Exercising a call option: How does this work in the Netherlands?

A call option is a right to buy the underlying value at a predetermined price. In the Netherlands, this should usually be done within a specified period. There may also be conditions attached to call options. In a recent Dutch case, the question was whether the claimant could exercise a call option. Corporate Law Lawyer Marco Guit explains how it works.

Call option on 50% certificates

The dispute submitted to the Dutch court in these proceedings was as follows. The claimant had entered into an agreement with the defendant concerning a call option. This call option entitled the claimant to acquire 50% of the depositary receipts for shares in the capital of (a subsidiary of) the defendant.

Exercising the call option

The agreement included the condition that the claimant could only exercise the call option “if and once the [defendant’s] debts had been repaid in full”. It was also stipulated that the claimant was entitled to inspect the records and to the repayment of these debts. The principal (of the debt) had been provided to the defendant for a maximum period of five years.

Debts not repaid: Still exercise the call option?

Five years after the conclusion of this agreement, the claimant invoked the call option. Her lawyer argued that the five-year period for repayment of the debts had expired. However, the defendant’s lawyer referred to the condition. This had not been fulfilled, and, therefore, the call option could not be exercised. Who was in the right?

No appeal to the condition if a conscious effort is made to delay repayment

In principle, the Dutch court agreed with the claimant’s assertion that the defendant could not invoke the condition if it had prevented the debts from being repaid. The question that divided the parties was whether the defendant had sufficient funds available to pay off the debts.

The Dutch court’s interim judgment: Inspection of the records

In an interim judgment, the court ordered the defendant to allow the claimant to inspect the records. This would give the claimant the opportunity to substantiate het claim that there was sufficient financial scope. However, unfortunately for the claimant, the report drawn up by the contracted accountant did not lead to this conclusion. The defendant maintained his reliance on the condition. The claimant’s claims were rejected.

Lawyer in drafting call option agreements

In the case at hand, a clear condition had been agreed: The claimant could only exercise the call option once the debts had been repaid. Nevertheless, the parties were at a deadlock. It is advisable – as far as possible – to prevent or limit a party’s (malicious) influence on the fulfilment of such a condition. It is also possible to avoid legal proceedings by agreeing on a different method of dispute resolution. For example, the provision that in the event of a dispute an independent third party (for example, a chartered accountant to be appointed by both parties) will provide a definitive answer.

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