Removal of a Shareholder for Unlawful Competition (Court Decision)

On March 29,  2017, the Qatari Court of First Instance has issued a new decision in a case of unfair competition between shareholders in a limited liability company. Qatar is a civil law jurisdiction and the concept of court precedent is not applied, although court decisions do carry weight. Despite the fact that this judgment does not have a binding effect, the method of application of the law in this case raises significant points that are noteworthy in this context.

In Case No. 4033/2016, the claimant was a Qatari shareholder owning 51% of the company’s shares with a foreign shareholder enjoying the remainder of the shares. The foreign shareholder participated in partnership of another company adopting the same type of commercial activity practiced by the company subject of the claim. The claimant alleged negligence and unfair competition against the foreign shareholder for such participation. Based on these allegations, the claimant approached the judiciary seeking 1) compensation for unfair competition; and 2) requesting removal of the foreign shareholder from the company for that reason.

Article 29 of Law No. 5 of 2002 regulating Commercial Companies (“Previous Law”), corresponding to Article 30 of Law No. 11 of 2015 on Commercial Companies (“New Law”) disallows shareholders to engage in business with a competing company, unless with the other shareholders’ consent. Should a shareholder engage in such activity, the law entitles the company to sue the shareholder in breach for compensation and to direct the benefits of the unlawful transactions undertaken by the violator to the account of the company. However, the Court rejected the claim partially on the basis that it was brought by the shareholder in his personal capacity, whereas the law grants the right to sue for unfair competition to the company.

Furthermore, in respect of the request for dismissal of the shareholder, neither the Previous Law nor the New Law address the issue of dismissal of shareholders in these circumstances. Hence, the Court relied on the general provisions of Law No. 22 of 2004 promulgating the Civil Law (“Civil Law”). Article 539 (1) of the Civil Law provides that, “Any partner may apply to the judiciary for a judgment removing any partner whose presence in the company has aroused an objection to the extension of its duration, or whose actions can be considered a cause justifying the dissolution of the company, or for any other serious reasons, on the basis that the company remains in existence among the other partners.”

However, the Court did not find that this provision applied in the circumstances as the article does not expressly identify unfair competition as a ground for removal of a shareholder from a company. The Court further reasoned that the request for removal of the shareholder should be rejected on the basis that a limited liability company must have at least two shareholders, and any decision to remove the foreign shareholder in this case would invalidate the company. Interestingly, under the New Law (which repealed the Previous Law) a limited liability company is permitted to have a single shareholder.

It is possible that in reaching its conclusion the Court relied on Article 5 of the Civil Law which states that:
Save as otherwise provided, a new law shall apply to all cases from such time as it comes into force. The consequences of actions or dispositions shall remain subject to the law applicable at the time of conclusion of such actions or dispositions, unless the provisions of the new law relate to public order, in which case the provisions of the new law shall apply to such consequences.

It is not clear at this time why the Court applied the requirements of the Previous Law in deciding whether to remove the foreign shareholder. However, given that this case has generated considerable discussion in legal circles, it is likely that an appeal is on the horizon.

To learn more, contact the authors:

Mahmoud Abuwasel

Sarrah El-Jaili