Shareholders’ mutual disputes, as well as disputes between shareholders and the company, are as old as business corporations themselves, and agricultural companies are no exception. On the contrary. Agriculture has become an increasingly attractive investment area in recent years, attracting those with potentially speculative intentions. How to resist these modern-day raiders? Prevention is the key.
The risk lies in the unfair exercise of shareholder rights by minority shareholders, which can lead in extreme cases to fatal consequences for the corporation.
We know from our experience that efforts to assert the interests of minority shareholders in an otherwise legitimate manner in the domestic context are more and more often translated into investment plans of various speculative groups. The procedure is simple: to make life more difficult for other stakeholders in the company through one’s minority share to the extent that it is more profitable to buy out such a minority shareholder at a premium price. This may be due to the fact that the minority shareholder managed to completely paralyse the company's activities. And sometimes it can happen that a minority shareholder ends up taking over the company.
Back to the past
The position of minority shareholders is historically more important in countries with a strong tradition of stock markets (typically the USA). The possibility of acquiring even a few shares in a capital company very easily and quickly inevitably brought with it a higher incidence of minority shareholders who claimed their own idea as a "fair" arrangement of the companies concerned.
Although the Czech Republic is not a country with a strong stock market tradition, the issue of minority shareholders is more than topical and important. A significant catalyst in this respect was the privatisation of state-owned enterprises and large agricultural cooperatives, which resulted in the formation of many companies with a fragmented shareholder structure. According to the Government Report on the State of Czech Society of 1999, in 1992–1993 agricultural cooperatives farmed two-thirds of the entire agricultural land. At that time, the property transformation of cooperatives was underway, coupled with the transformation into new business entities, and 1,321 new private cooperatives and companies were formed from 1,197 agricultural cooperatives.
Thus, since the early 1990s, a huge number of companies with a large number of shareholders with minor shareholdings, often with unlimited transferability, have emerged in the industry. Most of these shareholders probably did not want to exercise the rights attached to their shareholdings in principle. Already then, groups of so-called professional minority shareholders, or raiders, appeared, which (even today) buy such shares from the original owners in large amounts.
Among the companies most exposed to the risk of share transfers with the aim of gaining undue advantage today are privatised water companies and large agricultural companies and cooperatives. The reason for the interest of potential "raiders" in agricultural companies is that this is a lucrative investment segment, which can even beat inflation with its profits in the current market.
Agriculture in demand
Continuous demand for foodstuffs and agricultural raw materials creates a stable and sustainable market for agricultural products. The price of agricultural land is also rising. According to FARMY.CZ's Land Market Report, the average market price of agricultural land in 2022 was CZK 335,000/ha, which represents a 13.5% increase compared to CZK 294,000/ha in 2021. And the price has been rising continuously for the last 18 years. Compared to 2005, the price of agricultural land has almost quadrupled.
Investments in the agricultural sector can thus work as a form of portfolio diversification and also do not carry as much risk as other areas, as agriculture is not as susceptible to market fluctuations as, for example, stocks or real estate in general. Agriculture, where modern technologies are increasingly becoming more prevalent today, can also be expected to continue to develop and is a sector that has a future, not least because of the pressure for sustainable investments. Such a highly attractive field naturally attracts people with potentially speculative intentions.
Rights in the hands of speculators
As a rule, the investor has an interest in seeing his/her investment prosper so that he/she can make a proper yield on it. But not every owner has to have only the best possible condition of the company or other shareholders at heart. It is not even decisive whether the company is a limited liability company, a joint-stock company or an (agricultural) cooperative. All these legal forms place in the hands of minority shareholders, shareholders or cooperative members (for clarity we will use the term "shareholder" hereinafter) tools that they can use even to the detriment of the corporation.
The risk lies precisely in the unfair exercise of shareholder rights by minority shareholders. In fact, many rights are not attached to the size of a shareholding (except for voting rights and the rights of the so-called qualified members and shareholders). This may include, for example, the right to information (in the case of a cooperative, depending on its statutes), the right to attend a general meeting (members’ meeting), or the possibility to challenge the validity of a resolution of the general meeting (members’ meeting). These rights may be a good servant, but in the hands of individuals with bad intentions, they can also be an evil master.
In our experience, minority shareholders attack the corporation itself by exercising their rights. However, they can also target other shareholders directly. They can, however, only attack shareholders who are members of the statutory body. Typical grounds for provoking a dispute may be an alleged conflict of interest or a dispute as to whether the statutory body members have performed their duties conscientiously using the due care of a prudent manager.
Minority shareholders may therefore exercise their rights in different ways, which entails various risks. For example, they may seek to recall all or at least part of the members of elected bodies and seek to deny them their remuneration. They may also challenge the statutory body members directly by addressing the alleged damage caused by them and then seeking to recover that damage. They may also claim that the contracts on the performance of the office are wrongly set up and that the statutory body members have allegedly paid themselves remuneration improperly and will be asked to return such remuneration, etc. They may thus sue the current or even already recalled management.
Another option is that they will attempt to take control of the general meeting (members’ meeting of the cooperative) by various prohibitions on the exercise of voting rights by other shareholders. They may also try to initiate a number of lawsuits intentionally, often due to even formal errors of the statutory body. These may include a failure to comply with any of the formalistic requirements of the law, for example, in negotiating remuneration, convening a general meeting (members’ meeting) and its management, or performing other, typically routine acts of corporate governance.
Such disputes are, of course, very costly for the corporation. The practices may even escalate to the stage of taking complete control of the corporation or paralysing it to the point of its liquidation by the court.
Put up a defence
There is no more effective defence than prevention. That is, to anticipate that such a situation may arise and to prepare the (agricultural) corporation for a possible attack by minority shareholders. The first protective tool that should be on the radar of any corporation at risk is so-called preventive legal due diligence and a compliance program.
These will comprehensively verify whether the corporation is not creating, by neglecting (albeit marginal) duties, potential opportunities for minority shareholders that they could take advantage of. At the same time, through an appropriately set compliance program, the risk of the corporation being placed in a risky situation in the future is significantly reduced. For these purposes, however, it is advisable to set up documents, either by modifying the statutes or the memorandum of association, in which the rights of minority shareholders can be limited to a certain extent (for example, limiting the right to information, etc.) or at least specifically and precisely determine the manner of their exercise.
If an agricultural cooperative or other company already suspects that it faces a planned "shareholder raid", a very cautious approach is in order, especially when organising general meetings or cooperative members’ meetings. In such a case, the corporation must be sure to prepare a perfect invitation that takes into account the current case law of the Supreme Court (especially in the part of the justification of the individual items of the general meeting or members’ meeting, depending on its specific agenda), and to ensure the smooth course of the meeting of the supreme body, including the proper drafting of the minutes.
This includes the fair handling of all requests for information (or requests for clarification), which are also a powerful tool for shareholders to obtain information that they may later seek to use to their advantage. It is therefore always necessary for the corporation to examine in detail whether it has the right to withhold the requested information from minority shareholders. This is generally assessed according to the extent to which such information is related to the activities of the corporation or whether it is classified information under the law.
If such preparation is not done in the corporation, it can easily happen that a professional minority shareholder with experience from dozens of other general meetings or members’ meetings can use his/her position to cause serious harm to the corporation and eventually "forcefully" take over the corporation. Moreover, in practice, we are seeing this topic starting to gain momentum in the market again in recent months and years. Therefore, we cannot but recommend fortifying the corporation in advance by setting up appropriate legal documents, and thus preparing in time for a possible attack by raiders.
Verdi Agro Fund
Our new client is Verdi fond farem (Verdi Agro Fund), the first investment fund on the Czech market that offers qualified investors the opportunity to invest directly in agricultural farms and primary production.
It is part of HAVEL & PARTNERS' corporate philosophy to co-invest with clients and further support their projects when the opportunity arises. The firm’s partners also invested in Verdi Agro Fund through a company set up to manage the private capital earned during their years in the legal profession.
In the six months since its establishment, Verdi Agro Fund has produced a net yield of 10.1%. It not only has agricultural land in its portfolio but also farms, which it continues to modernize to stimulate their further economic development. The Fund currently owns shares in two Czech farms – in the Karlovy Vary and Pelhřimov regions, which together operate on more than 2,600 hectares of land.