Corporate rights of a partner/shareholder who has been declared legally incapacitated

For a variety of reasons, such as health issues or addiction, the family court may order the complete incapacitation of an individual. This has certain consequences, particularly with regard to the ability to manage one’s assets or carry out legal transactions. For a company in which the incapacitated person holds shares, the incapacitation of a partner or shareholder also presents a number of challenges and requires necessary measures to be taken.

As a result of total incapacitation, the partner or shareholder is deprived of the capacity to perform legal acts; however, they retain legal capacity and, consequently, remain a subject of rights and obligations, including retaining ownership of their shares and being entitled to the property and corporate rights associated with that ownership.

Incapacitation therefore does not affect the partner’s or shareholder’s right to: dividends; sale or other disposal of shares; participation and voting at the general meeting; challenging resolutions of the general meeting; etc.

However, in practice, the deprivation of a shareholder’s legal capacity means that he/she cannot independently determine their legal position, and in legal transactions, a guardian appointed by the court acts on their behalf. Any act undertaken personally by a shareholder who has been completely deprived of legal capacity under the Commercial Companies Code is absolutely void. Therefore, the guardian, acting on behalf of the partner or shareholder, will have the right to attend the general meeting and vote at it on behalf of the partner or shareholder.

To avoid any doubt regarding the guardian’s authority to participate in the general meeting, the company should ensure that the guardian attaches to the minutes of the general meeting a court certificate confirming his or her appointment as the legal guardian of the partner/shareholder who has been completely incapacitated.

Also significant from the perspective of the company’s operations and the certainty of commercial transactions is the provision of the Family and Guardianship Code, pursuant to which, in all major matters concerning the person or property of an incapacitated individual, the guardian must obtain court approval to take the relevant action. Neither the provisions of the Code nor legal scholars define what constitutes “major matters,” emphasizing that such an assessment must be made on a case-by-case basis. The lack of court approval results in the absolute invalidity of the action. This means that to minimize the risk of resolutions adopted with the guardian’s participation being challenged, the guardian should apply for a general authorization to exercise rights attached to shares.

In practice, many methods have been developed to mitigate these risks. Among them is a provision in the company’s articles of association or bylaws stating that total incapacitation constitutes grounds for the mandatory redemption of shares.

You can read more about the redemption of shares here.