Impaired relationship in AGM and board: inquiry proceedings?
In recent inquiry proceedings two shareholders of a company could not agree on anything, except the fact that the relationship was seriously impaired. It was sufficient reason for the Enterprise Division to order an inquiry into the course of affairs in this company. How exactly do inquiry proceedings work and what alternatives are there if there is deadlock in the board or in the annual general meeting (AGM) of shareholders? Corporate lawyer Marco Guit explains.
Two equal directors-shareholders
Two shareholders each hold 40% of the shares in a company. They are both also the sole directors. This means that a deadlock is more than likely. If one persons blocks a proposal by the other and vice versa, there is no deciding vote that can break the deadlock. In that case the Enterprise Division can provide a solution. One of the shareholders proposed inquiry proceedings and requested an inquiry and also the dismissal of the other director.
Deadlock in the AGM due to impaired relationship
During the proceedings the shareholders accused each other of being responsible for the impaired relationship, which resulted in a deep mistrust between them and a deadlock in the AGM and in the board. There is therefore no doubt that the relationship was seriously impaired. That is reason enough to doubt that a correct policy is followed and that the course of affairs in the company are proceeding properly. The Enterprise Division therefore ordered an inquiry.
Enterprise Division dismisses director
The Enterprise Division also took some immediate measures to (temporarily) break the deadlock. For example, one director was suspended and the Enterprise Division appointed a new director who has a deciding vote in all cases and who is independently authorized to represent the company. The relationship in the AGM is also worked on. Both shareholders had to transfer one share to a supervisor. This creates room for decisions.
The interest of the company is paramount!
In disputes between directors/shareholders it is important that each director/shareholder distinguishes between his interests as shareholder and his duty as director, whereby the interest of the company should be paramount. The core duty of a director is to focus on the interest of the company. If he has a direct or indirect personal interest that is contrary to the interest of the company, the director should refrain from making decisions (article 2:239 of the Civil Code of The Netherlands). If no board decision can be taken in such a case, the decision shall be taken by the supervisory board or by the Annual General Meeting.
Demanding forced resignation of co-shareholder
Apart from the inquiry proceedings, there are other options for shareholders in a conflict. Shareholders (holding at least one/third of the shares in the company) can demand that the shareholder “who by his actions damages the interest of the company to such an extent that continuation of his shareholdership cannot be tolerated in all reasonableness” is forced to transfer his shares (squeeze-out). Also, the shareholder who “is damaged in his rights or interests to such an extent that continuation of his shareholdership can in all reasonableness no longer be demanded from him” can demand that his shares are (enforced) taken over by the other shareholders (buy-out).