Defending the Rights of Minority Shareholders in Estonia
| Author | Andres Vutt, Margit Vutt |
| Position | Lecturer of Civil Law |
| Pages | 160-165 |
Page 160
One of the main principles of company law is the protection of persons in a lower position. When we consider the position of shareholders in relation to third (all other) persons on such a preference scale, the principle has to be taken into account according to which shareholders are usually viewed as relatively passive investors (they are not engaged in the everyday activity of the public limited company and their possibilities to guide the activity of the company are rather indirect). That is why the possibilities of shareholders to protect their rights have to be provided by law. This is just one aspect of protecting the rights of shareholders. The second problem is that shareholders are not equally positioned due to the number of the shares they hold. The shares may grant different rights (mainly concerning voting1), and the number of shares held by a person (or, to be more exact, the number of votes granted by such shares) is also decisive. The need to protect minority shareholders is chiefly related to the fact that investment in a public limited company should not become pointless or too risky for a shareholder2. Thus, when speaking about protecting the rights of shareholders in relations with third persons, the need to protect minority shareholders against majority shareholders should also be considered, to guarantee as equal as possible rights for shareholders.
Section 272 of the Commercial Code3 (hereinafter CC) passed on 15 February 1995 prescribes that shareholders are to be treated equally under equal circumstances. This rule has been transposed to guarantee the principle laid down in Article 42 of the 2nd Company Law Directive4 - the laws of the Member States shall ensure equal treatment to all shareholders who are in the same position. The objective of this norm ought to prevent any discrimination of a shareholder. For example, before the Commercial Code entered into force, it was common practice that the founder shareholders were often granted rights different (greater) than these of other (newer) shareholders, such as special rights to receive dividends or the right to vote, which were not in proportion with the nominal value. In further analysis of the principle of equal treatment, it is important to keep in mind that "equal circumstances", the existence of which is a prerequisite for equal treatment, means first of all the investment as the shareholder's most direct link to the public limited company. The investment of course is not the sole prerequisite. Situations occur where the investment-related basis for treatment is equal, but legal inequality arises from other circumstances prescribed by law or the articles of association (for example, a shareholder may not vote where certain matters are being decided - the unequal treatment here is due to the fact that his or her interest in deciding certain matters may be partial; or a shareholder has to pay not only capital and capital over par, but also an interest - in this case, the basis for unequal treatment is the shareholder's delay in making the contribution). The objective of the equal treatment provision is to lay down the most general principle for treating all these problems where the law does not provide a specific norm. The freedom to make decisions is thus partly limited. The general principle applicable in private law is that everything not forbidden is allowed. The difference between company law and, for example, contract law, is that the prerequisite for various legal transactions is not consensus between parties, but the majority can influence the minor-Page 161ity through the majority of votes. The equal treatment principle imposes certain limits to such possibilities of influencing. At the same time, the shareholder is not prohibited from waiving his or her rights5 - the freedom to make decisions is only partly limited.
In the protection of shareholders, the rights provided by law for each single shareholder and the rights provided for shareholders whose shares represent a certain part of the share capital have to be distinguished. It is clear that in certain matters, each shareholder has to be protected by providing individual rights for him or her. An example of such rights is the right of a shareholder to receive information, prescribed by CC § 287. The law does not, however, provide rights for each shareholder to influence the course and resolutions of the general meeting, but prescribes a minimum participation, which usually is one-tenth of the share capital.
The measures of minority protection established in Estonia chiefly regard the resolutions of the general meeting. According to CC § 303(1), a shareholder may not vote if release of the shareholder from obligations or liabilities, assertion of a claim against the shareholder or conclusion of a transaction between the shareholder and the public limited company or determination of a representative of the company in such claim or transaction is being decided. As opposed to the Swedish law, the Estonian law does not prohibit a shareholder from voting if the relations between the public limited company and a person concerning whom the shareholder has an important interest is being decided (Swedish Companies Act6, Chapter 9 § 3). Neither does the Estonian law prohibit a person from voting as a representative of a shareholder if he or she has a personal (partial) interest different from that of the company in a matter. The main reason why the right to vote is limited is to prevent situations where a shareholder can, through voting, influence decisions in matters where his or her personal interests dominate over the interests of the public limited company, and to provide a basis for asserting a claim against the majority shareholder if he or she has caused damage to the company by adopting such a resolution. However, the Estonian law is apparently not sufficient to guarantee the protection of minority shareholders, as practice suggests that it is transactions with persons connected with shareholders which constitute a problem. The only minority protection measure here is to demand that shareholders be treated equally as provided by CC § 272. The provision, however, has not been applied in the Estonian court practice so far. The Supreme Court of Estonia, in its judgements and in its forming of court practice thought that, has always referred to special norms when interpreting the Commercial Code, and has never referred to the general norm providing "equal treatment".
As a second measure to guarantee the protection of minority, the law provides for a qualified majority requirement in deciding certain matters. While resolutions of the general meeting are usually adopted with a simple majority of votes, it is necessary that at least two-thirds of the votes represented at the general meeting vote in favour in matters such as increasing or reducing share capital, amending the articles of association, or adopting a merger, division or transformation resolution. Further, if a public limited company has shares of different classes, resolutions on the increase and reduction of share capital and on the merger, division or transformation of the company have to be adopted separately for each class of shares, while it is necessary that at least two-thirds of the votes represented by each class of shares at the general meeting be in favour. The requirement has been transposed from Articles 25(3) and 31 of the 2nd Company Law Directive, Article 7(2) of the 3rd Company Law Directive7 and Article 5(1) of the 6th Company Law Directive8 on company law. Thus, the Estonian law not only protects the minority, but also protects the rights of owners of different classes of shares. It should also be kept in mind that the Commercial Code...
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