We would like to underline first of all that the term “veto right” is also used for the right of objection in practice and in the doctrine. Notwithstanding the foregoing, this designation is not true at all because a “veto right” is rather basically a right stemming from the Constitutional Law and is different than the right of objection, While a veto right necessitates a re-evaluation and is not intended to “block” something; however, “an action is suspended if the right of objection is exercised in the objection mechanism.”
Right of Objection may be defined as a right that allows its holder to block a resolution. The holder of that right may block the adoption of a resolution by entering a dissenting opinion even in circumstances when all conditions for that resolution are met.
A right of objection may be analysed in two different categories, namely, a right arising from the law and a contractual right. The right of objection as used in a shareholders‘ agreement is deemed to be a contractual right.
This right of objection may be vested in specific shareholder classes or specific shareholders for specific matters in a shareholders‘ agreement.
In this respect, even if the quorum for a resolution as prescribed in the law is reached, this resolution may not be adopted if the shareholder enjoying this right of objection does not vote in its favour as a result of exercising this right, which may require the favourable vote of that specific shareholders‘ class/ shareholder for that resolution.
With respect to resolutions to be adopted at a general meeting, shareholders enjoying this right or that belong to the shareholders‘ class enjoying that right will have a „privileged“ position over other shareholders, given the fact they will be entitled to block the adoption of a resolution.
It should be noted at this point that the right of objection differs from an aggravated quorum applicable for a general meeting resolution. This aggravated quorum is rather a right vested in the share itself, and it makes that share a preferential one, whereas in the case of the right of objection, this right is granted to the shareholder rather than the share itself. Accordingly, in the case of an aggravated quorum, while which shareholder class or shareholder casts favourable vote does not matter, in the case of a right of objection, a specific shareholder or shareholders class is given privilege for that right.
An example for a right of objection defined in a shareholders‘ agreement is that „unless Class A shareholders approve, no capital increase may be made“, or „no merger into another company may be permitted.“
An investor who wishes to go beyond being a mere shareholder and play a major role in how a company is operated and that company’s future must strictly insist that this right should be granted in his favour in a shareholders‘ agreement because, considering the fact that the ultimate goal in an investment is the value growth of a company and a huge rise in the value of investment during the exit, then the right of objection is undisputedly critical as it blocks the adoption of a wrong decision in significant matters.
Resolutions subject to a right of objection may be agreed and defined in line with both the company’s business line and the investor demands; however, considering the fact that a right of objection makes it more challenging to adopt a resolution in a general meeting; it is critical that this right should not be granted for exercising it for all resolutions but rather for truly strategic ones in order to avoid any deadlock.
In a case where an investor will be a party to a shareholders‘ agreement signed by all existing shareholders to make an investment, this investor should strictly go over the said shareholders‘ agreement to which he will be a party, and check if there are other shareholders with a right of objection to the extent that they may control and dominate the company.
