Corporate dispute: What can a minority shareholder do against the majority shareholder’s “control”?

Although at Devesa the majority of our clients are business owners or shareholders holding controlling interests in their companies, commercial practice regularly presents another highly common corporate reality: situations in which a minority shareholder feels entirely blocked by the power exercised by the majority shareholder within the context of a corporate dispute.

These situations are common both in private limited liability companies (Sociedades de Responsabilidad Limitada – SLs) and public limited companies (Sociedades Anónimas – SAs), particularly where the majority shareholder also acts as director of the company. In many such contentious situations, the minority shareholder is effectively excluded from management, disregarded in relation to any corporate decision and, in numerous cases, denied access to relevant information regarding what is occurring within the company, among many other scenarios.

Corporate disputes and abuse of majority control within the company

One of the most common misconceptions is that holding a majority of a company’s share capital allows a shareholder to act without legal limitation. However, holding a majority interest neither extinguishes the rights of the minority shareholder nor authorises the company to be used solely for personal benefit.

In practice, situations such as the following are relatively common:

• Filing annual accounts with the Commercial Registry without the company’s Annual General Meeting having even been held.
• The existence of certificates signed by the director without approved minutes and/or without any shareholders’ meeting having taken place.
• Payment of the director-shareholder’s personal expenses through the company’s accounts.
• The employment or remuneration of family members who do not genuinely work for the company.
• Systematic refusal to provide documentation and information requested by the remaining shareholders.
• Ongoing obstruction of dividend distributions.

In many cases, minority shareholders approach us describing this conflict situation with a sense of complete helplessness, believing that they “cannot do anything” because they do not hold a majority of the share capital. Legally, however, they possess highly significant mechanisms for enforcing and protecting their rights.

Rights of the minority shareholder in a corporate dispute

One of the principal rights of the minority shareholder is the right to information, expressly recognised under sections 196 and 272 of the Spanish Companies Act (Ley de Sociedades de Capital – “LSC”). Pursuant to that legislation, among other applicable provisions, shareholders may request corporate documentation, raise questions and review the annual accounts both before and during the General Meeting.

This is crucial because many irregularities leave a documentary trail. Invoices, bank transactions, unjustified expenses, personal payments made by the director or concealed remuneration paid to family members frequently appear, directly or indirectly, within the company’s accounting records.

In addition to the right to information, the LSC grants minority shareholders other important protective mechanisms, including:

• The right to request the calling of a General Meeting (section 168 LSC) where they represent at least 5% of the share capital.
• The right to challenge corporate resolutions contrary to law or detrimental to the corporate interest (section 204 LSC).
• The right to bring actions for liability against directors (sections 236 et seq. LSC).
• The withdrawal right arising from failure to distribute dividends under section 348 bis LSC.

All of these instruments enable minority shareholders to scrutinise the management of the company and defend their interests against potential abuses by the majority.

Judicialisation of the corporate dispute as a pressure mechanism

As indicated above, minority shareholders may also challenge corporate resolutions before the courts where such resolutions are contrary to law, contrary to the articles of association or detrimental to the corporate interest for the benefit of one or more shareholders.

In this context, the following situations become particularly relevant:

• Non-existent or improperly convened meetings.
• Irregular approval of annual accounts.
• Inaccurate or false certificates filed with the Commercial Registry.
• Non-transparent related-party transactions.
• Excessive directors’ remuneration.

In practice, the possibility of initiating judicial proceedings in relation to such conduct often becomes a highly effective pressure mechanism for minority shareholders, through which the sought-after transparency and disclosure of information is frequently achieved.

The majority shareholder will normally seek to avoid proceedings that could lead to audits, requests for documentation or personal liability where one or more irregularities have been committed.

Directors’ liability in a corporate dispute

In many cases, the majority shareholder is also the company director, which is especially significant because directors are subject to statutory duties of care, loyalty and regulatory compliance, among other obligations.

Certain conduct may give rise to civil liability actions for damage caused to the company or its shareholders. However, in more serious cases, such as document falsification, breach of fiduciary duties or falsification of annual accounts, the director’s conduct may even attract criminal liability.

The minority shareholder’s real objective in many corporate disputes

Although this is often initially denied, in many corporate disputes the minority shareholder’s ultimate objective is not to remain indefinitely at war with the majority shareholder nor merely to uncover all previously concealed information, but rather to achieve a reasonable and economically fair exit.

The difficulty lies in the fact that the shareholder controlling the company by virtue of a majority interest will often attempt to acquire or value the minority shareholding at a price substantially below its true market value, taking advantage precisely of the minority shareholder’s lack of information or worsening liquidity position, for example, following dismissal from employment or after years without dividend distributions.

How to address a corporate dispute as a minority shareholder

In conclusion, and in light of the foregoing, where there is abuse of a dominant position by one of the shareholders, it is essential for any minority shareholder to establish a robust legal strategy in order to address the corporate dispute, properly evidence and document the existing irregularities and, in parallel, work towards an appropriate valuation of the company in anticipation of future negotiations.

FAQ – Corporate disputes and minority shareholders

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Commercial and Corporate Law