The qualified majority is an action recognized by Law 32 of 1927 (Panamanian Corporation Law). However, this law dating from 1927 only dealt with the qualified majority for the reform of the articles of incorporation or statutes, the latter being the equivalent of the articles of incorporation in other jurisdictions. Due to the flexibility of this legislation, the qualified majority is today applied to endless actions in a company. The main purpose of this article is to describe the qualified majority and expose how said qualified majority can serve as a protection mechanism for a minority shareholder in a company.
It is usual for companies to have shareholders with different percentages of participation. The minority shareholder is one who, in a company, owns a smaller number of shares compared to one or more shareholders.
The minority shareholder by its nature is in a disadvantaged position compared to the majority shareholder or shareholders, even when they all have the same rights in a company. This disadvantage arises when a shareholders’ meeting is held and the minority shareholder’s vote, for or against, is not enough to tip the balance against the community of shareholders in a company. Therefore, and in situations like these, the minority shareholder has no choice but to abide by the decisions of the majority, even though such decisions could have a negative effect on the business of the company.
The qualified majority tends to be the first line of defense of a minority shareholder in a company, since the essence of this mechanism is that one, several or all the decisions that must be taken by the shareholders in a company require the presence (quorum) and affirmative vote of a percentage greater than the majority. The qualified majority is, therefore, essential for a minority shareholder as long as the percentage of his shares is contemplated within the percentage of the qualified majority.
Here is an example: 100% of the shares of a company is divided between Shareholder A with 75% and Shareholder B with 25%. The qualified majority to approve obtaining a credit is 80%. Therefore, the affirmative vote of Shareholder A and Shareholder B is required to approve obtaining the credit.
From this explanation it is likely that questions arise such as: (1) How is the qualified majority created or constituted?; (2) When must the qualified majority be constituted?; and (3) What decisions in a company can be subject to a qualified majority? We proceed to answer each of these questions.
The qualified majority can be constituted in the articles of incorporation, bylaws, shareholders’ agreement and any other contract or company agreement where the consent of all the shareholders is expressed. In practice, it is usual for the qualified majority to be constituted in shareholder agreements, but nothing prevents it from being regulated through other types of corporate documents. Consequently, it is a fundamental aspect for the constitution of the qualified majority that all shareholders grant their prior consent.
In reference to the moment, time or period in which the qualified majority must be constituted, there is no specific one as such. The qualified majority may be constituted when so agreed by all the shareholders, which may even be after the company is carrying out the business or acts for which it was constituted. However, and in the case of a minority shareholder, it is recommended that the qualified majority be agreed prior to the start of business or acts of the company.
Finally, any decisions, whether or not they are reserved for the shareholders in accordance with applicable law, may be subject to a qualified majority. Also, it is possible to agree that all the decisions that the shareholders must take are subject to the qualified majority.
In practice, it is usual for a certain number of relevant actions be subject to a qualified majority, these being regularly those that are of great importance for the minority shareholder. Some examples are: (1) the buying and selling of assets; (2) the obtaining of credits or the establishment of liens on assets of the company; (3) calls for additional capital; (4) the dissolution or liquidation of the company; (5) the amendment to the articles of incorporation, among others.
Therefore, it will be the ability of the minority shareholder to negotiate with one or several majority shareholders, which will dictate and determine the constitution of the qualified majority on one, several or all the decisions that must be taken by the shareholders in a company.
At LOVILL, we can provide you with the necessary legal advice in order to protect your interests as a shareholder in a company. We have a team with extensive experience in company and corporate law, with the capacity to advise you on this and any other similar matters.
If you wish to know more about this and other issues related to shareholders and society, please feel free to contact us.