Joint Stock Companies have to build an effective line of defense regarding although lawful, but generally unfair actions of minority shareholders

Greenmail or corporate blackmail (threats and efforts to create obstacles in functioning of a joint stock company with the aim of selling equity stake to the company-issuer under the price which considerably exceeds the market price), which in different forms has become quite widespread in our country, is compelling joint stock companies to develop an up-to-date and effective line of defense from such, although lawful, but generally unfair actions of minority shareholders.

The task is to paralyze

Among the most popular methods of creating such types of “problems” for joint stock companies (JSCs) is filing by minority shareholders of lawsuits on cancellation (invalidation) of decisions upheld by Supervisory Board of a certain JSC on conclusion of major transactions and invalidation of certain agreements. The claims take the basis on the fact that major JSCs (especially those established with foreign capital) do not always have a possibility to hold general meetings in execution of requirements posed by Article 70 of the Law of Ukraine “On joint stock companies” related to taking a decision on entering into major agreements or their further approval. In this connection corresponding obligations, as a rule, are placed onto a chief officer (management body) and onto the supervisory board of a JSC without introduction of amendments to the charter which is used as a basis for filing such lawsuits by shareholders practicing greenmail. Such actions pose threats not only in the form of losses and loss of business reputation, but also in the form of paralyzing all company’s activities. In case of obtaining such lawsuits a carefully crafted line of defense will not only save the company from unexpected overheads, but will also become a pre-emptive measure from further attacks of fellow specialists.

If, however, the case reached the court among the following merits of defense must be as follows.

No right

First and foremost we should focus attention on absence of the shareholders’ right to file the lawsuit of the mentioned nature to court. In particular, recommendations of the Presidium of the High Economic Court of Ukraine (the “HECU”) “On practices of application of legislation in the process of consideration of matters arising from corporate relations” No. 04-5/14 (item 2.2.1) as of December 28, 2007 and of the Decree issued by the Plenum of the Supreme Court of Ukraine (the “SCU”) “On consideration by the courts of corporate disputes” No. 13 (item 51) as of October 24, 2008 provide a conclusion that the law does not stipulate for a JSC shareholder’s right to file a lawsuit to court with the aim of protection of rights and interests outside boundaries of representation relations which constitutes a reason for dismissing the shareholder’s claims related to execution, introduction of amendments, termination or invalidation of agreements and contracts concluded with a Joint Stock Company. The said position was also approved by the SCU which upheld a corresponding resolution No. 8/219 as of April 18, 2011.

Thus, absence of the Power of Attorney issued by the JSC to a certain shareholder and no relevant provisions related to authorization rights in the company’s charter must serve as a ground for dismissal of the corresponding stated claims.

Analysis of the court practice gives evidence that courts had generally adhered to the mentioned legal position in the process of consideration of such category of disputes until the SCU upheld a resolution in the case No. 911/2089/14 as of January 21, 2015 in which it expressed totally controversial point of view – about availability of such a right of a JSC’s shareholder. However, with consideration for the fact that the claimant was an owner of 70% of shares of JSC such resolution cannot be considered to be a precedent for further application of legal norms as soon as this Article concerns greenmail measures used by minority shareholders whose share of corporate rights, as a rule, in a JSC is very low (less than 10%).

It must be mentioned that in the Law of Ukraine “On introduction of amendments to certain legislative acts of Ukraine on protection of investors’ rights” No. 289-VIII as of April 07, 2015 which introduced amendments to Article 28 of the Economic Procedure Code of Ukraine the legislator does not stipulated for the right of shareholders possessing less than 10% of the charter capital to lodge derivative lawsuits and represent interests of a JSC.

The amount of a shareholder’s share is also a factor estimated by the court in the process of consideration of such disputes from the point of the possibility of exerting real influence of a shareholder-claimant onto making a certain decision, in particular in the process of putting such matter to be reviewed by the General shareholders’ meeting. Corresponding positions were expressed by the HECU in its decisions in the cases No. 16-09/2817 as of April 14, 2011 and No. 910/18026/13 as of October 14, 2014.

Fact of violation/appeal

The following and not less important fact to be established by courts in these categories of disputes is availability or absence of fact of violation or appeal of the subjective material rights or lawful interests of a shareholder in protection of whose rights a lawsuit is lodged. A corresponding provision is stipulated by paragraphs 19, 39 of the decision of the Plenum of the Supreme Court of Ukraine “On consideration by the courts of corporate disputes” No. 13 as of October 24, 2008.

For the purpose of establishment of this fact one should rely on conclusions arrived at by the Constitutional Court of Ukraine in its decision No. № 18-рп/2004 as of December 01, 2004 as for the meaning of the term “legally protected interest”, namely – willingness (not a legal possibility) to use certain material and/or immaterial benefit within legal regulation, as well as a simple legitimate permit (being an independent object of judicial protection) determined by the general sense, objective and not directly mediated in the subjective right.

Simply said, it goes about real negative consequences suffered by the shareholder in connection with taking of a decision by the supervisory bard or execution of the agreement. Corresponding viewpoint was, in particular, expressed in the decisions of the HECU in the cases No. К14/198-10 as of March 15, 2015 and No. К2/045-11 as of November 06, 2012.

It means that having established availability of the subjective material right pertaining or legitimate interest (in protection of which the lawsuit was filed) to the person who lodged a lawsuit the court establishes availability or absence of the fact of violation or appeal and, correspondingly, upholds a decision on protection of the violated right or dismisses the claimant’s lawsuit if it establishes inconsistency and groundlessness of the stated claims.

So, various practices of consideration of such disputes exist today, but the aforementioned substantiations often constitute decisive points in the process of upholding court decisions. It needs to be noted that courts actually avoid using such wording as “abuse of rights” for denoting the reasons for dismissal of such types of lawsuits regardless of evident nature and aims of the shareholder. It could be possible that such tendency is related to absence of both practical and theoretical basis related to corporate blackmail.