Stalemate between directors who are also shareholders: what to do?
A common situation. A limited liability company with two directors who are both equal shareholders. The relationship between the two becomes disturbed. Even after calling in a corporate finance advisor, no (third) investor is found who wants to take over all or part of the share capital. Despite an appraisal of the company’s value, no agreement can be reached between the two parties on a buyout. And of course a (clear) dispute settlement in the articles of association or shareholder agreement is also missing.
The parties want to part ways, but at the right price. Meanwhile, the business must be continued without loss of value. The parties want to part ways in a normal way by avoiding escalation, but are still forced to hire a lawyer. What to do in a deadlock between directors who are also shareholders? Corporate lawyer Justin de Vries tells you more.
Options for forced transfer of shares
Attorneys are cautiously pointing out a number of ‘possibilities’ to enable the transfer of shares. In “brackets,” because actually the law does not provide an adequate solution to this “deadlock situation.
Transfer of shares in inquiry proceedings
One option is to initiate inquiry proceedings before the Enterprise Chamber. Although the existing inquiry procedure does not have the forced transfer of shares as a provision,[1] submitting such a dispute can lead to a (forced) transfer of shares.
Transfer of shares through statutory dispute resolution
Another option is to use the statutory dispute resolution procedure. In this procedure, shareholders can file an expulsion or exit claim.[2] Case law shows that the exit ground is interpreted restrictively. Not only is the procedure time-consuming, but the onerous standard used is considered a major objection.
This is odd. Does the situation have to escalate further before an expulsion or exit claim can be granted? Is there no other way to separate efficiently? Is there a rule for the situation where parties have entered into an engagement with good intentions but have become stuck with no real hope of restoring original understanding? No, there is not (as yet). [3][4]
Procedure court deadlock situation
In the proceedings before the Gelderland District Court dated June 8, 2022[5] , the “deadlock” situation described above played out. One of the shareholders decided, albeit in the alternative, to use the statutory dispute resolution procedure. This is proceedings on the merits which, as mentioned above, can take a long time and the outcome of which is uncertain.
Claim for appointment of temporary director
To ensure a workable situation during the proceedings, the shareholder decides to file an incidental claim for the appointment of a temporary director. According to the shareholder, it is important that an independent third party be appointed as a director. This third party will play a positive stimulating role for the company and will be able to exercise a decisive vote if decision-making by the incumbent board cannot take place or takes too long. In the shareholder’s view, an “incompabilité d’humeur” has arisen. For non-francophiles: this means that there is insufficient basis for fruitful cooperation. The other shareholder who is also a director puts up a reasoned defense and believes that decision-making is not hindered by the poor relationship between the parties.
Power of court appointment of temporary director
The existence of an “incompabilitie d’humeur” is not the standard by which the court should judge the dispute. But then, what should be the standard? And does the court even have jurisdiction to proceed with the appointment of a temporary director? Or is this reserved for the Enterprise Chamber?[6]
To begin with the last question. In the proceedings, the court considers itself competent to rule on the incidental claim for the appointment of a temporary director of a private limited company. The court considers that this judgment is actually reserved for the Enterprise Chamber, but that the court can also anticipate the inquiry proceedings to be conducted at the Enterprise Chamber. The outcome is correct, but the path towards it questionable. In this regard, see also Mr. Kemp’s annotation to this ruling.[7] Although this is not clear from the literature, it can be assumed that the legislator’s intention was that the preliminary relief judge and the Enterprise Chamber should both have jurisdiction in such cases.[8] There is also the possibility of applying to the Enterprise Chamber for an immediate injunction, without the need for a subsequent investigation.[9] The latter is no longer desirable and too costly in many cases.
Immediate appeal to the Enterprise Chamber: speed
Incidentally, the impression should not be created that in the proceedings before the Enterprise Chamber no quick immediate remedy can be taken. This was not the option chosen in this case. The primary claim in the proceedings before the court concerned performance of an alleged agreement on the transfer of shares from one shareholder to another. With the idea that proceedings on the merits had already been initiated, it is not surprising that an incidental claim was filed in the same court.
Review standard appointment of temporary director
Then the substantive standard of review. By what should the court test whether a temporary board should be appointed? In this case, the court tests against the “mismanagement standard” of the inquiry procedure. This is remarkable. If a standard has to be reviewed at all, it should be the standard used by the Enterprise Chamber for immediate relief. This also fits the nature of the measure to appoint a temporary board. The maladministration standard does not fit this. In principle, this judgment follows only after completion of the investigation in an inquiry procedure.
Court’s review of ‘mismanagement standard’
The court ruled that the plaintiff did not sufficiently prove that the other shareholder was guilty of “mismanagement. That the claim is dismissed with the application of this onerous standard is not surprising. Although the wrong standard appears to have been applied, the outcome of the proceedings is easily digestible. The fact that there is a disturbed relationship between the directors does not automatically mean that it impedes decision-making. It is up to the plaintiff to prove this. Further, it is also not obvious that the appointment of the third-party director provides any guarantee of an improvement in the relationship. This too is up to the plaintiff to substantiate.
Conclusion
Back to the beginning. The underlying problem in a “deadlock situation” is a lack of a legal arrangement that allows the corporate relationship to be terminated in an efficient manner, without the company’s affiliated business having to suffer and without the tension rising so high that indeed an exit claim is granted in a dispute resolution case. The first step to avoid this is to include a proper contractual dispute resolution provision, preferably in the articles of association and/or shareholders’ agreement.
For advice on the impasse between directors who are also shareholders, contact specialist Justin de Vries.
[1] Art. 2:356 BW.
[2] Art. 2:335-343c BW
[3] With regard to the dispute resolution scheme, I refer to interesting articles by Schreurs and Bulten: 1) mr. F. Schreurs, The revised dispute resolution scheme and the long road to a corporate divorce law, WPNR 2017/7158 2) and an article by Bulten: C.D.J. Bulten, ‘The dispute resolution scheme – I feel like a long-playing record’; De Wulf et al. in: Corporate Law in the Low Countries, What can we learn from the Belgians? (Institute for Business Law No. 117), pp. 143-161, Deventer: Wolters Kluwer 2020, ISBN 9789013155389.
[4] See Preliminary draft Law on Adjusting Dispute Resolution and Clarifying Admissibility Requirements Survey Procedure
[5] ECLI:NL:RBGEL:2022:2904.
[6] Art. 2:349a paragraphs 2 and 3 and Art. 2:356 sub c BW.
[7] JOR 2022/231 with annotation by Kemp, B.
[8] Incidentally, there is no unanimity in the literature on the question of whether the interim relief judge has jurisdiction to appoint a temporary director in addition to the Enterprise Chamber.
[9] It goes too far to go into that in depth in this article.
