Taking counsel

  • 2004-09-02
  • Justina Gutauskaite, Sorainen Law Offices in Vilnius
Can minority shareholders influence decisions at the general meeting?Minority shareholders by definition are usually unable to exercise any significant form of control within the company due to the comparatively small amount of capital they provide. The passivity of minority shareholders and their failure to unify votes at the general meeting leads to the misrepresentation of their interests.

Like in all the EU countries, the Baltic states' laws provide for several shareholder-control instruments - voting by proxy, shareholder voting agreements and transfer of the voting rights. In Lithuania and Estonia these instruments are regulated in more detail, whereas Latvian laws are silent in this regard, though they do not prohibit application of shareholder control instruments either.
One of the abovementioned instruments is voting by proxy, which is especially useful in cases when a shareholder is unable to personally attend the general meeting of shareholders, or for the purpose of allocating voting control by minority shareholders. Proxies are appointed by issuing powers of attorney, which generally may be revoked at any time. When several minority shareholders collectively hold the majority of a company's shares, they may appoint a common proxy to vote on their behalf and thus control the company.
Another shareholder control instrument is shareholder voting agreements, whereby the shareholders agree how they vote their shares at the general meeting. Under the voting agreement, shareholders may agree on the adoption of a common position of the parties with respect to voting at a particular general meeting or during a fixed period of time.
The shareholder voting agreements have to comply with the general contract law principles. Lithuanian and Estonian laws establish special requirements for shareholder voting agreements. Such agreements may not contain provisions binding to vote in a certain way or abstain from voting for remuneration. Lithuanian law also prohibits stipulating the obligation to vote according to the instructions of or for all the proposals brought forward by the managing bodies (e.g. the board of directors) of the company.
According to Lithuanian law, in case of a violation of the provisions of the shareholder voting agreement, a party is entitled to appeal to court for a recount of the voting results in accordance with the agreement. The court may reverse the decision taken at the general meeting if voting in violation of the agreement was decisive in adopting the decision. In Estonia, however, a violation of the shareholders voting agreement does not influence the validity of the vote cast unless the vote is declared void or annulled. It should be noted that by concluding the shareholder voting agreement the minority shareholders may authorize one person to vote on their behalf and thereby provide voting control.
Further, in order to concentrate their voting power, shareholders may conclude agreements on a transfer of the voting right (the so called voting trusts). In Estonia such transfers of voting rights are currently not allowed. The transferee may be a company's shareholder or a third party. Lithuanian law limits the duration of such agreements to 10 years. Please also note that Lithuanian laws establish the disclosure requirements for the agreements on transfer of the voting right, whereas the shareholder voting agreements may be kept secret from the company and other shareholders.
In summary, irrespective of their comparatively weak position at the general meeting, minority shareholders of Baltic companies can influence decisions by applying the shareholder control instruments. Still, in regards to Latvia, although in practice the shareholder control instruments are used in this country, there is no court practice in this respect, and therefore it is difficult to predict what would be the court's reaction to such instruments and, respectively, what would be the possibilities of their enforcement.

Justina Gutauskaite is an associate at Sorainen Law Offices in Vilnius.