In limited liability companies (LLCs), it is common to adopt a model where two managing directors exercise joint management. While this structure is designed to ensure balance and mutual control, in practice it may lead to a management deadlock, especially when conflicts arise between the managers.
In such situations, the key question is: how should the general meeting be convened to dismiss one of the two jointly acting managing directors who are also shareholders in the company?
This question will soon be addressed by the Commercial Division of the Supreme Court of Cassation (SCC), which has admitted a case for consideration with the purpose of developing the law. The forthcoming decision is awaited with particular interest, as there is currently no consistent or well-established judicial practice on the matter.
Why the Issue Arises
The Commercial Act provides that the general meeting of a limited liability company is convened by the managing director (Article 138(1) of the Commercial Act), and in cases of inaction – by shareholders holding more than one-tenth of the capital (Article 138(2) CA).
However, when the company is managed jointly – i.e. both managing directors must act together – a practical question arises:
is it permissible for the general meeting to be convened solely by one of them when the agenda includes the dismissal of the other?
The case before the SCC arises from a dispute between two shareholders-managing directors in an LLC, where one of them convened a general meeting with the agenda of dismissing the other and seeking liability for damages caused to the company.
The dismissed managing director challenged these resolutions by filing a claim under Article 74 of the Commercial Act – a legal remedy available to every shareholder to request the annulment of general meeting resolutions that contravene the law or the company’s articles of association. Such claims are commonly used in practice when there are allegations of improperly convened meetings or participation of persons in conflict of interest.
The Varna Court of Appeal held that the general meeting had been convened validly, applying by analogy Article 137(3), sentence 2 CA and Article 229 CA, which establish that a shareholder or shareholder in a joint-stock company may not vote on resolutions concerning their own liability towards the company.
According to the court, the same logic applies to the very act of convening the meeting – a managing director whose liability is at issue is in a conflict of interest and therefore cannot block the convening of the meeting by refusing to sign the notice.
Analogy with Joint-Stock Companies
In an earlier ruling from 1998, the SCC held that by analogy with the rules applicable to joint-stock companies (Article 229 CA), a shareholder in an LLC may not participate in a vote on resolutions to bring claims against them. This analogy is logical – both in LLCs and in joint-stock companies, the general principle applies that a person cannot exercise rights under a resolution that affects their own liability.
The forthcoming ruling of the SCC will clarify how far this analogy extends – whether it applies only to voting at the general meeting, or also to the very convening of that meeting.
What the SCC will decide
The SCC will address three specific questions:
- In a jointly managed LLC where two shareholders act as managing directors, is it permissible to convene a general meeting for the dismissal of one of them and for seeking their liability for damages, by a notice signed only by the other?
- If not, must the procedure under Article 138(2) CA be followed (i.e. convening by shareholders holding more than one-tenth of the capital)?
- Do Articles 137(3), sentence 2 CA and 229 CA apply by analogy when voting on resolutions to dismiss a shareholder-managing director and to authorise the filing of a claim under Article 145 CA against them?
What this means for businesses
The SCC’s ruling will have direct significance for all companies managed jointly by more than one managing director. It will bring practical clarity to questions such as:
- how a company may act effectively in cases of internal conflict between managing directors;
- how to apply conflict-of-interest rules when adopting resolutions;
- and what the legal consequences are when a general meeting is convened by only one of the managing directors.
The forthcoming decision is expected to ensure greater legal certainty and predictability in similar cases by providing a clear answer as to when the actions of one managing director are valid and when they are not.
What we recommend in the meantime
Until the SCC delivers its ruling, it is advisable for companies to:
- review their articles of association regarding management structure and procedures for convening general meetings;
- introduce explicit mechanisms for action in case of conflict between managing directors;
- carefully document the notices and minutes of general meetings to avoid grounds for claims under Article 74 CA (claims for annulment of general meeting resolutions that contradict the law or the company’s articles of association).
The SCC’s decision, expected in the coming months, will provide guidance for all commercial courts in similar disputes and will represent an important step towards a more predictable and effective judicial practice in corporate governance matters.
The article above is for information purposes only. It is not a (binding) legal advice. For a thorough understanding of the subjects covered and prior acting on any issue discussed we kindly recommend Readers consult Ilieva, Voutcheva & Co. Law Firm attorneys at law.
