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18.02.2020

Adversarial principle in actions for annulment of decisions of shareholders’ meetings

On 14 February 2020, iTiesibas published an article by Zane Eglīte-Fogele, Partner of PRIMUS DERLING on reviewing a judgment delivered by the Senate on 11 October 2019 in Case SKC-1374/2019.

As matters concerning the procedure for convening shareholders’ meetings of capital companies and the settlement of related issues in court are increasingly coming to the fore, this publication examines a judgment delivered by the Senate on 11 October 2019 in Case SKC-1374/2019. In its judgment, the court has emphasised the important role of the adversarial principle (audi alteram partem) enshrined in the Civil Procedure Law in disputes concerning invalidation of decisions adopted by shareholders’ meetings of capital companies.

Summary of the case

In 2019 the plaintiff, who was a defendant’s employee owning 25% of the defendant’s shares and a defendant’s board member, took legal action for invalidation of a decision adopted by the shareholder’s meeting to amend the company’s articles of association and change the board. The action was based on the grounds that the company (defendant) infringed several requirements laid down in the Commercial Law regarding the convening of shareholders’ meetings and decision-making procedure. The plaintiff complained that neither a notice of the shareholders’ meeting nor provisions of the articles of association to be amended had been provided according to the procedure laid down in the Commercial Law. The plaintiff also stated that shareholders of the company had not requested the convening of a shareholders’ meeting and the newly appointed board of the company had supplied untrue information about the company’s beneficial owners in an application filed to the Enterprise Register for registration of changes.

The company’s board stated in their application to the Enterprise Register that it was impossible to indicate beneficial owners, although the company is owned by three natural persons, each holding 25% of the company’s share capital, and a legal person, which is owned by a private individual and is also holding 25% of the company’s shares. In addition, the plaintiff learned about the shareholder’s meeting and decisions adopted by the meeting post factum incidentally during a conversation with another shareholder, when they discussed the potential sale of the defendant’s shares.

In the plaintiff’s opinion, the shareholder and former board member was excluded from the management of the company’s affairs illegally, which should be regarded as an act of raiding aimed at the appropriation of company’s property.

The case was heard at two instances because cases regarding invalidation of decisions adopted by shareholders’ meetings of capital companies are not subject to appeal pursuant to provisions of Article 25038 of the Civil Procedure Law. The court of first instance upheld the action fully and declared the decisions of the shareholders’ meeting invalid, while the court of cassation ruled that the judgment of the court of first instance had to be set aside and the case had to be referred back to the court of first instance.

It is important to note that in cases concerning invalidation of decisions adopted by shareholders’ meetings the dispute is, in fact, between shareholders rather than between a company and a shareholder.

This case stands out from other cases heard by the Senate because it focuses in particular on the role of the adversarial principle in actions of this nature and on the substance of actions challenging decisions of shareholders’ meetings.

The Senate has recognised that the case has to be referred back to the court of first instance because both parties to the case – namely the plaintiff (the company’s shareholder) and the defendant (the company) – were represented by the same person, which is contrary to the adversarial principle enshrined in the Civil Procedure Law, considering also Article 452 of the Civil Procedure Law, according to which a situation when a court judgment confers rights or imposes obligations upon a person who has not been summoned to the case as a participant in the procedure must be viewed as a procedural irregularity.

The Senate has held that, although the defendant in cases regarding invalidation of decisions of shareholders’ meetings is a company pursuant to the Commercial Law, a dispute, however, is between shareholders of a company. Based on the adversarial principle, both parties to the case must be given an opportunity to be heard and represented. This principle was not respected in this particular case because other shareholders of the company were not summoned to take part in the proceedings and were thus unable to express their opinions about the action and circumstances of the case. The Senate has also stressed that it was a plaintiff’s duty to invite other shareholders of the company as parties to the case.

The Senate has ruled that, if both parties represent a single right-holder and the plaintiff’s and defendant’s positions merge together, thus there being no dispute and no argument of the parties, proceedings lose their relevance. The Senate has concluded that these are grounds for setting aside the judgment of the court of first instance and referring the case back to the court of first instance.

It also follows from the judgment that the case has been heard by the court of cassation because the plaintiff has appealed against the judgment with respect to the invalidation of the decisions adopted by the shareholders’ meeting as the appellant in cassation considers that the court of first instance had to specify the date from which the decisions of the shareholders’ meeting in question had to be regarded as invalid. The Senate has not accepted this argument and explained that, when an action for invalidation of decisions of shareholders’ meetings is granted, such decisions have no period of validity. A decision of a shareholders’ meeting that has been declared invalid is regarded as non-existent and will not lead to any legal effects.