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Minority shareholder protection

The Slovak Supreme Court recently caught public attention when it rendered a judgement significantly enhancing the interpretation of corporate governance rules towards increased protection of minority shareholders.

The legal basis of rules against the abuse of shareholders' rights can be found in the Commercial Code. According to its provisions, the misuse of shareholders' rights, particularly the misuse of the majority or minority of voting rights in the company, shall be prohibited. In addition, conduct that disadvantages any of the shareholders in an abusive manner shall be forbidden.

Up to the present, these rules seemed not to be effectively reflected in the Slovak corporate environment. Even though squeeze-out and sell-out were introduced in the Slovak Republic, they proved to be of very limited use as they apply only to companies with shares quoted on the regulated securities markets.

The merits of the case referred to above relate to a company that was originally widely held. After a private equity investor acquired the majority stake, the process of the exclusion of minority shareholders began. Following a very common practice in Slovakia, the company changed its legal form from a joint-stock company to a cooperative and adopted new articles of association, according to which each member of the cooperative became obliged, under sanction of expulsion, to attend general (members´) meetings.

The expulsions were later challenged by several minority shareholders in separate lawsuits, one of them ending at the Supreme Court, which finally ruled that a cooperative controlled by a majority member may not compel its members to attend such general meetings, as their participation is merely a right, the non-exercising of which cannot be penalised.

The court, in its reasoning as obiter dictum, argued that the expulsion of minority members for not attending the general meetings was not justified, also in view of the fact that the date of the general meetings could be known to the members only through an announcement in the press and also because the general meetings were convened very frequently. In fact, the cooperative had tried everything possible to ensure that as few minority members attended such meetings as possible (it avoided sending direct invitations, held meetings only during business hours and limited the possibility of excusing absences, among other things).

Clearly, in light of this recent judgment, shareholder protection rules may be interpreted in such a way that the majority shareholder cannot repudiate minority shareholders on the grounds of their non-cooperation or non-alliance with the interests of the majority stakeholder. Furthermore, expulsion alone cannot be a legitimate goal but must be substantiated with objective grounds (particularly the breach of a duty). If the minority shareholders are exposed to such obligations or duties, which are simply unfounded (for example, mandatory presence at the general meeting, even when such minority shareholders have virtually no power to influence its resolutions), these would likely be perceived by the courts as abusive, and are therefore forbidden.

Andrej Schwarz

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