Representation of the company in the proceedings for authorization of a shareholder to convene a general meeting and in the related proceedings for an action for confusion

16.1.2024

The Supreme Court of the Czech Republic recently dealt with a very interesting case of strained relations between members of a joint stock company. The Supreme Court issued a clear decision on who is not entitled to represent a joint stock company in the proceedings for authorization of a shareholder to convene a general meeting and in any related proceedings for an action for confusion, regardless of whether that person is a member of the statutory body registered in the company's commercial register. I will try to explain the content of the Supreme Court's decision in this article. For those interested in a more detailed reading, it is the resolution of the Supreme Court of the Czech Republic, Case No. 27 Cdo 1020/2022 of 20 July 2023.

Introduction to the case and the intention of the "rebellious" shareholder

At the outset, one of the shareholders of the joint stock company in question sought to convene a general meeting of the company. The aim of this shareholder was to remove all the then members of the company's board of directors and supervisory board at the general meeting and to elect himself and other persons close or otherwise convenient to this shareholder as new members of the board of directors and supervisory board. In other words, the intention of this shareholder was more or less to control the management of the company.

Pursuant to Section 368 of the Commercial Corporations Act, the shareholder requested the Municipal Court in Prague to authorize the court to convene a general meeting of the company. The then chairman of the board of directors acted for the company in these proceedings.

The court authorized the shareholder to convene the general meeting in the said proceedings. The general meeting of the Company convened pursuant to the invitation of the shareholder authorized by the court was held on 11 July 2019. This general meeting approved the proposal to remove the then members of the Board of Directors and the Supervisory Board of the Company and to elect as new members the authorized shareholder and persons close or convenient to him.

However, the company itself filed an appeal against the decision of the Municipal Court in Prague to authorize the shareholder to convene the general meeting of the company (whether before or after the said general meeting is irrelevant for the conclusions of this article). In the proceedings on this appeal, the company was represented by the then chairwoman of the board of directors (i.e. the one who was removed from her position by the rebel shareholder-convened general meeting on 11 July 2019).

Many of you may now have an inkling as to how the newly elected board of directors of the company acted, with would-be ingenuity, in the appeal proceedings. The new board members did not dawdle and, on behalf of the company, boldly withdrew the appeal against the shareholder proxy resolution. To illustrate the situation, it should be noted that the niece and daughter of the rebel shareholder, who were also elected to the company's board of directors at the general meeting in question, represented the company in this withdrawal of the appeal. When the revocation was withdrawn, all the new members had already been entered as members of the board of directors in the company's commercial register.

The High Court in Prague dismissed the appeal proceedings on the basis of that withdrawal.

Action for confusion

However, the dismissed chairman of the board continued to actively defend herself against the actions of the rebel shareholder and a group of persons close to him. She therefore brought an action for annulment on behalf of the company against the decision of the High Court in Prague to discontinue the proceedings, arguing in particular that the withdrawal of the appeal was made by persons not authorised to act for the company. This was due to, inter alia, a conflict of interests.

However, in the proceedings on the action for annulment, the court of first instance concluded that the action for annulment had been brought by an unauthorised person. The former chairwoman of the board of directors appealed against the decision on behalf of the company.

The Court of Appeal then stated unequivocally that it was clear from the commercial register that the persons entitled to act for the company, inter alia before the court, were fully authorised. And it emphasised that the former chairwoman of the board was no longer one of those persons and was not entitled to bring an action for confusion on behalf of the company. That is not altered by the fact that, at the time of the Court of Appeal's decision, proceedings for annulment of the resolution of the general meeting of the company in question were pending, since a resolution of a general meeting is not considered valid until the court has finally declared it invalid.

The Court of Appeal thus stayed the appeal proceedings on the ground that there was an allegedly irremovable obstacle to the proceedings in that the action for annulment had been brought on behalf of the company by the former chairman of the board of directors, i.e. by an allegedly unauthorised person.

The appeal and the intervention of the Supreme Court

After a series of failures at the courts, the former chairwoman of the company's board of directors found a remedy before the Supreme Court, which annulled the decision of the Court of Appeal in the confusion proceedings and remitted the case back to the court for further proceedings.

The Supreme Court first emphasised its previous consistency in the view that a resolution of a general meeting (albeit suffering from a defect for which it may be declared void) is valid until it is finally declared void by a court. Applying this conclusion to the present case, it would appear at first sight that the Court of Appeal was correct in the proceedings for confusion in relying on the resolution of the general meeting (which has not yet been finally declared void) and the entry in the company's commercial register to examine the beneficiaries.

In the circumstances of the present case, however, the Supreme Court concluded that even this relatively clear and settled opinion cannot be approached in a purely mechanical manner and that the circumstances of the case must be examined.

The subject-matter and conduct of the proceedings in the action for annulment and the circumstances of the present case cannot be overlooked.

According to the Supreme Court, it is inadmissible for the newly elected members of the board of directors to represent the company in proceedings concerning the authorisation of a shareholder to convene a general meeting at which new members of the board of directors are to be elected. In particular, those members are in a clear conflict of interests, where their interests conflict with those of the company. "This is because the procedural success of the company in the proceedings to authorise the shareholder to convene the general meeting at which the new directors are (or were) to be elected would mean that the shareholder is not (or was not) authorised to convene that general meeting and that the election of the new directors is therefore vitiated by a defect."

The Supreme Court further declares, in relation to the proceedings on the action for annulment, that "if, in these circumstances, it were to be concluded that an appeal brought by a company for which (in the proceedings on the action for annulment) the chairman of the board of directors acted is an appeal brought by a person who was not authorised to act for the company in the proceedings (and therefore it is appropriate to discontinue the proceedings because of an irremediable defect in the conditions of the proceedings), it would be a denial of justice (denegatio iustitiae)."

According to the Supreme Court, in the present case, the newly elected members of the board of directors are not entitled to act for the company, even in the proceedings on the action for annulment of the decision in the proceedings on the authorisation of a shareholder to convene a general meeting. According to the Supreme Court, even here, it is not possible to strictly follow the view that a resolution of a general meeting is valid until it is finally declared invalid and to blindly follow the entry in the Commercial Register. In such a case, there would be no one to assert the defect of confusion on behalf of the company. The correctness of a final decision authorising a shareholder to convene a general meeting of the company would thus be unacceptably excluded from judicial review.

Conclusion

The Supreme Court's adoption of the above decision is undoubtedly to be welcomed. The decision demonstrates how important and useful it is for legal practice and its development to thoroughly evaluate all the relevant circumstances of each case. This applies even to those cases which at first sight could be resolved (incorrectly mechanically) by means of settled legal opinions. Which the lower courts in this case erred in doing.

This is certainly a significant contribution to corporate law and an understandable clarification. Every other rebellious shareholder should, in his or her own interest, familiarize themselves thoroughly with this decision of the Supreme Court before embarking on their bold journey to control corporate governance.