Challenging negative corporate resolutions

The Ruling of the Provincial Court of Valencia, of September 24, 2024, no. 162/2024 is generally in favor of the broad admissibility of the challenge of negative resolutions and, exceptionally, in cases of negative resolutions adopted abusively by the majority, in favor of the eventual judicial reformulation of the social will expressed at the general meeting.

The conflict arises in a family-owned limited liability company, with two blocks of shareholders (51% and 49%). In 2022, the majority block rejected a proposal by the minority block to amend the bylaws and introduce a system of proportional representation in the board of directors. This proposal sought to guarantee the participation of the minority in the management, but was rejected at an extraordinary general meeting.

The minority block challenged the agreement, claiming that it was against the company’s interests and that the majority had acted abusively. For its part, the company argues that negative agreements cannot be challenged and that the refusal to accept proposals does not constitute an abuse of rights.

However, the Provincial Court upheld the decision of the court of first instance, which dismissed the minority block’s lawsuit. The Provincial Court considers that in this specific case, no abuse of rights has been demonstrated on the part of the majority in the adoption of the negative agreements, since in limited liability companies there is no legal obligation requiring the approval of this system.

Content and scope of the contestability of negative agreements

In its ruling, the Provincial Court upholds a position favorable to the broad admissibility of the challenge of negative corporate agreements. It considers that such agreements may be challenged when one of the grounds provided for in art. 204 of the Capital Companies Act is present: contravention of a legal or statutory norm or affectation of the corporate interest. Interestingly, the Court also addresses the possible judicial integration of the corporate will in negative agreements. Although it stresses that judicial intervention should be prudent, it admits that judges, in exceptional circumstances, can reformulate the corporate will when it is evident that the decision of the General Meeting is abusive or pathological, in order to modulate its effects and protect the corporate interest.

Despite the above, the Court concludes that in this specific case there is no evidence of an abuse of rights by the majority or a contravention of the company’s interests. According to the ruling, although the unjustified frustration of a legitimate expectation of the minority shareholder may justify the nullity of an agreement on the grounds of abuse, this principle does not apply in this case. In limited liability companies, proportional representation on the administrative body is not a legally protected right nor a legitimate expectation in the absence of statutory provision. Although both factions had shared the administration in the past, the conflict that began in 2020 eliminated that practice, and the majority is not obliged to share control of the company with the minority block in situations of dispute. The Court concludes that the refusal of the majority does not violate the political rights of the minority, such as the right to vote, access to information or to take legal action.