1.1.6 Exit rights and the need for a balance of interests

Historically, legislators have been reluctant to introduce exit rights for shareholders into company law. This prudent attitude may be explained by the fact that a shareholder who wishes to exit the company always has the option, at least theoretically, to find a purchaser for his shares. Moreover, shareholders are free to enter a private limited company and may negotiate their relationships beforehand. The inclusion of exit clauses in the articles of association of the company, in its by-laws or in shareholder agreements may solve the problem of non-existent statutory exit rights.

However, opposed to this view, one could say that such private regulations can scarcely foresee all the potential difficulties a company may encounter during its life span and leave room for oppression. Moreover, the creation of exit regulations is usually costly; parties involved may have difficulty in accepting exit rights in regulations; and courts may fail to interpret these exit rights accurately or may even fail to enforce such regulations.1

Another explanation can be found in the troublesome nature of exit rights. In order to effectuate an exit right by way of legal proceedings, such proceedings have to point out who should provide financial compensation for the loss of the shares. To hold the company accountable for compensation can be a major burden with respect to the financial position of the company. Consequently, it may also have an impact on all parties that have a specific interest in the company, such as creditors or employees of the company and co-shareholders. Providing financial compensation may signify the final blow to the company.

An intricate question is whether co-shareholders rather than the company should provide financial compensation and, if so, in what circumstances. Shareholders should not be confronted too easily with the forced acquisition of the shares of their co-shareholders, as this would impose uncertain and probably unwanted obligations on shareholders. However, if a justification is to be found for the forced acquisition of shares, is a causal connection between the conduct of the majority shareholder and oppression of the minority shareholder sufficient? Or is a certain degree of culpability on the side of the majority shareholder required?

If the conduct of the majority shareholder is relevant, this raises the question of whether all conduct of the majority shareholder that causes harm to the minority shareholder should be taken into account, even if this conduct is outside of the company's affürs. For instance, a majority shareholder sets up a rival company that siphons off most business opportunities of the company in which the majority shareholder and minority shareholder take part. The majority shareholder may prejudice the interests of the minority shareholder through his conduct, but this prejudicial conduct will not be in the company's affürs.

A further crucial issue is on what conditions a shareholder should be able to exert his exit right. How these conditions should be ascertained comes down to complicated questions regarding the valuation of shares. What valuation date should be used? Do shares have to be valued with or without a minority discount? Do shares have to be valued pro rata to the value of the company as a going concern or at liquidation value? Does a minority shareholder need to receive compensation for the decrease in the value of his shares that is caused by the oppressive conduct?

Exit rights that entitle a shareholder to insufficient compensation for the loss of his shares may make an exit for a shareholder more or less unattractive, or even unreasonable, or unfür. Furthermore, putting the company or co-shareholders in a position in which the shares can be acquired at undervalue when the minority shareholder is oppressed, could obviously form a negative incentive for causing oppression.

On the other hand, excessive compensation may be unreasonable or unfür to the company or to the co-shareholders that are obliged to provide financial compensation. If a minority shareholder is put in such a comfortable position, there is a risk of abuse of that position by the minority shareholder. Additionally, as compensation affects the financial position of the company or of co-shareholders, deterioration of their financial position may confront others as well, such as creditors and employees of the company.

An initial conclusion to be drawn from the above is that the introduction of exit rights in a legal system requires a deliberate reflection on the balance of the interests involved. On the one hand, the need of a minority shareholder for an exit right should be considered. On the other hand, the interests of the company, the interests of co-shareholders, and the interests of other parties involved should be taken into regard as well.