Tarek Farran Aline Saade May 28 2019 Appeal court rules on shareholders' right to file claims against companies, chairs and directors Farran Law Firm | Litigation - Lebanon Tarek Farran, Aline Saade Litigation FactsDecisionsIn its decision in Mahasni v Eden Rock SAL (June 2016), the Beirut Appeal Court highlighted the requirements that shareholders must meet in order to submit claims against their company or its chair or directors.FactsMr Mahasni – who held 12,417 bearer shares in real estate and tourism company Eden Rock SAL – submitted a lawsuit before the Beirut First-Instance Court (ruling on commercial matters) against:the company;its chair;members of its board of directors; andvarious other parties.Mahasni claimed that the chair had acted beyond his powers by entering into a development, construction and forward sale agreement. In particular, Mahasni claimed as follows:The transaction had been entered into on 19 September 2011, but he had not been informed of it until the shareholders' general assembly on 18 November 2011, during which the transaction had been approved.The transaction had concerned a development and construction project, but the chair was empowered to conclude only sales transactions.The selling price had been below the fair market price and was to be collected by Eden Rock in instalments over five years.The transaction as described had enormous liabilities, risks and tax implications for Eden Rock.The claimant asked the court to, among other things, annul the transaction and the resolutions adopted during the 18 November 2011 shareholders' general assembly based on the following grounds:The chair had exceeded the powers granted to him by the board of directors under Article 157 of the Commercial Code.The directors and the chair had breached the law and Eden Rock's bylaws and had committed fraud by hiding the transaction from the shareholders. Therefore, they were liable for such behaviour pursuant to Articles 166 and 168 of the Commercial Code.The directors were also liable towards the shareholders for their administrative conduct pursuant to Article 167 of the Commercial Code, as the transaction had enormous liabilities, risks and tax implications for Eden Rock.DecisionsFirst-instance court decisionThe Beirut First-Instance Court examined the two kinds of lawsuit which shareholders can file against their company or its chair or directors.Individual actionsArticle 166 of the Commercial Code stipulates that any shareholder or third party can file a lawsuit against a company or its chair or board of directors in the case of fraud or a breach of the law or the company's bylaws which results in damage. However, Article 166 also provides that such damage must:directly affect the shareholder or third party; andbe distinct from damage which may affect the company's interests.In the present case, the court resolved that Mahasni had failed to prove that he had incurred specific damages as a shareholder, and that his claimed damages (although not proven) were the same as those which could be caused to the company. Therefore, the court rejected Mahasni's claim based on the requirements for individual actions set out in Article 166 of the Commercial Code.Company actionsArticles 167 and 168 of the Commercial Code stipulate that any shareholder can file a lawsuit against a company's chair or directors when any of the latter commit an administrative error. However, these articles also provide that such a suit must, in principle, be filed by the company. Where this is not the case, the shareholders can file the suit in lieu of the company on its behalf. Further, Articles 167 and 168 provide that the compensation claimed by shareholders in such cases will be restricted to the amount of their participation in the company's interest.Based on the above, the court resolved that since a company action must be filed against a company's chair or directors in certain circumstances, its object cannot be extended to include a claimant's right to request the cancellation of an agreement signed by the company and a third party. It therefore rejected Mahasni's claim based on the requirements for company actions set out in Articles 167 and 168 of the Commercial Code.Further, the court resolved that under Article 157 of the Commercial Code, only a company has the right to request the cancellation of an agreement between it and a third party. Such right cannot be transferred or conveyed to the company's shareholders in exercising its action.Appeal court decisionThe Beirut Appeal Court confirmed the first-instance court's decision and added that shareholders are, in principle, entitled to preserve their personal rights which derive from their participation in a company by exercising their voting right at shareholders' general assemblies.In addition to the rights granted to shareholders under Article 192 of the Commercial Code, which enable them to challenge general assembly resolutions, their personal rights are further protected by their ability to challenge the company's management through an individual or company action. However, in either case, a shareholder's claim should be restricted to the damage which they have personally suffered and limited to their participation in the company.For further information on this topic please contact Tarek Farran or Aline Saade at Farran Law Firm by telephone (+961 1 426 174) or email ([email protected] or [email protected]). The Farran Law Firm website can be accessed at www.farranlaw.com.