Possibility of Retaining Profit #4

The question of whether a business corporation may retain profit instead of distributing it is one of the key issues of corporate law, where the economic interests of the company have long intersected with the protection of its shareholders. Historically, the case law of the Supreme Court proceeded from a restrictive approach to the non-distribution of profit, formulated primarily in relation to joint-stock companies. In practice and in part of legal doctrine, this approach was subsequently often applied by analogy to limited liability companies, although there was no clear case-law basis for doing so.

Joint-Stock Company

In the case of a joint-stock company, settled case law is based on the premise that a shareholder’s right to a share in profit is one of the fundamental property rights attached to ownership of a share. A general meeting resolution not to distribute profit therefore cannot be entirely discretionary. The Supreme Court has repeatedly held that a joint-stock company may retain profit, or part of it, only where there is an important reason for doing so. At the same time, the prohibition on abuse of the majority of votes, which serves as a general corrective to the exercise of voting rights, must be respected.

If these conditions are not met, the profit should be distributed among the shareholders. In other words, retaining profit is not the rule, but an exception that must be duly justified. An important reason may take various forms. It may arise from the company’s economic situation, its business strategy or the need to stabilise its financing. Case law also accepts that such a reason may already be incorporated in the company’s articles of association, i.e. institutionalised as part of the corporation’s internal arrangements.

A typical example of a legitimate reason for retaining profit is the creation of reserve funds. The Supreme Court considered a situation in which a joint-stock company did not distribute part of its profit but used it to create a statutory financial reserve through a purpose-bound fund provided for in its articles of association. In that case, the Court concluded that the general meeting’s approach was compliant with the law, since there was an important reason for retaining part of the profit and, at the same time, the circumstances of the case did not indicate any abuse of the majority of votes. This approach confirms that, in a joint-stock company, the protection of shareholders and of their right to a share in profit remains a priority consideration.

Limited Liability Company

The situation is different in the case of a limited liability company. For a long time, the Supreme Court’s decision-making practice did not provide clear guidance in this respect, and conclusions formulated in relation to joint-stock companies were often merely adopted by analogy in practice. This uncertainty was only resolved by Supreme Court decision file no. 27 Cdo 1306/2023, in which the Court expressly emphasised that such automatic transposition is not appropriate. The Supreme Court pointed to the different nature of a limited liability company and stressed that its personal element justifies a different approach to decisions on the handling of profit.

The essential argument is that a shareholder of a limited liability company is not merely a capital investor, as is the case with a shareholder of a joint-stock company; their participation also has a personal and participatory character. This fact justifies a greater degree of autonomy in deciding how profit is to be handled. The Supreme Court therefore concluded that the general meeting of a limited liability company may decide to retain profit, or part of it, without having to demonstrate the existence of an important reason.

This conclusion represents a significant shift in case law, substantially expanding the dispositive nature of the legal regulation applicable to limited liability companies. At the same time, however, it does not amount to unlimited freedom. The prohibition on abuse of the majority of votes continues to apply and serves as a basic corrective. A decision not to distribute profit must therefore not be arbitrary or oppressive towards minority shareholders. In other words, although an important reason is not formally required, the prohibition on abuse of the majority of votes remains preserved as the fundamental corrective to the exercise of voting rights.

Conclusion

Current case law therefore clearly shows that the approach to retaining profit is not uniform across all business corporations. While a relatively strict regime based on the requirement of an important reason persists in relation to joint-stock companies, limited liability companies are experiencing a significant strengthening of shareholder autonomy. This development reflects the different function of the two corporate forms: a joint-stock company is perceived primarily as a capital company with a weakened personal element, whereas a limited liability company retains a more pronounced personal element.

Despite these differences, both regimes share a common denominator in the form of protection of weaker parties, namely minority shareholders. It is precisely through the prohibition on abuse of the majority of votes that it is ensured that broader autonomy in decisions on profit does not lead to unacceptable interference with their rights.