Loophole from unlawful shareholders’ resolutions

By Silk Legal

The systems for governance and maintaining balance within the management of a company require important mechanisms to successfully meet business objectives and generate value for all stakeholders.

Such mechanisms run best when they are specifically stated in writing, and outline who holds the authority to direct the company on the level of management policy. The mechanisms should be stated in the company regulations, the joint venture agreement, or the shareholders’ agreement.

This specification of policy may include matters related to finance, operations, management, and the overall direction of work. This will ensure that all systems are compliant with the law, as well as internal and external regulation.

Although management mechanisms may be specified down to the smallest detail, they should not permit one person to have authority over a company, or dictate policies, especially relating to the adoption of key management policies, the issuance of dividends or the increase of the capitalization of the company.

From the firm’s experience, disputes in business operations tend to arise from the appointment of key management who are not favoured by the other business partner. Such situations tend to escalate quickly into numerous, continuing lawsuits aimed at the cancellation of shareholders’ resolutions and compensation for damages resulting from the breach of investment agreements or shareholders’ agreements.

If both parties hold equal amounts of shares, or are in some other way unable to cast a decisive vote in adopting shareholders’ resolutions, then such a situation results in operational deadlock. In these cases, the situation often deteriorates as communication breaks down and both sides attempt to gain control over the business of the company.

Their strategies may include: summoning shareholders to meetings in distant locations or foreign countries; ordering company personnel to spend an inordinate amount of time verifying certain shareholders before they may be allowed to enter a meeting room; locking elevators or other equipment in order to prevent shareholders from attending meetings; or even colluding with postal workers to delay the delivery of official shareholders’ general meeting invitations.

Strategies aimed at gaining control of a company can include any actions aimed at obtaining a court judgment modifying company regulations in one’s favour as it relates to the adoption of share-holders’ resolutions.

Regarding the adoption of company resolutions by unlawful means, the law in Thailand is not currently able to protect shareholders in a timely manner. Specifically, temporary preliminary injunctions or temporary emergency injunctions designed to halt enforcement of unlawful company resolutions before the matter is considered by a court have little chance of success.

The law states that only shareholders or directors have the right to file a legal proceeding to revoke a resolution within one month of the adoption of the resolution by a general meeting of the shareholders. There are no laws that would void unlawfully adopted resolutions, unless the court rules otherwise.

In these cases, the most important point to consider is registration with the company registrar of a resolution adopted unlawfully by a general meeting of the shareholders. When there is a claim by one party that the registration of a certain resolution is unlawful, the company registrar will register the resolution regardless of the circumstances, because the registrar is not able to determine whether the general meeting that adopted the resolution was held in good faith. The authority to determine this issue lies with the court.

Therefore, if there is no plea to revoke the resolution or such a plea is made too late, the court may order that the complaint be dismissed. Therefore, a resolution adopted unlawfully by the general meeting would still be considered valid and enforceable in certain cases. Thai courts have established a precedent whereby the cancellation of any company resolutions have effect starting from the date that a court passes judgment. The unlawful resolution may have been enforced for several years before there is a court judgment voiding it.

This circumstance has created a legal loophole where actions, deriving authority from unlawful resolutions, are taken until resolutions are finally invalidated by the court. These may be held to be lawful actions, except only in those cases where the meeting was held in a manner that was illegal in itself, or where it could not be reasonable to consider that the meeting was a lawful representation of the company.

The performance of due diligence and the structuring of company regulations, including putting in place a management strategy related to corporate governance, specifically with regards to investment in a Thai-based company, is an important issue that will help prevent the risk of disputes.

Silk Legal is an international law firm based in Bangkok.



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