Expulsion of a Partner for Cause in Limited Liability Companies: Formal Requirements and Asset Implications

This article analyzes the legal, procedural, and substantive requirements for the expulsion of a partner for just cause in limited liability companies under Brazilian law. Provided for in the Civil Code, this mechanism is designed to safeguard the continuity and stability of the company when a partner commits a serious breach that renders their continued presence untenable. The analysis addresses the legal foundations, the procedural steps required, the grounds constituting just cause, the financial implications of the expulsion, and prevailing judicial interpretations.

Limited liability companies are characterized by enduring and highly personal contractual relationships among partners, founded on mutual trust and cooperation in pursuing the company’s business activity. When this trust is broken due to conduct incompatible with the duties of loyalty and collaboration, Brazilian law allows for the expulsion of a partner for cause.

Though exceptional, this remedy is essential to maintaining the stability and continuity of the company, avoiding the burden of coexisting with behaviors harmful to the company’s purpose.

This article examines the legal and practical aspects of expulsion for just cause, its formal requirements, and the economic consequences for the excluded partner.

2. Legal Basis and Requirements for Expulsion for Just Cause

2.1 Civil Code Provision

Art. 1,085 – Unless otherwise provided in the articles of association, a partner who commits a serious breach of duties or exposes the company to considerable risk of harm may be expelled by amending the articles of association, if the expulsion is approved by a majority of the other partners, excluding the vote of the accused partner, and provided the right to a defense is guaranteed.

This constitutes a case of compulsory partial dissolution based on subjective and causal grounds, conditioned upon the occurrence of a serious breach and compliance with internal procedural due process.

3. Recognized Grounds for Just Cause

The law does not provide an exhaustive list of just cause events, which are instead defined through case law. Commonly accepted grounds include:

• Breach of the duty of loyalty or acts of unfair competition;

• Misappropriation of company funds or assets;

• Repeated conduct inconsistent with the company’s objectives;

• Systematic noncompliance with contractual or legal obligations;

• Willful obstruction of the company’s regular operations.

  
  

“Repeated conduct by a partner diverting clients to a competing company they own constitutes just cause for expulsion.” (TJSP, Civil Appeal 1004298-78.2020.8.26.0100, judgment on 10/24/2023)

4. Formal Requirements for the Expulsion Process

Expulsion for just cause must follow a formal procedure to ensure due process and avoid nullity:

4.1 Express provision in the articles of association

The articles may detail the procedure, including quorum and notice requirements.

4.2 Majority vote of partners

The vote of the accused partner is excluded (Civil Code, Art. 1,085).

4.3 Guarantee of the right to a defense

The accused partner must be given a reasonable period to respond and be allowed to present a defense at a partners’ meeting.

4.4 Registration of the expulsion

The amended articles reflecting the expulsion must be filed with the Commercial Registry, along with any adjustments to the company’s capital.

5. Asset Consequences of Expulsion: Valuation of Interests

The partner’s expulsion results in partial dissolution of the company and requires the valuation of their equity interest, in accordance with:

• The articles of association (e.g., book value, market value, or asset-based criteria);

• Art. 1,031 of the Civil Code (valuation reference date is the expulsion event);

• If there is disagreement, a judicial action for valuation may be filed, usually involving an accounting expert.

  
  

“A partner expelled for just cause is entitled to receive the value of their equity interest based on the company’s financial position on the expulsion date, as determined by the articles of association.” (STJ, REsp 1.199.121/SP, Justice Luis Felipe Salomão, judgment on 09/10/2020)

6. Consequences of Expulsion and Limits on Retention of Assets

• The expelled partner loses their status as a partner but retains the right to receive their equity interest;

• The company cannot withhold payment solely on the basis of the expulsion;

• Any losses caused by the expelled partner may be claimed in court if not offset by express contractual provisions;

• Clauses that impose automatic forfeiture of the partner’s entire interest are deemed null and void for violating Art. 421-A of the Civil Code and the social function of contracts.

  
  

7. Relevant Case Law

“The expulsion of a partner requires clear evidence of serious misconduct and compliance with corporate due process, under penalty of nullity.” (TJMG, Civil Appeal 1.0000.20.131621-2/001, judgment on 05/18/2022)

“Valuation of interests must reflect the true value of the partner’s share, even in cases of expulsion for just cause.” (TJSP, Civil Appeal 1019876-45.2021.8.26.0100, judgment on 12/06/2023)

“A contractual clause establishing complete forfeiture of the partner’s equity as a penalty for just cause expulsion is abusive and void.” (STJ, REsp 1.729.554/SP, Justice Paulo de Tarso Sanseverino, judgment on 08/12/2021)

8. Best Practices for Expelling a Partner for Just Cause

• Include specific clauses in the articles of association defining the procedure;

• Formalize all steps (notifications, meeting minutes, registry filings);

• Allow sufficient time for defense and ensure due process;

• Decide by lawful quorum, excluding the accused partner’s vote;

• Value the equity interest per contractual or legal criteria.

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9. Final Considerations

The expulsion of a partner for just cause is a severe measure that demands solid evidence of serious misconduct, strict adherence to procedural requirements, and careful handling of the resulting financial implications. Its goal is to preserve the continuity and integrity of the company by removing partners whose conduct undermines the business purpose or corporate harmony.

Preventive legal counsel is essential to ensure the validity of the process, uphold the right to a defense, and mitigate future disputes, particularly concerning the valuation and payment of the expelled partner’s equity interest.