Co-ownership of shares in a joint-stock company - the latest case law

The Supreme Court of Cassation ("SCC") recently ruled on the issue of exercising the right to vote in a Shareholders General Meeting of a joint stock company in cases of co-ownership of shares (Judgment No 101, rendered on 03.02.2021 under commercial case No 1510 on the inventory for 2019). The judgment of the Court is final and cannot be appealed.

The case

The Supreme Court of Cassation was referred to with the following question:

Does the co-owner of shares in equal proportion over each share have the right to participate independently in the Shareholders General Meeting without appointing a proxy together with the other co-owners of these shares in accordance with Article 177 of the Bulgarian Commerce Act ("CA")? [1]    

The case originated between a joint-stock company and a few of the heirs of a deceased shareholder, represented by their mother and legal representative, in connection with a conducted Shareholders General Meeting. In accordance with the provision of Article 177 of the CA, the persons who jointly hold shares, jointly appoint a common proxy. In the case at hand, the deceased shareholder left six heirs. However, as only three of them had appointed a common proxy to the General Meeting, the latter was not allowed to participate in it. For this reason, the main dispute between the parties originated around the issue of whether a co-owner of a share can exercise rights and independently participate in the work of a General Meeting in the absence of a common proxy appointed by all co-owners.

Arguments of the parties

The heirs claim that shareholding grants certain rights to each shareholder, regardless of whether they are an independent shareholder or a co-owner of shares. The exercise of voting rights is carried out jointly by all co-owners of the share, but this does not mean that all other rights should also be exercised in the same manner. For instance, apart from voting, participation in the General Meeting provides an opportunity for exercising shareholders’ control rights, as well as the opportunity for the shareholder to act in an advisory capacity.

The joint-stock company, on the other hand, assumes a different stand. It argues that the provision of Article 177 of the CA, according to which "the shares are indivisible"  and "when the share belongs to several persons, they exercise their rights in it jointly by appointing a proxy", prevents the independent participation of co-owners in the General Meeting in the absence of a jointly appointed proxy. Hence, the improper exercise of the joint rights over shares cannot serve as grounds for protection against the company's refusal to respect them.

Opinion of the Supreme Court of Cassation

According to the Supreme Court of Cassation, only shareholders with voting rights can participate in the General Meeting. Pursuant to Article 177 of the CA, the individual shareholders do not have such independent right, hence their non-admission to the work of the General Meeting in the absence of an authorised common representative does not constitute a violation of their voting rights as members. The right to participate in the General Meeting in the absence of prerequisites for exercising voting rights is not protected by law.

The Supreme Court of Cassation also considers that the joint exercise of the rights over a share serves as protection for the company against the uncertainty implied by the co-ownership of shares and the potential danger of this co-ownership blocking the organisation of the joint-stock company. Furthermore, the joint exercise of rights over a share is also aimed at protecting the joint-stock company’s capital.

According to the Court, co-owners of shares may exercise their voting rights only by authorising a common representative with these rights in writing pursuant to Article 177 of the CA. The Court considers irrelevant the way, in which this representative is nominated in the context of the internal relations between the individual co-owners. The only mandatory requirement is for a written power of attorney issued by all co-owners to be presented to the bodies of the joint-stock company. Additionally, according to the Supreme Court of Cassation, the co-owners of shares (who do not have a common proxy)’s actual presence and participation in the work of the General Meeting with an advisory vote is not protected by law.

In view of the above, the Supreme Court of Cassation has reached the following conclusion: 

The co-owner in equal proportion over each share has no right to participate independently in a Shareholders General Meeting, and there should be authorisation of a joint representative by all co-owners under Art. 177 of the CA.   

(1) Art. 177 of the Commerce Act: “The shares are indivisible. Where the share belongs to several persons, they shall exercise their rights in it jointly by appointing a proxy.”