Corporate governance in companies: a way to reduce the risk of disputes

18 January 2024 | Knowledge, News

When an external investor joins a company or when entrepreneurs set up a joint venture, it is important to develop corporate governance principles, i.e. standards for decision-making, management, supervision and interaction between company bodies and owners.

In practice, the most relevant fundamental aspects of corporate governance are usually related to:

  • Majority and quorum requirements for company bodies’ meetings
  • A list of matters requiring a general meeting resolution (either unanimously or by qualified majority) or the supervisory body’s approval, i.e. so-called reserved matters
  • The power to appoint and dismiss management board and supervisory board members
  • Deadlock resolution mechanisms

Majority, reserved matters, quorum

The most basic solution for adapting the decision-making process to the needs of company owners is to modify (if possible) the rules under the Companies & Partnerships Code regarding the majority of votes required for resolutions to be effectively passed and the list of matters on which such resolutions are required.

Very often, the governing documents of companies also set out quorum requirements, i.e. the number of shares that must be represented (present) at the meeting in order for it to be held and for resolutions to be validly passed.

Appointment and dismissal of members of company bodies

The Code’s provisions on the appointment and dismissal of members of company bodies are most often modified in practice by granting personal powers to appoint and dismiss a certain number of members, depending on the number of shares held by a given shareholder.

Resolving deadlocks

In practice, deadlock resolution mechanisms most often apply to companies where the number of shares held by shareholders (or certain groups of shareholders, e.g. founders and investors) is equal or so close that, in the event of a disagreement or dispute, it may appear difficult to obtain the required majority.

In such situations, deadlock resolution mechanisms are the way to force a decision. Their use is often so severe for one of the parties that the mere threat of their use is enough to force a compromise. Such solutions usually amount to selling shares to the remaining shareholders.

Establishing corporate governance that meets the expectations of all company owners and ensures a clear division of responsibilities (and therefore accountability for their fulfilment) is critical to ensuring smooth decision-making and oversight.

However, this often avoids the potential disputes that can arise when the solutions provided for in governing documents are merely standard and not tailored to the needs of a particular company.

Source: Rzeczpospolita

Date: 26.02.2024

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Adam Czarnota

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