Golden shares: To what extent could they be abusive?

The contractual freedom provided by Law 1258, 2018 to the Sociedad por Acciones Simplificada (S.A.S.) is so wide that from its incorporation the shareholders may create tailormade shares, including the so called “golden shares”. This kind of shares grant its holder –regardless of its contribution–, more favorable economic and political rights than the ordinary ones.

In terms of political rights, this instrument allows “supermajorities” or the veto power over certain decisions. Regarding economic rights, the owner of golden shares may receive more dividends compared to those received by ordinary shareholders, despite of the percentage they have over the company’s capital. Thus, the general rule under which the dividends are distributed prorata of someone’s share can be modified in the company’s bylaws. In addition, these shares may also allow its holders to receive a higher percentage of the social assets, when the company is liquidating, after all the external liabilities are paid.

Regarding this matter, it is important to bear in mind that golden shares can be issued without the right of first refusal. This could dilute the ordinary shareholders, undermining their decision power, as well as their economic rights, because their revenue would be affected.

All of the abovementioned benefits lead to the following question: ¿how likely is it that by issuing or exercising the rights inherent to golden shares the shareholder may be using its right to vote in an abusive way?

To answer it, it must be highlighted that, generally, the Superintendence of Companies does not interfere in the shareholders’ decisions solely because they are against the interests of the minority shareholders. Therefore, if the affected shareholder wishes to activate the mechanism in order to have a judge declare it as void and claim damages, there will be a very high burden of proof. In fact, the case law provides that it must be proven: (i) the damage suffered by the shareholder –or the company- and (ii) the intent to cause the damage.

Regarding the golden shares, the damage can be produced by the golden-share issuance or the exercise of their rights, since their prerogatives may undermine the rights of other shareholders. Said damage may be reflected on the decrease of commercial value of their shares, as well as the decrease of their dividends, among others.

Secondly, for the abuse to exist, it is necessary to prove that the vote was made by the shareholder with the intent to cause damage or obtain an unjustified advantage. Otherwise, these situations will only be potentially abusive, and the shareholder would not be entitled to sue the vote’s validity nor to claim for damages. This intent is very difficult to prove, considering you must demonstrate that the shareholder’s intention was to injure the other shareholders or the company itself.

Considering the above, and regarding the risks related to the issue and use of golden shares, it is extremely important to obtain legal counsel when drafting the bylaws, or when a company’s corporate governance allows the amendment to the bylaws in order to issue this kind of shares easily.