Minority Shareholders.
Part A’: The Claim for Redemption Of Their Shares By The Société Anonyme.
The existence and exercise of minority rights – as described in an earlier article – “Minority and its rights in the Société Anonyme” and “Minority rights in the SA: the exceptional auditing” – are not always enough to achieve of the necessary balance in its (the minority’s) relationships with the company. Nor, in the end, in the company itself.
Sometimes “divorce” seems necessary …
The majority of shareholders exercising their voting rights are entitled (and rightly) to make critical decisions about the future of the company. Critical, in a logical sequence, also for the future of minorities. Sometimes even potentially damaging to the latter.
What are these potentially harmful decisions? And, if they are taken, the minority shareholders remain unprotected? And under what conditions would it be possible to implement a “divorce” between the company and the minority shareholders?
According to English actor Carrie Grant: “Divorce is a game played by lawyers”. And from this particular “divorce” they could not miss …
Causes For The Claim Of Shares Redemption
It is a fact that within the framework of democracy (and of the law of the Société Anonyme) the majority shareholders are the decision makers. Sometimes, however, these same decisions could be assessed as making it “in an obvious manner, particularly unprofitable” to retain the minority shareholders in the company (Article 45 par.1, section an of the l. 4548/2019). The assessment, of course, belongs to the minority shareholders themselves. The latter will exercise their statutory rights if they adopt this position.
The Law on the SAs (Article 45 par.2) recognizes as potentially harmful to minority shareholders decisions concerning: (a) the transfer of the registered office of the company to another State; (b) the introduction of restrictions on the transfer of shares; (c) the change of corporate purpose and finally (d) any other event which, according to the company’s articles of association, activates respective rights of the respective shareholders. In the latter case, however, it is necessary to provide for a time limit for their exercise.
The “Way Out” Of Minority Shareholders And The Relevant Conditions For The Shares Redemption Claim
In the event that any of the above events occurs, the law provides (significant) protection to minority shareholders: they are entitled to address to the competent court asking for the redemption of their shares by the company (Article 45 par.1: “redemption by right”-internationally known under the Anglo-Saxon term as sell-out). It imposes, however, a double condition on the applicants (and claiming to be protected): Firstly, there having been represented in the General Meeting which took the disputed decisions and, on the other, their opposition. Possible absence from the relevant General Meeting, voting in favor of the relevant decision or abstaining from the vote, it removes the aforementioned right (i.e. to appeal to the Court asking for the redemption of their shares). However, if a statutory provision refers to an event not related to a decision of the General Meeting, this (double) condition does not stand.
The term within which “the injured” minority shareholder must “take action” – i.e. bring the claim and exercise his / her right – is three months from the completion of the amendment of the articles of association. This time limit applies in cases of transfer of the company’s registered office to another state, of the introduction of restrictions on the transfer of shares and the change of the corporate purpose. In the other cases provided for by the Articles of Association, the deadlines indicated therein shall apply.
The Case Of Introducing Restrictions On The Transfer Of Shares
The company’s interest requires that the company’s continuity be safeguarded. And this is sometimes, to a considerable extent, dependent on its shareholder structure. The introduction of restrictions on the transfer of shares sometimes proves to be crucial (refer to the article on Restricted Shares). The relevant provisions in the Articles of Association at the time of the establishment of the company appear to be a “sine qua non” element to ensure the relations between the shareholders and the achievement of the corporate purpose.
In the vast majority of cases, unfortunately, such statutory restrictions are not provided for when establishing the company. When the need is identified subsequently, the majority shareholders are in fact able to impose the necessary statutory change. However, the minority shareholders are then (reasonably) entitled to request the redemption of their shares and, ultimately, their exit from the company. It is for the court to decide on the reasonableness of the request of the minority shareholders and, in particular, “if their stay in the minority becomes manifestly unprofitable”. In other words: minor restrictions on the transfer of shares could not justify meeting the request of minority shareholders.
However, for the cases where the necessary restrictions on the transfer of the shares have been provided since the company’s establishment, there is no reason for the corresponding minority shareholders’ rights.
The Case Of Modifying The Company’s Purpose
A similar assessment will, of course, be made by the Court even if the minority shareholder complains (and exercises his/her rights) due to a change in the corporate purpose. It would reasonably be considered to be particularly unprofitable for the applicant to convert, for example, a holding company into a CD production company. On the other hand, it would not be possible to (severely) support the minority shareholder requesting the redemption of his shares from a (painless) expansion of corporate activities.
The Court’s Judgment On The Claim For Shares Redemption
The minority shareholder’s claim for the redemption of its shares by the company is assessed by the competent court (Article 45 par.4). The latter is to determine whether the conditions laid down by the law and the substantive merits of the applicant’s arguments are fulfilled. If the claim is accepted, the Court shall determine the fair and reasonable consideration (in exchange for the redemption of the minority shares) and the terms of payment. In determining the price, the value of the company is taken into account. It is logically expected (and not only legally permissible) to request a relevant expert report, which is usually carried out by two auditors- chartered accountants or an auditing firm. This expert opinion is also the one to evaluate both sides’ arguments.
The court decision is always binding on the company (Article 45 par.5). In the event of the fault being breached within the time limit set by the court order, it may be decided the company’s dissolution.
However, the judgment is not binding on the requesting shareholder. If the price to be determined by the court decision is not evaluated by the applicant as satisfactory, it is entitled to refuse to complete the relevant procedure (transfer of its shares to the company). In that case, of course, he/she is charged with the costs of the relevant proceedings.
In Conclusion
Coexistence in life is not always easy – possibly once and unacceptable. Respectively in business – much more when particularly important (sometimes) economic interests are at stake. The law recognizes the minority shareholder’s right to ask for “dissolution” and for “compensation” by the company when certain important conditions are met. It is, however, particularly important to stress that the importance of the Articles of Association is once again as distinct. Its provisions should either take place in a timely manner (i.e. when the company is established) or in a way that does not affect minority shareholders (unless the aim is precise to affect their rights) …
There is no doubt that the specific legislation is a means of protecting minority shareholders. But as this divorce, as already mentioned, “is a game played by lawyers”, it is likely to become a weapon, important in the hands of the majority.
Particular attention, therefore, in both the articles of association and the lawyers …
Stavros Koumentakis
Senior Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (May 5th, 2019).
