Supreme Court decision
A recent case from the Supreme Court sheds light on the question of whether a provision in a shareholders' agreement with legal effect can deviate from rights stipulated in the Companies Act. Looking beyond the specific facts of the case, it provides a general method with which to predict whether a provision in a shareholder's agreement is to be given legal effect.
It is not uncommon for a shareholders' agreement to include terms in direct opposition to a general rule of the act. In essence, this is the reason that such agreements are made – that is, to set the balance of power in a way better suited to the parties than that established by the act. This can be done by prescribing a unanimous decision on certain issues where a majority vote would otherwise normally suffice, or by establishing terms for a party's right to transfer shares that go beyond the options given in the act.
Nevertheless, it is commonly held that only the parties and not the company is bound by the shareholders' agreement, even if all shareholders are parties thereto. It is often stated that the relationship between the parties is governed by civil law, whereas the relationship between the parties and the company is governed by company law. However, such a division is a simplification and does not resolve all the issues where the agreement stipulates one thing and the act another. A recent Supreme Court case illustrates this point.
Two companies each owned half of the shares in a Swedish company. According to their shareholders' agreement, a party had the right, under certain conditions, to purchase all except of one share of the other party. A dispute arose and an arbitration award later established that the conditions in question had been met, so that one party was entitled to buy the other party's shares save for one.
Following the award, the new majority shareholder invoked Chapter 22 of the act, according to which a shareholder that holds more than nine-tenths of the shares in a company is entitled to buy out the remaining shares of the other shareholders. The minority shareholder disputed the claim and argued that the parties had waived the right to demand a complete buy out due to the provision in their agreement.
The lower courts held that the majority shareholder was entitled to buy the last share. The minority shareholder appealed to the Supreme Court.
Supreme Court decision
As a first step in its analysis, the court concluded that the right of minority buy-out exists as a safeguard for both the majority and minority shareholder, since the minority shareholder has an equal right to compel the majority shareholder to purchase its shares. The right could also be viewed as a necessary instrument to facilitate mergers and, thus, to serve the public interest in rational ownership on the market. Moreover, the right cannot legally be restricted in the company's articles of association, although as the court pointed out, the limitation in the present case was not established by the articles of association, but rather in the shareholders' agreement.
Reviewing the act's preparatory bills, the court found that although the legislature had acknowledged that shareholders are allowed to deviate from many provisions which are solely in their interest, it had explicitly stated that certain provisions were mandatory. Thus, the court concluded that the legislature's intention has been to let the act – and not the shareholder's agreement – govern the question of whether an agreed deviation is to be given legal effect.
The court found nothing specific in the preparatory bills regarding deviations in a shareholder's agreement from the provisions of Chapter 22 of the act. However, since the possibility to restrict the right to minority buy-out in advance would be in direct contradiction of its purpose (ie, to protect a minority shareholders, to facilitate mergers and to uphold the public interest of rational ownership on the market), the court concluded that a deviation could not be given legal effect in a buy-out dispute. Thus, the court found that the majority shareholder retained the right to buy out the minority shareholder's last share, even though it had contractually waived that right.
It is important, although not surprising, that the court held that the act governs the legal effect of a deviation. A different finding would, among other things, have allowed shareholders' agreements to create a situation in which one party could legally exempt itself from liability to pay damages for violations of the act.
Despite the court's emphasis on the fact that the judgment was made in relation to the legal effects in a buy-out dispute, the question arises as to whether the court's reasoning can be applied in other cases which arise in the grey area between civil and company law.
The answer is that it probably can. The buy-out situation does not differ from situations in which, for example, the shareholders' agreement deviates from the provisions of Chapter 18, Section 11 of the act regarding the right of a minority shareholder to request distribution of profits, or where a shareholders' agreement stipulates that one shareholder is entitled to vote for the other shareholder's shares. In both such cases, the parties would have to review the act's preparatory bills to find out whether they mention deviation. Failing this, the parties would be obliged to consider the exact purpose of the specific provision. Even where such considerations could lead to different conclusions being drawn based on the inclination of the party undertaking them, they would nevertheless make it easier to predict whether a provision in a shareholders' agreement is to be given legal effect. In this respect, the question as to whether a provision in a shareholder's agreement can deviate from rights stipulated in the act has become less complicated.
For further information on this topic please contact Bo Thomaeus at Gärde Wesslau Advokatbyrå by telephone (+46 8 587 240 00), fax (+46 8 587 240 01) or email ([email protected]).