Exclusion of a Participant

Exclusion of a participant from a company. Corporate disputes over the exclusion of a participant (shareholder, founder) from a company — whether a limited liability company or a joint-stock company — are, in our view, among the most complex. Exclusion is possible, though it demands strong evidence of conduct that makes the company's activity impossible or materially hinders it.

The grounds for exclusion

A participant may be excluded where they grossly breach their duties or, by their actions or inaction, make the company's activity impossible or substantially impede it. Typical grounds established by case law include: systematic evasion of general meetings without good reason, thereby blocking decisions the company needs; conclusion of transactions to the company's detriment; disclosure of confidential information; competing with the company; or falsifying documents and misappropriating assets.

Exclusion is an extraordinary remedy. Courts weigh whether the conduct genuinely paralyses the company, and whether the conflict is instead an ordinary disagreement between participants that exclusion is not designed to resolve. Mutual claims by participants against each other, each seeking the other's exclusion, are frequently refused where the real issue is a deadlock of equals rather than the wrongdoing of one.

What the claimant must prove

• The conduct is a gross breach of duty or makes the company's activity impossible or materially harder.

• The link between that conduct and the harm to the company.

• That the harm is real and significant, not trivial or speculative.

Where a participant systematically fails to attend meetings, the claimant must show that attendance was essential for decisions and that absence was without good reason. Where the ground is a harmful transaction, the claimant must show detriment and, usually, bad faith.

Consequences of exclusion

On exclusion, the participant's share passes to the company, and the excluded participant is paid the actual value of the share, determined from accounting data for the last reporting period before exclusion. Disputes over that valuation are common and often require expert evidence — the actual value may differ substantially from the nominal value, and the two sides typically pull in opposite directions.

What this means for international investors

For foreign investors holding stakes in Russian companies alongside local partners, exclusion is both a shield and a risk. It offers a route to remove a partner who paralyses the business or acts against it — but it is hard to obtain and easy to misuse. A well-drafted shareholders' agreement, clear duties, and documented breaches are what turn a difficult exclusion claim into a viable one. Equally, an investor should guard against exclusion claims aimed at squeezing them out, by keeping a clean record of participation and good-faith conduct.

Related materials

• Shareholders' agreement

• Piercing the corporate veil