This article discusses the amendments of the dispute resolution proceedings as included in the Dutch legislative proposal for the “Act on the adjustment of the dispute resolution proceedings and clarification of admissibility requirements for inquiry proceedings”.

Introduction 

Shareholder disputes are, unfortunately, not uncommon in the Netherlands. A solution to deal with these disputes can sometimes be found amicably. If not, Dutch statutory law provides for the more formal measures, such as the so-called inquiry proceedings (enquêteprocedure) and the dispute resolution proceedings (geschillenregeling).[1]The latter provides a shareholder with the possibility to request the district court to force the other shareholder to sell its shares to the requesting shareholder (i.e., forced exit of a shareholder) or – the mirror situation – to force the other shareholder to buy the shares held by the requesting shareholder (and thus withdrawing as a shareholder).

In practice, it turns out that the district courts are generally not inclined to award forced exit or forced buy-out claims. Therefore, the dispute resolution proceedings are strongly criticized and even considered to be illusory. The legislative proposal for the “Act on the adjustment of the dispute resolution proceedings and clarification of admissibility requirements for inquiry proceedings”[2] (the “Proposal”) aims to address these concerns, (i) by improving the effectiveness of dispute resolution proceedings (by extending the thresholds on which forced exit or buy-out claims can be awarded) and (ii) through consolidation of dispute resolution and inquiry proceedings.[3]

Current regulations for settling corporate disputes

In the Netherlands, the inquiry proceedings are the most common proceedings for handling corporate disputes. In these proceedings, the Enterprise Chamber (Ondernemingskamer) of the Amsterdam Court of Appeal deals with corporate law disputes, such as mismanagement and deadlocks on shareholder level, which can result in immediate intervention in the corporate governance structure of a company. The Enterprise Chamber can conduct an investigation into the affairs and the course of action of a company. The request will only be allowed if the Enterprise Chamber considers that there are well-founded reasons to doubt the correctness of the affairs of a company. Often, the petitioner also requests for temporary remedies, such as the suspension of a director, the appointment of a director with special authorities or the temporary transfer of shares to an appointed trustee. The injunctions are aimed at restoring the internal checks-and-balances. The temporary transfer of shares cannot lead to a final transfer.

To accomplish a final transfer, the dispute resolution proceedings have been introduced, aimed at solving shareholder disputes through a final and irrevocable transfer of shares. The dispute resolution proceedings consist of four types of proceedings, in which the court can render a final judgment if a dispute between shareholders cannot be resolved amicably, such as the forced exit or forced buy-out proceedings. An award by the court implies that the shares in question are transferred at a share price to be determined at a later stage.

Simplifying dispute resolution proceedings by extension of thresholds

Forced exit proceedings (uitstootregeling)

Under the current regime, the forced exit of a shareholder may be claimed by one or more of its co-shareholders which, independently or jointly, hold at least one-third of the issued capital. The main test is whether the shareholder in question, by its conduct, adversely affects or affected the interests of the company to such an extent that the continuation of its shareholding cannot reasonably be accepted. Three elements can be distinguished: 

(a)     Firstly, the shareholder’s actions must adversely affect the interests of the company. The justification of a forced exit must be found in the interests of the company being harmed, and not the interest of the claimant (i.e., the shareholder(s)). Opposing shareholder’s conduct that is merely annoying or even unacceptable, is in itself not a justification for forced exit; 

(b)     Secondly, the relevant actions must have been performed by the other party in its capacity of shareholder. This means that the behavior must relate to the company’s performance. Actions or behavior by the other party in any other capacity than shareholder (for example as competitor of the company exploring corporate opportunities), is irrelevant; and

(c)     Lastly, the threshold includes a test of reasonableness. The claimant must demonstrate that the other party’s shareholding can no longer be reasonably accepted. The court must assess whether the interest of the other party to continue its shareholding outweighs the company’s interest. The misbalance should be solved by the forced exit of the shareholder. 

The above requirements make the forced exit very difficult to achieve. This is partly due to the strict interpretations of the three elements. The (limited) case law for this type of proceedings shows that the request can only be allowed if the respective company has already been practically uncontrollable for a long time and bankruptcy is hardly unavoidable. But in such situation, opting for the forced exit mechanism does not make much sense anymore.

The Proposal provides for an extension of the grounds on which a shareholder’s claim for forced exit can be allowed. The Proposal suggests that a shareholders’ forced exit is not only possible because of conduct by the shareholder in that capacity, but also because of conduct in another capacity. This could for example be the case (i) if a co-shareholder, in its capacity of a director of a competing business, unfairly competes with the company, or (ii) if a 50% shareholder that is also a director of the company causes harm to the company as a result of mismanagement.

Forced buy-out proceedings (uittreedregeling)

Under the current regime, a shareholder which believes that its rights or interests (i.e., not the rights or interests of the company) are adversely affected by its co-shareholder(s) may withdraw its shareholding. That shareholder can opt for forced buy-out proceedings. It must demonstrate that, as a result of the conduct of one or more of its co-shareholders, it is harmed in its rights or interests that a continuation of its shareholding can no longer reasonably be expected. In that situation, the shareholder may bring a claim for forced buy-out with the district court against its co-shareholders The petitioner requests an order to the co-shareholders to acquire its shares, resulting in a forced buy-out of a shareholder. The forced exit standard (the test of reasonableness) also plays an important role in the case of forced buy-out (element c). However, a distinction must be made between these thresholds. Firstly, “forced buy-out” does not concern the violation of the company’s interest, but the violation of the shareholder’s rights and interests. Secondly, the shareholder’s conduct does not necessarily need to be committed in its capacity as a shareholder. In practice, it seems that there is a lack of clarity about the abovementioned requirement, with the result that district courts apply different, and often too high, standards to forced buy-out claims. For this reason, the Proposal includes a simplified criterion for this type of claims.

The Proposal significantly lowers the threshold for the forced buy-out proceedings. A shareholder may bring an action for forced buy-out against one or more co-shareholders which behave in such a manner contrary to what is required by reasonableness and fairness that the continuation of the shareholding can no longer reasonably be demanded of him. This new requirement makes clear that a minority shareholder which is unreasonably harmed in its interests by co-shareholders or the company, may resign so that conflicted shareholders are no longer condemned to each other. Think of the case where the relationship between the shareholders has been severely disrupted, for example, after the dismissal of a minority shareholder as board member. 

However, under the Proposal, a forced buy-out claim cannot be granted if the company or a co-shareholder has made an “irrevocable, unconditional and reasonable offer” to take over its shares. “Reasonable” means an offer for a price that the shareholder would have reasonably received if it would have continued the forced buy-out procedure.

Conclusion

Corporate disputes, such as shareholder disputes, can be very detrimental to the company’s interests. It is therefore advisable to have an orderly legal possibility to separate conflicting shareholders permanently. Not only the conflicted shareholders, but also the company and its employees benefit from procedures that quickly lead to a final and decisive solution. On the one hand, dispute resolution proceedings should aim for a quick solution. On the other hand, it is important that the proceedings have sufficient procedural securities and guarantees, as they can lead to far-reaching measure (for example when shares are transferred to other hands). Overall, the Proposal aims to improve the effectiveness of dispute resolution proceedings by extending the thresholds on which forced exit or buy-out claims can be awarded. We expect that the Proposal (if adopted) will significantly improves the effectiveness, but only time will show whether it can sufficiently address all concerns.


[1]     Summary injunction proceedings are considered to be an alternative forum compared to the Enterprise Chamber of the Amsterdam Court of Appeal for corporate law issues to be dealt with. Although there are no limitations on the competence of the court to render such an injunction in these proceedings, the EC is deemed to be the key forum to deal with corporate law issues.

[2]     Wet aanpassing geschillenregeling en verduidelijking ontvankelijkheidseisen enquêteprocedure. The Proposal is currently in the preparatory phase. In this case, this is the period between the consultation period and the moment of adoption by the Lower House and the Upper House. As it is standard procedure in the Netherlands, the Dutch government drafts laws together with the Upper House and the Lower House. Usually, a bill is submitted, on the initiative of a specific ministry, but this may also be provided by the Lower House. The government often presents a proposal of a bill for consultation to the public, enabling them to submit comments. These comments, generally provided by interest groups and law firms, may influence the ultimate bill. However, it is eventually up to the Lower House and the Upper House to eventually adopt the bill.

[3]     The Proposal also aims to adapt some procedural aspects as it seeks to strike a balance between speeding up the dispute resolution proceedings whilst setting up a procedure with adequate safeguards and guarantees. In practice, the current dispute resolution proceedings is considered too lengthy, with the threshold for allocation being very high. The Proposal attempts to address these concerns.

Author

Rutger Doorduyn is an associate in the Amsterdam Dispute Resolution Practice Group. Rutger studied at the University of Groningen where he obtained a master’s degree in corporate law. He joined Baker McKenzie in 2018 and is admitted to the Amsterdam Bar. Rutger is involved in advising and representing companies and their (supervisory) board members in commercial and corporate disputes. His focus is on shareholder litigation, directors' liability disputes and inquiry proceedings before the Enterprise Chamber of the Amsterdam Court of Appeal.

Author

Robbert-Jan Kamstra is an associate in the Dispute Resolution Practice Group of Baker McKenzie Amsterdam. Before joining the Firm, he served for five years as a registrar at the court of Amsterdam. He was responsible for the records of the hearings and involved in the making of judgments. Robbert-Jan worked at the Dutch Young Bar Association (SJBN) as a secretary for two years. Robbert-Jan is experienced in commercial litigation and domestic and international arbitration.