Why Shareholders’ General Meetings Matter

Especially Under the New Commercial Code

In the period between the beginning of October and the end of December most publicly held companies convene their general meetings. This includes firms in the financial sector, whose high-profile assemblies are often newsworthy.  Therefore, this is high time to talk about shareholder meetings and their relevance apart from fulfilling legal requirements.

It is often said that shareholder meetings are simply a formality. They have no real power except rubber-stamping the proposals of the board of directors. Whatever decisions are made at shareholders’ general meetings are made because the board wants them to be. If at all, the instances where shareholder meetings opted out of board proposals are few and far between. This is because, under the law, only the board of directors can prepare the agenda of the general meeting, and the meeting cannot discuss matters which are not on the agenda. But both by law and practice, the board prepares not only the agenda but also the proposed resolutions for approval. In effect, it is not just the agenda that the board presents to the meeting; it includes detailed proposals along with each agenda item.

The law’s focus on appointment and removal of power

Traditionally, shareholders’ corporate governance power remained meaningful only in one respect – the power to appoint and remove directors. It is the only decision that could be taken without board initiation or proposal. Even that is in theory. All other decisions have to be proposed by the board of directors. The symbolic supremacy of the general meeting is, thus, limited to rejecting or approving proposals made by the board. The rationale behind the exception with respect to the removal of power is clear. The board cannot be expected to propose its own removal. Thus the removal of one or more board members can be initiated, and decisions can be taken in any general meeting even if it is not on the agenda. Theoretically, this means any shareholder can propose for one or more board members to be removed, and the meeting can discuss the motion.  However, the incidence of such an agenda popping up in a meeting is unheard of.

The new Commercial Code increases shareholder meeting power. One important inclusion in this respect is the right of shareholders to introduce an agenda for the meeting. The new Code allows for one or more shareholders that hold at least five percent of shares to propose an agenda for the general meeting either before the notice of the shareholders’ meeting is publicized or within three days thereafter. Though the agenda doesn’t have to be hostile to the incumbent board members, such a proposal will naturally receive a hostile reception from the board. In any case, this is another avenue for the shareholders’ meeting to at least consider, if not pass, decisions not proposed by the board.  One may wonder why care for putting an agenda in a meeting convened by the board in as far as the new code allows shareholders with the same five percent shares to request the court to convene a meeting chaired by themselves or their designated person. Apparently, this is a more effective option. However, for widely held companies the cost implication of convening such a general meeting implies that courts will not be easily persuaded to grant the request. And for that matter, the law is not even clear who would bear the cost of the meeting in such instances. The same challenge accompanies a general meeting convened by auditors at the request of shareholders representing at least 10 Pct shares. The easier option, thus, remains using the meeting convened by the board at the company’s own cost.

Further, the new Commercial Code enhances shareholder meetings’ control power as it grants shareholders other key privileges. One is the power to require investigation into specific transactions. Accordingly, 30 days before the convocation of a general meeting, one or more shareholders, regardless of the shares they represent, can request the board of directors to include a proposal for the appointment of an investigator to examine specific transactions or activities of the company.  This power can be even more effective than agenda-setting power. The other key power in the new Commercial Code is t one for controlling related party transactions. In an enhancement to monitor  related party transactions that existed in the old code, the new code requires that transactions between the company and the persons that control it (i.e., the senior management, board members and controlling shareholders, and other persons affiliated with them) be approved in advance by the general meeting if the size of the transaction is equal or greater than 10 Pct of the company’s assets. For related party transactions worth less than 10 Pct of the company’s asset size, the old procedure of ex-post shareholder approval applies.

Despite these newly enhanced powers, shareholder meetings don’t seem to have grasped them. It is now the second year since the new Commercial Code has come into effect. However, even in the financial sector where there are already many persons holding a five percent stake, no one has yet made use of these newer powers.

The inherent paralysis of shareholder meetings

In large companies, shareholder meetings are paralyzed. Paradoxically, the paralysis gripping such companies have its sources both in performance successes and failures.If companies suffer losses or perform below expectations, their shareholders lose interest, and many of them likely will not even show up for the meetings. However, shareholder interest in monitoring doesn’t change if companies register good profits. In such cases, no one cares for the details.

Secondly, most shareholder meetings take place in tight timelines. They often start late in the morning because it takes time until the required quorum is full for meetings to kick off. This means little time is left before lunchtime for the crammed agenda items to be covered. Even worse, most of this time is wasted on observing formalities rather than on making deliberations. Hence, no time for adequate deliberation on any topic other than voting on the board’s proposed resolutions.  Often a couple of participants are invited to comment on board proposals; as a result, such proposals pass with no or little changes. Thus, shareholder meetings rarely give the opportunity for alternative proposals from the shareholders.

Another factor contributing to the paralysis of shareholder meetings is the information asymmetry between the board and the shareholders. In a way, most of the participants in the meeting have as much information as the board provides at the meeting. No more, no less. The external auditors are meant to bridge this information asymmetry problem. It is questionable whether they are doing so. However, I will leave the question of whether auditors are living up to the expectation of the auditors themselves. Perhaps cognizant of this, the new Commercial Code improves access to information for shareholders by relaxing the old code’s restriction on the list of documents that can be accessed by the shareholders in preparation for the meeting. Hence, shareholders can request any document that will help them take a position on the agenda of the meeting. But it looks impractical.

From shareholder paralysis to shareholder activism

Shareholder activism includes the proper exercise of power by shareholders be it by setting an agenda and proposals for shareholder meetings, proposing an investigation of specific corporate transactions, or lawsuits against the board, and so on. Steady monitoring by the shareholders keeps the management on its toes and ensures the optimal utilization of the company’s resources through disciplined governance. Consequently, the company’s performance improves, thereby improving its profitability and improving its shareholder value in the long run. Hence, both the company and its shareholders stand to benefit from shareholder activism. In spite of the hitherto inactivity, the future may bring changes in shareholder activism, particularly in larger companies.

Apart from the enhancement of shareholder powers under the new Commercial Code, the implementation of the capital market proclamation enables institutional investors can create more activist shareholders. Institutional investors such as venture capitalists, mutual funds, collective investment funds, and pension funds, if liberated from their regulatory chains and banks, can bring about change in shareholder activism. The imminent emergence of blockholders in the banking industry (as far as foreign banks will be allowed to hold up to 30 Pct shares) implies that effective monitoring by shareholders will not be too distant a reality. Even the expansion of bigger law firms may contribute to the shareholder governance landscape.

Shareholder activism is not always benign, however. In reality, not all activists work for the good of the company. In the same way, that shareholder activism can serve in influencing corporate governance positively, it can also be used by unscrupulous shareholders to twist the arms of genuine management and obtain private rents. However, if companies are performing well, activists cannot get backers. If the company is making billions in profits, who cares for a million badly spent here or there? On the contrary, activists can play great roles in poorly run companies and can get a good following.

11th Year • Nov 2022 • No. 112