In a previous article, we were concerned with the election of the members of the Board of Directors by the General Assembly (: rule). We pointed out, however, that this specific rule is not without exceptions. On those exceptions: the present article.
Appointment of the First Board of Directors in the Initial Articles of Association
An exception to the rule of the election of the Board of Directors by the General Assembly is, first of all, the case of the appointment of the first Board of Directors in the initial statute of the SA (in essence, by the founders of the SA – art. 78 §2, section a’ and §117 2 c. c.). Its term of office will last until the first regular General Assembly, unless otherwise (and specifically) provided for by the statute. The first Board of Directors can also be elected by a universal and without an invitation to the shareholders General Assembly (art. 121 §5, as expressly provided for in art. 78 §2 section b), by signing the minutes of the General Assembly without a meeting (art. 136) or by court decision (art. 69 of the Civil Code, as expressly provided in art. 78 §2 ed. b’).
Direct Appointment of Member(s) by Shareholder
An exception to the rule of election of the Board of Directors by the General Assembly is (also) the personal right to directly appoint a member/members of the Board of Directors. The specific right can be granted to one or more shareholders of the SA (art. 79) – by way of derogation from the principle of equality of shareholders (art. 36 §2). In this case, the representation of the minority in the management of the SA is guaranteed. Also, possibility aids in attracting investors: the participants in the Board of Directors have, moreover, a wider right to information than that of the minority shareholders (see art. 141 §§6 & 7 and art. 142 §4). Said right is non-transferable and non-inheritable-unless otherwise provided by the articles of association; it also is waivable.
Prerequisites
A necessary condition for the granting of the right to directly appoint a member/members of the Board of Directors is (apart from the shareholder status) the relevant statutory provision. It is possible for the articles of association to specify by name the bearer of the relevant right or the qualities or characteristics they must bear (e.g. a minimum percentage of participation in the share capital). It is necessary, in general, to determine the conditions for its exercise; in particular, with regard to the percentage of participation of the shareholder in the capital and the declaration of appointment (art. 79 §1 in fine).
This right can be granted individually to a shareholder(s) or, jointly, to several of them. In the latter case, a joint act of the beneficiaries is required for the appointment of a member/members of the Board of Directors-obviously the same goes for their revocation (art. 79 §5).
The relevant statutory provision may be initial or consequential. In the latter case, an increased quorum and a majority is required at the General Assembly that will decide it (similar to the case of preferred shares – art. 36 §6). According to others, unanimity is required (invoking the proportional application of art. 89, sec. b΄ of the Civil Code)
In any case: this right cannot be revoked without the consent of its beneficiary.
Restrictions
The number of members of the Board of Directors that can be appointed directly, individually or jointly, by a shareholder/shareholders cannot exceed 2/5 of the total number of members of the Board of Directors (art. 79 §1, section a). According to the articles of association, the relevant ratio is maintained even in the event of a change in the number of members of the Board of Directors (art. 79 §4). The other members of the Board of Directors are elected by the General Assembly.
Mode of Exercise
The exercise of said right by the beneficiary-shareholder takes place before the election of the Board of Directors by the General Assembly. The latter, in case of direct appointment, is limited to the election of the remaining members. Shareholder(s) who exercise the right in question shall notify the appointment of the members of the Board of Directors in the company at least three full days before the meeting of the said General Assembly; and, in fact, they do not participate in the election of the rest of the Board of Directors (art. 79 §2). Their shares, respectively, are not counted in the formation of quorum and majority.
There is no legislative provision for the cases of the General Assembly conducted without a formal invitation of the shareholders (art. 121 §5) and the signing of the minutes of the General Assembly (art. 136). However, the non-observance of the above three-day deadline in these cases should be accepted. Also, the simple, relevant, declaration of the beneficiary-shareholder immediately before the election of the Board of Directors.
The shareholder-holder of the right to directly appoint a member of the Board of Directors may not exercise their specific right. In this case they will normally participate in the General Assembly for the election of the Board of Directors.
Revocation
The directly appointed members of the Board of Directors are also freely revoked – at any time – by the holder of the relevant right (art. 79 §3). The latter, in fact, may appoint a new member to replace the revoked one. If they fail or are late to do so, the Board normally operates with its other members – as long as there are not less than three.
If there is a serious reason on the person of the appointed member regarding their incompetence (e.g. non-fulfillment of their duties), shareholders (other than those who appointed them) may legally request their revocation. A necessary prerequisite is that they represent at least 1/10 of the paid-up capital. The relevant judicial process is developed in the framework of the ‘ex parte’ proceedings.
Replacement of (Incomplete) BoD
Another exception to the rule of election of the Board of Directors by the General Assembly is (also) that of the election of a member, by the Board itself, in case of an incomplete (“stump”) Board (art. 82 §1 and 117 §2, para. d)). If there is resignation or death or in any other way loss of the status of a member or of members of the Board, the latter may elect their replacement for the remainder of their term. A relevant statutory provision is not required (see Memorandum to law 4548/2018 on art. 82). Any powers of the replaced are not automatically transferred to their replacement.
Prerequisites
For this election on its part, the following are required (cumulatively): (a) Loss of Member Status, (b) Absence (:non-election) of Substitute Members by the General Assembly (according to article 81) and (c) Legal Composition of the Board (: its remaining members not to be less than three)
Publicity & Notice of Decision
The decision of the election, on the one hand, is submitted to the Business Registry in a declaratory manner (art. 82 §1 in fine) on the other hand, it should be announced at the next General Assembly. The GA can replace the elected member/members, even if there is no relevant item on the agenda (art. 82 §1 in fine).
Incomplete Board Continuation Clause of the Articles of Association
According to the law, a statutory provision for the continuation of the operation of the Board of Directors without replacement of its missing members is permissible (art. 82 §2). As long as the remaining members are more than half of those elected/appointed and not less than three.
Convocation of General Assembly by Incomplete Board of Directors
The members of the incomplete Board of Directors are, however, able to convene a General Assembly with the sole purpose of electing a new Board of Directors – even if they are less than three (art. 82 §3).
Judicial Appointment of the Board of Directors
The last exception to the rule of the election of the Board of Directors by the General Assembly is their appointment by court decision. In addition, the law on SAs refers to the relevant possibility, in case the first board of directors is not defined by the articles of association (art. 78 §2, sec. b΄).
Appointment of temporary administration by virtue of a court decision is imposed (art. 69 CC) as a last resort, in case of “lack of management”; specifically, when: (a) the persons required for the administration of the legal entity are missing or (b) interests conflict between the administration and the counterparts of the legal entity.
Such an appointment can be decided by the court following the application of anyone with a legal interest – during the process of ‘ex parte’ proceedings (art. 786 of the Code of Civil Procedure).
Regarding, in particular, the aforementioned prerequisites:
(a) Case of Absence of Management: It occurs in cases where no members of the Board of Directors are appointed or they have resigned or a member is absent (e.g. due to death or illness). In the cases, also, of the election of the Board of Directors with an invalid decision as well as (in the right opinion) when there is a fictitious lack of management (e.g. refusal to exercise duties by the members).
The appointment of a temporary administration by a court decision is significantly limited, given the provisions of the law on SAs. And this is because, before the legal action, it is possible: to replace the missing members (art. 81) or to elect others from the Board itself (art. 82 §2). Also, the continuation of the operation of the incomplete Board of Directors in the context of the relevant statutory provision (art. 82 §2). It is possible, in any case, to convene a General Assembly by the remaining members of the Board of Directors for the purpose of electing a new Board of Directors (art. 82 §3).
If a request for appointment is made on the basis of one of the above-mentioned cases, the court appoints all the members of the temporary Board of Directors – even if only some of its members have dropped out. Consequently, a mixed temporary Board of Directors, already existing of the judicially appointed members, is not formed. The temporary Board of Directors must proceed, based on what the court decision will determine, to immediately convene a General Assembly for the election of a new Board of Directors.
(b) Case of Conflict of Interests: Occurs in cases where the individual interests of the member of the Board of Directors are contrary to those of the SA. Or takes advantage of business opportunities for their own benefit or the benefit of a third party at the expense of the SA.
In this case, judicial involvement is significantly limited (according to article 69 CC) – given the provisions of the law on SAs: In the context of the duty of loyalty, a member of the board of directors is not entitled to vote on matters in which there is a conflict of interest with their company of the same or related persons (97 §3). It is also possible for the member in question to be replaced (provided this is provided for in the act of election or appointment of the replacement – art. 81 §2).
However, once a relevant application for appointment has taken place, the court appoints (in the most correct opinion) as many members of the Board of Directors as are prevented by the conflict of interest from performing their duties. The temporary administration, in this case, carries out those acts for the performance of which the members being replaced are prevented and/or those, specifically, designated by the court.
The (well-known) rule of electing the Board of Directors by the SA’s General Assembly has particularly interesting exceptions: the appointment of the first Board of Directors (usually by the articles of association), the direct appointment of member(s) by a shareholder or/shareholders, the replacement of absent members by the (“stump”) Board, the appointment of a temporary Board based on a court order. However, the specific exceptions are (in addition to being interesting, also) particularly important – potentially, in fact, problematic: they do not only ensure the smooth operation of the SA, but they also may, under certain conditions, overturn important balances in the management of the company – possibly also the shareholders balances. Therefore, we should all be particularly careful when managing them.
Important issues arise (also) regarding the eligibility and defects in the appointment of the members of the Board of Directors. We will look into them, however, due to their extent and seriousness, in our next article.-
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (December 18th, 2022).
Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.