Improving statutory exit arrangements shareholder disputes

Shareholders know that continuing to work together is not always easy. Disputes between shareholders are common. At this moment, it is currently not always possible to get rid of each other, even if a fellow shareholder has genuinely lost his way.

We are frequently approached with the question of how to achieve a lasting solution to a dispute with a fellow shareholder. At Fruytier, we have extensive experience in resolving disputes between shareholders. If necessary, we do not hesitate to litigate about it for our clients. Until now, this rarely went through the formal statutory dispute resolution process, which was too cumbersome and narrowly applied.

The legislature therefore recognized that the dispute settlement procedure needed improvement. This resulted in the adoption of the Act on Adjustment of Dispute Settlement Procedure and Clarification of Admissibility Requirements for Survey Proceedings. The law will take effect Jan. 1, 2025.

Practice is yet to tell, but it seems that with the amendments, the legislature will succeed in making the statutory dispute resolution scheme more pragmatic and effective. If you are a shareholder, keeping your knowledge of these regulations up to date is indispensable. In this article I briefly explain what you can achieve with the statutory dispute resolution scheme and highlight the most important changes to come.

Ejection or retirement

There are two variants of proceedings that can be used if you really cannot come to an agreement with your fellow shareholders. Dispute resolution can be found in the 8^ste title of Book 2 of the Civil Code (from article 2:335q in the current Civil Code, from article 2:336 Civil Code after the legislative amendment).

Expulsion (or the action of forced transfer) is usually the preferred option when your fellow shareholder’s behavior is damaging. If by his behavior he causes such damage to the interest of the company that he cannot reasonably be tolerated remaining a shareholder, one or more shareholders owning at least one-third of the shares can follow this procedure. If successful then the misbehaving shareholder can be forced to sell his shares to the shareholders who demanded the expulsion. Thus, if you start an expulsion procedure, you must be willing and able to take over the shares.

If you do not have the means to take over the shareholding of your co-shareholder, but still find it impossible to get along with your co-shareholder, the exit regulation offers a solution. Under this scheme, if the behavior of one or more of your co-shareholders harms your rights or interests to such an extent that you can no longer be required to remain a shareholder, you can ask the court to order either your co-shareholders or the company itself to take over your shareholding.

Now directly at the OK

One of the changes is procedural in nature. Instead of a summons procedure at the district court, after Jan. 1, 2025, it will be possible to directly approach the Enterprise Chamber (the “OK”) at the Amsterdam Court of Appeal in first instance for shareholders dispute, whereas currently the OK only handles appeals in these matters. In addition, after January 1, 2025, proceedings can be initiated with a petition, as is customary in inquiry proceedings at the OK.

The positive impact of this procedural change should not be underestimated. Our experience of litigating before the OK is very positive and this is also how it is perceived by our clients. The judges at the OK are experts and they are assisted by two non-judges from the commercial practice. The OK can therefore act quickly to intervene when necessary. Many times, tensions between shareholders will already have risen very high. After all, entrepreneurs usually prefer to resolve disputes outside the courtroom. This means that if the court does get involved, it must be able to act quickly to prevent the dispute from killing the company. The OK is specifically designed for this purpose and routinely handles requests for provisional measures at very short notice.

In addition, a major advantage is that after the change, it will be possible to handle expulsion/exit and inquiry in the same proceedings. Inquiry procedures are the usual form of approaching the OK when issues get out of control due to inadequate management at a company. By merging these two procedures, the legislature recognizes that there is a strong correlation between problems in corporate governance and disputes between shareholders. We regularly see, for example in family owned businesses, that there is a deadlock between (groups of) shareholders that makes the proper management of the company impossible. The fact that, in the context of the inquiry procedure, the OK now has the possibility to intervene directly between shareholders at the request of those involved is therefore a significant improvement in that context. The amendment to the law streamlines the judicial approach to corporate disputes.

Broadening applicability

Another important change is that until now the forced transfer has been narrowly applied based on the legislative history. The shareholder’s conduct can now be grounds for expulsion only if it involves conduct by the shareholder as such, in his role as shareholder. By this narrow interpretation, the conflict at this point must have already resulted in a stalemate or blowout at the general shareholders meeting to support an expulsion claim. As a result, the rule does not provide relief for the majority of shareholder disputes, even in very serious cases. For example, in the past, application of the scheme has been rejected where a shareholder was unfairly competing with the company. The change in the law removes this restriction. Because of the history, the legislative text now states explicitly that it can apply based on conduct “whether or not in the capacity of shareholder.”

In addition, the exit scheme is now also being opened to holders of depositary receipts. Within family owned businesses, the issuing of depositary receipts for shares is a good method to give children profit rights, without diluting the control within the company too much so that it becomes unmanageable. The downside, however, is that the children without control can become the “victims” of the wrong policies of their fellow shareholders. As certificate holders, they have no or only limited influence on this. It is therefore right that holders of depositary receipts should be given the opportunity to enforce through the courts that they can be bought out.

After the bill takes effect, it will still be possible to deviate from all or part of the statutory dispute resolution scheme through proprietary arrangements in the articles of association or in an agreement (such as a shareholder agreement). Those arrangements will continue to prevail over the statutory regulation. This is only different if the clauses deviating from the statutory regulation make the (forced) transfer of shares impossible or extremely objectionable.

Counsel is warranted

Are you in the process of establishing a company or are you thinking about shaping the transfer of your family business to the next generation? Then let us advise you on drafting a dispute resolution scheme. There is much more possible than that which even the amended law will allow. A sound and tailored dispute resolution scheme is essential in the context of guaranteeing the continuity of your company to be founded or to be passed on.

Are you already facing a high-stakes shareholder dispute? Then don’t wait any longer and contact us. Make no mistake about the enormous opportunity costs associated with letting the dispute fester. Not only are the direct costs due to the damage the dispute inflicts on your investment in the company concerned high, but as long as the dispute continues you do not have the opportunity to use the invested resources and (especially) your entrepreneurial energy elsewhere where they do pay off. Therefore, invest in a solution and call us immediately! Our lawyers, experts in shareholder disputes will be happy to discuss your options with you.

Get advice

Do you have any questions? Then contact one of our lawyers by mail, telephone or fill in the contact form for a free initial consultation. We will be happy to think along with you.