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MEALEY’S™

International Arbitration Report Madrid Update — Corporate Battles: The Amendment Of Dispute Resolution Clauses In Company Bylaws

by Calvin A. Hamilton and Fiona Borthwick

Monereo, Meyer & Marinel-lo Madrid, Spain

A commentary article reprinted from the February 2008 issue of Mealey’s International Arbitration Report


MEALEY’S International Arbitration Report

Vol. 23, #2 February 2008

Commentary Madrid Update — Corporate Battles: The Amendment Of Dispute Resolution Clauses In Company Bylaws By Calvin A. Hamilton and Fiona Borthwick

[Editor’s Note: Calvin A. Hamilton is a partner with the firm Monereo Meyer Marinel-lo, Abogados, Madrid and heads the arbitration department. He is admitted to the New York and the Madrid Bar. Fiona Borthwick is an associate with the firm and is admitted to the Madrid Bar. Copyright 2008 by the authors. Replies to this commentary are welcome.] The case under discussion concerns the challenge to corporate resolutions by shareholders of a Spanish company (referred to as “the Company”). These corporate resolutions were adopted in the Shareholders Meeting held on September 21, 1998 and the challenge sought to annul the resolutions in their entirety. A final decision on the matter was given in July 2007 by the Spanish Supreme Court. In the aforementioned Shareholders Meeting, one of the corporate resolutions concerned the amendment of the Company Bylaws in their entirety by reason of their adaptation to the enacted amendment of the Limited Liability Company Law (Ley 2/1995, de 23 de marzo, de Sociedades de Responsabilidad Limitada (LSRL)). The Bylaws of the Company included a Final Disposition which read as follows: “All the questions that arise from the interpretation or the application of these Bylaws in the relations between the company and its shareholders, and between the shareholders in their condition as such, are necessarily subject to arbitration in equity, in accordance with legislation in force at such time, and will be heard by an arbitrator appointed by the parties.

The challenge of corporate resolutions is excluded pursuant to that stipulated in Article 15 of the Law.” The resolution approving the amendment of the Bylaws was adopted and this amendment included a redrafting of the aforestated Final Disposition. This clause remained the same except that the final paragraph, which excludes the challenge of corporate resolutions from the scope of arbitration, was deleted. Therefore, on coming to trial, a procedural exception was put forward concerning the existence or not of a prior submission to arbitration.1 Under the earlier version of the Bylaws (the Founding Bylaws), the challenge of corporate resolutions was expressly excluded as a matter to be arbitrated and therefore the courts of law had jurisdiction. However, pursuant to the amended Bylaws (1998 Bylaws), all matters were subject to arbitration in equity.2 The plaintiffs who sought to challenge the corporate resolutions in this case were two individuals and a company who were shareholders of the Company.3 The plaintiffs sought to rely on the Founding Bylaws and therefore commenced the action challenging the corporate resolutions before the ordinary courts of law. It was the Company that, in its Response, made the plea of prior submission of the subject matter to arbitration in equity. The court of first instance ruled in favor of the plaintiffs on July 15, 1999 and annulled all the corporate resolutions adopted in the aforementioned Share-

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MEALEY’S International Arbitration Report

Vol. 23, #2 February 2008

holders Meeting. On appeal, on April 19, 2000, the Provincial Court confirmed the first instance decision dismissing the appeal filed by the Company. On appeal in cassation before the Supreme Court Civil Branch, in its decision dated July 9, 2007, the appeal was also dismissed and the Provincial Court’s judgement was declared final.4 As a result, the corporate resolutions adopted in the Shareholders Meeting of September 21, 1998 are null and void, as well as any other resolutions adopted in the interim that are inconsistent. The court order includes the cancellation of any of these resolutions that have been recorded in the Mercantile Registry. The effect is that the Company was effectively paralyzed during the period 1998 to 2007, with the Company believing that its Bylaws approved in 1998 were validly adopted as well as the other resolutions adopted in the same meeting. Shareholders Meeting in September 1998, there was an apparent split in the interests of the shareholders, many of whom were also members of the board of directors. It appears that some of the shareholders and directors wished to start new lines of business, namely in the construction industry, as well as developing and commercializing real estate, whereas the company had been created with the purpose of carrying out activities related to the transport of goods on land. The three plaintiffs held between them a total of 50% of the participations and were apparently opposed to the changes. The matters to be discussed at the Shareholders Meeting were, in the following order, the exclusion of two shareholders (two of the plaintiffs), modification of the corporate purpose to cover the new business activities, the amendment of the Bylaws, and finally the dismissal of the three plaintiffs as members of the board of directors. One party sought to oust the other. The battle lines were drawn. The strategy was clear: alter the balance of power and thereafter make the necessary changes. The problems arose as a result of the execution of that plan and in amongst all this is the issue of how corporate disputes should be settled: by arbitration or before the ordinary jurisdiction. The Company made the defense plea that the challenge of corporate resolutions was subject to arbitration in accordance with the 1998 Bylaws. The ap2

proval of those Bylaws took place after the resolution expelling the shareholders was adopted. The exclusion of the shareholders was the first resolution to be adopted. The reason given for the exclusion was the breach of certain corporate obligations (nonpayment). The exclusion affected a shareholder holding 28.57% and another holding 14.29%. Thereafter, believing the exclusion to be valid and effective, the other shareholders forced the excluded shareholders not to take part in the meeting and prevented them from voting in the other matters of business. The third plaintiff-shareholder, with a 7.14% holding, voted against the other resolutions for the reason that the excluded shareholders should take part and vote in all the resolutions. In relation to the procedural exception of prior submission of the subject-matter to arbitration, the judge ruled that the valid arbitration clause was the one contained in the Founding Bylaws for the following reasons: a)

that the agreement to arbitrate can be contained in a clause incorporated in a main contract;

b)

that that clause is valid and, on recording in the Mercantile Registry, binds present and future shareholders;

c)

that the agreement to arbitrate configures the position of the shareholder and his rights and obligations;

d)

that the agreement to arbitrate binds those parties who formulated it and requires their express consent.

The judge ruled that the arbitration clause in the 1998 Bylaws did not bind the plaintiffs because the plaintiffs had not been involved in its adoption having been excluded as shareholders prior to the vote on the amended Bylaws. Thus the challenge of corporate resolutions was not subject to arbitration. The judge then went on to rule on the substantive issues of the claim finding that the exclusion of the shareholders was unjustified and unlawful. This finding of nullity produced an effect of nullity in all the subsequent resolutions given that the plaintiff-shareholders were deprived of their voting rights.


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The First Instance judge failed to consider that not all three plaintiffs had been excluded prior to the vote on the amended Bylaws. The judge also appeared to imply that the Bylaws containing the arbitration clause had to have been recorded in the Mercantile Registry in order to bind the plaintiffs. Moreover the judge insisted that the arbitration clause had to expressly state the duty to comply with the arbitral award in order to be valid. The second instance judge agreed with the reasoning of the first instance judge adding that it is incomprehensible that the company Bylaws approved on September 21, 1998 are binding on the excluded shareholders, because since these shareholders were excluded prior to the vote on the Bylaws, the Company cannot pretend afterwards that they are bound by the new Bylaws on which they have not voted. On appeal in cassation, the defendant-Company argued that the first and second instance judges had ruled on substantive issues of the claim (the validity of the corporate resolution excluding the shareholders) in dealing with the procedural exception. Thus the appeal in cassation was, in part, an ultra vires claim based on the abuse or excess in the exercise of jurisdiction in deciding on the substantial issues of the lawsuit ignoring the existence of a valid and applicable clause submitting the matter to arbitration, infringing Article 687 Civil Rules of Procedure, as a result of its non-application, in relation to Article 533.8ÂŞ. The Company, in reliance on Article 43.2 LSRL, argued that since the Shareholders Meeting is the sovereign organ of a company and its resolutions are adopted in accordance with the rules on quorum and majorities established by law or in the Bylaws, then when the Shareholders Meeting adopts a resolution, this resolution binds all the shareholders, both those who voted in favor as well as those who voted against it, as long as the resolution was adopted with the necessary quorum and majority. The Company relied on the principle of preservation of a company whereby resolutions of a company are presumed to be lawful and this presumption may only be rebutted by a final decision to the contrary. Therefore, the Company argued, the plaintiffshareholders, in exercising their right to challenge the corporate resolutions, should have done so in ac-

Vol. 23, #2 February 2008

cordance with the Bylaws in force at the time of the filing of the claim, namely the 1998 Bylaws, and since these submit the challenge of corporate resolutions to arbitration, the ordinary jurisdiction must refrain from hearing the matter and refer the plaintiffs to arbitration. The Company also addressed the various erratas or omissions of the first instance decision as noted above. The Supreme Court dismissed the appeal on the same basis as the first and second instance judges. The Supreme Court ruled that because the arbitration clause contained in the 1998 Bylaws was not agreed to nor accepted by the plaintiffs then the action challenging corporate resolutions had to be heard before the ordinary law courts and not by an arbitrator. The Supreme Court also puts weight on the fact that, without the excluded shareholders, there was no quorum even to amend the Bylaws or widen the corporate purpose. In the view of the Supreme Court, it is the impossibility to vote the amended Bylaws that led the first and second instance judges to consider that the requirements of a valid arbitration clause were not met. There was no unequivocal intention of the plaintiffs to be bound by the new arbitration clause.5 The Supreme Court distinguishes the decision of the Supreme Court number 225/1998 dated April 18 (discussed in our March article) cited by the Company in support of its arguments for the reason that that decision concerned Bylaws which were in force, registered in the Mercantile Registry and approved with all the necessary rigor so that any future shareholder was bound by them and by the arbitration clause contained therein. The Supreme Court also reasons that the submission of matters to arbitration is voluntary and not obligatory and therefore its amendment was not strictly required as a result of the new legislation on limited liability companies. The Company was not obliged to amend the arbitration clause and the plaintiffshareholders were not prepared to amend the Bylaws except in those aspects that were strictly necessary. As regards the plaintiff-shareholder who was not excluded but rather voted against the amended Bylaws, the Supreme Court finds that since the arbitration 3


MEALEY’S International Arbitration Report

Vol. 23, #2 February 2008

clause is contained in a document that was not executed by the plaintiff, as a third party to that arbitration agreement, the plaintiff is not affected by the possible mandatoriness of that submission to arbitration. Only the executors of that document may be bound by it, or, after its recording in the Mercantile Registry, persons who become shareholders in the future. The plaintiff did not show his unequivocal intention to be bound by the arbitration clause. We may conclude that the intention of the parties as regards an arbitration agreement prevails even over principles of company law. Moreover these decisions highlight the control that is exercised by the ordinary jurisdiction in Spain over submissions to arbitration and that it is not necessarily to arbitration’s detriment. However, we are left to speculate how an arbitrator would have decided on the substantive issues of the case, in particular the validity of the resolution excluding the shareholders, and whether the courts of law used the “intention of the parties” argument, to a certain degree, for the purpose of avoiding injustice in this case due to their own misplaced distrust of arbitration. The effect of the Supreme Court decision is that within a company there may exist different forms of dispute resolution for corporate matters: one for those who voted in favor of a certain dispute resolution mechanism and another for those who voted against. Consequently, the implication is that any amendment of a dispute resolution clause or choice of forum clause in company bylaws must be agreed unanimously in order to avoid a dual-dispute resolution system.

Endnotes 1.

4

Pursuant to the rules of civil procedure applicable at the time of the lawsuit (Real Decreto de 3 de febrero de 1881, de promulgación de la Ley de Enjuiciamiento Civil), the plea of prior submission of the dispute to arbitration was formulated as a dilatory exception (Article 533.8ª). Since the new rules of civil procedure came into force in 2001 (Ley 1/2000, de 7 de enero, de Enjuiciamiento Civil), the exception is formulated by means of the declinatoria, a special procedure for disputing the court’s jurisdiction (Articles 63-65).

2.

In our contribution to Mealey’s International Arbitration Report of March 2007, we discussed the evolution of the submission of company law issues to arbitration concluding that there is a climate favorable to such submission although regard must be had at all times to the intention and autonomy of the parties and also to imperative rules of law. We discussed in particular the decision of the Supreme Court number 225/1998 dated April 18 which ruled that “the challenging of corporate resolutions is governed by peremptory norms [jus cogens], yet the arbitration clause does not extend to these but instead to the procedural channel for resolving them.”

3.

They were also directors of the Company until they were dismissed for cause and expelled from the Board by a resolution adopted in the same Shareholders Meeting referred to above but this is ancillary to the current discussion.

4.

Sentencia Tribunal Supremo no. 776/2007 (Sala de lo Civil, Sección 1) of July 9. Ponente: Sr. D. Juan Antonio Xiol Ríos.

5.

Article 5 of the 1988 Arbitration Law (Ley 36/1988, de 5 de diciembre, de Arbitraje) reads “1. The arbitration agreement must state the unequivocal intention of the parties to submit the resolution of all the litigious questions or some of these questions, that arise or may arise from certain legal relations, whether or not contractual, to the decision of one or more arbitrators, as well as state the duty to comply with that decision.”

This Law, which was applicable to the case under discussion, has been repealed and the new Arbitration Law (Ley 60/2003, de 23 de diciembre, de Arbitraje), contains the following provision: “Article 9. Form and content of the arbitration agreement. 1. The arbitration agreement, which may take the form of a clause incorporated in a contract or of an independent agreement, must state the intention of the parties to submit to arbitration all or any of the controversies that arise or may arise in relation to a specific legal relationship, contractual or extracontractual.” n


Arbitration and the Fisc: NAFTA’s ‘Tax Veto’ by William W. (Rusty) Park Professor of Law at Boston University Vice President, London Court of International Arbitration Arbitrator, Claims Resolution Tribunal for Dormant Accounts in Switzerland

A case of note reprinted from the May 2001 issue of Mealey's International Arbitration Report.

© Copyright 2001 Mealey Publications. All rights reserved. Reproduction strictly prohibited without written permission.


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MEALEY’S ™ A commentary article reprinted from the February 2008 issue of Mealey’s International Arbitration Report by Calvin A. Hamilton an...

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