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What may be agreed in shareholder agreements?

(27 Cdo 1873/2019)

All shareholders (and their lawyers) should be aware of a recent Supreme Court decision on the invalidity of individual provisions of shareholder agreements.

The Supreme Court stated that shareholders may not use a shareholder agreement to issue instructions to the board of directors on matters of business management. Such a provision continues to be considered invalid. Under the shareholder agreement, according to the Supreme Court, shareholders may undertake in discussions with members of the board of directors to recommend a specific solution to an issue within the scope of business management or present their opinions to the board of directors. In addition, under the shareholder agreement, shareholders may undertake to ensure that the board of directors shall take certain decisions in certain matters (liability for certain result). 

In other words, shareholders may legitimately undertake to intercede with the company board of directors (executive directors) in a matter within the scope of business management (obligation to intercede) or to ensure a particular outcome of a vote taken by the board of directors (executive directors) (obligation to guarantee a result), provided that individual members of the board (executive directors) will be permitted to proceed with due care and in compliance with applicable legal regulations and the founding documents. This judgment should therefore certainly be borne in mind when drafting shareholder agreements.

Is a shareholder entitled to receive an explanation if it does not attend a general meeting?

(27 Cdo 3812/2019)

The Supreme Court examined whether a shareholder submitting a written request for an explanation before the general meeting of a joint-stock company is entitled to such information, even if the shareholder had not attended the general meeting.

The Supreme Court ruled that a shareholder does not have such a right and justified the refusal on the grounds of the special nature of a public limited company and that it differs from a limited liability company. It was ruled that obtaining an explanation is a subjective right exercised by a shareholder in its own interest and not in the interest of the general meeting. The right to an explanation ensures that a shareholder is suitably informed when exercising its rights at a general meeting or to allow the shareholder to make a qualified assessment of matters discussed at the general meeting. The company must then provide an explanation to the shareholders at the meeting. The Supreme Court thus concluded that a shareholder who does not attend the general meeting is not entitled to receive an explanation.

When does the restriction on limited transferability of registered shares becomes legal effective?

(27 Cdo 2927/2019)

In this decision, the Supreme Court addressed whether, upon establishing a joint-stock company, a restriction on the transferability of registered shares specified in the articles of association produces legal effects (is effective) if such information is not recorded in the commercial register. The Court concluded that recording a restriction on the transferability of registered shares always has a constitutive effect, regardless of whether the restriction was contained in the articles of association upon the establishment of the company or appended to the articles of association only subsequently (by amending them). Whether the articles of association were amended upon the unanimous agreement of shareholders or by a resolution of the general meeting is insignificant. 

Until the restriction on the transferability of registered shares is recorded in the commercial register, the shares may be transferred without restriction. From a legal perspective, it is unimportant if anyone acquiring shares becomes aware that the articles of association contain an ineffective arrangement for limiting the transferability of registered shares. 

We recommend that joint-stock companies with limited transferability of registered shares, as specified in their articles of association, should check whether they have entered such information correctly in the commercial register.

The principles of fair trade and applying them in practice

(27 Cdo 996/2019)

The Supreme Court in this decision applied the basic principle of fairness in assessing the statutes of a housing cooperative. It ruled that if in a particular case a provision contradicted the principles of fair trade, such a regulation should not apply.

In general, it is up to the housing cooperative whether (and under which conditions) to approve an application and grant membership. The Supreme Court pointed out that the specific circumstances of a particular case cannot be overlooked. An applicant met all the conditions for membership of the housing cooperative. However, he did not reside at the address in question at the time because he was looking after his parents. The cooperative members were convinced that he was not using the property and thus rejected his membership application. In this situation, however, under the Supreme Court’s interpretation, the obligation of the cooperative to accept the applicant’s written application in these circumstances meets the requirement of fairness between parties. In addition, the Supreme Court stated that on the contrary, applying the provisions of the statutes of a housing cooperative, under which membership requires the consent of a members meeting and de facto leaves it to the discretion of the cooperative members, contradicts the need for fairness in this case. Such an arrangement on the part of the cooperative cannot, therefore, enjoy legal protection; the application must be assessed as if the consent of the members’ meeting was not necessary for granting membership.

AUTHORS

Janka Brezániová

Partner

 Prague

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David Marek

Associate

 Prague

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