AGMs during the pandemic   

The COVID-19 pandemic has severely affected the economic heartbeat around the world and faced businesses with a number of unprecedented challenges, both from a purely practical and a legal standpoint. Various measures have been introduced to mitigate and reduce the adverse effects - provision of remote services, digitalisation of the activity, audio and video conference meetings and trainings, etc. Numerous legal entities were forced to suspend their operations altogether, leading to severe and in some cases irreversible financial damage. In light of such a situation, the Government of the Republic of Bulgaria has taken diversified measures in order to limit economic damage and protect the interests of businesses. Some of the measures included extension of the deadlines for filing annual financial statements of companies and declarations to report the absence of operations, social measures to support employees and workers, etc. However, many legal issues remain unresolved, in particular with regard to commercial law.

In view of the above, this article addresses the legal status of the general meetings of shareholders and stakeholders in the context of the COVID-19 pandemic and the associated restrictions on movement , which continue to this day. Attention is drawn to limited liability companies and joint-stock companies as the most common commercial form of partnership.

Shareholders General Meeting

The Shareholders General Meeting is the supreme body of a limited liability company ("LTD"). It consists of all shareholders and decides on fundamental questions related to the organisation and activities of the company. For this reason, the proper and unimpeded performance of its functions is vital. The Shareholders’ General Meeting makes decisions by holding meetings. In order for them to be lawful, there exist requirements related to the presence of a quorum and a majority for voting.

However, what happens when a date is fixed for the Shareholders General Meeting to be held at a certain place, but some of the shareholders cannot attend in view of the imposed restrictions on movement and subsequent compliance with quarantine in the conditions of the COVID-19 pandemic? Experience from recent months shows that this is a completely realistic scenario. For example, a LTD, which has three shareholders living in different European countries, but the meeting should be held in Bulgaria.

The Shareholders General Meeting cannot be held in a reduced quorum[1]. Although there is no explicit quorum requirement in the Bulgarian Commerce Act (“CA”), analysing the provisions on majority decision-making in limited liability companies, it follows that shareholders holding sufficient shares in the company’s total capital must be present in order for a lawful decision to be made.

One of the possibilities provided by the CA is decision-making of the Shareholders General Meeting in absentia. In accordance with the Act and applicable case law, in order for the decisions to be duly adopted, two conditions must be met. Firstly, the shareholders need to express their consent to the proposed decision in writing and secondly - the consent has to be expressed by all of the shareholders, i.e. with unanimity. When making decisions in absentia, the question of a majority is not raised at all.Decisions should be taken unanimously by all shareholders and not unanimously by those who have declared written consent and signed. The decision is considered taken only after signing the consent of the last partner in the company entitled to vote. Even if only one partner has not signed, nor expressed their consent, we enter the hypothesis of a non-taken, rejected decision[2].

The above-described possibility is a practical and convenient solution for shareholders when they cannot attend the meeting. The purely technical drawing up of the minutes of the meeting and the application of the signatures can be done both on one document and on several different ones, which in their entirety and in content form a single document. Again it should be underlined that decision-making in absentia requires unanimity and the application if the signatures of all shareholders.   

What happens if some of the shareholders still want the Shareholders’ General Meeting to take place with the physical presence of its participants?    

In the absence of quorum, as noted above, the Shareholders General Meeting cannot be held, as the necessary preconditions for its lawful conduct are not met and, accordingly, no decisions can be made. In this case, the meeting should be postponed so that all shareholders can be present (or at least a sufficient number to form a quorum).

Nevertheless, if there is a quorum but one of the shareholders is unable to attend (due to movement restrictions and its consequences related to the spread of COVID-19), then there is a risk of damaging their interests as a partner in the company or voting on issues , on which he may disagree, express a dissenting opinion, etc.

The Commerce Act provides the shareholder with a few possibilities: (i) protection of their membership right[3], and (ii) revocation of a decision of the general meeting[4].

The claim under Article 71 of the CA aims to protect the shareholder’s membership right and their individual rights as a member. The latter are tangible and intangible and include the right to be involved in the management of the company, to participate in the distribution of earnings, to be informed on the course of the company’s business, to review of the company's documents, and the right to be entitled to receive a liquidation share.The claim under Article 74 of the CA, for its part, aims at the shareholder to revoke a decision of the Shareholders’ General Meeting when the same contradicts the mandatory provisions of the law or the Memorandum of Association of the company. In case of a flawed procedure for convening and holding the general meeting, the partner has the claim under Article 74 of the CA at their disposal. The non-observance of the rules for convening the general meeting by the managing director will affect the legality and validity of the decisions taken by the shareholders[5].

Therefore, in the hypothesis under consideration, the invited but absent shareholder has the claim under Article 74 of the CA at their disposal. The claim will be admissible, i.e. it will be considered by the competent court, as the shareholder has a legal interest based on their status as a shareholder in the company, but it is debatable whether the claim is justified, i.e. whether it will be respected by the court. At present, there is no case law on the question of whether a partner who has been duly notified of the Shareholders’ General Meeting, but due to objective impossibility was not able to attend, may request revocation of the decisions adopted under Article 74 of the CA.According to the applicable legal provisions and judicial acts, if a meeting is held with the required quorum and a duly notified shareholder is not present, then there is no reason for the latter to challenge its legality and the decisions taken at it. Also, the partner may not file a claim under Article 71 of the CA for protection of their rights as a member, because in the described factual situation such a claim will not be respected.

Is the hypothesis of Article 306 of the CA regarding force majeure applicable and can it be invoked by the shareholder who has not had the opportunity to attend the Shareholders General Meeting? This provision is found in Part Three "Commercial Transactions", Chapter Twenty-One "General Provisions", Section IV "Non-performance" of the Commerce Act. From its systematic place it can be concluded that it is applicable to legal relations related to commercial turnover and transactions between merchants. The case law has not considered the question of whether force majeure finds application in the event of an objective impossibility for a shareholder to attend the Shareholders General Meeting.

Stockholders General Meeting

The Stockholders General Meeting is the supreme body of a joint-stock company („JSC”). It consists of all stockholders with voting rights and deciding on fundamental questions related to the organisation and activities of the company falls within its competence. Similar to the LTD, it is important to ensure its proper and unobstructed functioning.

The Stockholders’ General Meeting makes decisions by holding meetings. In order for them to be lawful, there are requirements related to the presence of quorum and a majority for voting. Unlike the Shareholders General Meeting of a LTD, the requirements for quorum of a Stockholders General Meeting of a JSC are different. This is due to the fundamental difference in the nature of the relations between the participants in the two companies.

As a general rule, the Memorandum of Association of a JSC may provide for a requirement for a quorum of the capital (Article 227(1) of the CA). The absence of the necessary representation of the capital, in the sense of the introduced with the optional clause of Article 227(1)1 et seq. of the CA rule, has a negative impact on the regularity of the respective Stockholders‘General Meeting and makes it impossible for the participants in its work to take binding decisions[6]. In any case, certain decisions can only be taken by a certain majority[7].

On the other hand, the provision of Article 227(3) of the CA[8]introduces the so-called "reduced quorum", i.e. if the scheduled general meeting cannot be held due to absence of quorum, the meeting determined after it shall be considered lawful, regardless of whether the representation of the capital is present. However, it should be underlined that the second general meeting held in the absence of quorum is lawful, but it can only make decisions by the majority specified in the law or the Articles of Association. The quorum is relevant to the legality of the holding of the general meeting, and the majority - to decision-making[9].

Therefore, when holding a Stockholders General Meeting in a reduced quorum, there is a theoretical possibility that the rights of a stockholder (or stockholders) will be affected due to the objective impossibility of the same to be present and to participate in the discussions and take part in the decision-making. In any case, each shareholder can claim the protection of his/her rights under Articles 71 and 74 of the Commerce Act at their disposal (see above). The admissibility and merits of these claims in such a case are a different matter and should be the subject of a separate examination.

Conclusion and practical aspects

The requirement for the physical presence of shareholders and stockholders (whatever the reason for such a requirement may be) needs to be seriously reconsidered in the context of COVID-19 and its consequences, which at this time cannot be accurately predicted. Although this is a matter of individual decision for each legal entity, the requirement for physical presence can lead both to the restriction and thus infringement of the rights of shareholders/ stockholders, and to the creation of preconditions for various forms of abuse due to the absence of a certain person at a general meeting   

Technical progress also requires legal progress

In the context of global modernisation and digitalisation of the entirety of social and economic life, the possibility for holding remote general meetings (of both the shareholders and stockholders) should be introduced. This can be achieved through conference calls and the use of various technical means to achieve them. The world is currently facing an unprecedented challenge in modern history caused by the COVID-19 pandemic. For this reason, the law and the legislation must be adapted accordingly to ensure the security of commercial turnover and the economic development of society. 

[1] Judgement № 67 / 21.02.2005 of the SCC on civil case № 605/2004, Commercial Department

[2] Judgement № 53 / 09.07.2009 of the SAC on commercial case № 116/2009, Commercial Department

[3] Article 71 of the Commerce Act: “Any member of a company may bring an action before the district court having jurisdiction over the company’s registered office to protect their membership right and individual rights as a member, when these have been violated by bodies of the company.”

[4] Article 74 of the Commerce Act:

(1) “Every partner or shareholder may file a request before the district court, having jurisdiction over the company’s registered office, to revoke a decision of the General Meeting, if the decision contravenes mandatory provisions of the law, the Memorandum of Association or, respectively, the Articles of Association of the company. The request shall be filed against the company.”

(2) “The request shall be filed within 14 days after the date of the General Meeting, if the requisitioner was present or duly notified, or, if not, within 14 days after becoming aware of the decision, but not later than three months after the date of the General Meeting.”

[5] Judgement № 36 / 26.05.2015 of the SCC on commercial case № 685/2014, I commercial division, Commercial Department

[6] Judgement № 174 / 26.05.2008 of the SCC on commercial case № 609/2007, II commercial division, Commercial department

[7] Article 227(2) of the Commerce Act: “Decisions under Article 221, Items 1 - 3 may be adopted only if at least one-half of the capital.”

[8] Article 227(3) of the Commerce Act: “In the absence of quorum in the cases under Paragraphs 1 and 2, a new session may be scheduled after at least 14 days, and that session shall be valid regardless of the capital represented. The date of the new session may be indicated in the notice on the first session as well.”

[9] Judgement № 117/ 11.03.2005 of the SCC on civil case № 494/2004, I commercial division

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