Can a company terminate a management agreement if its position as a statutory director remains intact?

“Recently, I successfully represented a client in the Court of Appeal in Amsterdam (hereinafter: the Court) regarding the interpretation of a management agreement. This ruling was remarkable because the judge upheld the client’s position as director, even though the management agreement was terminated. This unusual situation arose because the Court placed significant importance on the linguistic interpretation of the agreement, particularly since it was drafted by the company’s lawyers. In this article, I discuss both the management agreement in general and the rendered judgment.”

What is a management agreement?

A company may choose to hire a person or business to perform management tasks without hiring them as an employee. Instead of a salary, a management fee is paid for the work. A management agreement is required for this arrangement.

From a legal perspective, the management agreement is considered a contract for services under Article 7:400 of the Dutch Civil Code (hereafter: BW). In practice, a company often enters into a management agreement with its director, executive, or manager. In this case, the company acts as the client, and the other party is the contractor.

A management agreement offers several advantages for the company. The contractor has fewer rights than an employee under an employment contract. For example, the contractor is not entitled to a severance payment, protection against dismissal, or continued payment during illness. Moreover, the client can generally terminate the contract in accordance with Article 7:408(1) in conjunction with Article 7:400(2) BW, unless otherwise specified by law, custom, or the terms of the agreement. In return, the contractor often receives a high management fee.

Relevant facts and circumstances of the ruling

About twenty years ago, the parties entered into a management agreement for an indefinite period. There is a management B.V. (private limited company), which is governed by sole shareholder [M]. The management agreement stipulates that the management B.V. is responsible for the management of company B and is the statutory director of this company. Furthermore, since 2017, management B.V. has been the statutory director B of company B (hereafter: statutory director). Additionally, management B.V. holds shares in company B.

The “share sales and purchase agreement” stipulates that as long as two specific shareholders own more than 10% of the shares in [company B], the statutory director B can only be appointed or dismissed by these shareholders. The largest shareholder is management B.V., the statutory director B. This means that, in principle, management B.V. cannot be dismissed as statutory director B as long as it holds its shares.

In early 2020, the board decided to terminate the management agreement. The primary dispute is whether this management agreement can be terminated, despite management B.V. still being the statutory director of company B.

The Termination of the Management Agreement

The Court emphasizes that, according to established case law, it is not only a matter of the linguistic interpretation of the contractual provisions. It also concerns the meaning that the parties could reasonably have assigned to each other in the given circumstances and what they could reasonably have expected from each other, with all circumstances of the case being relevant.

The Court takes into account that the management agreement was drafted by the lawyers of management B.V. Therefore, in the Court’s opinion, the linguistic meaning of the wording of the management agreement plays a significant role.

According to the Court, the management agreement contains a non-exhaustive list of grounds for termination, as indicated by the phrase “at least (but not exclusively).” This means that termination is also possible in other cases. The management agreement does not include an explicit prohibition of termination in the situation where management B.V. is still the statutory director. While the management agreement was clearly linked to the appointment of management B.V. as the director of company B, this does not automatically mean that management B.V. must continue working under the agreement as long as the directorship formally persists.

This is despite the fact that, as a statutory director, management B.V. cannot, in principle, be dismissed as long as it holds more than 10% of the shares in company B. However, according to the Court, this is separate from the possibility of terminating the management agreement. Therefore, the management agreement can indeed be terminated, even if management B.V. is still the statutory director.

The Court states that if company B had desired further protection under the agreement, it should have reached such an agreement with management B.V. and the other parties involved. The fact that it did not do so is at its own risk, especially since both the management agreement and the share sales and purchase agreement were drafted by its own lawyers.

Conclusion and Advice

The status of the parties and the legal assistance they have may lead to significant weight being placed on the linguistic interpretation of a management agreement. Therefore, it is crucial to formulate the wording carefully. If you need assistance in drafting a (management) agreement or if you have a dispute regarding the interpretation of a (management) agreement or share purchase agreement (SPA), feel free to contact one of our specialized lawyers  via  email, telephone or fill out the contact form for an initial consultation. We are happy to assist you.