Among partners' most frequent complaints is that a company trades and shows profits yet they have received nothing for years. Management always justifies this by the need to expand, to build reserves, or by market conditions. The question is whether this is management's right or an abuse. The answer is that retaining profits may be entirely legitimate or may be a means of squeezing a partner into selling their interest cheaply. Distinguishing the two rests on objective criteria rather than on intentions. This article explains the position under Companies Law No. 1 of 2016.
Requirements for Distribution
- Genuine profits: distribution may be made only from actual realised profits per approved financial statements. Distributing from capital affects creditors' security and is unlawful.
- Approval of the statements: distribution follows the general assembly's approval of the financial statements and the auditor's report.
- Covering carried-forward losses: losses carried forward from earlier years must first be absorbed before any distribution.
- Statutory reserve: the law requires a proportion of net profits to be set aside annually to build a statutory reserve until it reaches a defined level of capital, a mandatory deduction admitting no discretion.
- Optional reserve: may be created by assembly resolution, and it is usually the focus of dispute as it is sometimes used as a pretext for withholding profits.
- Assembly resolution: distribution is a matter for the general assembly on management's proposal. A manager may neither distribute nor withhold of their own accord.
When Retention Is Legitimate
- Planned expansion: where the company is undertaking a defined expansion requiring funding, documented by studies and resolutions.
- Meeting obligations: existing debts or contractual commitments requiring liquidity.
- Existing risks: pending claims that may result in financial awards, or contingent liabilities requiring provision.
- Market conditions: an anticipated downturn warranting prudence.
- The test: the decision must serve the company's genuine interest, rest on stated and documented objective grounds, and be temporary rather than permanent.
When Retention Is Abusive
These are the indicators courts ordinarily rely on:
- Persistence without justification: withholding profits over successive years without a defined project or convincing explanation.
- Swollen reserves: accumulating reserves far exceeding the company's actual needs.
- Contrast with management remuneration: withholding profits from partners while paying high remuneration and allowances to the manager or connected persons, by far the clearest indicator.
- Related party contracts: channelling the company's profits to the majority through contracts with companies they own at non-market prices.
- Intent to squeeze: where retention coincides with an offer to buy the partner's interest at a low price, the true purpose becomes apparent.
- Lack of disclosure: refusing to provide written justifications or withholding financial statements strengthens the inference of abuse.
A Partner's Remedies
- Written request: begin with a formal request to management asking the reason for non-distribution and requiring written justification.
- Raising it at the assembly: requesting that distribution be placed on the general assembly agenda, a right of partners holding the prescribed proportion.
- Recording objection: where distribution is refused at the assembly, record your objection in the minutes with reasons, a practical condition of any later challenge.
- Challenging the resolution: a resolution withholding profits may be challenged where shown to have been taken as an abuse of the majority's power.
- Accounting claim and expert evidence: applying for an expert to examine the company's true financial position and report whether profits in fact permit distribution.
- Management accountability: where profits are shown to have been diverted through related party contracts, the file moves from a distribution dispute to accountability for mismanagement.
- Exit at a fair price: remains a practical objective in many cases, and establishing abuse strengthens the negotiation.
Practical Guidance
- Provide in the shareholders' agreement for a clear distribution policy, such as distributing a minimum proportion of net profits annually where the statutory conditions are met.
- Request and retain the financial statements annually, as comparing successive years reveals the pattern of retention.
- Watch the management remuneration line in the statements, the clearest mirror of the intention behind retention.
- Examine related party contracts, the channel most used to divert profits.
- Do not confine yourself to oral complaints. Record every demand in writing, the foundation of any claim.
- Do not wait many years, as limitation may affect claims for profits of earlier years.
Profit is the purpose of partnership, and withholding it persistently without justification empties the partnership of content and turns a partner into a funder without return. Yamnak Law Firm advises on distribution policies and drafting shareholders' agreements and conducts challenges to profit retention resolutions and management liability claims before the courts.
