Invalidating a resolution of the general meeting

Andriy Lytvyn, lawyer, Ilyashev&Partners
Source: YURIST & ZAKON

In recent years corporate relations and related disputes have become quite common in Ukraine. It is not surprising, because business activities between partners often result in different opinions and approaches to management of a business entity. The most common litigations in the field of corporate relations are appealing against resolutions of management bodies. In our state formation of regulatory framework and case law, which help to settle such relations, is still in progress.

Thus, one of the rights enshrined in the Law of Ukraine “On Business Associations” and the Civil Code of Ukraine (hereinafter, the CC) is the right to participate in management of the company as envisaged in the constituent documents, except as otherwise expressly provided in law. Members of a business entity may have other rights as defined by the constituent documents and law.

Legislation stipulates that the general meeting of members (shareholders) is a supreme governing body of a limited liability company and a joint-stock company. The law also states that a company member may appeal against a resolution of the general meeting in court, although law does not expressly provide such protection of civil rights.

Clause 4 of Art. 12(1) of the Code of Commercial Procedure of Ukraine (hereinafter, the CCP) provides that commercial courts have jurisdiction over corporate disputes between the entity and its members (founders, shareholders, participants), including a member who withdrew, and members of a legal entity having relation to creation, operation and termination of such entity, except for labor disputes.
Pursuant to the above rule, everything may seem clear, namely a dispute on invalidation of a resolution of the general meeting will be governed by clause 4 of Art. 12(1) of the CCP. Though it was proven that this statement shall not be fully agreed with.

The Supreme Court of Ukraine (hereinafter, the SCU) in a letter dated August 01, 2007 “On corporate governance dispute resolution practice” noted that not all disputes related to invalidation of a resolution of the general meeting may be referred to disputes under clause 4 of Article 12(1) of the CCP. The Court set forth some criteria, which are: 1) composition of parties to a dispute; 2) ground for the claim on invalidation of a resolution of the general meeting. It was also noted that cases on invalidation of resolutions of management bodies of a business entity brought by the person, who is not a shareholder or a member of the company, including one who withdrew, do not refer to corporate governance disputes.

Grounds for invalidation of a resolution of the general meeting can be divided into general, which do not necessarily entail invalidation of a resolution of the general meeting, and unconditional.

The general grounds are as follows:
– breach of law and/or constituent documents when convening and holding the general meeting of the company;
– deprivation of a shareholder (member) of the opportunity to participate in the general meeting;
– violation of rights or legitimate interests of a shareholder (member) by resolution of a general meeting.

It shall be noted that in clause 18 of Resolution of the SCU Plenum “On corporate governance dispute resolution practice” No. 13 dated October 28, 2008 the court concluded that not all violations of the legislation committed when convening and holding the general meeting shall be the ground for invalidation of resolutions approved at the meeting.

The above Resolution of the SCU Plenum also provides for unconditional grounds for invalidating resolutions of the general meeting in connection with an explicit statement of the law, such as:
– approval of resolutions at the general meeting having no quorum for holding a general meeting or decision-making;
– approval of resolutions on matters not on the agenda of the general meeting of the company;
– approval of resolutions on changing the statutory fund, if not complied with the procedure for granting relevant information to shareholders (members).
When deciding on invalidity of a resolution of the general meeting in connection with other violations committed during convocation or holding of the general meeting, the commercial court must consider whether such violations could affect approval of the relevant resolution by the general meeting.

Regarding the claims on invalidation of minutes of the general meeting, such claims are not based on well-established case law and effective legislation, but rather serve as a way of delaying the proceedings. Minutes is a technical document recording approval of a resolution, unlike a resolution it is not an act, and thus cannot be regarded as invalid.

Art. 98 of the CC sets forth that the general meeting is entitled to make decisions on all company-related matters. It is fully confirmed by the case law stating that the resolution approved by the general meeting of members (shareholders) on matters falling within the competence of other bodies of the company cannot be invalidated.

Courts also do not have to grant the claims on: recognition of resolutions of the general meeting as valid, effective or enforceable; recognition of the general meeting of members (shareholders) as held; recognition of reorganization as accomplished. The above requirements do not meet the statutory remedies. Commercial courts that have established it shall dismiss the claim.

In view of the foregoing, currently Ukraine has already established its case law regarding invalidation of resolutions of the general meeting, however, our country only begins creating effective corporate disputes resolution mechanisms.