Are you a minority partner? You still have rights, according to the Supreme Court

In the heart of the legal world, stories sometimes unfold that seemingly stem from the classic David and Goliath battle. One such case recently passed through the Czech court system, where a minority shareholder of a trading company dared to oppose a majority shareholder who also held the role of sole managing director. This case opened an important legal debate on the balance of power and protection in commercial companies.

(on the photo JUDr. Jakub Dohnal, Ph.D., LL.M., managing partner of ARROWS)

It began as a dispute over the fair management of the company, where the majority shareholder was accused of breach of duty and abuse of his position in the company. The minority shareholder, feeling powerless in light of these events, filed a motion for the appointment of a substantive guardian to protect the interests of the company and ensure that it was managed fairly and transparently.

The situation came to a head when the case came before the Supreme Court, which was called upon to consider whether, in the context of the conflict of interest of the majority shareholder, a substantive guardian could legitimately be appointed and whether the merits of the action to be brought by the guardian could be considered in the context of that process. The Supreme Court's decision had far-reaching implications not only for this particular case, but also for the future interpretation of the law on corporate governance.

This article will delve into the depths of this case, explore its complexities, and reveal how this precedent may affect future corporate law, particularly in situations where minority shareholders are pitted against the overwhelming power of the majority.

This is the story of the Supreme Court's decision in Case No. 27 Cdo 1190/2022, dated 24 May 2023, which will affect minority shareholders.

In a recent legal dispute that is resonating in the business law community, major issues have been raised regarding substantive custody and conflicts of interest in corporations. This case, which has gone through various levels of court all the way to the Supreme Court, is a fascinating study of the dynamics between majority and minority shareholders and the role that equitable governance plays in corporate governance.

At the outset was a petition by one of the minority shareholders of the company, which resulted in a request for the appointment of a substantive guardian. This was motivated by concerns about breaches of duty and possible conflicts of interest on the part of the majority shareholder, who was also the sole managing director of the company. The case focused on a key issue: Can the majority shareholder be expelled from the company and what effect does this process have on the management and decision-making of the company?

The decision of the Court of First Instance and the subsequent appeal brought divergent views on the application of legal principles, particularly in the area of minority shareholder protection and fair representation of the company. With each verdict, new aspects of legal interpretation have emerged, resulting in a complex patchwork of legal opinions and applications.

The case eventually reached the Supreme Court, which was tasked with resolving a key legal dilemma: What is the scope of judicial review in cases where the appointment of a substantive guardian is proposed? These Supreme Court decisions now represent an important precedent that may influence future cases and have broad implications for commercial law, particularly in the area of corporate governance.

In the following sections of this article, we look in more detail at each stage of this case and analyse the key legal issues, decisions and their implications for commercial law and practice.

Chronology and analysis of the proceedings: from inception to verdict

Initial Phase: Application for the appointment of a guardian

The proceedings began with a motion filed by one of the minority shareholders of the company, who pointed to long-standing breaches of duty and potential conflicts of interest by the majority shareholder, who was also the sole managing director of the company. This proposal raised questions concerning the fair administration of the company and the protection of the rights of the minority shareholders.

Decision of the Court of First Instance

The Regional Court initially granted the application, but this decision was overturned by the Court of Appeal. The second decision of the Court of First Instance was then to dismiss the application, which was justified by a change in the financial circumstances of the majority shareholder, who had transferred his shareholding to a trust.

The appeal proceedings and their outcome

The Court of Appeal upheld the second decision of the Court of First Instance, emphasising that the majority shareholder was no longer formally a shareholder and could therefore not be excluded from the company. That decision gave rise to a debate on the extent to which the merits of the action could be assessed in the proceedings and what effect the transfer of the shareholding to the trust had on that.

Appeal and grounds of appeal

The appellant appealed against the decision of the Court of Appeal, arguing points of law which had not been addressed in the appeal proceedings. In particular, the appellant challenged the legal assessment of the case, that is to say, whether it was correctly assessed that the majority shareholder was no longer a member of the company and whether the validity of the action could be assessed in the context of the appointment of a guardian.

The Supreme Court's decision

The Supreme Court upheld the appeal and annulled the decisions of the lower courts, referring the case back to the court of first instance for reconsideration. The key conclusion was that in proceedings for the appointment of a guardian, the success of a legal person in asserting its rights cannot be pre-judged. With this decision, the Supreme Court pushed the boundaries in the interpretation of the law, particularly in the context of the protection of minority shareholders' rights and fair corporate governance.

Implications of the decision

The Supreme Court's decision has brought a new perspective to the issue of substantive guardianship and conflict of interest in companies. It has been emphasised that the protection of minority shareholders' rights and fair corporate governance are essential, even in cases where the assets of the majority shareholders undergo significant changes.

This decision opened the door to further examination of the legal framework governing relations between shareholders and management and set a precedent for future cases where similar situations may arise. The emphasis on the need for objective assessment in each individual case contributes to greater legal certainty and promotes fair and transparent corporate governance.

An important element pointed out by the Supreme Court in paragraph 40 is the change in the Companies Act effective from 1 January 2021, which fundamentally affects shareholder actions. As a result of this change, it is now explicitly possible to bring a shareholder action to enforce a company's right to have a shareholder expelled from the company by the court under section 204 of the Corporations Act.

Key impacts of the change:

• Enhanced rights of minority shareholders: this amendment provides minority shareholders with greater opportunities to defend themselves against unfair or harmful practices by majority shareholders.
• Ensuring fair corporate governance: Allowing a shareholder to sue for expulsion of a shareholder who acts against the interests of the company increases transparency and fairness in internal corporate governance.
• New precedents for future cases: the Supreme Court's decision in this case sets a precedent for future situations where similar conflicts of interest might arise and provides a clearer legal framework for resolving such conflicts.

Application in practice

In practice, this means that minority shareholders now have a stronger position when they believe that the majority shareholder is not acting in the best interests of the company. They can resort to legal proceedings without being limited to the company's internal mechanisms.