Challenging “negative corporate resolutions” according to the Audiencia Provincial de Madrid.

Ruling 492/2022, of 24 June, handed down by the 28th Section of Audiencia Provincial de Madrid, deals extensively with the debated question of the challengeability of so-called “negative corporate resolutions”, i.e. rejections by the General Shareholders Meeting of proposals submitted by the directors or by any other legitimised party.

The ruling itself provides a summary of case law and doctrine, citing authoritative voices (Rojo, Alfaro, Iribarren, among others), which – very succinctly condensed – would make it possible to affirm that the challenge of “negative corporate resolutions”, and the subsequent judicial proclamation of the initially rejected corporate resolution, will be possible:

˗ On formal grounds: when the company has improperly computed, or failed to compute, a decisive vote for the negative result.

˗ On substantive grounds: when the “negative corporate resolution” contravenes a mandatory legal or statutory rule; provided that there is no other alternative to comply with that rule. 

However, the Judgment mentions on several occasions that “negative resolutions” cannot be challenged due to their abusiveness (art. 204.1 LSC) since – even if the challenge were successful – the Court would not have standing to replace the company’s will and declare the rejected resolution to exist, which would leave the challenge empty of content.

It is not clear why the judgement stresses so much the impossibility of the court to substitute the decision of the general meeting, unless the rejected resolution is of mandatory – and unequivocal – compliance according to law or the articles of association. Could the omnilateral shareholders’ agreements be added to this binomial? Could the closing clause of Article 1. 258 CC (contracts do not only bind to what has been expressly agreed, but also to what is in accordance with good faith)? And what about cases in which the court decision is imposed on (or supplements) the will of individuals? And what about cases of “cramdown” of the decisions of the general meeting in the context of restructuring (TRLC), in which it is not even the court that supplements the will of the company, but only a group of creditors? In my opinion, judicial reluctance to proclaim the validity of a corporate agreement that is rejected in an abusive manner is not sufficiently justified, especially if the agenda expressly included deliberation and voting on the issue; and in the minutes of the Meeting, the express mention that the shareholders who rejected the proposal did not propose any alternative.

On the other hand, the judgment culminates its reasoning with a paragraph that is difficult to contrue:

“Actually, if the challenge to the resolution were admitted, which we reject, it could only be sustained in its illegal nature because the shareholder who voted against the resolution acted in breach of the rules of good faith or with abuse of rights (article 7 of the Civil Code) so that his vote would not be counted and the resolution could be understood to have been adopted by the vote of the other shareholder holding 50% of the share capital.”

The Chamber seems to say that judicial invasion of the competences of the General Meeting could be avoided if, instead of annulling the “negative resolution”, the decisive vote exercised in bad faith or with abuse of rights were annulled. In such a case, the decision would be left to the General Meeting of Shareholders to decide by counting the remaining votes, in accordance with the corresponding legal and statutory majorities.

But then why does the Chamber apostille “what we reject”? If the main impediment has disappeared (replacing the will of the meeting) by considering the decisive vote null and void and the consequent proclamation of the company’s will, why do we “reject” it? It could be because, in the present case, the judgment declares the resolution to be subsisting for other reasons unrelated to this issue (lack of standing and breach of the duty to inform); or because, in such a case, it would not be possible to challenge the resolution but rather to annul the vote; Therefore, the claim would have to be directed against the shareholder who votes abusively or in breach of his fiduciary duties (and not against the company); and therefore the action would not be to challenge the company agreements, but rather an action for nullity based on the mechanism of Articles 7. 1 and 6.2 CC.

In practical terms, and to conclude these very modest lines, in similar cases it would perhaps be advisable, for any person with a legitimate interest, to accumulate the declaratory action for the nullity of the vote with that of condemning the company to proclaim the correct result of the vote without counting the vote or votes declared null and void as abusive. In this case, the resolution would not be annulled, but would survive with the opposite result.

Published in Almacén de Derecho, on 22th October 2022

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