Disputes between shareholders: Solutions that prevent a bitter split between shareholders

In onze nieuwsbrief van 2019, stonden we al stil bij de procedures uitgewerkt in het vennootschapsrecht om geschillen tussen aandeelhouders in een vennootschap op te lossen. Dergelijke conflicten leiden immers vaak tot zware botsingen waarbij het voortbestaan van de vennootschap niet zelden op het spel komt te staan. Het aandeelhoudersbelang komt daarbij veelal kaarsrecht te staan tegenover het vennootschapsbelang.

The dispute resolution mechanism, which has been included in our Code of Companies and Associations since 1997 – and further elaborated in 2019 – offers shareholders a way out to resolve the conflict. In this news blog, we would like to briefly revisit the basic principles of this dispute resolution mechanism (1) and consider a number of alternatives to resolve or avoid the conflict (2).

Dispute resolution: The basic principles 

For which companies?

The dispute resolution mechanism applies only to the BV and the non-listed NV. Shareholders of the other remaining company forms, such as the CV, partnership and Comm.V., cannot rely on this mechanism and must turn to other solutions (dissolution, termination, …).

Which claims?

Exclusion

A claim for exclusion aims to compel a shareholder to transfer their securities. Only shareholders who alone or together hold at least 30% of the securities (or equivalent securities) may bring this claim.

Exclusion is only possible if there is a legitimate ground. This legitimate ground is tested and assessed by the courts from the perspective of the company’s interest. Case law distinguishes 3 categories of grounds for exclusion: a) breaches as a partner or director (including facts from private life) of such a nature that the company’s interests are seriously and irreversibly harmed b) incapacity of a partner (for example due to illness), c) serious and lasting disagreement between the partners, without an immediate fault necessarily underlying it: it is sufficient that there is a lasting and definitive breakdown in the relationship between the shareholders, to such an extent that they can no longer work together and can no longer pursue or achieve the company’s purpose.

Withdrawal  

An action for withdrawal aims to compel the co-shareholders to take over the shares of a fellow shareholder. This claim may be brought by any shareholder, regardless of how small their participation is. 

Withdrawal is only possible if there is a legitimate ground. Unlike the assessment of the legitimate ground for exclusion, the legitimate ground for withdrawal is assessed and determined from the interest of the shareholder concerned, namely when that interest is jeopardized by the conduct of other shareholders and it can no longer reasonably be expected that he remain a partner.

Case law offers many applications: abuse of majority power (for example by not distributing dividends for years or withdrawing directors’ fees); breaches by a co-shareholder (for example breach of a non-compete obligation); lasting, fundamental, irreversible disagreement making cooperation no longer possible, …

Competent court

The claim must be brought before the President of the Enterprise Court of the place where the company’s registered office is located. He sits ‘as in summary proceedings’, which means that he decides the dispute on the merits in accordance with the rules applicable to summary proceedings. The success of this dispute procedure is therefore often attributed to this swift procedure.

At what price are the shares then transferred?

After assessing whether the claim is well-founded, the President of the Enterprise Court will then determine the price at which the securities must be transferred or taken over.

The many discussions regarding the reference date on which the value of the securities had to be calculated were resolved in the new WVV: the reference date is the date on which the President orders the transfer of ownership, which in principle will be the date of the court decision. Nevertheless, the legislator acknowledges that this date is not always equitable, given that the value may have risen or fallen significantly due to circumstances specific to the acquiring/transferring shareholder.

The President therefore has the possibility to apply a correction by shifting the reference date or, at his own discretion, increasing or decreasing the value of the securities depending on the circumstances.

Alternative solutions in the event of a dispute between shareholders

Mediation

Communication is the source of many solutions to disputes. Unfortunately, we find that communication between shareholders has often escalated to such an extent that a constructive conversation is no longer possible. Nevertheless, there is still an underexposed option to restore that communication, namely by making (mandatory) use of a recognised mediator.

Zowel de statuten als een aandeelhoudersovereenkomst kunnen voorzien in de opname van een verplichte voorafgaande bemiddelingspoging door een erkende bemiddelaar. Al te vaak zien we dat deze mogelijkheid niet werd opgenomen, noch in de statuten, noch in een aandeelhoudersovereenkomst. Het belang van een degelijke aandeelhoudersovereenkomst lichtten we al toe in een eerdere nieuwsbrief.

Every accredited mediator has completed specialised training and has been recognised by the Federal Mediation Commission. The role of this independent and impartial mediator is to work with the parties towards a fair and balanced solution that respects everyone’s needs and concerns. In this respect, the law provides the necessary safeguards for the proper conduct of a mediation process (confidentiality, the mediator’s position, …). Each party can communicate its wishes and concerns in complete confidence. Moreover, the parties remain in control of the mediation. They decide for themselves whether an agreement is reached and, if so, to what extent. Often, the solution is more creative than what can be obtained before a court. In addition, it is usually considerably less expensive. Figures show that an agreement is reached in more than 50% of mediations that are started. 

If, moreover, a mediation solution is reached under the guidance of an accredited mediator, the solution found between the parties can be approved by the court.

Shoot-out clauses

In addition to arbitration, a shareholders’ agreement also often provides for shoot-out clauses, which come in many forms and have exotic names (Texas, Mexican, Russian, …).

The essence is that a procedure is worked out that must be applied in the event of a conflict between shareholders. It will determine to whom and at what price shares must be transferred. The objective is to ensure this takes place as fairly as possible.

When applying the Texas shoot-out, shareholders bid against each other until one party’s offer is accepted by the other. A shareholder can each time choose to accept the other shareholder’s offer or reject it and make a counteroffer. The other shareholder may then in turn accept that offer or make a higher counteroffer. This process is repeated until one shareholder accepts the other’s final offer.

The Mexican shoot-out works differently. In this case, both shareholders are required to submit an offer for the other’s shares in the form of a sealed bid. This bid is lodged with an independent third party (for example an accountant, lawyer or civil-law notary). The shares are sold to the shareholder who has made the highest bid, at the amount he has offered. Under this clause, it is also possible for the shares to be sold to the highest bidder at the price offered by the other party (also known as the Dutch auction).

Conclusion

The operation of the company and its corporate bodies can be completely paralysed by a breakdown in the relationship between shareholders. When it is clear that, as a shareholder, one cannot break this deadlock, the dispute resolution procedure may indeed be a very last resort.

However, case law has by now also confirmed that this is a remedy of last resort. The parties must first make every effort to resolve their dispute amicably. Mediation is often overlooked in this regard, even though it is an efficient means of resolution. Articles of association and shareholders’ agreements can also prevent or resolve many conflicts.

Therefore, make sure you receive proper guidance from the very start when setting up a company. Prevention is better than cure. And if there is truly no other option, the dispute resolution procedure remains your last resort …

De cel vennootschapsrecht van Reyns Advocaten heeft een ruime expertise in deze materies en kan u in dit alles bijstaan. Aarzel niet om contact met ons op te nemen.