Conflicts and conflicting interests between shareholders
The relationship between shareholders in a corporation is sometimes like a marriage. Often things go well, but it also happens often enough that after a short or long time a conflict arises between shareholders and parties no longer want to continue with each other. Like a marriage, this can lead to a “fighting divorce” or “parting as good friends” and everything in between.
In an earlier article “Stalemate between directors who are also shareholders: what to do?” it was pointed out that the law does not as yet offer an adequate way out for shareholders in a relationship crisis. There is, however, a bill in which a shareholder can be obliged to leave via the Enterprise Chamber of the Amsterdam Court of Appeal (Overheid.nl | Consultatie Wet aanpassing geschillenregeling en verduidelijking ontvankelijkheidseisen enquêteprocedure (internetconsultatie.nl). It is expected that this bill will be submitted by the end of 2023. However, it remains to be seen to what extent this legislation will be able to provide fast and adequate solutions for shareholders in a conflict situation. What is certain is that every situation is different. In court, all the circumstances of the specific case always play a role.
This article discusses various points to consider during a relationship crisis.
The shareholders and the board
In the SME business, the shareholders are often also the directors of the company. But this does not always have to be the case.
Of importance is the board’s own role. Although shareholders own the company and therefore feel that they are in control, policy is set by the company’s board. Minority shareholders who are not directors have only limited rights.
The independent role of the board means that in a conflict between shareholders, the situation can easily arise where the shareholder who is not a director feels aggrieved. The shareholder who is a director tends to think that his personal interest is equal to the interest of the company. For example, consider the situation where the company needs new business premises and “coincidentally” the director has a property available for lease by the company.
If the director agrees an excessively high, non-market rent on behalf of the company with himself in his capacity as owner and lessor of the property, that is a legally valid agreement, but one that puts the company at a disadvantage. This is not allowed and in order to prevent such situations, a director must comply with the legal regulation on conflict of interest (The legal regulation of conflict of interest in a B.V. (and foundation and association). Often the articles of association or shareholders’ agreement also contain provisions intended to protect the company. If such provisions are violated, the director may be liable to the company in private.
On the other hand, it may be precisely the minority shareholder who has a priority other than what is best for the company. For example, when long-term investments need to be made while the minority shareholder would rather receive short-term dividends or a good price for his shares. Each shareholder is free to vote as he wishes in the General Shareholders’ Meeting. Because shareholders, unlike directors, are not obliged to serve the interests of the company, the conflict of interest rule does not apply. According to the Enterprise Chamber, however, the decision-making process within the company must proceed with due observance of the standards of reasonableness and fairness applicable between the shareholders. What that means in the concrete case is always something that can be discussed.
Information in the event of a conflict between shareholders
In the SME company, the shareholder who is not a director is not only entitled to information during the Annual General Meeting of Shareholders. Information must also be provided to this shareholder outside the AGM. Carefulness, transparency and openness by the board is required, according to the Enterprise Chamber. The company has a duty of care to the minority shareholder and must also provide information proactively. This applies especially in special situations, such as when the company is in financial dire straits, when investments have to be made or when other important decisions are being made.
At the same time, the management’s policy freedom must be respected. The shareholder does not determine the company’s policy. When his rights are respected, the court must be cautious in reviewing the decisions taken by the company’s board. For example, the board may not want to provide certain information for sufficiently compelling reasons. Consider, for example, business-sensitive information that a shareholder could use to compete with the company after his departure.
Competing activities and corporate opportunities
In a conflict situation, a shareholder may tend to want to independently exploit business opportunities that arise. Viewed in isolation, it is not prohibited to set up new activities. But it may be different if these new activities compete with the company’s activities. Or when they are activities that are in line with what the company is already engaged in and which could therefore also be developed by the company. Business opportunities that are part of the possible activities of the company should not be exploited outside the company. This will put the company at a disadvantage and it can take action against it.
On the other hand, shareholders in a conflict situation who want to part company will also want to be active and continue doing business in the future. Restrictions on competition and not being allowed to use the company’s corporate opportunities can stand in the way of this or, on the contrary, create new conflicts. The line between what is not allowed and what is allowed is thin. However, the consequences of just or just barely crossing this line are great.
The business and profitability of the company
Whereas in a fighting divorce the children are often the victims, in a conflict between shareholders it is often the company. Time, negative energy and costs associated with the conflict have a negative impact on the company’s operations and profitability. From that perspective, the common interest of shareholders in a conflict situation is not to escalate the conflict into endless wrangling, but to bring it under control and resolve it as quickly as possible. This can be done by making agreements, but also by a legal procedure in which the knots are cut by a judge. Sometimes there is a tendency to think that, above all, there should be no litigation and matters should be settled amicably, but the very act of continuing to negotiate, discuss and fruitlessly attempt to strike a deal can involve an enormous amount of time and negative energy. It can also be very pragmatic to clearly write down the positions on both sides. The court can then decide or – in urgent cases – order interim measures to bring the situation under control.
How to deal with a conflict between shareholders?
There is no golden rule on how best to handle conflict between shareholders. Account must be taken of the rules set by the law and the courts. Conflicts should be kept under control as much as possible and escalate as little as possible. Negotiating a settlement can be useful. However, legal action may also be the remedy that is appropriate and necessary. Emotions are a poor counsellor and the true interests of all parties involved should be considered and sought as much as possible.
In a long-term conflict, an involved shareholder once made the statement, “I feel like I have been driving around the traffic circle for years and there is no exit in sight.” Such a situation should be avoided as much as possible. This is best done by having a clear approach and strategy, making the right choices in time, and responding appropriately and pragmatically to actions of the other party.
Information
Would you like assistance and advice on how to handle a conflict between shareholders as wisely as possible? Then please contact Bouwe Bos or Justin de Vries.
