The Calculation of the Value of the Outgoing or Excluded Partner's Interest in a Partnership

Legal insight

July 2021

George Kefalas, LL.M. (mult.), Μ.Sc.

Summary: According to the law on partnerships (Law 4072/2012), the outgoing or the excluded partner (in addition to the claim for the return of the objects he/she had contributed during use) has in principle a claim for payment of the full value of the participation. The application of this provision raises a number of issues, which this article attempts to answer. 

1. Introduction

In our previous articles we have discussed both the right of a partner to exit and the right of other partners to request the exclusion of their partner from a partnership. According to para. 1 of Article 264 of the Act. 4072/2012 "In case of exit or exclusion of a partner, the company shall return to him/her the objects he/she had contributed during use". At the same time, para. 2 of the same article stipulates that, unless otherwise specified in the partnership agreement, the exiting or excluded partner has a claim against the company for payment of the full value of his participation. An exception is the case where a partner exits a partnership of limited duration without good cause, in which case he is not entitled to receive the value of his participation (see Article 261(3) of Law 4072/2012). Therefore, the full value of the participation is entitled to receive the full value of the participation of the person leaving a partnership of unlimited duration (regardless of the existence or non-existence of an important reason), the person leaving a partnership of limited duration, if there is an important reason for leaving, and, finally, the partner who is excluded from a partnership. However, how is the value of the participation to which the partner is entitled to be awarded by the courts calculated and against whom can the partner turn to claim it? Also, what is the critical time for determining the value of the participation and when is it paid to the outgoing or excluded partner? We seek to answer these questions with our thoughts below. 

2. The calculation of the value of the participation of the outgoing or excluded partner

Firstly, the provision of para. 2 of Article 264 states that: "If the partners do not agree on the value of the participation, the value to be paid shall be determined by the court referred to in paragraph 2 of Article 259 in accordance with the procedure of voluntary jurisdiction". The decisive factor is therefore, in principle, whether the partners agree. If the withdrawing or excluded partner and the other partners agree on the amount of the value of the first partner's participation, the first partner will receive that amount on withdrawal or exclusion. 

Further, the relevant provisions of the company's articles of association are crucial. Thus, the articles of association may stipulate how the value of the participation of an outgoing or excluded partner is to be calculated, for example by providing that he is entitled to receive only the book value of his participation or that the determination is to be made by an independent expert. The articles of association may also provide for the way in which the value of the participation is to be paid to the outgoing or excluded partner, e.g. directly or in instalments, in cash or in kind, etc. 

In most cases, however, the partners do not agree among themselves on the value of the outgoing or incoming partner's participation, nor are there any provisions in the articles of association to this effect, so that the latter is forced to resort to the competent courts (or to arbitration, if the company's articles of association provide for this). 

The courts have ruled in this respect that, in order to calculate the value of the participation of the outgoing or excluded partner, the entire assets of the company, i.e. its assets at a given time and in particular its assets, including its claims against third parties and the monetary value of the intangible assets it has acquired (reputation, clientele, value of distinctive signs, etc.), must be taken into account. ) from its operation up to that time, as well as its liabilities, i.e. its debts to third parties, and the current and expected financial performance of the company's business should also be taken into account. 

Consequently, in calculating the value of the company and, by extension, the value of the partner's shareholding, account is taken of both the value of the company's tangible assets and the value of its intangible assets, which in many cases are the most important assets, and the company's debts to third parties. 

The relevant decisions usually state that 'the decisive element in determining the value of the leaving partner's participation is, in principle, the market value of the participation at the time of the leaving partner's departure'. Thus, decision No. 3292/2018 of the Athens Court of Appeal held that the value of the company at the time of the partner's departure amounted to EUR 480,000, given that 14 months before a potential buyer had offered the amount of EUR 120,000 for the purchase of a 20% stake in the company (and, consequently, the value of 100% of the company amounted to EUR 600,000), but in the meantime, market conditions in the company's area of operation deteriorated. On this basis, it was concluded that the value of the shareholding of the outgoing shareholder, who held 37% of the shares, amounted to EUR 177 600 (480 000 x 37%). 

In another case, the court based its decision on the value of the company and therefore the participation of the outgoing partner on a private agreement between the partners. Indeed, in the case of the judgment of the Thessaloniki Court of Appeal, decision No 570/2017, the partners had agreed in the private agreement of 3.8.2009 that the value of the company amounted to EUR 800,000. The court reduced this value to the amount of 375,000 euros, due to the intermediary, until the exit of the partner (which took place on 25.10.2013, i.e. four years after the signing of the agreement), financial crisis and other special circumstances, but also taking into account a fine imposed on the company by IKA. 

Cases such as the above are, however, the exception rather than the rule. In the majority of cases, there is neither an offer by a potential buyer to acquire the company or shares in the company nor a prior agreement between the partners on the value of the company, so the court is called upon to judge from scratch the value of the company and, consequently, the value of the outgoing or excluded partner's shareholding. 

Previously, partners who had exited or been excluded from a partnership and appealed to the courts invoked POL 1055/2003, which provided for a specific way of calculating the taxable value of the business, but after the entry into force of the Income Tax Code (ITA) from the year 2013, this is no longer applicable. Under the effective regime of the CCT, article 42 of the CCT and the interpretative POL 1032/2015, which states the following with regard to the determination of equity in partnerships, are crucial: "The equity of companies that keep simple books of account shall be taken as the equity as derived from the company's articles of association and amendments thereto. Account will also be taken of any purchases of fixed assets, subsidies which have not been included in the acquisition value of fixed assets and in the coverage of other costs, as well as other evidence of an increase in capital for which the company has not made an amendment to the articles of association'. However, the above method of calculation is only indicative, as it fails to capture the intangible value of the company. For this reason, moreover, even if the taxable value of the company is determined, the courts usually order an accounting expert opinion to determine the value of the company on the basis of the data mentioned above (see, for example, judgments 25229/2013 and 6422/2018 of the Thessaloniki Single Court of First Instance and judgment 2806/2017 of the Athens Single Court of First Instance). 

3. Who should the outgoing or excluded partner turn to for payment of the value of his/her participation?

According to the prevailing opinion in the case-law of the courts, the withdrawing or excluded partner can only claim payment of the value of his holding from the company from which he has withdrawn or excluded himself and not from the personally liable partners of that company. In other words, only the assets of the partnership are liable, not the assets of the other partners. However, this opinion has been widely criticised in theory and is not irrefutable. 

4. The decisive time of payment and determination of the value of the partnership interest to the outgoing or excluded partner

The provision of para. 2 of article 261 of the Act. 4072/2012 stipulates that: "In a partnership of unlimited duration, the value of the participation shall be paid to the outgoing partner at the end of the financial year". Therefore, if the outgoing partner and the other partners agree on the value of the participation of the former, the corresponding amount must be paid to the outgoing partner at the end of the financial year in which he/she declared his/her departure from the company. The same applies in the case of a limited partnership, provided that all the partners agree on the existence of good cause and on the calculation of the value of the outgoing partner's participation. Not infrequently, of course, the outgoing partner and the remaining partners will not agree on the value of the participation, in which case they will be taken to the courts (or to arbitration if there is a provision to that effect in the articles of association) to determine the value of the participation. In such cases, the outgoing partner may claim payment of the corresponding amount after the relevant court decision has been issued. 

Similarly, in the case of the expulsion of a partner from a partnership, which always requires the issuance of a court decision, payment of the value of the participation requires the prior issuance of a court decision ordering the partner's expulsion. 

On the other hand, the value of the participation must be determined at the time of the partner's exit or disqualification. Thus, in the case of an exit, the decisive factor in determining the value of the partnership and, by extension, the value of the partner's participation is the time when the outgoing partner's declaration of withdrawal from the partnership is received by the partnership and the other partners. Similarly, in the case of a partner's disqualification, the relevant time for determining the value of the disqualified partner's participation is the time of the decision of the court of first instance ordering the disqualification. 

5. Instead of an epilogue

As is the case with most private law issues, the calculation of the value of the partnership and of the partnership interest of an outgoing or disqualified partner is in principle a matter of agreement between the partner and the other partners and the relevant provisions of the partnership's articles of association. However, in the absence of an agreement between the partners or a relevant provision in the articles of association - which will usually be the rule - the court (or the arbitral tribunal, if recourse to arbitration has been agreed) will be called upon to determine the value of the partnership interest of the outgoing or excluded partner in accordance with the factors mentioned above.