Appeal to veto unacceptable by standards of reasonableness and fairness?

The veto is a right inextricably linked to a form of democratic control. The veto has been around for so long that it dates all the way back to the Roman Republic, where the Roman tribunes (representation of the people) could keep senators in line (fun historical fact to find out over Christmas).

An essential addition to still give the minority a form of control; something that can be seen today, for example, in shareholder agreements and also central to an interesting ruling from Nov. 5, 2024. The veto right in principle allows minority shareholders to still oppose certain decisions without requiring a majority. The court ruled in the present ruling that in some circumstances reliance on a veto right may be unacceptable based on reasonableness and fairness.

For advance information, roughly speaking, a “simple” majority is 50+1, a “qualified” majority is then a deviation from that, for example, a 2/3 (66.67%) number of votes or 4/5 (80%) of votes (with possibly other conditions).

In the ruling, minority shareholders of the StudyPortals company VOC and Keen disagreed with the decision of the qualified majority of shareholders to distribute free reserves to shareholders. This was because the shareholders' agreement contained a provision that resolutions could be validly passed by qualified majority, but that in some cases consent of VOC and Keen was required to count as a valid resolution. These included decisions regarding distributions to shareholders. The provision that VOC and Keen had to consent to such decisions effectively meant that they had a veto power within the shareholders' meeting. 

 
Specifically, what happened in this case? The qualified majority of the shareholders voted to distribute free reserves to the shareholders. The distribution was in the amount of €4.5 million. This distribution was actually paid out several days after the resolution, even though VOC and Keen voted emphatically against the resolution and had a veto power. VOC and Keen then turned to the preliminary injunction court to reverse the distribution as soon as possible and to grant an express prohibition that no distributions could be made as long as they did not consent. Indeed, VOC and Keen believed that these free reserves should be used for any acquisitions or other major financial projects consistent with StudyPortals' goals. 

The preliminary injunction court first determined that the resolution was validly passed because there was a qualified majority. However, the question is to what extent VOC and Keen can claim performance of the shareholders' agreement. The defense put forward on this claim includes the fact that VOC and Keen's reliance on the right of veto should be considered unacceptable by the standards of reasonableness and fairness. The court goes along with this. 

The judge's considerations mainly focus on the fact that StudyPortals has not made distributions to shareholders since 2015, but has been making profits for years. The judge cites the point that according to established case law, the principle is that profits should be distributed to shareholders unless it is contrary to the interests of the company. A policy where reserves are held unnecessarily and for a considerable time is also not justified in principle. When looking at the party intentions during the conclusion of the shareholders' agreement, it does not explicitly appear that the shareholders wanted to deviate from this principle regarding the veto power for VOC and Keen. There is a balancing of interests by the court, with the interest of distributing the profits outweighing the interest of preserving a coercive power of VOC and Keen to use the profits for acquisitions, etc. So should this discussion arise in the future, another balancing of interests will have to be done to determine whether the veto is lawful. 

All in all, the right of veto is not an absolute means of making your mark as a minority shareholder. Although of course this only applies when it is unacceptable by the standards of reasonableness and fairness in the interest of the company. However, the right of veto remains of great importance to minority shareholders and will continue to play a major role in most cases and simply be legally valid if agreed upon in the agreement. Just as it has played a role since the Ancient Romans.

So for a minority shareholder, it is a good idea to include a veto right in a shareholder agreement.

Do you have a question about this topic or about corporate law? Please feel free to contact one of our corporate law specialists We are happy to help you!