NEW LIMITATIONS ON THE MAJORITY SHAREHOLDER’S RIGHT WITH THE AIM OF PROTECTING MINORITY SHAREHOLDERS

At the end of 2021, the Armenian Government, with the aim of improving the business environment of Armenia, initiated a legislative amendment to the RA Law “On Joint Stock Companies” (the “Law”), which introduced additional mechanisms to protect the interests of minority shareholders.

 

The major change in the Law, which came into force on January 1, 2022, concerns the procedure for concluding transactions with the presence of a conflict of interest in a joint-stock company. Namely, this amendment clarifies the degree of involvement of the interested shareholder in the decision-making process.

 

Hereinafter, the shareholder who has a conflict of interest is not entitled to attend the discussion or participate in the voting of the decision on the conclusion of the transaction in which there is a conflict of interest, and the adoption of which is transferred to the competence of the general meeting, such as:

 

  • the amount payable under the transaction, or the calculated market value of the property being the subject of the transaction, is equal to at least 10 percent of the value of the company’s assets,

 

  • a transaction or several interrelated transactions are concluded for the purpose of allocating voting shares and securities convertible to voting shares in a total quantity that exceeds 2 percent of the quantity of existing outstanding company shares

Also shares belonging to the interested shareholder are not taken into account when calculating the quorum of the meeting. In this case, the decision to conclude a transaction is made only by a majority of votes of the owners of voting shares and shareholders who have no conflict of interest in making such transaction.

 

At the same time, it should be noted that the aforementioned regulation is not applicable if all shareholders of the company have exercised their preemptive rights.

 

To make it easier to describe the legislative changes made, let’s imagine that a joint-stock company has two shareholders, one of whom - A owns 91% of the company’s shares, and the other B - 9% (minority shareholder). The Company makes a decision on the issue and relocation of additional shares (more than 2% of the quantity of existing outstanding company shares).

 

According to the new regulation, a shareholder who has a conflict of interest in this matter has no right to participate in the discussion and voting on concluding transactions for the purpose of placing additionally issued shares. That is, for example, if only shareholder A exercises its preemptive right and wants to purchase the additional issued shares, then the latter has no right to be present at the discussion or participate at the voting of the general meeting’s decisions regarding the transaction, and such decision can be (discussed) made exclusively by shareholder B.

 

Considering these legislative amendments, our team has developed legal solutions that will enable joint-stock companies and shareholders to avoid the obstacles introduced by these new regulations.

 

NOTE: This material is for general information only and is not intended to provide legal advice

Lilit Hakobyan, Associate, Attorney-at-law

[email protected]

 

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