In the wake of the economic downturn we have seen an increase in shareholder disputes as joint venture results drop and often further investments are required. Dutch law provides for various effective measures to deal with shareholder disputes. This update addresses four main measures: inquiry proceedings (enquêteprocedure), summary proceedings, statutory shareholder dispute settlement proceedings (geschillenregeling) and squeeze-out proceedings.
It may look self-evident to enter into clear shareholders agreements. However, we regularly advise on cases where no solid arrangements have been made, for example on additional financing or payment of dividend. In addition, it is advisable to make sure that the shareholders agreement provides for a fully worked out exit scenario. Proper arrangements on a (forced) exit may help considerably in case of a dispute.
Furthermore, if it comes to a dispute it is important to collect as much information as possible before escalating the dispute. Particularly a shareholder that is at odds with the company's board may have difficulties obtaining the information required to thoroughly prepare proceedings. Although Dutch law provides for certain information requests these take time and with shareholder disputes swift action is often essential.
Inquiry proceedings are instituted before the specialist Enterprise Chamber of the Amsterdam Court of Appeals and are aimed at (i) an inquiry into the management of a company and (ii) interim measures to prevent (further) harm to a company. It can only be requested in relation to Dutch companies.
Inquiry proceedings can (among others) be initiated by shareholders and by the company itself. A shareholder is authorised to initiate inquiry proceedings if it holds at least 10% of the issued capital or shares with a nominal value of at least EUR 225,000. In case of companies with an issued capital of over EUR 22.5 million, a shareholder must hold at least 1% of the issued capital to be authorised to initiate inquiry proceedings. If the shares are listed, a shareholding with a market value of at least EUR 20 million (at the time of submission of the application) gives a right to initiate inquiry proceedings. For holders of depository receipts the same equivalent thresholds apply. A joint submission by several shareholders (or holders of depository receipts) is possible.
The main feature of the inquiry proceedings is the possibility to request interim measures. These interim measures can be broad and may have far-reaching effects. Interim measures are aimed at a prompt interference to avoid further harm to a company and will often be ordered in case of dead-lock situations that threaten the company’s immediate future or where there are clear signs of mismanagement. Regularly, interim measures are the main - or sole - reason for initiating inquiry proceedings.
As long as an interim measure has a temporary character almost anything is possible. Interim measures can have permanent consequences notwithstanding their temporary character. Examples of interim measures that have been awarded are the suspension of (supervisory) directors, the temporary appointment of a (supervisory) director (sometimes with overriding voting powers), the temporary transfer of shares, the suspension of voting rights and the prohibition for the general meeting of shareholders to vote on certain topics.
Although interim measures are often the main driver for initiating inquiry proceedings, the inquiry remains the core of the proceedings. One cannot request interim measures without also requesting an inquiry. In practice applicants often request the Enterprise Chamber to first decide on the interim measures and stay the inquiry request.
The Enterprise Chamber will order an inquiry if it finds there are sufficient grounds to question the management of the company. This criterion not only refers to the directors of the company, a deadlock between shareholders or certain acts by one or more shareholders may also prompt an inquiry.
The Enterprise Chamber will appoint one or more independent experts to conduct an investigation into the management of the company if it considers sufficient grounds to be present. After the investigation the experts file a report with the Enterprise Chamber with their findings.
After the experts have filed their report, the applicants in the proceedings leading up to the investigation may file an application with the Enterprise Chamber to take certain final measures if the experts’ report concludes that mismanagement took place. The Enterprise Chamber will determine if mismanagement has occurred, based on, but not solely on, the experts’ report. The Enterprise Chamber does not assess the liability of individual directors or order any payment of damages.
The final measures that may be requested are limited to the following:
- Suspension or annulment of a decision by a decision-making body of the company;
- Suspension or dismissal of one or more directors or supervisory directors;
- Temporary appointment of one or more directors or supervisory directors;
- Temporary deviation from the articles of association;
- Temporary transfer of shares; or
- Dissolution of the company.
The main advantages of inquiry proceedings are the highly specialised judges and the possibility of requesting interim measures. Inquiry proceedings have often been used successfully in disputes between shareholders, in particular in cases where swift and decisive action was required.
Although inquiry proceedings can be an extremely effective tool in solving shareholder disputes there are also certain risks. The Enterprise Chamber has broad discretionary powers to order interim measures, also if such measures have not been requested by one the parties to the proceedings.
In addition, it is not always easy or possible to withdraw an inquiry request. If the Enterprise Chamber has ordered an inquiry the applicants can no longer withdraw their request and the decision can only be challenged by means of an appeal with the Dutch Supreme Court. Up to the depositing of the inquiry report with the court, the applicants can however still request the Enterprise Chamber to cease the inquiry and end the inquiry proceedings. The Enterprise Chamber is free to decide if it follows this request.
Finally, directors appointed by the Enterprise Chamber will make their own decisions and are generally free to do so. Such decisions may not necessarily be in line with the applicants’ wishes or ideas. It is not always easy to challenge such decisions or to have the court appointed director removed.
All in all there is an element of uncertainty in (the consequences of) initiating inquiry proceedings that should be properly balanced when deciding on embarking on inquiry proceedings.
Summary proceedings can be an attractive alternative for inquiry proceedings if a shareholder does not meet one of the applicable thresholds, if the joint-venture company is a non-Dutch entity or if the claimant does not want an inquiry.
In first instance summary proceedings are conducted before a district court judge and a judgment can be obtained at very short notice. A judgment in summary proceedings will lead to an interim measure. Interim measures in summary proceedings can have permanent consequences. In our experience summary proceedings can be a very efficient way to solve shareholder disputes, for example by forcing a shareholder or the joint venture company to take or to refrain from certain actions, including complying with obligations under a shareholders agreement. A court order in this respect can (and will often) be complemented with a penalty sum.
If there is sufficient connection with the Dutch jurisdiction, Dutch courts will have jurisdiction over non-Dutch defendants. This may prove helpful in case of a non-Dutch shareholder in a Dutch joint-venture or in situations where the joint-venture company is a non-Dutch entity and one seeks a court order against the company.
Because summary proceedings can only result in interim measures they might not entirely end a dispute, however they can create momentum or leverage to force a solution.
Statutory shareholder dispute settlement proceedings
Another alternative for inquiry proceedings are the statutory shareholder dispute settlement proceedings. These proceedings are aimed at a transfer of the shares held by a shareholder to the other shareholder(s). The proceedings can be instituted by a shareholder who wants to exit the company because of acts by the other shareholder(s). Alternatively, shareholder(s) wanting a forced exit of another shareholder because of acts by that shareholder can institute these proceedings, whereby the claiming shareholders must represent at least one third of the issued share capital.
In the past these proceedings have not been used very often as they were protracted and when the judgment was finally handed down it was often no longer relevant because the company had either lost much of its value or had gone into liquidation.
Recently new legislation has come into force amending the statutory shareholder dispute settlement proceedings. The aim is to make the proceedings quicker, for example by making it possible for the court to render its judgment readily enforceable. This means that an appeal will not prevent a forced share transfer. Parties can also combine a claim for a forced exit/transfer with a request for interim measures, which will be heard by the court as soon as possible effectively combining the statutory shareholder dispute settlement proceedings with summary proceedings.
In addition, shareholders can tailor the proceedings in the articles of association of the joint-venture company or a shareholders agreement, for example by agreeing to arbitration or by including detailed valuation principles.
Finally, if parties agree that the shares should be transferred they can file a joint request to have the purchase price for the shares established by the court.
With the new legislation the statutory shareholder dispute settlement proceedings have become a more interesting alternative for inquiry proceedings, in particular in cases where (i) an inquiry is not desirable or (ii) a forced share transfer is the only real solution as inquiry proceedings cannot lead to a permanent share transfer.
Not necessarily limited to dispute situations, squeeze-out proceedings are aimed at enabling a majority shareholder to acquire the remaining outstanding shares of a company. A shareholder (or two or more shareholders acting in concert) holding at least 95% of the issued share capital can initiate squeeze-out proceedings. For private limited liability companies the shareholder(s) also need(s) to have 95% of the voting rights in the shareholders meeting as private limited liability companies can have non-voting shares.
The competent court is the Enterprise Chamber. The claiming shareholder has to summon all other shareholders to appear in court. In case of listed companies of which the shareholders are unknown, this will require a public summons.
The Enterprise Chamber will verify if (i) the claimant meets the 95% threshold(s) and (ii) the other shareholders have been properly summoned. If both are the case, generally one or three independent experts are appointed to set the price for which the claimant will be ordered to buy the remaining shares.
Squeeze-out proceedings following a public bid
Following a public bid an additional possibility to squeeze-out the remaining shareholders exists parallel to the general squeeze-out proceedings. The threshold is set at 95% of the issued share capital and 95% of the voting rights. The proceedings must be initiated within three months from the elapsing of the term set for acceptance of the public bid.
Again the Enterprise Chamber is the competent court and it will determine if (i) the claimant meets the 95% thresholds and (ii) the other shareholders have been properly summoned. The Enterprise Chamber can use the public bid price to determine the price for which the claimant will be ordered to buy the remaining shares. If at least 90% of the shares that were covered by the public bid have been acquired following the public bid, the bid price is deemed to be a fair price. The Enterprise Chamber can however appoint one or three experts if it decides the public bid price does not represent a fair value for the remaining shares.