May 24, 2018 1289

How can minority shareholders influence the appointment of CEOs and other top executives

Minority shareholders have little influence on the general meeting and no control over managerial decisions. The new law on LLCs will increase the influence of minority shareholders in the appointment and dismissal of CEOs

How it used to be

Current legislation contains no mechanisms to make the votes of minority shareholders matter in decision making. A majority owner of, say, 80% can serve as a one man general meeting and make decisions at his own discretion.

However, it is possible to put provisions in the charter concerning the appointment or dismissal of CEO and other top executives that would indirectly compel majority owners to discuss matters with minority shareholders. To be specific, it’s about increasing the quorum. For instance, 3 participants with 80%, 10% and 10% shares raise the quorum for making decisions regarding the CEO’s appointment to 90%. In this case, the presence of the majority owner and one of the minority ones is required – otherwise the decision will be stalled. On the other hand, this mechanism has a significant drawback: if the quorum is reached, the majority shareholder will still be able to decide as he wants, without taking into account the opinion of the minority shareholder.

How it’s going be

After the LLC law comes into force, minority shareholders will have more options to help protect their interests.

1. Increasing the number of votes necessary for the appointment or dismissal of the CEO (part 5, Art. 34). By increasing the number of votes necessary for the appointment/dismissal of the CEO to 90% in the charter, minority shareholders will be able not just to block such a decision, but also force majority owners discuss it with them. It will be impossible to make such a decision without the votes of minority shareholders.

The LLC law excludes the concept of "quorum" in the work of the general meeting altogether. Right now its authority is determined by quorum – the minimum number of the votes of participants present at the general meeting. After the entry into force of the law, the authority of this management body will depend on whether the number of votes is deemed sufficient by the law or the charter.

2. Mandatory approval of candidates for top positions by all shareholders (part 6, Art. 11). The charter could provide for the approval of candidates BEFORE the general meeting. It could also contain a provision that only the candidates approved by all shareholders are to be voted for at the general meeting. This will ensure additional protection for minority participants.

3. Protection of minority shareholders through a corporate contract (Art. 7). It is possible to put a provision in such a contract that would make one of the shareholders with, say, a 20% share responsible for nominating a candidate, while the majority participant, in turn, will have to support that candidate.

It is already possible to conclude corporate contracts, in accordance with the law on corporate contracts No. 1984-VIII that has been in effect since February 2018.