What may a fund do as a shareholder of a public company?
14.04.2011 corporate | capital markets
Statutory restrictions on participation of open investment funds in joint-stock companies should be interpreted narrowly. Restrictions on voting rights do not limit the exercise of other share rights.
The Investment Funds Act in Poland contains a number of regulations intended to force diversification of risk in open investment funds. The regulations were introduced in order to protect investors by preventing a fund from becoming overly dependent on the financial condition of just a few companies in which the fund holds shares. There are restrictions on acquiring securities in a company, as well as restrictions on exercising the right to vote the securities.
An example of the first type of restriction is that an open investment fund may not acquire shares giving it greater than 10% of the total number of votes in any body of the issuer. Nor may the fund acquire more than 10% of the non-voting shares of a single issuer.
Voting restrictions apply when several funds managed by a single investment fund company are all invested in the same company. If two such funds together exceed the threshold of 10% of the total number of votes, they may exercise voting rights up to a maximum of 10% of the votes, and votes above this ceiling will be ineffective.
It should be borne in mind that this restriction applies only to voting rights, which means that the funds will still be able to exercise other rights under the securities. For example, if funds managed by a single investment fund company hold shares representing at least a fifth of the share capital of a company, they will still be authorised to seek appointment of members of the supervisory board through block voting. Because Commercial Companies Code Art. 385 §3 refers to participation in a company’s capital (“Upon motion of shareholders representing at least one-fifth of the share capital….”), and not the number of votes they hold, it is irrelevant whether the shareholders seeking to appoint supervisory board members in block voting may exercise voting rights to the shares or not.
This position was recently upheld by the Katowice Appellate Court in a ruling issued in a case concerning the ability to demand appointment of supervisory board members by block voting by funds managed by a single investment fund company holding over 10% of the total votes in the company. The ruling is important for funds and their investments in public companies, as it confirms the possibility of influencing the composition of supervisory boards despite being unable to exercise more than 10% of the voting rights.
In practice, despite the limitation on voting, capital participation in a company by funds may enable them to establish their own blocks at the general meeting and appoint supervisory board members. In order to determine how many shareholders it is necessary to establish a block, the number of shares represented at the general meeting should be divided by the number of positions on the supervisory board. When making this calculation, all shares represented at the general meeting are counted. It appears that restrictions on rights to vote the shares should have no influence on this, as the regulation refers to the total number of shares represented at the general meeting, not the number of votes held by the shares represented at the general meeting. Clearly, however, the actual result of the voting in the block will reflect only the votes that were effectively cast. If one block is created only by funds managed by the same investment fund company, although limited to exercising no more than 10% of the votes in the company, the 10% of votes effectively cast may decide on appointment of a member of the supervisory board.
Based on this position, potentially a situation could arise where funds managed by the same investment fund company holding a majority of the share capital of the company will be able, using block voting, to appoint a majority of the members of the supervisory board, notwithstanding the restriction to 10% of the votes. This raises the question of whether this interpretation is contrary to the intent of the regulation, and thus whether a petition could be filed to set aside a resolution appointing supervisory board members under this scenario, approved through block voting, as being contrary to law.
Marcin Pietkiewicz, Capital Markets practice, Wardyński & Partners