George Kefalas, LL.M. (mult.), Μ.Sc.
(republished from capital.gr)
Summary: With the Law no. 4548/2018 on the joint-stock company (as with the previous Law 2190/1920), the minority of the company is granted a number of rights, through which it can achieve control over the actions of the company's management and, by extension, the majority. One of the most important minority rights is the right of control, which, together with the right to information, can provide the minority with the necessary material for the exercise of corporate claims against the management in question.
In the context of the operation of a public limited company, two or more opposing interest groups are often formed. On the one side is the majority, which appoints the management of the public limited company, which generally obeys the instructions of the majority group, and on the other side is the minority, one or more minority groups. In order to protect the minority group in each case, the law of the public limited company provides a number of rights to ensure that the majority group and the management of the company can be controlled by the minority group in each case. Of particular importance in the context of these rights are the right to information of shareholders provided for in paragraphs (a) and (b). 6 and 7 of Article 141 of Law No. 4548/2018, as well as the right of the minority to request the extraordinary control of the public limited company, as structured in Articles 142 and 143 of Law No. 4548/2018.
2. The right to carry out an extraordinary inspection
2.1 The right of the small minority
The right to carry out an extraordinary audit, as provided for in Article 142 of the Act, shall be exercised by the small minority. 4548/2018, is further divided into two subcategories. Thus, a small minority (representing at least 1/20th of the company's share capital) may request the court to order an extraordinary audit of the company, if there are suspected acts of the company's corporate bodies - in particular the company's management - that violate provisions of the law or the company's articles of association or decisions of the general meeting (GA) (small minority audit).
In practice, the minority shareholders would have to file a petition before the court, in which they would indicate specific acts of the company's organs that violate specific provisions of the law or the articles of association or resolutions of the general meeting and, if the court suspects that such acts have indeed taken place, it would order the audit. The concept of probability consists in the fact that it is not necessary for the judge to be fully convinced or absolutely certain that the acts complained of occurred, but it is sufficient to consider them as probable. Thus, for example, in decision No. 29/2015 of the Lamia Magistrate Court, an audit was ordered, as the court presumed that the Chairman of the Board had not convened an ordinary or extraordinary General Meeting, in which, among other things, he would have informed the shareholders about the collection of the insurance compensation following a fire that completely destroyed all of the company's facilities, despite the fact that a minority shareholder had requested information on the company's financial issues in an extrajudicial statement.
If an audit is ordered in the above cases, the audit will only be an audit of legality, i.e. it will examine whether the provisions of the law or the articles of association or a decision of the general meeting have in fact been violated by the company's bodies.
The review of the small minority is limited in time, as the application must be submitted within three years of the approval of the financial statements for the financial year in which the acts complained of took place.
Usually, the alleged acts leading to the control of the small minority are related to the management of corporate affairs by the Board of Directors, such as the conclusion of contracts between the company and members of the Board of Directors in violation of Article 100 of the Act on the Control of Small Minority Shareholders. 4548/2018, provision of remuneration to Board members in violation of Articles 109 et seq.
2.2 The right of the large minority
On the other hand, a minority of 1/5 of the share capital can request the court to order the control of the company if there are specific indications that the management of the company is not being carried out as required by good and prudent management. In this case, it is not sufficient for the judge to presume the above facts, but they must be fully proven. A stricter degree of proof is therefore required. The question that arises, however, is when can it be said that the administration is not being carried out as required by good and prudent administration? This condition will be met when the management is exercised in a manner contrary to the interests of the company, such as when it serves the interests of the managers themselves or only certain shareholders or third parties. It is accepted that in order for there to be a plea of imprudent and diligent management, the actions of the management must cause damage to the company. Thus, inter alia, an extraordinary audit of the large minority was ordered in the following cases:
As mentioned above, for the control of the large minority it is not sufficient that the management is not prudent and sound, but it must be further demonstrated that there is a tendency for the company's situation to deteriorate, which may be either due to the existence or increase of losses or because profits are decreasing or less than expected. Thus, the decision No. 273/2014 of the Single Court of Appeal of Larissa, after accepting that inaccurate entries have been made in the company's balance sheets for the financial years 2007-2009, ruled in its reasoning that: "The above acts were not proven to be responsible for the reduction of the profits of the 1st defendant company, in view of the economic crisis that hit the country and especially the technical companies".
The audit ordered at the request of the large minority is, unlike the audit of the small minority, a feasibility audit, i.e. it consists in examining whether the audited management operations benefit or harm the company. That is to say, whereas in the small minority control only the contradiction of the act complained of with the law, the articles of association or a resolution of the general meeting is checked, in the present case, in the large majority control, the act complained of, in order to lead to the control, must cause some form of damage to the company in the above-mentioned sense.
Therefore, the defence that the Board of Directors (BoD) may raise against any request for an audit against it, apart from the denial of the acts alleged by the requesting minority, is the fact that the alleged acts, even if true, did not cause any kind of damage to the company or even that they were in the interest of the company (cf. MMP 1848/2017: 'All the above mentioned management choices, namely the acquisition and refit of the "...", even if in excess of the original budget, as well as the general repair/upgrade of the vessels "..." and "..." are considered to have been dictated by the need to strengthen the company's commercial presence and were in the company's interest and in pursuit of the company's objective of strengthening its fleet vis-à-vis its competitors').
Finally, as regards the right of the large minority to request control of the company, the law does not impose any time limit. However, any request submitted several years after the alleged facts and while the requesting minority was already aware of them beforehand may be rejected as improperly submitted.
3. The representation of the applicant's minority on the board of directors of the company
Par. 4 of article 142 of the Act. 4548/2018 provides that the court may find that the representation of the applicant shareholders on the board of directors of the company does not justify the request for control. In other words, any submitted request for control may be rejected because there is minority representation on the board. However, the mere participation of the minority shareholder on the board will generally not be sufficient for the rejection of the request as improper, but will usually require the existence of other circumstances. The requesting minority shareholder would have to be complicit in, or at least knowingly tolerate, the acts that he or she subsequently denounces in the application in order to be considered to have abused his or her right. Thus, if a shareholder was not present at the critical meeting at which a decision was taken or opposed to it, it will not then be possible to propose against him to join the company's board of directors.
4. Carrying out the audit
The audit is entrusted by the court to a certified public accountant or an auditing company, and, depending on the size of the company, it may also be entrusted to a first class tax accountant. Their remuneration is determined by the court, which may also set a time limit for the completion of their work. The parties may propose the auditor, but the court is not bound by their proposals and may appoint another third party. Appointed auditors shall enjoy the same information rights as regular auditors. Thus, they have the right to obtain the necessary information in person and to access, examine and search the books and other documents of the company.
5. Instead of an epilogue
The right of control, and especially that of a large majority, is one of the most catalytic rights of the minority. Together with the right to information, they provide the minority with the necessary material for the exercise of any corporate claims against the company's management. However, both small and large minority requests must refer to specific acts of the corporate bodies which constitute either a breach of the law, the articles of association or a general meeting resolution. or constitute indications of unsound and prudent management, otherwise the application risks being rejected as indefinite (see the Athens Single-Member Court of First Instance1211/2020 which rejected as indefinite the application of a shareholder of the large minority who stated that the management had unlawfully and improperly rejected his request for postponement of the General Meeting, denying him access to the company's books and records and that there were management irregularities and incorrect entries in the company's books).