Taking Counsel: Decision making at the board: diagnosis 's disablement

  • 2009-01-14
  • By Michailas Molis [Jurevicius, Balciunas & Bartkus]
On Nov. 11, 2008, the Parliament of the Republic of Lithuania adopted amendments to the Law on Companies. Although the primary aim of the amendments was the implementation of Directive 2007/63/EC of the European Parliament and of the Council, as well as several Communications of the European Commission, that should have led to a reduction of the administrative burden on business entities and improved their efficiency, the result of the amendments might be opposite because of the new rule on decision making at the board.

The rule mentioned above is established by Article 35 of the Law on Companies. Before the amendment of Nov. 11, 2008 it stated that a decision of the board may be adopted and the meeting of the Board shall be valid if more than two thirds of all elected board members are present at the meeting (thus achieving a quorum). A decision was considered adopted if more members of the board present at the meeting voted in favor than against the respective decision. If a board member abstains from voting, then his vote is not counted.

However, despite the already high quorum requirements and the Government's desire to reduce obstacles for business entities, the amendments of Nov. 11, 2008 include a new stricter rule regarding decision making at the board. The new rule, which will become effective on July 1, 2009, while leaving unchanged the quorum requirement, establishes that a decision of the board shall be considered adopted only if more than half of all the elected members of the board vote in favor of the respective decision.

The implications of the new rule become obvious when considering a practical situation. Under the rule currently in force, in the case of a board consisting of seven members, the quorum requirement will be satisfied if at least five members are present at the meeting. A decision may be adopted by a different number of members voting in favor of the decision 's starting with unanimous uphold by all members of the board and ending with an only one vote in favor of the decision, in case all other members present at the meeting abstain from voting. On the other hand, under the new rule in the same situation, where the board consists of seven members and the quorum requirement remains the same (at least five members shall be present), a decision adopted by the board will only be considered valid and effective when it is upheld by at least five out of seven members of the board.

The reasonableness and necessity for such a strict rule on decision making by the board is questionable. There is no reasoning for its necessity provided in draft of the amendments suggested by the Government, or in conclusions or minutes of the meetings of the Parliamentary committees. Furthermore, the Law Department of the Chancery of the Parliament itself has expressed its doubt toward the new rule when providing Parliament with its conclusion on the impact of the rule on businesses, in which it stated that such a rule may raise serious obstacles to a prompt decision making process.

Furthermore, the new rule will cause an additional administrative burden and costs on companies, both of which the package of amendments adopted on Nov. 11, 2008 intended to reduce. The burden and costs do arise from an obligation towards companies arising from the new rule to change their articles of association and register them at the Register of Legal Persons.

Justification for such a strict rule cannot be found in legislation of the European Community and its member states, or in the U.S.A., as they contain less strict rules. Article 50 of the Statute for a European company (SE) adopted by the Council's regulation establishes the quorum of at least half of all elected members of the Board and a simple majority of the members present at the board's meeting for adoption of a valid decision. The draft statute on European Private Companies establishes no requirements regarding quorum or decision making procedure at the board at all, as it is governed by the principle that as much freedom as possible shall be left for founders and/or shareholders of a private limited company to define issues regarding the company's internal organization and operation in its articles of association.

The laws of Germany and England applicable to limited companies do not contain provisions on questions related to the adoption of decisions by the board, including the majority requirement for the adoption of a decision. The U.S.A. Model Business Corporation Act establishes that the quorum shall exist in cases where a simple majority of members of the board are present at the meeting, and it might be reduced to one third by the articles of association of the company. Under this Act, a decision is considered adopted if at least a simple majority of the members present at the meeting vote in favor of the decision.

It shall also be noted that even before the amendment of Nov. 11, 2008, Article 35 of the Law on Companies did permit, and after the amendment still permits, any public or private limited liability company to envisage in their articles of association higher requirements both for quorum and majority, necessary for adoption of a decision by the board, than are established by the Law. Such an option has always provided companies with a possibility to bring the decision making process at the board in line with the needs of a company.

The conclusion might be made that the new rule, which requires more than half of all the elected members of the board to give their votes in favor of a decision in order to adopt it, is not in line with company law developments of the European Union and foreign countries and might be considered as a step backward, which may raise serious obstacles to prompt decision making and effective management of a company. Considering the fact that the board shall take the most important operational and management decisions of the company and taking into account the current economic situation, when many businesses are facing serious challenges and must respond promptly to the changes on markets, the new rule might become a decisive factor for some companies in their fight for survival.

Michailas Molis  is a lawyer at Jurevicius, Balciunas & Bartkus, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms including Glikman & Partnerid in Estonia and Kronbergs & Cukste in Latvia, dedicated to providing a quality "one-stop shop" approach to clients' needs in the Baltics.