In a recent case, a decision of a Mexican court was made public [1], which brings us back to the topic of whether, in all cases, the majority shareholder in a business company will necessarily have absolute control over its decisions.
That is to say, if one or more shareholders own the majority of the shares of stock in a company, it will allow them to make not only the most important decisions for the company but also those made in its ordinary course.
For example, from making decisions such as a merger, dividing, transforming, or liquidating the company to adopting important but less significant ones like granting powers of attorney, appointing managers and statutory auditors, or deciding whether or not to hire a particular supplier, to name just a few examples.
The court’s ruling
According to the aforementioned court’s criterion, a shareholder who holds 99% of a company’s shares of stock has dominant will and decision-making power in its supreme body, which is the general meeting of shareholders.
The above is because their decisions are made by majority vote, and the mentioned majority shareholder, according to the court, is entitled to one vote for each of their shares of stock. To support this, the court cited articles 77, 78, and 113 of the General Business Company Law (the “Law”) as the provisions that underpin his determination. [2]
The court concluded that a legal entity (a business company) that claimed in a constitutional lawsuit (amparo) not to have been summoned to the main lawsuit where it was sued, thus presenting itself as a third party by analogy, will not be able to have that status in an indirect constitutional trial (amparo indirecto). The court determined the above because its majority shareholder, who holds 99% of the shares of stock, was also sued in that main lawsuit, and this shareholder did appear in court to defend their rights.
A third party, by analogy, is a party in a trial who, having been sued, was not summoned to court or whose service of process was not carried out legally and therefore could not appear in the proceedings to defend their interests.
The court observed that the majority shareholder has dominant will and decision-making power in the shareholders’ meeting, who in turn can make agreements ranging from the continuation of the meeting to the appointment of representatives to attend the lawsuit. As a consequence, the company is so closely tied to the shareholder that it is undeniable that it had direct, exact, and complete knowledge of the lawsuit to which it was not summoned. [3]
Analysis of the court’s decision
The court’s decision raises several points that are important to address:
1.- Even though the shareholder holds 99% of the shares of stock of the company to which the constitutional protection (amparo) was denied, they are two distinct persons. That is to say, they have their own legal capacity, with distinct assets.
The court did not consider that the diverse legal capacities of the company and its individual shareholders were relevant for the company to be recognized as a third party by analogy.
The court observed that the majority shareholder has dominant will and decision-making power in the shareholders’ meeting, who in turn can make agreements ranging from the continuation of the meeting to the appointment of representatives to attend the lawsuit. As a consequence, the company is so closely tied to the shareholder that it is undeniable that it had direct, exact, and complete knowledge of the lawsuit to which it was not summoned. [3]
Analysis of the court’s decision
The court’s decision raises several points that are important to address:
1.- Even though the shareholder holds 99% of the shares of stock of the company to which the constitutional protection (amparo) was denied, they are two distinct persons. That is to say, they have their own legal capacity, with distinct assets.
The court did not consider that the diverse legal capacities of the company and its individual shareholders were relevant for the company to be recognized as a third party by analogy.
Even though the summons, being one of the most formal acts recognized by Mexican law, was not served to the company, the court gave greater weight to the shareholder’s majority status. Which led the court to conclude that it was undeniable that the company, through the influence the shareholder has over the meeting, had direct, total, and precise knowledge of the main lawsuit.
2.- The company, being a legal entity that acts through its legal representatives, does not become aware of the existence of a lawsuit against it because one of the shareholders has also been sued, and the latter has indeed become aware and attended the lawsuit in defense of their interests.
Typically, acknowledgment of a lawsuit is given through the holding of a shareholders’ meeting, where one item on the agenda is precisely the disclosure of the lawsuit against the company by the individual shareholder being sued and the adoption of measures to address it. Or that the shareholder has reported to the board of directors the existence of such a lawsuit.
Therefore, the company’s awareness of the existence of the lawsuit does not occur automatically.
Now, if typically the summons of a legal entity to a lawsuit must be understood with a legal representative with sufficient powers and following very specific legal formalities, one might question how service of process can be given with a shareholder, who, even if they are a majority shareholder, is not necessarily the administrator or attorney-in-fact of the same.
3.- Perhaps the most important element to consider is that the court’s criterion will not necessarily be applicable to all shareholders and companies that find themselves in a similar or analogous situation.
As I indicated in the introductory part of this article, the court assumed that the shareholder holding 99% of the shares of stock has the right to one vote for each of their shares of stock and therefore has dominant decision-making power in its highest governing body.
The type of shares of stock referred to by the court are shares of common stock, whose regulation is contemplated in Article 113 of the Law, which states that “each share of stock shall have the right to one vote only.”
However, the Law itself recognizes the existence of another type of shares of stock, for example, limited-voting shares of stock, whose regulation is also contained in said Article 113.
Limited-voting shares of stock are those given to shareholders who prefer a quicker return on their investment in exchange for sacrificing their voting rights, except in very specific matters: extension of the company’s duration, early dissolution of the company, change of the company’s purpose or nationality, transformation of the company, and merger with another company.
The limitation of voting rights to the aforementioned matters for shareholders holding these shares of stock is in exchange for receiving a 5% dividend that is paid before shares of common stock or a higher dividend if agreed upon in the bylaws. As well as that, in the event of liquidation, these are reimbursed before the shares of common stock.
Limited-voting shares of stock also enjoy other rights, such as reviewing the financial reports and corporate books and the rights granted to minorities by law. Nothing more.
This type of share, as well as others that limit the voting rights of shareholders but grant economic benefits not enjoyed by shares of common stock, are recognized by the Law and their existence and regulation can be established in the bylaws of a company or in any subsequent modification thereof.
Final comments
The important point is that the holders of those that are not shares of common stock, even if they represent an absolute majority, do not ensure that their holders have the dominant will and decision in the general shareholders’ meeting for all the topics discussed.
For example, limited-voting shares of stock do not vote on the appointment of attorneys-in-fact and their instruction to attend a specific lawsuit. So that limits their power and control, regardless of whether they are the majority.
The court’s ruling invites reflection on the apparent dominant decision-making power that majority shareholders of a company might have. The court’s decision could be applicable in cases where the shares of stock owned by a shareholder are shares of common stock.
We have already seen that there are other types of shares of stock, such as limited voting shares of stock, that do not necessarily confer on their owners absolute decision-making power on all matters discussed in shareholder meetings, especially those concerning the ordinary course of the company. When the majorities are represented by limited voting shares of stock or analogous, in my opinion, the application of the jurisdictional criterion I analyze would be very questionable.
To read the court’s decision, visit the following link: https://sjfsemanal.scjn.gob.mx/detalle/tesis/2028997
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[1] Second Collegiate Court in Civil Matters of the Third Circuit
[2] Articles 77 and 78 refer to limited liability companies, whose contributions are not represented by shares of stock, unlike limited liability stock corporations.
[3] Thesis: III. 2nd. C. 38 C (11th). THIRD PARTY BY ANALOGY. THE LEGAL ENTITY WHOSE MAJORITY SHAREHOLDER HOLDING 99% OF THE SHARES OF STOCK APPEARED IN THE NATURAL LAWSUIT TO DEFEND ITS RIGHTS AS AN INDIVIDUAL DEFENDANT DOES NOT HAVE THAT CHARACTER IN THE CONSTITUTIONAL LAWSUIT (AMPARO). Digital Record: 2028997.