Transfer of participations in the company to employees through clauses such as Put and call option, Good and bad leaver, Drag along / Tag along

Cristina Ticu Jianu
Cristina Ticu Jianu
Diana Gaitan
Diana Gaitan

(1) The analysis of the present subject has as starting point some legal situations found in practice, regarding the intention of some shareholders from limited liability companies (LLC) to “gratify” / “bonus” employees, usually management, by the method of granting participations (shares) in LLC., the procedure similar to the usual mechanisms within joint-stock companies (JSC).

(2) The most common examples in practice concern minority quotas (for example 5-10% of the share capital), and the purposes of these transactions are usually, on the one hand, to distribute to persons in the management of the company a part of the profit of the company, in the form of dividends, and on the other hand, to co-interest the employees to work together in the interest of the company to which he will become a shareholder.

(3) Since the mechanism of co-opting the employee into society is one that does not cause difficulties, we will deal with the mechanism of his exit from society in the following.

(4) Such clauses could be granted both the right of the minority shareholder (for example, the employee) to withdraw from the company, as well as the right of the majority shareholder (the initial shareholder) to regain the right over the participations transferred to the employee, without having the nature of a sanction (exclusion), but to operate only as a manifestation of the will of the shareholders of the pre-established company, on the basis of contractual freedom, Art. 1169[1] Civil Code and 202 paragraphs 1 and 22[2] of Law no. 31/1990).

(5) The nature of such a legal fact, withdrawal from the company, or forced redemption of the participations, manifested by the Notification communicated to the shareholder, could be similar to that of unilateral termination of a contract, the procedure allowed by the parties’ convention, in the present case of the articles of incorporation (According to Art. 202 paragraph 1 of Law no. 31/1990).

(6) In the practice of companies from other states, such mechanisms are common and take the form of clauses regarding the termination of the shareholder status by the forced transmission / redemption of the participations, such as:

(i) The transmission of participations between shareholders, with the pre-established agreement of the shareholders.

(a) Put and call option, these are the clauses that establish both the right of the majority shareholder to buy the participations of the minority shareholder and the right of the minority shareholder to sell the participations to the majority shareholder in the company.

In this case, there are also established, by clear and expressly determined rules, the aspects regarding the essential conditions of the exit, for example: The notice limit for exercising the options rights, the means of communication thereof, the terms for exercising the options for sale / purchase, the ways of determining the price of the transaction, the method of payment of the equity price, the date on which the transmission of the shares to the parties and to third parties will actually operate, possible penalty clauses of non-performance of obligations, the documents necessary for the operation of the transfer of the participations.

(b) Good leaver – clauses, through which it is establish also the exit from the company of the employee who holds the status of minority shareholder, as well as the criteria for determining the price of the participations, as a result of the termination of the employment contract, by exercising a call option from the majority shareholder by transmitting a written notification that will include the conditions mentioned at point (a) from above

(c) Bad- leaver –clauses establishing that, in case of dismissal of the employee for reasons attributable to him or any other situations agreed by the parties as falling within this notion, the employee undertakes the obligation to transmit his shares to the majority shareholder, following the call option expressed by it, losing the capacity of shareholder in the company, specifying also the criteria for determining the price of participations (price which, as a rule, is affected by his negative conduct).

(ii) The transmission of participations to third parties, with the prior agreement of the shareholders.

(d) Drag – along, these are the clauses establishing the obligations of minority shareholder, specifying the financial conditions applicable to such assignments, in case of transmission of the participations to a third party, that makes an offer to buy 100% (for example) of the shares of the company, namely, under the same conditions and at the same price obtained by the majority shareholder.

(e) Tag along- these are the clauses by which the joint rights of the minority shareholders to participate at the sale of the shares held in the company, to a third party, in case the majority shareholders express their intention to exit the company, that is, the co-sale rights of the minority shareholder, to a third party, under the same conditions and at the same price obtained by the majority shareholder.

(7) In this situation, the transmission of shares to third parties could be riskier than the transmission between the parties, from the perspective of the formalities of registration in the trade register (for opposability), therefore, it would be preferable to first resort to the mechanisms of termination of the shareholder capacity (mentioned in chapter (i) above) and in the second stage, upon transmission to third parties.

(8) This conventional mechanism of “exit” of the shareholders from the company, by withdrawing from the company or by redeeming the participations in L.L.C., we consider that it is different from the mechanisms of exclusion of the shareholder provided by the law at L.L.C. (Article 222 of Law no. 31/1990), a mechanism that the law does not even provide for, as well as by the mechanism of withdrawal of the associate/shareholder provided for both LLC and JSC. (Articles 226 and 134 of Law no. 31/1990).

(9) In practice, these mechanisms of forced exit of the minority shareholder (former employee of the company) could also generate some difficulties if the employee subsequently either terminates the legal employment relationship with the company, or maintaining this quality, does not actually contribute to the decision making of the company (affectio societatis), or, moreover, it generates misunderstandings between the shareholders leading to the impossibility of adopting the decisions for the functioning of the company, because the current legislation is still not related to the principle of contractual freedom, which allows the adoption of the articles of incorporation permissive to these situations, namely, Law no. 31/1990 is still lacunar / insufficient from the perspective of opposability, that is, the registration with the trade register of the updated situation of the participations in LLC.

(10) However, we consider that these “exit” mechanisms from LLC can be adopted by convention (as mentioned above, by including clauses in the articles of incorporation), considering that relatively recently, on 10.05.2021, H.C.C.J. – The Panel for Preliminary Ruling on Questions of Law – was decided by Decision no. 28/2021, through which, when examining some legal provisions applicable to the exclusion mechanism of the shareholders, it established that the applicable norm for the assumptions of exclusion of the shareholder, provided by 222 of Law no. 31/1990, it is not supplemented with the provisions of Article 1.928 of Law no. 287/2009 on the Civil Code.

(11) At the same time, in the considerations of this decision (paragraph 55, letter e), the H.C.C.J. also established, as an alternative, practically, that such clauses could be included in the articles of incorporation of companies, when it noted the following:

“e) Of course, within the limits of the autonomy of the will, following the thinking of the legislator and the purpose of the institution, the parties have the right to multiply or contractually restrict the causes of exclusion.”

(12) Therefore, the reacquisition of control by the majority shareholder over the participations ceded to the employee, can be achieved by activating clauses such as those listed above.

(13) Of course, for more clarity, it could be considered, possibly, in future changes (de lege ferenda), correlation of this legal solution given by I.C.J. by Decision no. 28/2021 with the provisions of Law no. 31/1990 but also with Law no. 265/2022 on the Trade Register and for amending and completing other normative acts affecting the registration in the Trade Register.

(14) The legal texts which could cause confusion in the application of the principle of contractual freedom mentioned by the I.C.C.J. in that decision (no. 28/2021), and which could be improved, could be:

– article 204 paragraph (4) of the Law on companies no. 31/1990, in the form amended by Law no. 265/2022 which shows the following:

40. In Article 204, paragraph 4 shall be amended and shall read as follows:

(4) After each amendment of the articles of incorporation, the administrators, respectively the directorate, shall submit to the trade register the amending act and the full text of the articles of incorporation, updated with all the amendments, which will be registered in the trade register on the basis of the conclusion of the trade register registrar. In the cases referred to in Article 223 paragraph (3) and Article 226 paragraph (2), the registration in the trade register shall be made ex officio, on the basis of the final decision of exclusion or withdrawal.and

– article 45 paragraph (1) of Law no. 265/2022, [which repealed Law no. 26/1990], and which provides in the following:

“Art. 45 – (1) For the purposes of the registration of court decisions, in cases provided by law, the courts shall communicate a copy of the final court decision or, where the law provides, bailiffs, in which the particulars to be recorded in the trade register are noted.

(2) The judicial decisions referred to in paragraph (1) may also be transmitted electronically, in copy, through the system of interconnection of the ONRC integrated information system with the ECRIS system.

(15) The mechanisms of forced exit of the shareholders from the LLC were analysed in the specialized doctrine, opinions being sometimes different or even divergent.

(16) [3][4]In the sense of the contractual freedom by which it is allowed to include the clauses of exit of the shareholders from the companies in the articles of incorporation, there are several opinions of which we recall the opinion that deals with the applicability of the rules on joint stock companies to limited liability companies4 and which considers that these admissible mechanisms are a remedy (item 3), or the opinion5 in which the arguments of the H.C.C.J. Decision no. 28/2021 were analysed, and which concluded that: “the supreme court recognizes the shareholders freedom to supplement, by statute, the quasi-empty set of exclusion causes provided for by law”, and (in footnote no. 68) thus, “Or, in other words, self-reflective contracting, as should be – ideally – any process of establishing contractual content.”

(17) If there are several shareholders in the society and the transmission of the participations is made only between the exiting shareholder and the one from which he previously acquired the shares, the transmission by assignment between the two shareholders is allowed, as noted in the specialized doctrine[5], respectively: “it does not imply the consent of the other shareholders, because in such a hypothesis it does not affect the character of the intuitive person of society.”

(18) As an alternative, in order to remove some risks regarding a possible difficulty to register with the trade register (opposability) the updated situation of the shareholders as a result of the exit of one of them, one could resort to an intermediary solution, namely the transformation of L.L.C. into closed type JSC, and subsequently, to adopt the exit mechanisms from the company because the provisions of Law no. 31/1990 are more flexible with respect to JSC than with LLC.

(19) In conclusion, we consider that such clauses can be conventionally implemented within a limited liability company (L.L.C.), even if they are companies of persons, because the “intuitu personae” character of L.L.C. is respected precisely in the consideration of the reasons for adopting such a decision (of co-opting the employee in the company), such as the qualities that recommend him for the position of manager.

(20) We also consider that such a premise is sufficient to lead to the conclusion that the “affectio societatis” principle, which governs the corporate law in respect of LLC, is respected, because there should be a willingness to associate and work together to obtain benefits for shareholders and employees (management).

(21) Consequently, the operations of transmission of the shares, at least between the shareholders of the company (the situation analyzed), should be able to be carried out and registered with the Trade Register, pursuant to Article 202 paragraph 1 of Law no. 31/1990, and the provisions of the Company’s Articles of incorporation in which the parties have expressly agreed this possibility, as well as the evidence from which the fulfilment of the pre-established conditions in such clauses results, without the need for another GMA Decision, respectively the exit of the associate so co-opted.

[1] Art. 1.169. – The parties are free to conclude any contracts and determine their content, within the limits imposed by law, public order and good morals
[2] Art. 202. –(1) Shares can be passed on between shareholders.
(2) Unless otherwise provided for in the articles of incorporation, transmission to persons outside the company is allowed only if it has been approved by shareholders representing at least three quarters of the share capital.
[3] Aplicabilitatea regulilor privind societățile pe acțiuni la societățile cu răspundere limitată. De când? De lege ferenda– authors: Gheorghe PIPEREA, Petre PIPEREA, Published on 09.02.2017, available here.
[4] Revista Romana de Drept Privat (Universul Juridic) nr. 4/2021 – Excluderea asociaţilor, între Codul civil, Legea societăţilor nr. 31/1990 şi Decizia Înaltei Curţi de Casaţie şi Justiţie nr. 28/2021 privind dezlegarea unei chestiuni de drept – author Lucian Bercea 28 December 2021, available here.
[5] Commercial Law – University Course- 3rd edition- revised and added edition, Hamaniu Publishing House 2018, author: Vasile Nemes

Cristina Ticu-Jianu, Partner LTJ & PARTNERS
Diana Gaitan, Senior Associate LTJ & PARTNERS

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