Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/6.5.9.3:6.5.9.3 Tunnelling

Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/6.5.9.3

6.5.9.3 Tunnelling

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A second category in case law on the exit proceedings considers the category of tunnelling. For the defmition of tunnelling, I refer to § 1.1.4 of this study. Ifa minority shareholder suffers oppression by way of tunneling, the court may grant relief under the exit proceedings.

1.

A clear example of tunnelling is the Metz case.1 This case concerns a dispute in a BV in which inter alia Metz Sr, Metz Jr and three other family members held shares. The BV was active in the retail of furniture as well as in real estate. Metz Sr and Metz Jr held the majority of the shares. As appeared from the annual accounts, the company owed a debt to Metz Sr and Metz Jr at an excessive rate of 12%, far beyond the market level at that time. It was not wholly clear why the company needed this Joan. Moreover, Metz Sr and Metz Jr were rewarded huge bonuses (tantièmes), although the profits of the company did not justify the high level of these bonuses. The other family members criticized this policy, and, as their complaints were not honoured, they requested for the purchase of their shares. In order to determine the value of the shares for a voluntary sale, Metz Sr and Metz Jr did not provide realistic information about the value of the company and did not assist in any other way. Consequently, the other family members called in a real estate agent to determine the value of the BV. Somewhat later, the other family members started exit proceedings. On the basis of the abovementioned facts, the District Court of Rotterdam held that the continuation of their shareholdings could no longer reasonably be expected and ordered the transfer of their shares to Metz Sr and Metz Jr.

2.

Another case worth mentioning in this category is the Van Huizen case.2Two brothers, Aart and Johan, initially participated in a partnership. After about ten years, the business of this partnership was contributed to a holding BV. In this holding BV Aart and Johan became shareholders and managing directors. Subsequently, the business was contributed by the holding BV to a subsidiary BV. For tax reasons, Aart held some more shares than Johan, but it was agreed that the additional shares would be purchased by the company within three years. After difficulties arose between the brothers, they decided that Aart would keep his majority stake. It was thought this would improve the situation, because then there would be less risk of a deadlock. However, difficulties did not disappear and Johan became overstrained. The general meeting of the holding BV, in which meeting the majority of votes was cast by Aart, dismissed Johan as a managing director. Johan offered his shares for sale to Aart and tried to fmd a solution, but Aart refused this. In the meantime, Aart increased his remuneration as managing director with 50%. Moreover, with his majority vote in the general meeting Aart achieved that the company no longer distributed profits, despite the fact that in earlier years profits were distributed on an annual basis. As Johan did no longer profit from the company, he could no longer start new ventures in order to support himself. Taking all these facts into regard, the court of Rotterdam held that oppression was present and rewarded Johan's claim under the exit proceedings.

In the proceedings, Johan also requested for the nullification of the resolutions to reserve profits and for increase of the remuneration of Aart. Aart demonstrated that the remuneration was in accordance with the market level and that it was in the company's interest to reserve the profits. The court agreed with Aart and held that therefore the resolutions could not be nullified on the basis of Art. 15 paragraph 1 onder b in conjunction with Art. 8 DCC.

The judgment in the Van Huizen case is remarkable. The court denied nullification of the resolutions whereas an exit claim was rewarded. Nonetheless, in the court's opinion the resolutions formed part of the prejudicial conduct of Aart justifying the exit of Johan. Because of the following reasons, I do not agree with this judgment of the Court of Rotterdam. As will be explained in § 6.9.4, the proceedings for nullification of resolutions and exit proceedings may run parallel as a consequence of the underlying principles of reasonableness and fürness. Nullification of resolutions concerns a less far-reaching measure than exit of a shareholder. Because of that, I am of the opinion that if resolutions cannot be nullified further to the principles of reasonableness and fürness, these resolutions cannot form prejudicial conduct as referred to in Art. 2:343 DCC.3 In my view, the court could have considered that the resolutions could be subject to nullification, but are not nullified because rewarding the exit proceedings would eliminate the need for nullification.

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