Protecting Minority Shareholders of a Czech s.r.o. in the Articles of Association

To prevent shareholders with larger holdings from using that size to push through their own interests — sometimes at the expense not only of the other shareholders but of the company itself — Czech law allows a number of “braking mechanisms” to be written directly into the articles of association. Such measures will often head off a situation that is damaging both to the other shareholders and to the company.

Neither the current law nor its predecessor defines a minority shareholder. Section 73(1) of Act No. 90/2012 Coll., on Business Corporations (the “BCA”), instead defines the majority shareholder: a shareholder holding a majority of the votes arising from participation in the corporation. A minority shareholder is therefore, a contrario, a shareholder without such a majority. A further concept is the qualified shareholder, defined in Section 187(1) BCA as a shareholder, or shareholders together, whose contributions reach at least 10 % of the registered capital or who hold at least a 10 % share of the voting rights.

The distinction matters, because it determines which rights a given shareholder can assert and how. Some rights against the company are open only to a qualified shareholder; others belong to minority shareholders generally. The category of minority shareholder covers both qualified shareholders and those whose votes, alone or together, fall short of the qualified threshold.

The BCA protects minority shareholders not only by defining these categories but by granting rights exercisable only by them — in some cases only by a qualified shareholder — so that the proper functioning and development of the company cannot be deliberately blocked. These protective mechanisms divide, according to the conditions for their use, into ex ante and ex post means. Ex ante means are in essence those that can be written into the articles of association; ex post means are in essence the judicial protection of minority shareholders' rights.

Amending the articles of association

The act with the greatest capacity to affect how a company works is an amendment of the articles of association. Under the BCA, voting on such an amendment may be entrusted to the general meeting. Where it is, minority shareholders may have no opportunity even to attempt to outvote the majority. If the decision remains in the hands of the shareholders themselves, Section 147(1) BCA applies and the agreement of all shareholders is required. That removes the scope for arbitrary action by the majority.

Voting at the general meeting

Further ways of limiting the influence of a majority shareholder concern voting at the general meeting — the company's supreme body, which determines the direction of its activity. They include separate voting, cumulative voting, adjusting the minimum number of votes needed for a resolution, and adjusting the quorum.

Separate voting under Section 171(2) BCA protects minority shareholders (though not only them) by providing that a resolution amending the articles which interferes with the rights or duties of only some shareholders requires the consent of those shareholders. Where the amendment interferes with the rights and duties of all shareholders, the consent of all is required. This is designed for cases where the general meeting decides on the amendment; where the articles do not entrust that decision to the general meeting, the provision loses its significance, because the consensus of all shareholders will be needed in any event.

Cumulative voting requires that the articles permit it (Section 178 BCA). Where they do, members of the company's bodies may be elected in this way under Sections 178 to 180 BCA. A shareholder's votes are calculated by multiplying the votes they may cast at the general meeting by the number of seats to be filled. The shareholder may then use all those votes, or any number of them, for a particular person or persons. Voting is on each member separately, and votes are cast only in favour of electing a given person. Those receiving the highest number of votes are elected, provided that at least an absolute majority of all the votes of the shareholders present has been cast. Where several people receive the same number of votes, a further ballot is held; if the position repeats, the choice is made by lot. A further advantage is that a member elected in this way may be removed only with the consent of a majority of those who voted for the election, or their legal successors — though this does not apply to removal for a serious breach of duty. The minutes must record how many votes were cast for the election or removal of each proposed person and a list of those who so voted. To prevent speculation about how to split votes and which shareholder votes first, a secret ballot may be provided for; that requires a more detailed procedure, so that a shareholder who dislikes the result cannot later object that the election was invalid.

The majority needed for a resolution. The general meeting has a quorum where shareholders holding at least half of all votes are present, and decides by a simple majority of the votes of those present (Sections 169(1) and 170(1) BCA). For matters of greater weight the BCA requires a qualified two-thirds majority. A solution, particularly from the minority's point of view, is to require a higher proportion of votes for specific matters which are, or which the shareholders regard as, fundamental. The opposite risk must be weighed as well: setting the bar too high makes decision-making cumbersome and weakens the company's ability to respond quickly and effectively.

The quorum may likewise be set differently from the statutory rule in the articles, and separately for individual matters — some call for a rapid response, others are serious decisions with a substantial impact. Here too, overdoing it can produce not only the intended protection of the minority but also the unintended consequence of a majority shareholder permanently boycotting the meeting.

Protection that does not depend on the articles

The remaining protections in the BCA apply directly by law and need not be implemented in the articles. In substance they are the ex post remedies: a petition to declare a resolution of the general meeting invalid; the derivative action (where a managing director causes the company loss, a shareholder may, as the company's representative, claim compensation from the director before the court); a claim for so-called reflective loss (loss derived from loss caused to the company — available where a member of the corporation has harmed it in a way giving rise to a claim, though such claims may not fully succeed, since under Supreme Court case-law the court may order the wrongdoer to compensate only the company and not the shareholder, even where the shareholder brought the claim); a claim for harm caused by an influential person (where the majority shareholder causes the company harm reflected in the value of a shareholding); and review of the report on relations by a court-appointed expert.