Election of the supervisory board by groups: An important right of minority shareholders
Poland’s Commercial Companies Code provides for a number of institutions strengthening the position of minority shareholders. One is that shareholders representing a fifth of the share capital may demand that the company’s supervisory board be elected by voting in separate groups (Art. 385). This is a departure from the statutory method of appointing the supervisory board by a resolution of the general meeting adopted by a simple majority of votes. One or more shareholders representing 20% of the share capital may demand that the supervisory board be elected in groups, even if the company’s statute provides for a different way of appointing the supervisory board, e.g. through personal entitlements.
Formal requirements
This power is linked to the amount of shareholding. It can be exercised by a single shareholder or a group of shareholders, provided that they jointly represent at least 20% of the company’s share capital.
The minority shareholders submit a request to the company’s management board. The form of the request is not specified in the code, but for evidentiary reasons it would be advisable to submit the request in writing.
In the legal literature, a request for election of the supervisory board in groups is treated as a request to place certain matters on the agenda. Thus, if the request is made no later than 14 days (21 days in a public company) before the date of a general meeting that has already been called, the management board shall place an item on the agenda of the next general meeting concerning election of the supervisory board in groups. If as of the date of filing the request, the general meeting has not yet been called (or the request is made less than 14 or 21 days in advance), the management board should convene the meeting and include election of the supervisory board by groups in the agenda.
Art. 385 of the Commercial Companies Code does not expressly require the management board to convene a general meeting in response to a request for election of the supervisory board in groups, but, at the same time, the minority shareholders may request that an extraordinary general meeting be convened and certain matters be placed on the agenda, pursuant to Art. 400.
There is also a line of court decisions, following the judgment of the Supreme Court of Poland of 18 November 2008 (case no. II CSK 304/08), holding that a resolution of the general meeting to remove from the agenda the election of the supervisory board by groups, requested by minority shareholders, is contrary to the act.
Voting
To start, we must calculate how many shares are needed to form a group entitled to elect one supervisory board member. To this end, we need to divide the number of shares represented at the general meeting by the number of supervisory board members provided for in the statute.
Pursuant to the Commercial Companies Code, the supervisory board of a joint-stock company comprises a minimum of three members, or five in public companies. For the sake of this example, we will assume that, according to the statute, the company’s supervisory board has five members, its share capital is PLN 100,000, divided into 100,000 shares with a nominal value of PLN 1 each, and 100% of the shares are represented at the general meeting.
In this case, to create a group capable of electing one member of the supervisory board, it will be necessary to gather shareholders holding a total of at least 20,000 shares. The shareholders can group themselves in such a way as to collectively represent, for example, 40,000 shares and this way appoint two board members. However, the legal literature does not allow a situation in which one shareholder “splits” his shares and votes on the election of supervisory board members from his different shares in different groups or partly in groups and partly in a general vote. Importantly, according to the repeated position of the Supreme Court (resolution of 11 September 2013, case no. III CZP 39/13, and judgment of 13 February 2014, case no. V CSK 162/13) and commentators, shareholders who have formed a group do not participate in the election of the remaining members of the board, either by merging into other groups or by a general vote.
The cases where a company’s statute indicates a range in the number of supervisory board members, e.g. from five to seven, require separate analysis. This is a situation we often encounter in public companies. The result of the action determining the number of shares necessary to form one group electing one supervisory board member will be different if we assume the minimum and different if we assume the maximum number of supervisory board members provided by the statute.
The seats on the supervisory board that will not be filled by separately constituted groups will be filled at the same general meeting by a general vote, in which only those shareholders who did not cast a vote as part of the group vote participate.
In group voting and in voting in which all other shareholders participate, each share is entitled to only one vote, regardless of any voting preference.
Upon the election of at least one member of the supervisory board by group voting, a resolution according to which the mandates of all existing members of the supervisory board expire early may prove momentous in practice. Combined with the fact that a request pursuant to Art. 385 is binding on the management board, this provision makes it possible for minority shareholders to try to use their powers to shorten the term of a supervisory board. It is up to the management board to assess whether the request is made for legitimate reasons or to obstruct the functioning of the company’s bodies.
The majority shareholder’s perspective
This regulation may be of significance for majority shareholders.
The provisions do not indicate an upper limit on the shareholding that can be represented by shareholders requesting voting in groups. Therefore, this institution can also formally be used by the majority shareholder. But in practice election of the supervisory board by groups usually does not benefit majority shareholders, as higher participation in the share capital guarantees them a significant influence over the decisions of the general meeting in the standard voting model. Unequivocally, voting in groups strengthens the position of minority shareholders, who, if they collect 20% of the shares, may file a request and influence the composition of the supervisory board. In the foregoing example, minority shareholders representing 20% of the votes in a company with a five-member supervisory board will be able to elect one board member.
Summary
This power allows minority shareholders to put their representatives on the company’s supervisory board and thus gain at least partial influence over the company’s operations. The mechanism is effective insofar as election of the supervisory board in groups can be demanded regardless of whether the standard appointment and removal of members of the company’s supervisory board is carried out according to statutory rules or the company’s statute contains different regulations in this regard. There is an emerging view in the legal literature that personal entitlements in this regard are also suspended. This means that Art. 385 of the Commercial Companies Code takes precedence over the provisions of the statute, and election of supervisory board members by voting in separate groups can be ordered in principle in any joint-stock company.
From the perspective of an investor who plans to acquire a majority stake in the company, this mechanism for electing supervisory board members through voting in groups constitutes a risk at the level of staffing the supervisory board. Depending on the composition of the supervisory board and the acquired stake, minority shareholders may be entitled to fill certain board seats with their candidates. In particular, this risk arises in takeovers of public companies, where it is not uncommon for an investor to be unsure of the stake it will ultimately succeed in acquiring, and therefore cannot rule out the possibility that 20% of the shares will remain in minority shareholders’ hands. At the same time, in practice, it is not uncommon for minority shareholders to join forces and use their powers. In each transaction, ways to mitigate this risk can be considered, but it would be difficult to eliminate the risk completely.
Katarzyna Jaroszyńska, Marcin Pietkiewicz, Capital Markets & Financial Institutions practice, Wardyński & Partners
