Resolving a deadlock between shareholders

Resolving a deadlock between shareholders

Many companies have only two shareholders who each hold 50% of the shares. In most cases these shareholders are also director. When the shareholders have a conflict (about the management of the company or the fact that one of the directors does not keep to the agreement) a “deadlock” situation can occur. While the obvious solution may be that one shareholder buys out the other, in practice this is not always that simple. Corporate lawyer Hidde Reitsma explains.

Deadlock between shareholders: interest company prevails

Firstly it is important to establish what the consequences for a Dutch (limited) company are in case of a deadlock / stalemate between the shareholders and directors. Generally speaking a director/shareholder needs to differentiate between his interests as shareholder and his interests as director, in the latter the best interest of the company always being paramount. In general there are two situations of conflict.

Company can address director

The first situation that can lead to a conflict is when a director violated his mandate. The other director/shareholder in his capacity as director (and thus on behalf of the company) rebukes the “violating” director. A violation often sees on the situation where a shareholder has withdrawn monies from the company account without legal justification, has not accounted for certain expenditures or has represented the company while exceeding his authority. In some cases the company can simply claim the withdrawn funds and if necessary claim the money in proceedings. If the company suffers a loss due to bad management the director may also be held personally liable following article 2:9 Civil Code and/or 6:162 Civil Code.

Deadlock situation in The Netherlands

A conflict between directors/shareholders often leads to problems regarding the representation of the company: the director cannot represent the company without consent from the other or the accused director deliberately obstructs any decision making. In that case the other shareholder/director can request the ordering of an inquiry (Right of Inquiry/Inquiry Proceedings) at the Enterprise Chamber and request for the removal of the accused director as a provisional measure. After all, due to the deadlock, removal via the road of passing a resolution at a shareholders meeting is impossible (however it is recommended to call a meeting anyway in order to compile a file).

Conflict regarding management of business

In the second conflict situation parties disagree how to manage the company (and one party is usually accused of mismanagement). The shareholders / directors may not have violated any agreement or binding clause, but they can just have irreconcilable views on how to execute company policies. If there is reasonable doubt of good management, a request to order the inquiry can be filed by (among others) the shareholder too.

Preliminary relief measures by the Enterprise Chamber

As part of that procedure the Enterprise Chamber may, if deemed necessary, order extensive measures, like the removal of the responsible directors and the transfer of their shares to a third party who will keep them under control to avoid further deadlock. These measures can only be ordered however if it is established that one director is responsible for the mismanagement (often because he let his personal interests prevail).

Buy-out of a shareholder

In many occasions the deadlock-situation is eventually resolved by a buy-out by one of the shareholders. In that case it is important that the parting shareholder completely disconnects himself from the company fully. Therefore it is commonly agreed that the buyer also takes over any debt of the seller to the company (in case of a current account), and settles this debt with the purchase price of the shares. Because not only both shareholders, but also the company is involved in a buy-out, it is important that this is executed in a legally correct manner. While a company’s explicit approval is needed for such a take-over of debt, this approval must be scrutinized as there can be a case of conflicting interests between the buying shareholder/director and the company (which is also represented by the first).

Dutch lawyer specialized in shareholders disputes

The corporate lawyers of AMS have great experience in advising clients regarding shareholders disputes. It is recommended to seek advice of a specialized lawyer when dealing with a deadlock or when confronted with inquiry proceedings. Should you have any question with respect to corporate litigation or any related issue, please feel free to contact one of our lawyers.

Hidde Reitsma - Advocatenkantoor AMS Advocaten
Hidde Reitsma Hidde has a varied consultancy and litigation practice, focusing on corporate law and insolvency law. He frequently acts in proceedings before the Enterprise Chamber of the Court of Appeal in Amsterdam and in cases on directors’ liability. Hidde also advises on drawing up and negotiating contracts, mergers and acquisitions and joint ventures. Follow Hidde also on Google or LinkedIn. Hidde is available via e-mail and +31 (0)20-3080315.
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