law: Obligation to distribute profits in a limited liability company (January 2024)

We begin 2024 with a heavyweight corporate judgment – we have picked a ruling which addresses profit distribution in limited liability companies.

The judgment we have picked follows up on the previous case law of the Supreme Court concerning joint-stock companies, which held that the right to participate in the company’s profits is one of the fundamental rights of a shareholder. Thus, according to that case law, the general meeting could only resolve not to distribute profits (or their part) if there were important reasons for this and the prohibition of abuse of the majority of votes was respected. Thus, put simply, the issue was that of compulsory profit distribution in joint-stock companies.

In the judgment discussed in this article, the Supreme Court addressed the question whether the same conclusions apply to limited liability companies. The Supreme Court considered the question of (in)validity of a resolution of the general meeting of a limited liability company, by which 84% of the distributable profit for the fiscal year was divided among the members, while the remaining 16% of the profit was retained in the company. 

A minority member challenged this resolution of the general meeting. According to the minority member, there were no important reasons for retaining 16% of the profit and, therefore, this part of the profit should have been distributed among the members as well. Hence, the minority member considered the resolution adopted by the general meeting to be invalid.

The Supreme Court held that the above conclusions regarding the “obligation to distribute profits” were not automatically applicable to limited liability companies. This is due to the different nature of a limited liability company and a joint-stock company. Indeed, although they are both companies with limited liability, there are numerous differences between them. 

Therefore, the Supreme Court concluded that the general meeting of a limited liability company, when deciding on the (non-)distribution of profits, is not subject to the same limitations as it is the case with a joint-stock company. Even so, it is always necessary to take into account the general limits, especially the question of abuse of votes to the detriment of the whole.

The above is an absolutely fundamental conclusion for corporate practice. Disputes initiated by members regarding the distribution of profits are among the most frequent reasons for litigation in the field of corporate law. Clarification of the position of members in a limited liability company is thus invaluable.

Related articles
ESOP myths | Myth #3: ESOPs from the incorporator’s perspective – are they really intricate, and will they cause you to lose control?
Ondřej Florián, Kamil Kovaříček, Barbora Břežná, Josef Zumr

ESOP myths | Myth #3: ESOPs from the incorporator’s perspective – are they really intricate, and will they cause you to lose control?

Incorporators, like anyone else, may perceive ESOPs to be overwhelming, complicated, and intricate, even though this need not be the case. At the same time, more than anyone else, incorporators may be concerned about giving up part of their business to managers and about the perceived loss of contro