Abusive corporate agreements and minority obstructionism

The majority shareholders cannot impose any agreement within the company to the detriment of the minority and the minority shareholders cannot, in turn, obstruct the normal functioning of the company.

One of the principles of company law is the majority principle, which means that decisions within the Boards of Directors of commercial companies are taken by majority vote. However, this principle should not be applied absolutely and the legal system establishes a series of limitations and corrective measures to prevent these decisions by the majority of shareholders from being imposed in some cases to the detriment of the minority shareholder, i.e. the one who has a smaller percentage of the company’s share capital and therefore has a lower percentage of vote and, in short, less possibility of influencing the company.

It is not uncommon for the majority of the shareholders in a Board to take a series of decisions that are at least debatable, many of which may be taken with manifest abuse of rights, on some occasions, and on others are taken in a more sibiline manner, but not in a less abusive manner.

An example of the former would be those cases in which disproportionate remuneration is established for company directors who are clearly linked to a majority block of shareholders, or in which disproportionate benefits are recognised for related parties, so that the company’s assets are displaced in favour of those parties to the detriment of the company itself and the minority shareholder, preventing, for example, the distribution of dividends as a result of that displacement of assets. These situations may also be detrimental to the minority shareholder when he is systematically deprived of the right to information for the correct exercise of his voting rights, so that he is gradually excluded from company management or when there are unjustified dismissals of directors who are related or proposed by a minority shareholder.

In other cases, the abusive nature of the majority is less visible, but no less damaging. A clear example of this type of situation can be found in the planned increases in share capital, which are expressly designed to dilute the minority shareholder’s share of the company’s capital, and which are carried out under conditions that make it difficult or impossible, depending on the case, for the minority shareholder to exercise his or her preferential acquisition right when subscribing for or taking over the new shares or holdings that are to be issued as a result of the capital increase. As a result of this agreement to increase capital, the minority shareholder will have an even smaller percentage of the share capital in favour of the majority shareholder, who will see his position strengthened even further, to the detriment of the minority shareholders, who may see their share of the company’s economic results drastically reduced, as well as their voting rights and, consequently, their decision-making power in the company.

The same situation may arise in the event of structural changes in the companies. For example, in a merger by acquisition, where one company is taken over by another and the shareholders of the former are integrated into the latter under the conditions set out in the merger agreement. In these cases, the position of the shareholder in the new company (acquiring company) will be determined, essentially, by the exchange ratio set between the shares or holdings of the acquired company and the acquiring company, a disproportionate exchange ratio often being set at the expense of the shareholder of the acquired company (generally a minority), so that the latter will have a smaller holding in the company after the merger.

In all these cases the law provides, as indicated, for corrective measures. In this sense, article 204.1 of the Law on Corporations establishes “corporate resolutions that are contrary to the law, oppose the articles of association or the regulations of the board of directors of the company or harm the corporate interest for the benefit of one or more partners or third parties may be challenged. Injury to the social interest also occurs when the agreement, even if it does not cause damage to the social patrimony, is imposed in an abusive manner by the majority. It is understood that the agreement is imposed in an abusive manner when, without responding to a reasonable need of the company, it is adopted by the majority in its own interest and to the unjustified detriment of the other partners”

Therefore, in all these cases it will be essential to prove the non-neediness of the agreement adopted or the particular interest of the majority to the detriment of the minority partner in order to guarantee the viability of the challenge action.

On the other hand, abuses in the corporate sphere are not limited to impositions by the majority, but the minority partner may also carry out acts that may be detrimental to the management of the company, as is not so uncommon in companies with a limited number of partners where there is open conflict between them. These cases include, for example, the continuous and uninterrupted request for corporate information, the unjustified or arbitrary blocking of agreements that, for example, require a majority of more than 50% of the share capital, continuous requests for the convening of meetings without any appreciable corporate interest, etc.

The position of minority shareholders in these cases is said to be unfair and contrary to the so-called “social interest”. Both in these cases and in the case of abuse of the position of the majority shareholders, as we have indicated, there are measures and resources to prevent the abusive agreement from being consumed or the permanent hindrance of company management.

In AddVANTE’s commercial litigation department we have extensive experience in corporate conflicts of all kinds, both in defence of the company’s social interest and of the minority partner. In all these cases it is essential to be properly advised to avoid the frustration of the company’s decision-making in some cases or the injury of the injured minority partner in others.