A shareholders agreement is written when relations are good and read when they are not. Almost every dispute between shareholders turns on a question the agreement either answered clearly, in which case there is no dispute, or left open, in which case the agreement is the argument rather than its resolution. The quality of the document is measured entirely by how it performs in the second situation, which is precisely the situation nobody wants to imagine while drafting it.
Control has to be defined, not assumed
The first thing an agreement must settle is who decides what. Ordinary business decisions belong to management or the board; fundamental decisions, issuing shares, taking on debt, selling the business, changing its nature, related-party transactions, belong to the shareholders by a defined majority. The list of reserved matters is where the real negotiation sits, because it defines the boundary between running the company and controlling it. A list that is too short leaves a minority exposed; one that is too long makes the company ungovernable.
In a Dutch BV the statutory starting point is that the general meeting holds, within the limits set by the law and the articles, every power that has not been given to the board or to others, which is the rule in article 2:217 of Book 2 of the Dutch Civil Code. Article 2:239 gives the management of the company to the board, subject to restrictions in the articles, and supplies two tools a list of reserved matters can rely on. Board resolutions can, by or pursuant to the articles, be made subject to approval, but only the approval of another body of the company, and the articles can require the board to follow the instructions of another body, which the board must do unless they conflict with the interest of the company and its business. A reserved-matters list that is meant to bind the board through the articles is therefore framed as approval or instruction rights of another body of the company, such as the general meeting.
Deadlock is not an edge case
Two shareholders with equal rights and no deadlock mechanism have built a company that can freeze permanently, and equal ownership is common. The agreement needs a route out: a buy-sell provision, an escalation to named individuals, an expert determination, or an agreed sale. Any mechanism is better than none, because the alternative is a court, which is slow, public and rarely produces the outcome either side wanted. We deal with the same problem in the investment context in our note on co-investment and club deals.
Dutch law supplies a default, and it is the reason drafting matters. Under article 2:230, where votes in the general meeting are tied on anything other than the election of persons the proposal is rejected, and a tie in an election is decided by lot, in each case unless the articles provide another solution, which the same article says may consist of entrusting the decision to a third party. A tied vote on a proposal therefore produces a rejection rather than a decision, so the freeze described above is, in law, a standing no that suits whichever shareholder prefers the status quo. At board level, article 2:239 allows the articles to give a named director, or a director identified by function, more than one vote, but no director can cast more votes than the other directors together. The protections a minority needs around these defaults are the subject of our note on minority shareholder protection and deadlock.
An agreement is not tested when everyone agrees. It is tested at the one meeting where they do not, and everything else in it is preparation for that meeting.
When the contract runs out, the statute has an exit
When relations have broken down, Book 2 has an exit route of its own, which does not depend on the agreement providing one and is available for a BV or NV unless its shares or depositary receipts are admitted to trading on a regulated market, a multilateral trading facility or a comparable system in a state that is not a Member State, as article 2:336 provides. Under article 2:336a, one or more shareholders who alone or together provide at least one third of the issued capital can, within the limits the same article sets on who may bring the request, ask the Enterprise Chamber of the Amsterdam Court of Appeal to order another shareholder to transfer his shares, where that shareholder’s conduct, whether or not in his capacity as shareholder, harms or has harmed the interest of the company so seriously that his continued shareholding cannot reasonably be tolerated. Article 2:343 is the mirror image. A shareholder whose rights or interests are so harmed by the conduct of one or more co-shareholders that continuing as a shareholder can no longer reasonably be required of him can ask the Enterprise Chamber to order those co-shareholders to take over his shares, or to order the company to take them over on the basis of conduct of co-shareholders or of the company itself, subject, for a BV, to the restrictions on a company acquiring its own shares in article 2:207 as article 2:343 applies them.
Both tests turn on conduct and on its effect, which a contractual deadlock clause can be drafted not to require. The agreement still matters inside the statutory route. Article 2:337 allows the articles or an agreement to submit these disputes to arbitration, and provides that where they contain a dispute arrangement, a departure from the statutory scheme cannot be invoked insofar as it makes a transfer of the shares impossible or extremely onerous. When a request is granted, article 2:339 has the Enterprise Chamber appoint one or more experts to report on the price, and where the articles or such an agreement contain provisions on valuing the shares, the experts report taking them into account. The same article lets the Enterprise Chamber dispense with experts where the parties agree on the valuation, or where the articles or the agreement contain a clear yardstick from which it can readily set the price. Article 2:340 then sets the limit: the Enterprise Chamber disregards provisions on valuation in the articles or an agreement insofar as they would lead to a manifestly unreasonable price.
Transfer and pre-emption
What happens when a shareholder wants out, dies, or wants to bring in a third party. Pre-emption rights, giving the others the first opportunity to buy, are standard and important, but the mechanism has to include a way of setting the price, because a pre-emption right with no agreed valuation method is a right to argue. Drag-along and tag-along provisions, which respectively force a minority to join a sale and allow it to, are what make the company sellable as a whole, and their absence can trap all the shareholders in an asset none of them can exit.
Funding the next round
Companies need more money, and the agreement should say what happens when they do. If one shareholder will not or cannot fund, the consequence, dilution, a loan on defined terms, a shift in control, has to be agreed in advance. This is among the sharpest provisions in any agreement because it is where a difference in financial capacity becomes a difference in control, and it is far better negotiated in the calm of drafting than in the pressure of a funding gap.
In a BV the decision to issue new shares sits, under article 2:206, with the general meeting unless the articles designate another body, and the general meeting can delegate that power and revoke the delegation, with the same rules applying to the grant of rights to take up shares but not to an issue of shares to someone exercising such a right acquired earlier. Article 2:206a then gives each shareholder, unless the articles provide otherwise and subject to the rules in that article on certain classes of shares, a pre-emption right in proportion to the aggregate amount of his shares, with no such right on shares issued to employees of the company or of a group company. That right can be limited or excluded for each single issue by resolution of the general meeting, again unless the articles provide otherwise, and where it applies it can be exercised for at least four weeks after the announcement of the issue is sent. The same article, again unless the articles provide otherwise, gives shareholders a pre-emption right when rights to take up shares are granted, such as options or conversion rights, other than rights to shares of the classes it carves out, with its other rules applying correspondingly. There is no pre-emption right on shares issued to someone exercising a right to take up shares acquired earlier. For a convertible loan or an option, the pre-emption right therefore attaches to the grant of the right, not to the later issue of the shares. Because the exclusion, whether on an issue of shares or on a grant of rights to take them up, is by default a resolution of the general meeting, a minority that wants to keep its percentage looks to the articles or to the reserved matters to prevent an exclusion it did not vote for.
The agreement and the articles have to agree
A shareholders agreement is a contract between the shareholders; the articles of association are the company’s constitution and bind third parties. Where they conflict, the result is confusion and litigation. In a Dutch structure the interaction between the agreement and the statutory framework of the BV has to be handled deliberately, and it connects to the governance design we describe in our note on governance design in Dutch holding companies. The two documents should be drafted together, by people who have read both.
Book 2 gives the two documents a bridge. Article 2:192 lets the articles attach obligations of a contractual nature to the shares, towards the company, towards third parties or between shareholders, which is how obligations that must bind future holders can move from the agreement into the constitution, and the same article bars imposing any of them on a shareholder against his will. Over the articles, and over the company relationships within which the agreement operates, sits article 2:8, under which the company and everyone involved in its organisation by virtue of the law and the articles must, in that capacity, behave towards one another as reasonableness and fairness require, and a rule binding between them by law, custom, the articles, regulations or a resolution does not apply insofar as applying it would be unacceptable in the circumstances by those standards.
Which law, and where disputes go
For a cross-border group, the agreement has to state which law governs it and where disputes are resolved, and those choices have consequences for enforcement that we deal with in our note on governing law and jurisdiction in cross-border contracts. A shareholders agreement silent on these points is an agreement whose most basic question, which court, is itself a dispute waiting to happen.
Jurisdiction has a boundary of its own. Article 24(2) of the Brussels I bis Regulation gives exclusive jurisdiction, regardless of the domicile of the parties, to the courts of the Member State in which a company has its seat in proceedings which have as their object the validity of its constitution, its nullity or dissolution, or the validity of the decisions of its organs, with the seat determined by the court’s own rules of private international law. Article 25(4) deprives a choice-of-court agreement of legal force where the courts it purports to exclude have exclusive jurisdiction under article 24, so a clause sending every dispute under the agreement to the courts of another Member State does not carry a challenge to the validity of a resolution of a Dutch BV’s general meeting with it. The statutory exit procedures are different again, since article 2:337 allows the articles or an agreement to submit them to arbitration.
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This article is informational and does not constitute legal advice. The law differs by jurisdiction and the treatment of any matter depends on its facts. Each engagement is subject to scope and applicable regulation.