Corporate Law Malta

The relationship between majority rule and minority protection is an important relationship under Maltese corporate law when it comes to shareholders’ rights. Maltese law attempts to strike a balance between these two facets to mitigate any situation which may heavily prejudice the position of the minority shareholder. The provisions of the Companies Act (’the Act’) underline the importance the legislator places on minority shareholders’ rights; the law itself, therefore, does not desire a situation where a set of shareholders see their powers dampened by unfair practices and decisions.

There are two main avenues through which minority shareholders may preserve their rights at law. The first avenue is that of instituting the action provided for under Article 402 of the Act – the unfair prejudice remedy – while the second avenue emanates from Article 214(2)(b)(iii), which provides that a minority shareholder may opt for the winding up of the company where there are ‘grounds of sufficient gravity’ as defined under the Act.

Under Article 402, the Act provides minority shareholders of a company the right of redress to the court if a situation arises where the company’s affairs have been, are being, or are likely to be conducted in an oppressive, unfairly discriminatory or prejudicial manner in relation to said minority shareholder and which goes against his and/or his fellow members’ interests.

The Court, in such cases, is afforded discretion to determine each case individually. Where it finds that the complaint is factual and the circumstances dictate that it is just and equitable to do so, it may make such orders as to:

• Regulate future affairs and conduct of the company; or
• Restrict or forbid that any proposed act be carried out; or
• Mandate that the company act in a manner in which, according to applicant, it has failed to act; or
• Provide that a particular member’s shares be purchased by other member/s or even by the company itself. In the latter case, the Court may also declare that the company’s issued share capital be reduced; or
• Mandate that compensation be paid to the applicant by the person deemed responsible for the loss or damage incurred due to the act or omission complained of; or
• Mandate that the company be dissolved and, consequently, wound up; or
• Have the company amend its Memorandum and Articles of Association (M&A)

The Maltese Courts have noted many a time that, for this action to have a successful outcome, the conduct complained of need not be unfairly prejudicial, oppressive or discriminatory towards the plaintiff, meaning that said acts or omissions may be unfairly prejudicial, oppressive or discriminatory towards another shareholder of the company. The Courts, furthermore, have clarified that it does not suffice to complain that the conduct is oppressive, prejudicial or discriminatory vis-à-vis the general interests of the shareholders. The Courts have also noted that, to assess whether said conduct has occurred, one ought to assess whether the day-to-day running of affairs of the company conflicted with the company’s M&A.

Moving on, Article 214 of the Act confers upon the minority shareholder the right to have the company dissolved and, consequently, wound up. Specifically, Article 214(2)(b)(iii) provides that a company may be dissolved and wound up by shareholders where there exist ‘grounds of sufficient gravity’ which warrant said dissolution and consequential winding up.

The Courts, in this regard, are granted a wide margin of discretion in determining what constitutes said grounds of sufficient gravity. This is a direct consequence of the fact that the Act itself does not provide any definition of which grounds are considered sufficiently grave for the purposes of this Article.

Once the Courts would have determined that such grounds exist, it will proceed to order the dissolution and consequential winding up of the company. The Courts may also consider conduct and any other factor happening during the course of proceedings, meaning that it is not confined to merely consider conduct occurring prior to the action having been instituted.

The remedy created by virtue of Article 214 of the Act is, therefore, another powerful tool in the arsenal of the minority shareholder. The discretion granted to the Courts in determining what constitutes grounds of sufficient gravity evinces this remedy’s advantageous nature.

Apart from these two avenues, the Act grants various other remedies to minority shareholders in order to preserve their rights. These may be considered as falling under two facets: individual membership rights and qualified minority rights.

The former set of rights relate to those of:

• being notified of general meetings;
• requesting the court to order that a general meeting be held;
• requesting that the court appoint a director, especially in instances where the number of directors falls below minimum provided by the law; and
• the right to request the court to appoint an auditor

 On the other hand, the latter set of rights relate to, inter alia, those of:

• requesting an extraordinary general meeting;
• demanding a poll;
• applying for an investigation into the company’s membership; and
• the removal of a director.

Therefore, the number of procedures to sufficiently protect minority shareholders and their interests as a whole, as created by the Maltese Companies Act, are manifold. However, the Act attempts to ensure that this is done by also considering that the company is not put into a position which jeopardises its operations and day-to-day running of affairs.

For more information or personalised assistance in corporate law matters please contact us at info@gtg.com.mt