Is 50%+ entitling to do whatever one wants?
Under Malta’s corporate law framework, mainly the Maltese Companies Act, Cap. 386 of the Laws of Malta (“Act”), the majority rule is the fundamental principle to arrange the will formation of legal entities. But this doesn’t mean, a shareholder holding 50% or more of the company is in the legal power to act like whatever suits him. Also, majority shareholders have to adhere the ‘legal bargain’, i.e. the legitimate expectations and fundamental understandings which form the members association, when incorporating. In the following article we will outline the requirements and procedure of enforcing remedies against 50%+ shareholders.
For the sake of simplicity, we will assume ordinary shares for the case. Although the basic principles can also be applied to as remedy against the majority in voting rights in cases where other share variants, like preference shares or deferred shares are included, regarding to mathematical aspects.
The Relevant Legislation
The first layer to rectifiy the company getting into wrong trajectory should be directly by means of a general meeting or indirect through the board of directors. In case, this is not possible, the key to protect your company from mismanagement or misdecisions of other shareholders, lies in the rues of minority protection. With this minority protection, the applicant is not dependent on a contractual or statutory regulation in his favour, but can turn directly to the competent court by virtue of the law.
To invoke this remedy successfully, the minority shareholder(s) must content an affair of company has been or are likely to be conducted in a manner of:
- Unfair prejudice;
- Oppressive; or
- Unfairly discriminatory.
In doctrine and jurisprudence, several groups of cases have been identified that fall under the definition of unfair prejudice. These are in particular:
- Exclusion of a member from management without justifiable reason;
- Inadequate, delayed, or failed dividend payments;
- Questionable dealings and relationships with associated persons;
- Excessive financial benefits to certain members;
- Procedural irregularities;
- Dilution of shareholding;
- General mismanagement of the company’s affairs.
‘Oppressive’ and ‘Unfairly Discriminatory’ Behaviour
Oppression within the meaning of the Article 402 hereby can be understood as cases, where the defendant used to act in dishonest use of his majority position. In view of the fact that the cases of oppression usually also involve unfair treatment, the cases of oppression can regularly also be counted as a rule example of unfair prejudice.
The term of unfairly discriminatory, however, goes beyond the cases mentioned above, namely those cases in which an act of the majority shareholder is backed up by an improper distinction, that is, an inequality that should not have any factual influence on the decision. In practice, both terms will take a back seat to the actual case groups mentioned above, which will regularly be present in relevant factual situations.
‘Members or members as a whole’ as a whole
Furthermore, the actions or omissions of the member to be removed must have been unfair to ‘a member or members as a whole’. This makes clear, that the Action must encroach the member in his function and interest as shareholders not as director or creditor.
The second case group of cases against the interests of the ‘members as a whole’ is creating a challenging situation given to the majority status of the acting or omitting member to be attacked: it lives with the peculiarity of its nature that the action of the attacked majority shareholder must also be directed towards his own interest, at least from a corporate point of view. However, since the above-mentioned groups of cases should always have negative effects on the business of the respective company, this element of the offence is usually present in the case of such an act. The interest of a shareholder in the smooth continuation of his company is regularly affected by actions that only benefit him.
If these criteria are met, minority shareholders can seek legal redress by applying to the court for an order. The court may:
- Regulate the conduct of the company’s affairs;
- Restrict or forbid specific actions;
- Provide for the purchase of the shares of any members by the company itself, resulting in a return to share capital and reduction; or
- Ultimately, dissolve the company, leading to consequential winding-up procedures.
The legal consequence relevant to our question will be the order of the (re)purchase of the shares of the plaintiff shareholder or the company itself. A trial issue that must always be taken into account is the valuation of the shares. The application for the legal consequence must be submitted to the court. It should be noted that according to the second paragraph of the relevant norm, the competent authority, the Malta Business Registry, can apply for one of the legal consequences mentioned above, when it has received an inspector’s report.
Way Two: Contractual Relationship Solutions
In addition to the remedies available under corporate law, parties involved in shareholder disputes can explore contractual relationship solutions. These remedies may include negotiation, mediation, or arbitration, depending on the terms of the shareholder agreements in place. Utilizing these alternative dispute resolution methods can offer a more flexible and cooperative approach to resolving disputes and safeguarding shareholder rights in Maltese companies but require a lot of sensitivity for the constellation and not least the human character of the persons involved. This version usually provides a higher degree of damage limitation.
In closing, our commitment as Company Service Providers goes beyond the establishment of your company in Malta. It is about setting up the perfect structure for your endeavor, may that be an investment firm, a fund or a virtual asset service provider. We are here to proactively guide you through the intricate process, ensuring a robust foundation that minimizes the risk of shareholder disputes. Our expertise lies in evaluating potential risks before incorporation and strategically incorporating eventualities into tailored articles of association, aligning with the diverse interests of all involved parties. The legal bargain mentioned at the beginning should ideally find its customised formulation in the founding document itself; in this way, the company enjoys a higher degree of stability.
Our goal is clear: to eliminate the need for reactive measures, such as minority protection actions, by addressing potential issues at the outset. The best contracts are the ones that lie in the drawer for 30 years, because everything was thought of when they were drawn up.
Feel invited to contact us, whether you aim to set up a proper structure in Malta or need advice in the next step when a shareholder dispute looms on the horizon.
 How Andrew Muscat describes the basis of the members association (Principles of Maltese Company Law, second edition, Chapter 16, Section 126.96.36.199. Unfair Prejudice);
 Andrew Muscat in Section 2.3.5. of the aforementioned publication