Bad Faith in Challenging Company Resolutions (2020)

When is there bad faith in challenging corporate resolutions?

 Let’s imagine for a moment. The Partners’ agreement of a limited company provides that a capital increase must be adopted with the favorable vote of 75% of the capital. But this agreement is not reflected in the articles of association. In fact, the Articles of Association require the favorable vote of 51% of the capital.

Now suppose that, a proposal is made to increase the capital of the company. And that the Board agrees to its dismissal with a 60% vote in favor and a 40% vote against.

Would it be possible to challenge the agreement rejecting that proposal? It is true that the agreement reaches the Articles of Association’s provisions. But the agreement does not comply with the provisions of the Partners’ Agreement.

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Is there bad faith in challenging corporate resolutions?

 As a preliminary point, it should be recalled that the Parasocial Pacts are agreements between partners. Through these Pacts, the intention is to regulate (with a binding character) certain aspects of their relations related to the company’s life. And all of this, apart from the channels specifically provided for this purpose in the Law and the Articles of Association. Today nobody doubts the validity of the Parasocial Pacts. The problem is usually connected with their effectiveness. Especially, when such Agreements are not implemented in the Articles of Association. There is then a contradiction between the former and the latter.

This is the case of challenging corporate resolutions adopted by the Shareholders’ Meeting or by the Board. And the only basis for the challenge is that such resolutions are contrary to a Shareholders’ Agreement.

In this sense, there is a large and reiterated jurisprudence of the Supreme Court. This jurisprudence establishes that the infringement of a Parasocial Agreement is not enough for the annulment of a social agreement. In order to consider a challenge to a shareholders’ agreement, it is necessary to prove that such agreement: (1) infringes the Parasocial Agreement, (2) the law, (3) the statutes. Or that the agreement infringes the interest of the company, benefiting one or more partners or third parties.

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Consequences of the nullity of corporate resolutions

The action to contest the social agreements expires within one year. However, when the agreements are contrary to public order, the action will not expire nor will it be time-barred.

In view of the above, the recent Sentence of the Supreme Court (of 25 February 2016) is interesting. This ruling analyzes the opposite case to the one being judged:

Challenging corporate resolutions adopted in compliance with a Parasocial Pact, because such Pact was not included in the articles of association, therefore resulting contrary to the articles of association and the law.

1. One of the partners transfers the ownership of its shares in two companies (A and B).
2. All partners accept in writing. The partners accept that the seller reserves the lifetime usufruct of the sold shares. The bare owner retain all rights inherent in membership. In particular, the right to vote at meetings.
3. Company A does not have any statutory regulations regarding the usufruct of shares. The law states that in such cases the dividends correspond to the usufructuary. All other shareholder rights, including voting rights, are held by the bare owner.
4. Regarding company B, its articles of association state differently. In case of usufruct, the voting rights correspond to the owner.
5. At the meetings of both companies, certain agreements are approved with the vote of several partners. And of the usufructuary.
6. The partner who voted against such agreements files a challenge. He does so on the grounds that the resolutions were approved with the vote in favor not only of certain partners, but also of the seller-user, which is contrary to the articles of association and the law (as indicated in points c) and d) above.

In view of the foregoing, first the Second Instance Court and then the Supreme Court, dismissed the challenge formulated as being contrary to good faith.

Particularly, the commented Judgment points out textually:

“It infringes the requirements of good faith a shareholder who has given his consent to legal transactions, which resulted in a certain distribution of shares and company holdings, in which he obtained advantages (…) and in which a certain regime was agreed for the voting rights associated with those shares and shareholdings (attribution to the usufructuary of the transferred shares and company holdings) when he challenges the company resolutions approved at the meeting in which those voting rights were used as agreed.

Those who, together with the plaintiff, were parties to this omnilateral parasocial agreement [signed by all the partners composing the capital] and constitute the only personal substratum of the companies, could legitimately ensure that the plaintiff’s conduct complied with the regulations established in the parasocial agreement”.

In conclusion: When the corporate agreement has complied with the Parasocial Pact, the intervention of the partner in said Pact may serve, together with the other circumstances of the case, as a criterion to judge whether the performance of the partner challenging the agreement respects the requirements of good faith, being this circumstance, a determining factor when estimating or not the challenge in question.

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The dissolution of a Company due to the paralysis of its corporate bodies.