Corporate disputes or litigation are best resolved by amicable settlement, so as not to affect the company’s course of business. However, this is not always feasible, owing to irreconcilable differences between partners or shareholders.
Sometimes certain shareholders or partners remain passive in the face of the injustice done to them, believing that there is no scope for reaction. This, however, is incorrect. Company legislation provides various means of defence, and even of attack, for a partner or shareholder whose interests are being prejudiced. It should be noted that the lapse of a long period of inaction operates against the interests of the wronged shareholder, since there are time limits, after the expiry of which the assertion of rights becomes particularly difficult.
What are the rights of minority shareholders in a société anonyme (AE)?
The fundamental principle governing the operation of a société anonyme is that the majority — that is, the shareholders holding 50% of the company’s capital plus 1 share — may decide on almost all of the company’s matters, the most important of which is the election of the company’s Board of Directors.
Because of this majority principle, minority shareholders often find themselves isolated from the company’s management and watch the Board of Directors carry out acts which they consider harmful to the company and, by extension, to the shareholders, while as a minority they feel like mere spectators.
Nevertheless, the minority of shareholders enjoys strong rights. We set out below the rights of minority shareholders, developing more extensively those which are most substantive:
1) Right of minority shareholders to request an extraordinary audit of the company.
a) Right of minority shareholders holding 5% to a legality audit.
Pursuant to the law, shareholders representing at least one twentieth (5%) of the paid-up capital are entitled to request from the court an extraordinary audit of the company.
The audit, if ordered by the court, is confined to the legality of the company’s management and does not extend to the substance of the management. That is to say, in this case where the audit is ordered upon application of the minority holding 5% of the capital of the société anonyme, it is limited to whether the audited acts violate provisions of the law, of the company’s articles of association, or of resolutions of the general meeting.
b) Right of minority shareholders holding 20% to a substantive audit.
Pursuant to the law, shareholders representing one fifth (20%) of the paid-up capital are entitled to request from the court an audit of the company, where, on the basis of its overall course of business and of specific indications, it becomes credible that the management of corporate affairs is not being conducted as the principle of sound and prudent management requires. The articles of association may reduce, but not by more than half, the percentage of paid-up capital required for the exercise of the right under this paragraph.
In this way the minority can effectively and substantively audit also the manner of management of the company — that is, whether the Board of Directors is doing its job properly or not — and not merely the legality thereof.
If the application is granted, the court entrusts the conduct of the extraordinary audit to at least one certified auditor-accountant or audit firm or, if the company is small, to a Class A Tax Accountant.
The court’s decision also fixes the auditors’ fee, which is paid by the applicant after the conclusion of the audit. However, the court may attribute the whole or part of the auditors’ fee to the company, or order that the applicant prepay it and recover it from the company. The fee is subject to revision after the conduct of the audit, upon application of the auditor or of the party liable for its payment.
The auditors must, without culpable delay, complete the task entrusted to them and submit their report to the audited company and to the person who requested the audit. The board of directors is required to bring the auditors’ report to the shareholders’ attention at the latest at the immediately following general meeting.
If the auditors find violations punishable under criminal law, they must also submit their report to the competent public prosecutor.
2) Right of minority shareholders of the société anonyme holding 5% of the paid-up share capital to request the Board of Directors to assert the company’s claims against members of the board of directors who have harmed the company in breach of their duties.
3) Right of minority shareholders of the AE to request the Board of Directors to provide the general meeting with the specific information requested concerning the company’s affairs, to the extent that such information relates to items on the agenda.
If shareholders represent one tenth (10%) of the paid-up capital, the board of directors is required to provide the general meeting with information on the course of corporate affairs and the company’s financial position.
4) Right of minority shareholders holding 5% to request the Board of Directors to convene an extraordinary General Meeting.
The law provides that, upon application of shareholders representing one twentieth (5%) of the paid-up capital, the board of directors is required to convene an extraordinary general meeting of shareholders, fixing a date for the meeting which must not be more than forty-five (45) days from the date of service of the application on the chairman of the board of directors.
5) Right of holders of 5% of the paid-up capital to request an open vote on an item or items of the agenda.
When is a Corporate Lawsuit brought against members of the Board of Directors of a société anonyme?
It should be noted that the corporate lawsuit may also be brought against third persons, even if they are not members of the board of directors, provided that they exercise the powers of the board of directors pursuant to Article 87 of Law 4548/2018. The conditions for bringing the corporate lawsuit are the existence of a resolution of the board of directors and the weighing of the corporate interest.
In cases where the board of directors remains inactive and does not bring the corporate lawsuit, minority shareholders representing 5% of the paid-up share capital may request the members of the board of directors to bring the corporate lawsuit.
This phenomenon is frequent in cases of change in the company’s ownership structure and change of the board of directors, where, after the new board of directors of the société anonyme assumes its duties, the new shareholder discovers that the previous management has carried out acts harmful to the company, such as acts of competition or acts that generally damaged the company.
What is the right to information of a member of the Board of Directors of an AE concerning corporate affairs?
This right is autonomous and personal to each member of the board of directors and is exercised by the member individually.
For example, a member of the board of directors who comes from the minority of the share capital, although formally participating in the board of directors of the société anonyme, does not have access to all the documents that the other members of the board of directors have, and therefore cannot properly exercise either oversight or the right of decision and vote at meetings of the board of directors.
In such cases it is accepted that every member of the board of directors is entitled to be informed about all corporate affairs and to inspect all books and documents of the company, within the framework of the management rights and duties he holds as a member of the board of directors.
Where the other members of the board of directors refuse the exercise of this right, an application for interim measures may be filed seeking access to all documents and information about all matters.
What is the liability of an Administrator of a Private Company (IKE)?
The administrator’s liability stems from the duty of loyalty he owes to the company. It is a frequent occurrence that the partners or a new administrator discover that the previous administrator acted in breach of the duty of loyalty.
The duty of loyalty is specified mainly in the administrator’s duty not to pursue his own interests in conflict with those of the company, to disclose to the partners in good time any of his own interests and any conflict between his own interests and those of the company, and also the duty not to carry out acts on his own account or on behalf of third parties that fall within the company’s purpose, nor to be a partner in a personal company or another EPE or IKE pursuing the same purpose, unless the partners resolve that such acts are permitted.
Lastly, the administrator’s duty of loyalty also includes the duty to maintain confidentiality regarding corporate affairs.
Unfortunately, business owners often draft the articles of association hastily, without providing for special clauses and detailed specifications of the rights and duties of the administrator, and generally without setting out in detail what applies to the operation of the company, only to find themselves facing unpleasant surprises later on.
What happens in cases of Corporate disputes and exclusion of a partner?
Often the partners disagree on everything, with the result that the management of the company becomes impossible.
Pursuant to the law, decisions in general partnerships are taken by agreement of all partners, but majority decision-making may also be agreed.
The management of corporate affairs is a right and duty of all partners, unless the partnership agreement provides otherwise. Where management is exercised by all or by several partners and the partnership agreement does not provide otherwise, each managing partner may act alone.
Very importantly, if one of the other managing partners objects to the carrying out of an act before its execution, the managing partner must not perform it. There are means of reaction by which you can stop arbitrary decisions of the company’s administrator.
It is also important that the administrator of a general or limited partnership has a duty to provide information about the course of corporate affairs, as well as a duty to render account to the other partners.
Although most small and medium-sized companies in Greece are family-owned, corporate disputes are not rare. Often the management of the company runs the business with a lack of transparency, concealing revenues or even passing off personal expenses as company expenses, with the result that minority partners are harmed. Means of defence: corporate lawsuits, interim measures for the rendering of account by administrators, annulment of resolutions of the Board of Directors or of the General Meeting of the company, voluntary withdrawal of a partner, and exclusion of a partner from the company by virtue of a court judgment.
Pursuant to the law, a partner may, by declaration to the company and the other partners, withdraw from the company, unless the partnership agreement provides otherwise. In a partnership of indefinite duration, the value of the participation is paid to the withdrawing partner at the end of the financial year, while in a partnership of fixed duration the payment of the value of participation to the withdrawing partner depends on the existence of good cause. If the court finds that no good cause exists, the partner has no claim for payment of the value of his participation.
If, in the person of a partner, there exists a circumstance that would justify the dissolution of the company, the Court may, upon application of the other partners, instead of dissolving the company, order the exclusion of that partner. Clearly, this is a very powerful weapon for the partner whose rights are being violated, since he can request from the Court the exclusion of the partner who is violating his rights, both from the management of the company and from the company itself.
- See also article Companies
- See article Company Formation
- See article Commercial Contracts
- See article Interim Measures against Facebook/Twitter/Instagram for Advertising Accounts
- See article Cybercrime
- See also article Professional Commercial Leases
- See also article Tax Law
- See also article Intellectual Property Rights
- See also article Payment Order
FREQUENTLY ASKED QUESTIONS ON CORPORATE DISPUTES AND LITIGATION
1. I am a minority shareholder and I am being wronged — what can I do?
Law 4548/2018 on sociétés anonymes provides powerful tools to the minority. With a 5% stake in the share capital, one may request from the court an extraordinary legality audit, the convening of an extraordinary general meeting, and the bringing of a corporate lawsuit against members of the board of directors who have harmed the company. With 10%, there is a right to information on the course of corporate affairs. With 20%, a substantive audit may be requested, examining whether management is conducted in accordance with the principle of sound and prudent administration. In personal companies and Private Companies (IKE), corresponding rights are provided for the rendering of account by the administrator and for the judicial exclusion of a partner who breaches his duties.
2. How do I react when the management conceals data and revenues?
The concealment of data, transactions with persons related to management, or the recording of personal expenses as corporate ones constitute classic cases of breach of the duty of loyalty. An application is filed with the Court of First Instance for an extraordinary audit of the company by a certified auditor, while at the same time interim measures are sought for the provision of information and access to the company’s books. If damage to the company is established, the board of directors is requested to bring a corporate lawsuit against the culpable members. In serious cases, criminal offences (breach of trust, embezzlement) are also made out, in which case a criminal complaint is also filed with the Public Prosecutor of the Court of First Instance.
3. How much time do I have to take legal action?
Time is critical and varies according to the claim. The annulment of resolutions of the general meeting must be brought within a short mandatory time limit from the adoption of the resolution or its registration. Claims for damages against members of the board of directors are subject to a three-year or five-year statute of limitations depending on their nature. Interim measures for access to documents may be sought for as long as the refusal continues. Inaction operates against the shareholder, as it makes proof more difficult and allows the management to consolidate its acts. The timely service of an extra-judicial notice interrupts time limits and records the disagreement chronologically.
4. What documents do I need for judicial proceedings?
The articles of association of the company with all amendments, minutes of general meetings and of the board of directors, published financial statements of recent years, a certificate from the General Commercial Registry (GEMI) showing the company’s current status, and a certificate of holding of shares or corporate units are gathered. Important also is any evidence substantiating loss-making management: contracts with related parties, invoices, bank transactions, correspondence and extra-judicial notices. In personal companies, the partnership agreement and any private agreements between partners are added. This material is assessed by the lawyer in order to select the appropriate legal remedy.
5. What chances of success does the claim have?
The outcome depends on the quality of the documentation and on meeting the percentage thresholds. Where there are specific indications of mismanagement, the courts appear willing to order an extraordinary audit and to grant interim measures of information. The judicial exclusion of a partner presupposes good cause and very strong proof of breach of duties. In a corporate lawsuit against members of the board of directors, proof of fault, damage and causal connection is required. Often cases conclude with a buy-out of shares or an amicable withdrawal of the wronged partner — a solution which often serves his interests better than protracted litigation.
6. What is the role of the lawyer in a corporate dispute?
Ziamparas D. & Associates Law Firm undertakes initially the study of the articles of association, the minutes and the financial data, in order to identify breaches and select the most effective strategy. The firm drafts extra-judicial notices, applications for extraordinary audits, interim measures for information and rendering of account, corporate lawsuits, actions for annulment of resolutions and applications for the judicial exclusion of a partner. It represents the client before the Court of First Instance and negotiates with the opposing management for an amicable resolution, buy-out of units, or withdrawal from the company on fair terms. At the same time, it assesses the existence of criminal offences and files the relevant criminal complaints with the Public Prosecutor of the Court of First Instance where necessary.