Under Dutch law, there are three different but closely linked procedures for the buy-out of a shareholder:
1) the buy-out procedure for the benefit of a shareholder who seeks to be bought out;
2) the squeeze-out procedure for the use by other shareholders who want to buy out a shareholder;
3) and lastly, the squeeze-out procedure for the benefit of a 95% shareholder who wants to buy-out the last remaining minority shareholders.
A shareholder whose rights or interests are being damaged by the conduct of the other shareholders in such an extent that continuing his share ownership cannot reasonably be asked of him, can demand that the other shareholders take over his shares, even if they do not want to. This situation will usually involve a minority shareholder who has been sidelined by the majority shareholder. After all, the majority shareholder will usually form the board (or decide who is in it). He will thus decide on other essential issues as well such as the dividend distribution. If the demand of the shareholder who wants to be bought out is awarded, the defending party will be ordered to take over the shares for a purchase price set by the court in this same procedure.
While the abovementioned buy out procedure is pending, the squeezed out shareholder often starts inquiry proceedings at the Enterprise Chamber of the Amsterdam Court of Appeal as well. This can be an effective way to give the buy out a push. A majority shareholder who votes in favour of the squeeze out of another shareholder is likely to be acting out of his own interests instead of the interests of the company. The Enterprise Chamber usually considers these practices “founded reason” to doubt the correctness of the course of action of the company. Unlike the buy-out procedure, the inquiry proceedings are a quick and efficient procedure.
The so-called squeeze-out can be used to expel a shareholder who commits misconduct. Shareholders (who have at least 1/3 of the shares) have the right to demand that this shareholder transfers his shares involuntarily when his misconducts damages the interests of the company in such a manner that continuing his share ownership cannot be tolerated. This buy-out option is laid down in the corporate law section of the Dutch Civil Code and is officially intended as a tool to act against shareholders committing (severe) misconduct.
A squeeze-out request at the Court is awarded when two assessment criteria are met. Firstly, the concerning shareholder has to have damaged the company: his acts – or omissions- are contrary to the company’s interest. Secondly, he has to have acted in his capacity of shareholder (as opposed to e.g. his capacity of CEO). Acts that are not related to the performance of the concerning shareholder as such, are not relevant for the assessment of a squeeze-out request. This procedures are quite uncommon, mostly because the procedure contains many safeguards regarding the pricing. Besides, a granted request can only be executed (meaning the actual withdrawal) when the case has been irrevocably decided on. This may take years however. T
herefore parties often chose to refer to inquiry proceedings instead. The misconduct of a shareholder will often give reason enough to doubt the cause of action and the Enterprise Chamber can therefore order provisional remedies. For example transfer the concerning shareholder’s share to a trustee. In that way the stubborn shareholder will no longer have voting rights. Such a transfer may prevent that the interests of the company are (further) compromised. Usually an interim measure like this can be enough for the bickering shareholders to reach a mutual arrangement.
Finally, the third option, a shareholder who holds at least 95% of the shares in a public or private limited company, has the possibility to demand that the last remaining shareholders involuntarily transfer their shares. The judge shall deny this claim when (a) a minority shareholder will suffer severe material damage due to the transfer despite the compensation he is entitled to, (b) the defendant holds a share which, is connected to special control, or (c) the claimant has waived his right to lodge this request.
Since October 2012 the “flex-BV” act has entered into force. This acthas –among many other things- changed the buy-out procedure for the benefit of the shareholder who wants to be bought out (forced acquisition). Furthermore, the flex-BV has more flexible rules regarding the pricing at a buy-out and squeeze-out procedure. It is now possible to include a different method of pricing than the one prescribed before by law (valuation by independent experts) directly in the article of association. The method of pricing has to be objectively determinable though. Only when agreements on pricing are manifestly unreasonable, a judge can set these aside. The judge can only marginally review the chosen pricing method. As this lenient pricing rule is quite new, time will tell which pricing methods will be considered acceptable and which not.
Law firm AMS is based in Amsterdam, the Netherlands. Our corporate lawyers have gained a broad experience in advising and litigating in cases regarding buy-out of shareholders.