The impact of marital community property regime on shares in a limited liability company

Introduction.

Upon entering into marriage, marital community property is created by operation of law, covering items acquired during the marriage by both spouses or one of them. This statutory regime, as defined in the Family and Guardianship Code, affects many aspects of economic life, including the rights and obligations associated with owning shares in a limited liability company or shares in a joint-stock company.

The purpose of this article is to highlight how marital community property affects the acquisition, disposal, and division of these assets.

1. General principles of marital community property.

1.1. Concept and scope of statutory community property.

Marital community property, known as statutory joint property of spouses, arises automatically upon marriage, unless the spouses concluded agreement regulating their property relations differently. Marital property includes property acquired during the marriage by one or both spouses. Assets not covered by statutory community property belong to the personal property of each spouse. Community property includes, in particular: remuneration received for work, income from other gainful activities, as well as income derived from both: community property and the personal property of each spouse. 

Key to this analysis is the presumption that any property acquired by one of the spouses during the period of the marital community property is part of the joint property, as ruled by the Supreme Court in its resolution of July 7, 2016 (ref. III CZP 32/16), stating that: "(...) there is a factual presumption that an asset acquired by one of the spouses during the period of the marital community property is part of the joint property of the spouses; this presumption may be rebutted by demonstrating that the acquisition was made with financial resources belongs to the personal assets."

This means that in the event of a dispute, e.g., in proceedings for the division of property, the spouse who acquired shares in a company has the burden of proving that the funds for their purchase came from his or her personal property (assets) and not from the joint property. 

1.2. Definition and elements of personal property.

Marital joint property does not include all of the spouses' assets. Each spouse continues to have their own personal property, which is not subject to division in the event of termination of the joint property regime. Pursuant to Article 33 of the Family and Guardianship Code, personal property includes assets acquired before the establishment of the statutory community property, as well as those acquired during its existence, but by inheritance, bequest, or donation, unless the testator or donor has decided otherwise. The personal property of each spouse also includes assets used exclusively to satisfy the personal needs of one of the spouses.

In the context of acquiring shares, the so-called principle of subrogation plays an important role. If shares are acquired with funds from personal property, then, by virtue of subrogation, they will also constitute the personal property of the purchaser, even though their purchase took place during the marriage. In such a situation, the purchase of shares does not require the consent of the other spouse, because the funds used to finance the purchase of the shares was not part of the spouses' joint property. For example, if one of the spouses purchased shares with money obtained from the sale of real estate that he or she owned before the marriage, those shares will become his or her personal property. 

1.3. Management of joint property.

Both spouses are obliged to cooperate in the management of joint property and may do so independently. However, the Family and Guardianship Code specifies activities that exceed the scope of ordinary management and therefore require the consent of the other spouse. Pursuant to Article 37 of the Family and Guardianship Code, such activities include:

• legal actions leading to the sale, encumbrance, or purchase of real estate or perpetual usufruct, as well as actions leading to the transfer of real estate for use or to derive benefits from it;
• legal actions leading to the sale, encumbrance, or purchase of a property right, the subject of which is a building or premises;
• legal actions leading to the sale, encumbrance, purchase for consideration, and leasing of a farm or enterprise;
• donations from joint property, with the exception of small donations that are customary.

A unilateral legal transaction made without the required consent of the other spouse is invalid. The validity of a contract concluded by one spouse without the required consent of the other depends on the confirmation of the contract by the other spouse.

This means that the above-mentioned actions for which the consent of the other spouse is required are devoid of legal effect from the outset in the absence of such consent.

1. Shares in a limited liability company in the context of marital property.

2.1. Acquisition of shares and the presumption of joint ownership.

According to the case law of the Supreme Court, shares in a limited liability company acquired during the period of marital joint property, from funds derived from joint property are part of that property. Although only the spouse who formally took up or acquired the shares is a partner in the limited liability company, these shares constitute the joint property of the spouses. This is a fundamental discrepancy between the entry in the National Court Register (KRS), which indicates only one partner, and the actual legal status. The fact of the entry in the National Court Register does not determine whether the shares belong to personal property, and in the event of a dispute over the division of joint property, their belonging to joint property will be presumed. 

2.2. Legal nature of shares: distinction between corporate and property rights.

In legal doctrine and in the case law of the Supreme Court, there is a concept of dividing the rights attached to shares into two categories: 

• Corporate rights: these are vested exclusively in the spouse who is formally a partner. They include the right to make decisions at the shareholders' meeting, the right to vote, the right to control the company's activities, and the right to dispose of shares. 
• Property rights: these are vested in both spouses, as shares in the company constitute part of the joint property and include, in particular, the right to dividends and the right to the value of the shares in the event of termination of the joint ownership.

The duality of rights presented above is a legal solution that protects the composition of the company while ensuring that the other spouse participates in the economic value of the assets.

2.3. Spouse's consent to dispose of shares.

A widely discussed issue is the requirement to obtain the consent of the other spouse for the sale of shares in a limited liability company. 

The doctrine indicates that such consent is not required if only shares are being sold, and not the entire enterprise. It is emphasized that Article 37 of the Family and Guardianship Code contains a closed list of activities for which the consent of the spouse is required for effective performance. These include, among others: the sale or purchase of real estate or perpetual usufruct, as well as the sale or encumbrance of an enterprise, and donations from joint property. The above list does not include the sale of shares in a limited liability company, and for this reason, legal doctrine indicates that the consent of the other spouse is not required for the effective sale of shares held by a spouse-partner in a limited liability company and belonging to the joint property.

However, it should be remembered that such consent will be required, inter alia, in the case of the sale of an enterprise as well as the donation of shares. Furthermore, it is also important to remember the provision of Article 36 (1) of the Family and Guardianship Code, according to which a spouse may object to the management of joint property intended by the other spouse, with the exception of activities in current everyday matters or aimed at satisfying the ordinary needs of the family or undertaken as part of gainful activity.

Such objection by the spouse is effective against the purchaser of the shares if he or she had the opportunity to familiarize himself or herself with it prior to the purchase of the shares. Therefore, only in the absence of an objection raised by the spouse is the spouse-partner entitled to dispose of the shares without the participation of the other spouse in such a transaction.

2.4. Impact of the termination of marital property regime on shares.

According to the resolution of the Supreme Court of July 7, 2016, (no. III CZP 32/16) if the contribution made to the company belongs to the joint property of the partner and his/her spouse, the share in the company acquired by the partner is also included in that joint property. As indicated above, in the event of the acquisition of shares from funds included in the joint property, the spouse of the partner is entitled to property rights resulting from the shares held (e.g., dividends).

The termination of statutory marital joint property, e.g., as a result of divorce or separation, results in the conversion of joint ownership of shares into fractional co-ownership and affects changes in the manner of managing the property. Fractional joint ownership is governed by the provisions of the Civil Code concerning fractional joint ownership, and not by the provisions of the Family Code concerning the joint property of spouses (joint ownership).

As a result of the property division proceedings, shares in a company of which only one of the spouses (former spouses) is a partner may be divided between them. It is therefore possible that these shares will go to the former spouse who is not a partner in the company. However, it should be remembered that only the property rights to the shares are divided, not the corporate rights. The court may, however, award the shares in their entirety to the existing partner, imposing on him or her the obligation to pay the other spouse. It is worth remembering that the value of the shares is determined on the date of termination of the joint property.

In order to protect company against uncontrolled changes in the composition of shareholders, the articles of association of a limited liability company may contain clauses limiting or excluding the entry of a shareholder's spouse into the company if the shares are subject to joint ownership. This is provided for in Article 183 (1) of the Commercial Companies Code.

Therefore, it is worth remembering that planning economic activities should always be preceded by a thorough legal analysis, taking into account the specifics of each case.

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