How to maintain corporate control in an international group of companies

Mainstream

Maintaining corporate control in an international group is not a matter of title to shares or shares. It is the ability to make a legally relevant decision at any time, block a threat and hold key assets regardless of jurisdiction.

The main question is not who owns the property. The main question is who really manages the company when there is a conflict of partners, pressure from minority shareholders, an attack on assets or a sanctioned blocking.

Effective control protection begins with three checks:

What protective mechanisms really work in each particular jurisdiction.Is there a pre-prepared plan for the restoration of management in a critical scenario?

If these three issues are not addressed proactively, even 100% ownership of shares does not guarantee that you will hold on to the business.

When there is a threat of loss of corporate control

Protection of control becomes critical if:

• Corporate conflict between majoritarian and minority partners is brewing
• Joint Venture Partner Tries to Block Key Decisions
• Management of a foreign subsidiary acts contrary to the instructions of the holding
• Unauthorized change of director in one of the group companies
• minority shareholders challenge transactions, decisions of meetings or composition of the board of directors
• attempts to blur the share through additional issue or increase of the authorized capital are shown
• In one jurisdiction, interim measures have been introduced that block the management of accounts or assets.
• the group has companies in offshore and onshore jurisdictions subject to sanctions restrictions
• The ownership structure is built through nominee holders, managers or trustees, and there is a risk of losing actual control.
• Discuss the withdrawal of one of the beneficiaries or the restructuring of the business
• heirs or third parties claim rights to shares in the group
• The controlling shareholder has lost the physical ability to manage, and there is no Plan B.

The mistake most owners make

Many international group owners start with the question:

How do I file a lawsuit to regain control?

That's the wrong first question.

The right question is:

How else, in the construction stage, can we make it almost impossible to lose control, and in the event of an attack, it takes days rather than years to recover?

Sometimes the best answer is a properly designed corporate contract. Sometimes it is a trust structure of ownership. Sometimes options and call mechanisms allow you to instantly consolidate shares. Sometimes, pre-arranged and signed decisions that come into force when certain conditions occur. Sometimes, parallel interim measures are taken in several jurisdictions at the same time.

Protecting corporate control is not a response to conflict, but a business architecture built before it arose.

Step 1. Conduct an audit of the corporate structure

The first thing to do is not to discuss the shares, but to make a full inventory of the group.

Key elements for analysis:

• jurisdiction of each group company
• Chain of ownership from ultimate beneficiary to operating assets
• type of corporate forms (LLC, Ltd, SA, AO, LLC,., etc.)
• presence of corporate agreements, shareholder agreements, trust declarations
• distribution of voting and non-voting shares
• composition of the board of directors and executive bodies
• decision-making rules: Unanimity, qualified majority, veto power
• Holding of “Golden Shares” or Special Rights
• stock-sharing
• Deadlocks in key companies
• who performs the functions of a nominal holder, protector, manager
• Possibility of unilaterally changing the statute
• Applicable Law and Jurisdiction for Corporate Disputes

If a structure has grown chaoticly, there are almost always bottlenecks in it that can be lost as a result of a single local court decision or managerial action.

Step 2. Check the constituent and corporate documents

Control is not only the stakes, but also the rules of the game, written in the statutes and internal regulations.

It is necessary to check:

• Procedure for appointment and dismissal of directors
• powers of the sole executive body – can it sell assets, issue powers of attorney, change bank signatures without the consent of the council?
• procedure for convening meetings of participants
• quorum and majority for key decisions
• Minority shareholders have the right to block decisions
• share-purchase
• preemptive
• deadlock resolution
• Possibility of transferring shares to a trust or under an option
• Change of control (change of control)
• Conditions for Issuing New Shares and Convertible Instruments

Often, real control is lost not because of a decrease in the share, but because the charter allows the minority to paralyze any activity, and the majority shareholder can neither appoint a director nor change the bank.

Step 3. Identify applicable corporate control law and jurisdiction

In an international group, corporate relations in each company are governed by the law of the country of its incorporation. This is critical because:

• Cyprus, BVI, Netherlands, UAE, Hong Kong, Switzerland and Russia protect majoritarians and minority shareholders in different ways
• Different standards of fiduciary duties of directors
• The possibility of using corporate contracts, trusts and options has its own specifics
• Limitation periods for challenging decisions vary greatly
• access to interim measures and the speed at which they are obtained differ from jurisdiction to jurisdiction

Therefore, for each significant group company, you need to clearly understand which right protects your control and which creates risks. At this stage, it is often revealed that the beneficiary owns the company through a jurisdiction where the minority shareholder has the right to demand the liquidation of the company in a conflict, which can put the entire business at risk.

Step 4. Build a layered control protection system

Effective protection is never based on a single tool. It's lined up in layers.

Key levels of protection:

1. Level of ownership The correct structure of the holding: Separation of voting and non-voting shares, the use of trusts and private funds to isolate control from the personal risks of the beneficiary.
2. Corporate agreements and shareholder agreements with detailed mechanisms for resolving deadlocks, options for buying a share in the event of certain events, assurances and guarantees.
3. The right to appoint a majority of directors, the introduction of a “golden share”, the restriction of powers of directors on key issues, the requirement of double signatures, the institution of a protector in a trust.
4. Key assets (real estate, IP, trademarks) can be allocated to separate companies with special protections that are independent of operational management.
5. Pre-prepared documents for immediate change of director, blocking of bank accounts, filing of interim measures in courts of key jurisdictions.

The more layers of protection are built in initially, the harder it is to attack the controls and the faster recovery occurs.

Step 5. Use of corporate contract and optional constructions

The corporate contract (shareholders’ agreement) is a central instrument in international structures. It allows:

• fixing the voting procedure on key issues
• Create mechanisms for resolving deadlock (Russian roulette, Texas shootout, mediation with subsequent buy-out)
• provide call and put options in case of breach of obligations, death, incapacity, bankruptcy of the partner
• to establish special conditions for the transfer of shares to third parties (tag-along, drag-along)
• Reconcile an independent director with a decisive vote
• fix applicable law and arbitration for corporate disputes (often selected by LCIA, ICC, SIAC)
• confidentiality

It is important that the provisions of the corporate contract are implemented in the company’s charter in those jurisdictions where this is necessary for their enforcement. A contract that is contrary to the mandatory law of the country of incorporation may not protect control at a critical time.

Call/put options allow the beneficiary or entity controlled by him to acquire the partner’s shares at any time at a predetermined price or formula. It is one of the most powerful tools for fast consolidation of control.

Step 6. Protect yourself from share dilution and unfriendly takeover

Dilution of the share through additional issue of shares or increase of the authorized capital is a classic way of losing control without formally reducing the number of shares in the majority shareholder.

Prevention requires:

• the charter shall provide for the mandatory approval by all shareholders (or super-majority) of any increase in the share capital
• Pre-emptive rights (pre-emptive rights) for all participants
• exclude the possibility of issuing new classes of shares with a raised vote without the consent of the controlling participant
• in the corporate contract to fix a direct ban on blurring actions and sanctions for violation
• in trust structures to limit the powers of the trustee to issue new shares
• to require independent evaluation in any share transactions

In some jurisdictions (e.g. Cyprus), the dilution of the share may be carried out even in the presence of a corporate contract, if the articles of association do not contain direct restrictions. Therefore, synchronization of the charter and the shareholders’ agreement is a prerequisite.

Step 7. Provide control through trusts and private foundations

A trust or private foundation is often used as the owner of shares in a holding company. With the right structure, this allows:

• Separate legal ownership from economic interest
• Protect shares from personal creditors, family claims and inheritance disputes
• establish a mechanism for the continuity of control through the tread and predetermined instructions
• avoid compulsory withdrawal of shares for political or sanction reasons (with certain reservations)
• Provide management through a loyal professional trustee

However, without proper legal registration, a trust can become a tool for losing control: If the trustees start to act independently or the relationship with him is not settled, the beneficiary may lose the opportunity to influence the company. Here the choice of jurisdiction of the trust (Jersey, Guernsey, BVI, UAE, etc.), the figure of the protector, the content of the letter of wishes and the right of the beneficiary to change trusts are critical.

Step 8. Preparing interim measures in key jurisdictions

When a corporate conflict has already begun, the speed of reaction determines the outcome. The owner should have at his disposal legal mechanisms for:

• seizure of shares or shares of a disputed company
• Prohibition of Changes to the Shareholders Register
• ban
• Blocking of bank accounts until dispute resolution
• ban on the disposition of key assets
• appointment of interim manager
• Anti-suit injunction against parallel processes in inconvenient jurisdictions

To do this, lawyers prepare draft applications in advance, collect evidence, and determine the optimal forum. In the CIS countries, local state courts are often effective, in international structures – emergency arbitration mechanisms (emergency arbitrator) or English freezing orders with a global effect.

Step 9. Develop a plan to restore control

Plan B should be ready before it is needed. It includes:

• List of jurisdictions in which protection will be initiated
• Definition of the first, second and subsequent lines of defense
• pre-appointed lawyers and consultants
• templates of procedural documents for changing directors, challenging decisions, filing lawsuits
• contact information of registrars, banks, trustees
• communication with counterparties and banks to maintain operational activities
• mechanisms for emergency transfer of assets or change of jurisdiction of the company (redomiciliation) in permissible cases
• Financing – reserves for emergency legal expenses

Practice shows that: When a business is attacked, it loses weeks to find lawyers while the enemy acts as quickly as possible. The recovery plan should allow protection to begin within 24 to 48 hours.

Step 10. Act ahead of time: monitoring and risk management

Keeping control is a continuous process, not a one-time action. It is necessary:

• Regularly update information about directors, shareholders, trustees
• Monitor changes in corporate law in all relevant jurisdictions
• monitor legal claims and claims against group companies
• monitor compliance with corporate formalities to exclude the possibility of invalidation of decisions
• Keep a current register of all key documents
• Regularly test the safety mechanisms (mock drills)
• Maintain working relationships with registrars, banks and local consultants

Comparison of control tools

How to strengthen your position before a conflict arises

The best control protection is built into the structure of a business at the stage of its creation or restructuring.

It is recommended:

• to build a transparent and logical chain of ownership with a clear separation of voting control and economic interest;
• For each company in the group, prescribe the rules of deadlock resolution and the mechanism for appointing directors.
• unify applicable law in key corporate agreements and arbitration clauses
• provide for the compulsory redemption of the partner’s share in case of his unfriendly actions (bad leaver provisions)
• Ensure that key assets (IP, real estate, trademarks) have a separate “security loop”
• appoint an independent protector in a trust with the right to change trustees without the consent of the beneficiaries
• Prepare a “disturbing set” of documents for emergency change of directors and filing interim measures

The structure must be designed not only for peaceful possession but also for the toughest scenario.

Common Mistakes in Protecting Corporate Control

1. Control through a nominal holder without a contract If the denomination has disappeared or become disloyal, it is extremely difficult to restore ownership.
2. The Charter, written under English law, may not work in a company registered in the CIS.
3. International arbitration may render a decision, but the local registry will not execute it without additional procedures.
4. Savings on a trust structure An unprofessional trust or lack of a tread often results in the seizure of trustee control.
5. With equality of shares, the business is paralyzed, and there is no exit mechanism - the result is: liquidation of a successful company.
6. After making a record of a new director or a change of owner, it becomes much more difficult to restore the status quo.
7. Sanctions may block the management of accounts and assets in certain jurisdictions without a pre-prepared compliance plan.
8. In a conflict, they are worth nothing - only documents work.

Checklist of the owner of the international group

Before a conflict arises, you need to answer 15 questions:

Who is the legal owner of each group company?In what jurisdiction is each company registered and what law regulates its activities?Is there a corporate agreement or shareholder agreement in all significant companies?What decisions can be made without your consent?Who can change directors in a key operating company?What is the procedure for blocking management actions?Where are the originals of constituent documents and share certificates?Do minority shareholders have the right to demand liquidation or redemption of a stake?Does there be a mechanism for resolving a deadlock?Do options exist to purchase shares in the event of risk?Can your share be blurred? What interim measures can be obtained in each jurisdiction and how quickly?Who is the protector of the trust and can he change the trust?Is there a “disturbing plan” with ready-made draft documents and a list of contacts?How sanctions restrictions affect the ability to manage and dispose of assets?

What a strong corporate control strategy looks like

A strong strategy includes five levels:

1. Architectural level Correct jurisdictional structure, separation of voice and capital, trusts.
2. Contract Level Corporate contracts, options, clear rules for appointing directors and permissions of deadlock.
3. The full set of current statutes, decisions, signed applications for change of directors "in case", stored at the trustees.
4. Procedural level: Prepared applications for interim measures, pre-selected jurisdictions and arbitration institutions.
5. Rapid Response Level Action Plan, legal team, funding, communication channels – all to start defense within a day.

Without the fifth level, the first four may be paper armor that you can’t wear.

FAQ

Can I still control my business if I only own 50% of the shares?

Yes, through a corporate contract with a deadlock resolution mechanism, options, the right to vote with an independent director or the division of shares into voting and non-voting.

Which is better: Trust or corporate contract?

These are not alternatives, but elements of a single system. The trust solves the problem of asset isolation and succession; The corporate contract regulates the relationship within the company. They often work together: The trust owns the shares, and the operational management is determined by a corporate contract.

How to protect control under sanctions?

It is necessary to conduct a sanctions audit of the structure, consider the transfer of ownership to neutral jurisdictions, appoint reserve directors and managers who are not sanctioned persons, and provide for mechanisms for emergency interception of management.

Can I challenge a change of director without my consent?

Yes, but the result depends on the law of the country of registration of the company and the speed of action. It is often easier to prevent a change by interim measures than to challenge it retroactively after the sale of assets.

What if your partner blocks your decision?

Try to run a deadlock mechanism stipulated by the contract (for example, buy-out according to a certain formula). If there is no mechanism, initiate restructuring negotiations with the simultaneous preparation of arbitration or litigation.

How long will corporate control be restored?

Without preparation – from several months to several years. With a pre-made plan and draft interim measures – sometimes a few days are enough to block unfriendly actions.

Is it possible to protect the control in the CIS through international arbitration?

Yes, an arbitral award may be a key element of the strategy, but it will need to be recognized in local jurisdictions to be enforceable. It is therefore important to combine arbitration with simultaneous action in local courts.

Related services

Corporate Conflicts and Protection of Business Owners International Corporate Structures and Holdings Trusts, Private Funds and Succession of Capital Support of M&A Transactions and Restructuring International Arbitration and Cross-Border Litigation Sanctions and Compliance Support Protection against Unfriendly Takeover and Raider Attacks

Related material

How to build an international holding company resistant to corporate attacks Corporate agreement under Russian and foreign law: Key differences Trust as a tool for maintaining control and protecting assets Interim measures in corporate disputes: Russia, CIS and Deadlock’s common law in the joint venture: How to break the deadlock without losing business Calls and Puts in International Structures Recognition and enforcement of foreign arbitral awards in CIS countries How to lose control

Conclusion

Maintaining corporate control in an international group of companies is not passive ownership of shares, but an active system of protection covering the law of several jurisdictions, trust and corporate mechanisms, interim measures and a ready-made plan of action in a crisis situation.

A strong position is not built at the time of the conflict, but long before it – through a legally accurate ownership architecture, verified statutory documents, corporate agreements and a pre-worked strategy for restoring management.

In international corporate wars, the winner is not the one with the largest share. The winner is the one who, in quiet times, has foreseen all scenarios of loss of control and made sure that none of them became a reality.