Legal Updates

Use in bad faith of a board member’s veto right may result in a denial of such right

November 10, 2020

As part of an investment agreement in a company, it was determined that the CEO will have a veto right as to decisions regarding the employment and dismissal of management, subject to consultation with the other board members in good faith. At a dispute regarding the CEO’s performance, a search committee was nominated by the board for the purpose of finding a new CEO, which the current CEO sought to veto.
The Court held that the use of the veto right was done both in contrary to the agreement and to the CEO's duty of good faith, in a manner that negates the right. A contract’s interpretation is made from a point of view of the contract’s wording. Nevertheless, when the wording is inarticulate, the parties’ intention at the moment of execution must be reviewed. Further, when reviewing a grant of a veto right, a shareholder’s obligation to exercise his rights fairly, in good faith and for the benefit of the company should also be taken into account. Here, the agreement clearly stated that the veto right is subject to good faith consultation with the board of directors. Thus, the CEO’s refusal to cooperate with the search committee, denied him his veto right.