Articles determine the nature of the company

A company’s articles of association determine the nature of the company (take for example the description of the purpose), regulate the internal competences (e.g. dismissal and appointment), limit the powers (e.g. decisions requiring approval), determine the internal responsibilities (e.g. drawing up the annual report and accounts), regulate the external powers (who represents the company in law), determine the method of decision-making, etc. As indicated above: the articles of association are somewhat comparable with the constitution or the state regulations of a country. The articles of association are therefore essential to the proper functioning of a company.

Precisely because the articles of association have an essential function, it is customary in practice to attach special conditions to decision-making aimed at amending the articles of association: it is usual to prescribe both what minimum proportion of the capital must be present or represented in the meeting of shareholders (e.g. 3/4 of the issued capital), also referred to as a quorum, and what proportion of it must vote in favor of the resolution to amend the articles to enable the resolution to be passed (e.g. 3/4 of the votes present).

The inclusion in the articles of association of a supermajority and the requirement for a quorum for certain resolutions is done from the idea that it is desirable to create as broad as possible a support among the shareholders.

Experience has shown that it is common among companies with many (mainly smaller) shareholders for a proportion of the shareholders not to attend a meeting of shareholders. This is generally referred to as shareholders’ absenteeism. It can certainly make a difference to the voting relationships whether a proportion of the shareholders is or is not present or represented at the meeting. Two examples will illustrate this.

Example 1

A has 40% of the shares in a company (and therefore 40% of the votes) and wants a particular resolution to be passed. All the shareholders are present or represented. The other shareholders are against the proposal. The proposal is rejected with 40% for and 60% against.

Example 2

A has 40% of the votes and wants a particular resolution to be passed. Of the other shareholders 25% are not present or represented at the meeting. Present at the meeting are therefore: A (the 40% shareholder) and only a proportion of the other shareholders (who together hold 35%). Now the resolution is passed, because A can bring out about 53% of the votes present at the meeting.

It will undoubtedly be desirable from the perspective of the 40% shareholder if resolutions can be passed with an absolute majority, because he can then profit from the fact that a proportion of the shareholders does not participate in the meeting of shareholders. (To be continued)

Karel Frielink
Attorney (Lawyer) / Partner

(11 October 2013)

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