Attack on a public company as a way to make a quick buck

Shareholders and their proxies are standing near the table where registration for the public company’s general meeting is taking place. One of them, in an email to the editor of a national newspaper, wrote a few days before the meeting that “a heated general meeting is being prepared”, at which a clash is expected between one of the shareholders and also the former CEO and other shareholders holding significant stakes in the company. A polite quiet gentleman approaches the table, introduces himself and says that he is a shareholder of the company. As proof of this, he presents a copy of his registered certificate of ownership of 200 shares in the Company and declares that he wishes to attend a meeting of the Company

It would appear to be an innocent situation. However, the Company’s Board was well aware that this was an attempt to attack the Company in a “fishy” manner. The Board was faced with a choice at this point:

• to admit to the meeting a person who is not known to be a shareholder of the Company. This is because the person was not on the list of shareholders entitled to participate in the meeting provided by the National Depository for Securities. This solution involved being exposed to the charge of admitting an unauthorised person to a meeting at which company secrets may be decided, whether to
• refuse to admit that person to the meeting in the knowledge that such a person would file a security claim for the annulment of the resolutions adopted at the meeting, claiming wrongful non-admission to the meeting.

The Board of Directors chose the latter option, to the apparent satisfaction of the shareholders and proxies of the former CEO, who at the meeting, by another means, sought a hostile takeover of the company (as discussed in more detail in another post).

The rationale for such an action is very simple. The Supreme Court, i.a. in the judgment of 10.06.2005, II CK 715/04 stated that if a shareholder is unjustifiably prevented from participating in the meeting, it is not necessary to prove that if this shareholder had participated in the meeting, his/her votes would have determined a different outcome of the voting. The rationale for this position is based on the assumption that such a shareholder, by attending the meeting, would have been able to convince other shareholders to take a different decision.
An inadmissible shareholder therefore has an easier way to obtain security/validation of the resolutions adopted at the meeting (a symbolic number of shares is sufficient) than a shareholder attending the meeting. Indeed, with regard to shareholders attending the meeting, there is well-established case law and doctrinal opinion that in order to declare a resolution invalid/obtain security for resolutions adopted at the meeting, it is the shareholder attending the meeting who must demonstrate that the failures at the meeting or at its convening affect the outcome of the vote on the contested resolution.

Thus, a shareholder who is not allowed to attend the meeting may assist its principal in blackmailing the company or its hostile reception.

At the same time, this shareholder in the course of the security proceedings referred to the decision of the Court of Appeal in Łódź of 27.03.2015, ref. no. I ACz 393/15, by which the Court of Appeal in a similar case dismissed the complaint of another company against the decision granting security to a shareholder wrongfully not admitted to the meeting. However, the essence of the case boils down to determining what constitutes unjustified non-admission to a meeting.

In the case at hand, the Regional Court in Warsaw, which was considering the application for security of this “wronged” shareholder, even before the application was considered, had the company’s position indicating the purpose of the action of such shareholder and its connection with another shareholder who, at the meeting, was seeking a hostile takeover of the company.

At the same time, the company argued that in the above-mentioned case we are not dealing with an unjustified non-admission to the meeting, as the shareholder had not properly registered at the meeting, i.e. the shareholder holding dematerialised shares of the company had not, within the statutory deadline, applied to the entity maintaining the securities account for the issuance of a registered certificate of the right to participate in the general meeting (Article 4063§ 2 of the PCCC). In view of the above, a shareholder could not be included in the list of persons entitled to participate in the meeting drawn up by the NDS on the basis of information provided by the entities maintaining brokerage accounts about the issued registered certificates of the right to participate in the general meeting. As a consequence, the shareholder could not be included in the list of shareholders entitled to attend the meeting prepared by the management board based on the data provided by the NDS.

In view of the above data, the District Court in Warsaw dismissed the shareholder’s application for security. This ruling was upheld by the Court of Appeal in Warsaw. Subsequently, the Regional Court in Warsaw dismissed the shareholder’s claim, indicating that he was a shareholder of the company, but was legitimately not allowed to participate in the meeting due to his misconduct. The “aggrieved” shareholder did not even file an appeal[1].

The case described above demonstrates that even the most trivial event can be a very big threat when the company has become the target of a hostile takeover. The inclusion of a security regarding key company resolutions would allow the principal of the “wronged” shareholder to blackmail the company and gain “wind in the sails” on other fronts of an extensive corporate dispute.

It is worthwhile in such cases, even before the meeting, to have a professional advisor, because in the case of corporate disputes, even the most insignificant event, such as the receipt of innocent correspondence or the appearance at a meeting of a person claiming to be a shareholder of the company, may result in the company “exposing” itself to corporate blackmail or, in drastic cases, to a hostile takeover.

Comment [1]
In all these proceedings I was the company’s attorney.