Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/5.5:5.5 Scope

Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/5.5

5.5 Scope

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In the view of the legislator, the winding-up remedy is a measure of last resort.1 It is the death sentence for a BV. The winding-up remedy is to be applied especially in circumstances in which a deadlock in the decision-making process in the company cannot be resolved in any other way. In line with the view of the legislator, the OK refuses to order a winding-up of the company when less far-reaching measures are available. For instance, in the Van Asselt case, the OK ruled that transfer of the shares would provide a more convenient solution, although the OK could not order this transfer.2 In the Bosbo case, the nullification of a resolution was considered as a sufficient remedy.3

Nonetheless, it is worth mentioning that the winding-up of a company does not have to lead to the liquidation of its business. Another company may be found that is willing to take over and continue the business, which is preferred above the maintenance by a company in which a continuous situation of mismanagement is present.4

The situation in which a winding-up order can be given is confined by Art. 2:357 paragraph 6 DCC. This section determines that the OK should not order a winding-up of the company when either the interest of the shareholders or the interest of the employees or the public interest would oppose to this. This provision is an outstanding example in statute of the institutional view of the legislator with respect to the company. The institutional view implies that the company should be regarded as an entity in which discerned interests come together, such as the interests of shareholders, the interests of employees and the interests of creditors.

As explained in the legislative history, the interest of the shareholders as referred to in Art. 2:357 paragraph 6 DCC should be regarded as the interest of the shareholders in general, rather than the interests of discerned shareholders in particular.5 The same applies to the interests of the employees. With Van der Grinten, I agree that despite the fact that one or more of these interests will be prejudiced the OK is permitted to order a winding-up when other justified interests should prevail.6 A balance between the interests has to be weighed. For instance, the OK may order a winding-up despite the fact that liquidation of the company would involve tax consequences that are disadvantageous for one or more of the shareholders.7

Geerts points to the fact that the OK has not yet had the chance to consider the requirement that the winding-up should not be contrary to the public interest. As appears from case law, the OK took into consideration that all creditors could be paid in some cases.8 In some other cases, though, the OK ordered a winding-up of the company, despite the fact that not all creditors could be paid.9 In the laffer cases, the OK considered that the winding-up of the company was not contrary to the public interest.

In my view, the public interest may, amongst others, involve the interests of third persons in general, though, not private interests in particular.10 This view is in line with how the interests of shareholders and employees have to be treated. In my opinion, the public interest is an open standard, which may include interests, for instance that of creditors, the environment or science. In this respect, it is of interest to observe Art. 2:345 paragraph 2 DCC, as this provision contains the notion of public interest as well. Pursuant to this provision, the Advocate General is entitled to start an application under the inquiry proceedings for reasons of public interest. With reference to this provision, Maeijer, Van Solinge and Nieuwe Weme remark that this notion deals about weighty and general interests that are under the threat of being damaged, which interests surpass private interests.11

Another example of how the notion of public interest can be interpreted is the situation in which holders of depositary receipts for shares, holders of a rights of usufruct or pledge are involved. It is likely that the OK ought to refuse to order the winding-up when a winding-up would be contrary to the interests of the holders of depositary receipts for shares in general.12

Case law shows that the OK prudently weighs the discerned interests involved, it ought to weigh.13 Hence, in most of the cases the remedy is applied at companies with a minor business and with no or only a few employees. In several cases, liquidation of the business of the company has already factually (not legally) commenced before the order was given.14 As appears from the chronological overview of case law beneath, the OK seldom orders the winding-up of a company.

1.

The first case in which the OK ordered the winding-up of the company is Schenkkan.15 In this case, two brothers each held 50% of the shares in a (closed) NV. Both were sole managing directors of the company as well. Their lack of cooperation, that is to say serious conflicts, led to a deadlock in the decision-making process. The OK concluded on the inquiry report that mismanagement was present. It did not seem plausible that the deadlock could be solved by less far-reaching measures. The OK observed that all creditors of the company could be paid, including the managing directors that were entitled to pension rights. Concerning the five employees, an appropriate redundancy scheme could be met. Therefore, the OK took the view that the interests of shareholders and employees and the public interest did not resist the winding-up of the company. The OK ordered the winding-up of the company.

The circumstances in this case are comparable with a number of later cases in which the winding-up of the company is ordered and can be seen as the classic situation of application of the winding-up remedy.

2.

Westland Import concerns a comparable case.16 As opposed to the Schenkkan case, in this company, there were no employees and the activities of the company already came to a halt.

3.

In a somewhat similar case, Gebroeders Moeskops, there was a breakdown of mutual trust, for which both 50% shareholders, who were sole directors as well, could equally be blamed.17 This breakdown of mutual trust led to a deadlock in the decision-making process. Measures less far-reaching than winding up appeared to be impossible. Considering that, due to the financial decay of the company, the only employee would be dismissed and creditors would be paid, except for the managing directors as regards their entitlement to pension rights, The OK ordered the winding-up of the company at the request of both brothers.

In the Gebroeders Moeskops case it appeared that other final orders given by the OK would not provide a solution. An amicable settlement was not feasible either. In this case, the investigator involved tried to solve the deadlock by way of proposing proceedings in which both parties would offer their shares. The shareholder offering the highest price for the shares would be entitled to purchase the shares. Before both offers would be made an independent expert appointed by the investigator, would value the shares. This proposal was rejected by one of the brothers.

4./5.

Comparable deadlock cases involve ICCJ, in which the company was no longer viable, while its activities ended and De Rozelaer, in which the company, ordered to be wounded up, had some debts, but possessed no assets.18

6.

In Van der Klis, the OK was of the opinion that mismanagement was present, while for several years the controllers of the company used it for their own profit at the expense of the company itself, of its employees and of its creditors.19 The mutual confidence between the board of directors on the one hand and employees on the other hand was broken down to such an extent that the company was factually out of control. Moreover, the financial situation of the company was hopeless and the administrator (bewindvoerder) intended to sell all the assets of the company. The OK judged that in view of the laffer two circumstances, the winding-up of the company was justified. The court considered that the interests of the employees would not be prejudiced and that it was neither alleged nor proved that the interests of the shareholders of the public interest would be harmed as a consequence of the winding-up.

After introduction of proceedings for the settlement of disputes, the winding-up remedy was even rarely ordered. In the following cases a winding-up order was given:

7.

An atypical case is that of Heron and Bêtacom.200n the basis of the inquiry report, the OK considered that several serious shortcomings were present with regard to the BVs Heron and Bêtacom. According to the OK, the shortcomings separately and jointly constituted mismanagement. Concerning Bêtacom, the mismanagement consisted of the absence of the keeping of accounts, the failure of preparing and adopting the annual accounts of 1992 and the failure of the convening of the annual general meeting of shareholders in 1993. Although a deadlock in the decision-making process in Bêtacom was not present, the OK ordered its winding-up. Heron was already in a state of bankruptcy. As appears from the facts, Heron actually performed the business activities. Licensing rights needed for the business of Heron originally were initially entrusted to Bêtacom. Later on, the licensing rights were transferred out of Bêtacom, thereby leaving the latter company practically without any function.

8.

In Kerstens/Muys, a deadlock was present between two shareholders of a BV, named Kerstens and Muys.21 The OK appointed a supervisory director in order to seek an amicable solution. This supervisory director sought a solution in the transfer of the shares by one of the parties, but did not succeed. Kerstens refused to purchase the shares of Muys. The latter refused to lift an attachment (beslag) on the credit balance of the company for as long as Kerstens did not purchase her shares. The OK concluded that this deadlock constituted mismanagement, by taking into regard that the company advanced towards bankruptcy. While less far-reaching measures did not seem to be pos sible and after weighing the prescribed interests (the company only had some on-call workers) the OK ordered the winding-up of the company.

9.

A notorious case involving a deadlock between two 50% shareholders, both sole managing directors, concerns De Stefano.22 In 1986, the OK ordered the dismissal of both managing directors and appointed a third person as managing director. Afterwards, the OK extended the appointment of the managing director several times. A solution by way of less far-reaching measures could not be met. Fifteen years later, in 2001, the OK ordered the winding-up of the company.

10.

Makelaardijhuis 77 concerns a classic 50/50 deadlock case as well.23 The two shareholders quarrelled about the policy of the BV, leading to the closing down of its business. Amongst others, annual accounts were not adopted, without consent, costs were made for the account of the company, and a considerable amount was withdrawn from the company's account in favour of one of the shareholders. The factual liquidation of the company was already started, but could not proceed due to the deadlock. The OK ordered for the winding-up, holding that no interest would oppose to this, and appointed a supervisory director in order to take care of the liquidation.

11.

Willem III concerns an unusual deadlock case. In this case, a depositary office held all shares of the BV concerned.24 There was a conflict between on the one hand a group holding 52% of depositary receipts for shares and on the other hand, a holder of 48% of depositary receipts for shares. Both groups of holders of the depositary receipts for shares were represented in the board of directors of the depositary office, causing a deadlock in the decision-making process. The activities of the company had stopped for several years and the deadlock disturbed a proper winding-up and liquidation of the company. While less far-reaching measures would not be able to solve the situation and while no important interest would resist a windingup,25 the OK ordered to wind up the company.

12.

In Zeelandia, the inquiry involved several companies, forming a joint venture in the field of real estate development.26 The shares in these companies were divided into unequal parts between two groups, namely between Woerdeman et al. as minority shareholders and Van Wilsum et al. as majority shareholders. Between the groups of shareholders, a dispute arose. Both groups used the companies for their own profit in several ways and to the detriment of the companies. In addition, the minority shareholders were prejudiced in their interests.27 On the basis of the inquiry report, the OK drew the conclusion that mismanagement was present in two of the companies in the joint venture. The OK took regard of the seriousness of the acts, the necessity to correct the prejudice to the minority shareholders and to the probable creditors of the companies. Moreover, the OK took into consideration that the prospect that relationships within the companies could recover lacked. Consequently, the OK ordered the winding-up of the companies.

Six of the abovementioned cases represent classic deadlock cases. Three other cases show a more unusual deadlock, yet still a deadlock. Pursuant to the view of the legislator, these cases reflect that the winding-up remedy is particularly suitable in deadlock cases. All the same, this does not imply that the OK automatically ought to order the winding-up of the company when mismanagement is established and a deadlock is present.28 Less far-reaching measures may be more convenient.

Moreover, neither the view of the legislator nor statute excludes the application of the winding-up remedy in cases in which there is no deadlock. In the cases Heron and Bêtacom and Zeelandia, a deadlock as such was absent. In the former case the company was already without any activity. In Zeelandia, the OK considered the seriousness of the acts constituting mismanagement. In so doing, the OK acknowledged that application of the winding-up remedy is only justified onder exceptional circumstances, as an ultimum remedium.

Another case worth mentioning is the case of ITP Holland, in which the OK uses a similar approach that nevertheless produced the opposite result. In this case, the OK judged that the acts constituting mismanagement were not serious enough to justify a winding-up:

"the established mismanagement is not of such a serious nature that this rigorous measure is required."29

IJsselmuiden and Geerts criticize this decision, stating that the seriousness of the mismanagement should not be of influence on the decision of the OK to order the winding-up of the company.30 I disagree with both authors, as I am of the opinion that the nature and the seriousness of the mismanagement are relevant factors to be taken into regard by the OK when providing for a certain order. The view of IJsselmuiden and Geerts seems to be in conflict with the view of the legislator on the winding-up remedy as a remedy of last resort. As appears from the quotation included in § 5.4 from the explanatory memorandum on Art. 54 WvK (currently: Art. 2:355 DCC), the legislator expressly considered that the OK ought to provide orders that are suitable regarding the nature and seriousness of the mismanagement and prepare, if possible a way for recovery.31 On the other hand, as mentioned before, I admit that the OK has to provide the order that fits the circumstances of the case. I certainly do not assume that the winding-up remedy should only be applied in the most serious case of mismanagement.

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