Legal Updates

A decision made in breach of a veto right set in the articles of association will be considered a decision unduly taken

April 17, 2022

Company shareholders decided that part of the investment in the company will be converted into shares, without taking into account the founder’s veto right, even though the company's articles of association stipulated that the company's founder has such right regarding such a transaction.

The Court held that the decision was unduly taken. The law stipulates that the articles of association are a contract between the company and its shareholders and among themselves. Therefore, interpretation of the articles will be according to the parties’ intent, as it is implied from the articles and the circumstances of the case, with the language of the articles given primacy. Here, the articles of association expressly stipulated that decisions on material matters set in it will not be made without the consent of the founder, as long as he holds at least 10% of the company share capital. In addition, because the articles of association stipulated that a shareholder's holding shall include a calculation of the number of shares held by him both directly and indirectly, the founder holds more than 10%. Thus, as the decision was made while ignoring the founder’s veto right, it was unduly taken.