YUST  /  Press-center  /  Media

Breach of shareholder agreements and ruling the management decisions invalid


Erika Kindsvater, Advocate of the Law Firm "YUST"

In compliance with the current legislation, a breach of a shareholder agreement may not be a base for ruling illegal the decisions of a JSC management. However, the draft of the amendments to the Civil Code stipulates such possibility regarding the decisions by the “economic company” management (clause 5 of Article 67.2) provided that all members were parties to the shareholder agreement at the moment of making said decision, and the ruling of the management decision invalid does not breach any rights and legally protected interests of any third parties.

This provision possesses a certain similarity to the position of the Supreme Federal Court (SFC) of Germany adopted in 1983 and 1986, which has not yet been clearly discarded. The SFC took the position that the decision of a general meeting of an LLC may be ruled invalid if it conforms to the charter but breaches the shareholder agreement entered into by all shareholders.

Agreements of the shareholders directly connected with the manner of voting were the subject of said SFC decisions. In the first case, the shareholders decided that the company would not participate in other (competing) companies, but afterwards a general shareholders’ meeting decided to participate. In another case, the decision by the general meeting went against the shareholder agreement, according to which the general director’s (Geschäftsführer) powers could only be terminated upon his consent.

The SFC’s opinion was widely criticized. The separation principle (Trennungsprinzip) of the corporate law was cited as an argument, which, according to the critics, allows for no exceptions. Those shareholders who wish to settle an issue in a manner obligatory for the company may, in the critics’ opinion, include the respective provision in the charter or take the appropriate decision at a general meeting. They have no other ways.

The next argument is: pursuant to Article 243 of the German Law on JSCs (also applicable to LLCs), a breach of “law” or “charter” is required in order to file the claim to rule the decision of the general shareholders’ meeting. There are similar norms in the Russian legislation (Article 43 of the LLC Law and clause 7 of Article 49 of the JSC Law), which, should the clause 5 of Article 67.2 of the draft changes to the Civil Code be adopted, will have to be harmonized with the new CC provisions.

The SFC based its decisions primarily on the economical nature of the process. In those cases, the shareholders who voted in compliance with the shareholder agreement could file against those shareholders that breach the covenant a claim to express their will (that is, vote) according to the agreed procedure. The Civil Procedural Code of Germany stipulates the fiction of expression of one’s will in its Article 894, for such claims.

According to the draft changes to the Civil Code (clause 5 of Article 67.2), the decisions by “management”, that is – not only of the general shareholders’ meetings, but also of the board of directors and the administration. Pursuant to clause 2 of Article 66 of the JSC Law and paragraph 2 of clause 1 of Article 41 of the LLC Law, a member of the board is not obliged to be a shareholder or a stockholder of the company, nor is a member of the administration obliged to. In such cases, they cannot be parties to a shareholder agreement and may even be unaware of its contents (as the parties to shareholder agreements, pursuant to clause 3 of Article 67.2 of the draft, must only inform the company of the fact of its execution). And clause 4 of Article 67.2 of the draft accentuates the obligation nature of such agreement. Pursuant to that clause, shareholder agreements establish no obligations for entities that are not parties to it.

Only the execution of a shareholder agreement between shareholders and said members of the board (administration) or between shareholders and the company itself as “other third parties” (clause 8 of Article 67.2 of the draft) is the way out of the situation. The limits set by paragraph 2 of clause 1 of Article 67.2 of the draft should be paid attention to, according to which shareholder agreements may not oblige its parties to vote under instructions by the company management.

The current legislation does not permit LLCs to act as parties of shareholder agreements (clause 3 of Article 8 of the LLC Law “founders (shareholders) may…”). However, the wording of the current JSC Law does not enable similar conclusion regarding the JSCs: “agreement… on peculiarities of exercising of the rights to shares”. JSC has those rights (even if limited), so the situation is debatable.

In Germany, obligation agreement between an economic company and its shareholders (stockholders) is allowed. Care should be exercised towards its contents, because, depending on the agreement’s subject and contents, it may be interpreted as a hidden agreement between ventures (Unternehmensvertrag, Articles 291 and 292 of the German Law on JSCs), it may transgress the limits allowed by corporate law or contain provisions that should be regulated in the charter. As a rule, an agreement with the company stipulates additional duties of the shareholders (stockholders) or limitation of the right to dispose of shares (equity).

The “partnership agreement” (Partnerschaftsvertrag) between the JSC and each shareholder was the subject of the judgment II ZR 80/10 by the SFC dated 22.01.2013. In such agreement, each shareholder undertakes to gratuitously transfer all his shares to the company in the event of termination of said agreement (also due to its termination by the company in due time).

The SFC left the issue of whether or not such method to oblige a shareholder was allowed open, because “in any case” the agreement between the JSC and a shareholder is invalid if it obliges the latter to transfer to the company his shares, which he bought, gratuitously and without being entitled for a corresponding compensation in the event of termination of contractual relations. The court regarded this as a breach of the constitutional right of property.

There is an opinion (shared by the Supreme Court of Bavaria) regarding such “tying” the shareholder to the JSC that such obligation covenant of a shareholder with the company is acceptable, in particular – when it is done with the purpose of keeping a certain circle of shareholders. For example, if shares were given to the company employees and employment has ceased, and the return of such shares to the company needed to be stipulated from the start.

The critics believe that, in such situation, the administration may define the composition of the general shareholders’ meeting (in addition to the legal possibility to condition the alienation of the shares by the agreement of the JSC) through option and the demand to return the shares, which is unacceptable.

For more details see here.

Back to list