Obligations of the board of management in a joint venture
A recent ruling of the Supreme Court addressed, among others, the position of the Enterprise Division and the responsibility of managing directors in a joint venture. The latter is interesting, because a joint venture often has a great degree of contractual freedom, and is much less restricted than, for example, a private company with limited liability. A legal entity incorporated as a private company has an authorized capital divided into shares that cannot be transferred freely; the shares are registered. Which interest should the managing directors of a joint venture serve and when is there an issue of mismanagement? Corporate lawyer Martijn Kesler explains.
Joint venture: cooperation with a large degree of freedom
A joint venture can be considered a form of permanent cooperation between companies that retain their independence. This cooperation is (usually) conducted in an independent entity and has a large degree of freedom concerning the cooperation between the parties and the relationships in the joint venture. These relationships are often recorded in a specific joint venture agreement.
Shareholders incorporate joint venture
In this case two shareholders (for convenience’s sake we shall call them Shareholder I and Shareholder II) incorporated a joint venture. In this manner a hotel was operated in Cancun, Mexico. Apart from this joint venture company a whole series of companies was incorporated, including intermediate holding companies and operating companies. Some of these companies were Dutch, apparently to decrease the tax burden. This latter meant, in conjunction with the Ogem case law, where the Supreme Court found that foreign companies could also be involved in the investigation of the Enterprise Division, that these Mexican shareholders disputes could be resolved before the Enterprise Division.
Managing directors let the own interest prevail
It is important to note that in this joint venture company, managing directors were appointed by specific nomination by one of the shareholders. This client-contractor relationship between shareholder and managing director apparently meant that the interest of Shareholder II took priority, for the managing director appointed by Shareholder II, over that of Shareholder I. In other words, the managing directors let the own interest prevail over that of the company.
Proportional relationship in control of company
In 2009 the lawyer of Shareholder I went to the Enterprise Division with the complaint that Shareholder II had significantly impaired the proportional relationship in the control of the company. The share relationship, which started out as 50% – 50%, was now, some years later, 0.13%-99.87%. Concerning this matter, Shareholder I stated that she was misled, has not been informed about the course of business, and, through special shareholders’ meetings (which Shareholder I did not attend) could not prevent the issue of additional shares. The direct consequence was the dilution of the shares of Shareholder I.
Lawyer demands investigation into mismanagement
When, at the end of September, Shareholder I applied for an investigation from the Enterprise Division, the Enterprise Division ordered an investigation into mismanagement. The Enterprise Division stated, after the investigation was completed, that there was mismanagement and, among others, nullified the resolutions by the board of management to cooperate in the dilution of Shareholder I. A significant decision.
Enterprise Division not bound to opinion of investigator
One of the complaints submitted to the Supreme Court was that the Enterprise Division, deviating from the investigator’s report, concluded that the board of management had been negligent. This led to the complaint of why the Enterprise Division had even appointed the investigator, if the Enterprise Division would deviate from his opinion. However, the Supreme Court dismissed this summarily and stated that the Enterprise Division is not bound by the opinions of the investigator. In fact, the Enterprise Division is free, also based on the arguments of the parties and the investigative report, to reach another opinion.
Duty of disclosure towards the other shareholders
Another complaint was that the Enterprise Division failed to recognize that the parties are free to organize a joint venture in the manner they choose, and that, for example, a duty of disclosure towards other shareholders concerning the issue of shares can be deviated from. The Supreme Court summarily dismissed this as well. According to the Supreme Court, the circumstance that shareholders are free to organize a joint venture does not release them from the obligation to act reasonably and fairly towards each other (article 2:8 of the Civil Code of The Netherlands).
Obligation to serve interest of the company
The manner in which a company is finally organized, does not release the board of management from its obligation to serve the interest of the company and the allied company. According to the Enterprise Division, the board of management was obliged to inform Shareholder I about possible shifts in the proportion of the shares and the board of management violated its special duty of care, as board of management, to combat dilution. The board of management failed to do so.
Lawyer with experience with the Enterprise Division
No matter what the structure of the company is, article 2:8 of the Civil Code of The Netherlands remains important. Even if a managing director is explicitly appointed by a certain shareholder – which always causes a certain tension – this director shall always have to serve the interest of the company. In this case the board of management failed to do so, in allowing the dilution, by only taking the interest of its ‘own shareholder’ into account.
Enterprise Division should always act independently
This tension frequently occurs within Dutch corporate law, for example if a director-major shareholder appoints its own managing director in the company and if the articles of association stipulate that the board of management should act by instruction of the shareholder. The position of the Enterprise Division is also briefly addressed in this ruling. Like a managing director, the Enterprise Division should always act independently and never serve another interest than which they consider reasonable and fair. Even if an investigator concludes otherwise.