Law & Numbers - News Legal

The majority shareholder falls out of control

14.07.2014 (Hungary)

The corporate law is based on the “majority principle”: the majority shareholder can control the decisions at the shareholders’ meeting. While the old Companies Act already contained certain exceptions to this principle the new Civil Code broadens the scope of the exceptions. The new Civil Code declares that if a shareholder is “personally interested” in a decision, it is not allowed to vote on the given question. Although the courts’ interpretation of this new provision is not yet known, a conservative interpretation could lead to a substantial weakening of the “majority principle”.

The old legislation

The old Companies Act already disallowed shareholders to cast their vote in certain cases. A shareholder was not allowed to vote, for instance, if the decision relieved him from an obligation or provided him an advantage vis--vis the company. Similarly, the shareholder was not allowed to vote if the resolution empowered the company to enter into a contract with or start a lawsuit against such shareholder.

The interpretation of this provision already raised issues. For example, if a private individual was the majority shareholder in a company, theoretically, he was not able to elect himself as the company’s executive officer, since he was prohibited to vote on such decision. The problem could have, however, easily been overcome: if the private individual became shareholder of the company through another company, the restriction was not applicable.
It is important to note that, under the old laws, shareholders were excluded from the voting in well-defined events only; this provision did not, therefore, substantially restrict the control rights of the majority shareholder.

The new law – who is personally interested?

The new Civil Code broadens the scope of the above voting restriction and provides new exceptions from the majority principle. As an example, the new Civil Code extends the voting restriction to the relatives of the interested shareholder, to the companies that have majority control in the interested shareholder and to the companies in which the interested shareholder has majority control. Further to these changes, the new Civil Code introduces a new, and rather ambiguous voting restriction. Accordingly, if a shareholder is “otherwise personally interested” in the decision, he is not allowed to vote.

Obviously, the majority shareholder is interested in basically all decisions of the company. A company group normally takes into account the interests of the group when exercising the shareholders’ right in a subsidiary. Will this exclude the shareholder from the voting? Is, for instance, the majority shareholder allowed to vote on the merger of its subsidiary if the merger is purely in the majority shareholder’s interest? Is the majority shareholder allowed to vote on the adoption of the company’s business plan if the business plan requires co-operation with another subsidiary of the shareholder? Upon the literal interpretation of the law the shareholder would be excluded from passing these decisions. This would, however, be clearly against the business logic.

According to the old Companies Act, the majority shareholder could squeeze-out the minority shareholder or weaken its position in the company in various ways. For example, the old Companies Act required a ¾ majority to exclude the pre-emption right of the existing shareholders upon a capital increase. This enabled a shareholder having a ¾ majority to unilaterally increase its ownership to the detriment of the minority shareholder. Do the provisions of the new Civil Code prevent the majority shareholder from using these techniques? The minority shareholder may argue that the majority shareholder is personally interested in the relevant decision; so it may argue that, according to the above rule, the majority shareholder is not allowed to vote on such decisions.

A temporary solution

It will probably take several years for the courts to come to a common interpretation on this provision. In the meantime the grandfathering provisions of the new Civil Code could limit the unpredictability of the law and provide some leeway. Even though the new Civil Code came into effect in March 2014, companies have two more years to operate under the rules of the old Companies Act. Companies need to switch to the rules of the new Civil Code only if they amend their articles. Furthermore, if a limited liability company’s registered capital is less than HUF 3 Million (approx. EUR 10,000) then this company can follow the rules of the old Companies Act until March 2016, whether or not the company’s articles are amended.

In order to keep the full control, majority shareholders could consider to keep the operation of their company under the rules of the old Companies Act for another two years and to switch to the rules of the new Civil Code in 2016, only.

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