Limits to shareholder agreement validity regarding board member instructions

In Judgment No. 27 Cdo 1873/2019-336, the Supreme Court (SC) dealt with the validity of clauses in shareholder agreements, making a significant contribution to the abundant case law concerning the boundaries between business and strategic management.

The Supreme Court dealt with the validity of clauses of a shareholder agreement (SHA) giving shareholders the right to nominate a certain number of members to a company’s board of directors. The SHA also stipulated the shareholders’ obligation that if the company needed funds, the shareholders should ensure that the board members nominated by them agree on a specific amount and ask the shareholders to provide the funds, and that, based on this request, the shareholders would conclude a loan agreement. The first-degree and the appellate court both agreed that decisions on the manner of financing the company’s operation concern the management of the company business activity and therefore fall within business management. Under the law, shareholders are not allowed to give instructions to the company’s board of directors as regards its business management; therefore, both courts held that the respective provision of the shareholder agreement was invalid.

Nevertheless, the SC stated that a distinction should be made between a company's business management and its strategic management. Both business management and strategic management are within the powers of the board of directors of a joint stock company, unless entrusted to another body by law or the company’s statutes. A decision on how (in what manner) the funding of the company shall be secured may or may not fall within business management: securing funds for the day-to-day operation of a company's business is "organising and managing a company’s normal business activities“; therefore, it falls under the company's business management. However, in some cases, the issue of securing funds may go beyond normal business management, e.g. when it concerns the financing of significant new projects. If the decision is more of a strategic or investment nature, it falls within the strategic management of the company, which is also within the powers of the board of directors, but the general meeting may, within the limits of the law and the statutes, give instructions to the board of directors. Unless the statutes provide otherwise, the general meeting is allowed to give instructions to the board of directors regarding the company’s strategic management. (Please note, however, that shareholders themselves cannot do so, not even to the members of the board of directors nominated by them).

The Supreme Court also dealt with the rules of interpreting a SHA, noting that the principle of autonomy of the parties' will shall apply, therefore an agreement shall be viewed as valid rather than invalid, and priority shall be given to an interpretation that does not result in its invalidity, if such an interpretation is possible. The Supreme Court also noted that if a SHA were to obligate shareholders to give instructions to the board members interfering with business management and to ensure that the instructions are followed by the board even if in breach of their fiduciary duty (duty to act with due managerial care), such an agreement would be invalid on the grounds of being contrary to law. However, it is possible for shareholders to undertake in a SHA to induce members of the board of directors to be in favour of a certain solution to a matter or to achieve a certain result. Still, it is necessary to respect the condition that while acting to achieve this outcome, the board members must not breach their due managerial care.

We consider this Supreme Court decision very beneficial, both for business operations and transactional practice.

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