Disagreements between shareholders: can a manager restrict information?

One of the fundamental rights that shares give their holders is the right to participate in the management of the company. In order to participate in the management of a private limited liability company, a shareholder naturally needs to have access to the company's documents and information that may be relevant to decisions relating to the management, development and investment of the company. When relations between shareholders and the company's management bodies are good, based on trust and the pursuit of common objectives, everything is simple. But what about when the relationship is complicated - does the company's CEO or board of directors have the ability to restrict shareholders' right to information? Sandra Mickienė, Associate at AVOCAD, talks about this .

Although shareholders invest their own funds in the company's capital and should, for this reason alone, seem to have a right to all information relating to the company's activities, the reality is that shareholders' right to information is not unlimited. The law provides for three types of information that shareholders may request:

First, a shareholder is entitled to information of a general nature specifically listed in the Law (such information includes: the Articles of Association, the annual and interim financial statements, the minutes of the general meetings of shareholders and any other documents of the company that are required to be made public by law). As this information is publicly available, it should not be classified as a company's business or trade secret or confidential information and should not be refused by the company to a shareholder. This means that the company is obliged to make this information (these documents) available to the company's shareholders at all times.

Second, a shareholder is entitled to other information and documents that are specifically set out in the company's articles of association. In other words, if the company's articles of association specify additional company documents to which shareholders are entitled to have access, the company will be obliged to make these documents available to shareholders if they so request.

Third, the information and documents that the shareholder needs to comply with other legal requirements. This category includes all documents relating to the company's business secrets and confidential information. A shareholder seeking this type of information from the company should justify the legal requirements for which the information is needed. If the shareholder does not demonstrate (justify) the need for the confidential information to fulfil the legal requirements, the company may refuse to provide the shareholder with this information.

Therefore, the answer to the question whether the director of a company has the possibility to restrict the shareholders' right to information is as follows: the law provides for the possibility for companies to refuse to provide information and documents when the latter relate to the company's commercial or industrial secrets or confidential information.

Probably the most serious problems with the implementation of the shareholders' right to information arise when companies operate in accordance with the model articles of association. First of all, the model articles of association do not provide for any additional documents to be made available to the shareholder on request. Although the Model Articles of Association provide that the shareholder is entitled to have access to all documents of the company, they also provide, in another sentence, that the company may refuse to give the shareholder access to and/or copies of documents relating to the company's business secrets or confidential information. In other words, the Model Articles provide for the same restrictions on the provision of information to shareholders as the Act. Therefore, a shareholder would only be able to receive publicly available documents without restriction under the Model Articles, and in respect of all other information, the company has the right to refuse to provide the shareholder with the additional information and documents requested.

So, if a company operates under the model articles of association and there are only two shareholders (one of whom is not only a shareholder, but also a director of the company with, for example, a larger or equivalent shareholding), whose relationship is in a state of disrepair, it is obvious that, such model articles of association, on the basis of which the company operates, enable the shareholder, who is also the manager, to manipulate the situation by withholding from the other shareholder all the information he has requested under the pretext of the protection of confidential information, including trade/production secrets. A shareholder with a minority/equivalent shareholding does not even have the possibility to remove such a manager from office. Obviously, such shareholders are in an unequal position: one shareholder, being also the manager of the company, has access to all the company's data, including financial documents, trade secrets, etc., whereas the other shareholder may be (reasonably or unreasonably) restricted in this respect.

How can you protect yourself from such situations?

In particular, we would suggest that companies should not be set up on the basis of model articles of association, but on the basis of individualised articles of association, which could extend the list of information or documents that must be provided to shareholders. Individualised articles of association would not only benefit shareholders in this respect, but also in order to limit the powers of the manager, which are quite broad under the model articles of association (for example, the manager of a company may, on the basis of the model articles of association, enter into any contract for the transfer, investment, lease, acquisition, mortgage, pledge, hypothecation, guarantee or warranty of fixed assets, irrespective of the carrying amount or the selling price of those assets, without the need for the approval of a general meeting of the shareholders).

If shareholders find the model articles of association convenient due to simpler procedures for amending them (amendments can be made electronically through the self-service system of the Centre of Registers) and lower costs (amendments do not need to be notarised when made through the self-service system of the Centre of Registers), another option to expand the list of information to be provided to shareholders would be the conclusion of a shareholders' agreement. It could not only extend the list of information to be provided to shareholders, but also regulate the procedure for the disposal of the information, establish the division of shareholders' competences, limit the manager's competences by specifying which decisions require the approval of, for example, all shareholders, provide for the specific conditions of the procedure for the replacement of the manager to enable those shareholders who have a smaller or equivalent shareholding to take action, etc.

If the drawing up of both the individualised articles of association and the shareholders' agreement is not possible due to conflicting shareholder relations or other circumstances, if the company refuses to provide the shareholder with the information requested by the shareholder, the shareholder has the right to apply to the court and ask the court to oblige the company to provide the information he or she requested.

When to go to court?

In this context, the Supreme Court of Lithuania has provided significant interpretations that are worth considering when deciding whether to apply to court and whether to protect one's rights as a shareholder:

• Although the law gives the company the right to refuse to give a shareholder access to and copies of documents relating to the company's trade secrets or confidential information, this right is not absolute. It is not sufficient to state declaratively that the documents requested by the shareholder relate to trade secrets or confidential information. The company bears the burden of proving that the information or documents which the shareholder requests to be disclosed relate to its trade secrets or confidential information. The courts will assess in each case whether the information is reasonably capable of being classified as a trade secret or confidential information.
• The data constituting the content of confidential information are not always trade secrets. Information that can be classified as a trade secret is essentially subject to three requirements: secrecy, value and reasonable efforts to preserve the information. Information shall be regarded as a trade secret if it has actual or potential commercial value by reason of the fact that it is not known to third parties and cannot be freely accessed by the owner of the information, or by any other person to whom the owner has entrusted the information, by reason of the fact that he or she has made reasonable efforts to preserve the secrecy of that information. Thus, for confidential information to qualify as a trade secret, it must first have some value and the fact that the information is not made public does not mean that it has commercial value.
• The company should also justify that such provision of copies of information or documents relating to its trade secrets or confidential information to the shareholder would be prejudicial to the company or otherwise prejudice its legitimate interests.
• The term 'compliance with the requirements of the law' includes the shareholder's interest and need to obtain information also for the purpose of exercising his right as a shareholder to participate in the management of the company, and therefore the claimant, when applying to the court for an order to require the company to provide the information he has requested, may simply refer to his right to participate in the management of the company as a basis for his claim in the abstract, in other words, it is not necessary to specify the specific provision of the law on which he is requesting that the company provide the information he has requested.