5.7 Dispute demerger

As outlined above, the winding-up remedy provides for a solution of last resort, especially in the situation of a deadlock involving two 50% shareholders who do not fancy amicably settling their dispute. The winding-up remedy considers an ultimum remedium. As dissolution of the company (usually) concerns the worst-case scenario, less far-reaching measures are preferred. A useful alter-native for the winding-up of the company has been suggested by the Company Law Committee and by Leijten, and has been further elaborated by Van Solinge.1Leijten and Van Solinge have suggested adding the order for dispute demerger (ruziesplitsing) of the company to the range of final remedies in Art. 2:356 DCC. Willems, former President of the OK, and Veenstra support this suggestion.2 Slagter indicates that a dispute demerger can be an attractive alternative to the proceedings for the settlement of disputes.3

I note that up to now the legislator has not taken over the suggestions of Leijten and Van Solinge to add an order for dispute demerger to the range of final remedies of Art. 2:356 DCC. However, I agree with Leijten and Van Solinge that the order for dispute demerger could form a constructive alternative to a winding-up order. Before further entering into this subject, I will first give a broad outline of the dispute demerger.

The dispute demerger is found in Art. 2:334cc DCC and is one of the varieties of the instrument of (voluntary) legal demerger. The expression dispute demerger seems somewhat confusing, as a dispute is not a necessary prerequisite for using this type of demerger.4 It merely indicates the situation in which the instrument can be helpful.

The dispute demerger leads to a split between shareholders of a BV. The basic rule is that a split between shareholders of a BV will not be achieved in a legal demerger. Pursuant to Art. 2:334e DCC all shareholders of a BV subject to demerger become shareholder of all transferee BVs. Art. 2:334e paragraph 2 and 3 DCC provide some exceptions on this general rule. One of these exceptions considers the dispute demerger. This exception is mentioned in Art. 2:334e paragraph 3 at b DCC.

As follows from Art. 2:334cc DCC, solely in case of an absolute demerger (zuivere splitsing) the notarial deed of demerger may provide that the respective shareholders of a BV subject to the demerger will become shareholder of respective transferee BVs. For example, before the demerger the demerging BV X has two shareholders, shareholder A and shareholder B. The notarial deed of demerger may then provide that shareholder A becomes the sole shareholder of transferee BV A and shareholder B becomes the sole shareholder of transferee BV B. With help of this demerger, not only the estate of the BV has been split, but also its shareholders are split.

A dispute demerger is not possible in the situation of a partial legal demerger with a split-off (afsplitsing). By means of an absolute demerger, two or more transferee BVs each acquire a part of all assets and liabilities onder universal title of the BV subject to demerger. The BV subject to demerger ceases to exist by means of the demerger. The transferee BVs can be already existing BVs, but can also be incorporated in the demerger process.

Additional requirements apply in case of a dispute demerger, which are found in Art. 2:334cc DCC. Firstly, the demerger proposal must specify, which shareholder becomes shareholder of which transferee BV. Secondly, the management board has to state in the explanatory notes to the demerger proposal the criteria upon which such allocation of shares is based. Thirdly, the auditor referred to in article 2:334aa DCC has to certify whether the proposed allocation is reasonable, taking into consideration inter alia the documents appended to the demerger proposal. Fourthly, the resolution for demerger has to be adopted by the general meeting of the company subject to the demerger with a 75% majority of the votes cast in a meeting at which 95% of the issued capital is represented.

In practice, arranging a dispute demerger will often not be feasible because of the high thresholds required for a resolution for dispute demerger. Shareholders holding at least 5% of the shares may block such resolution by not being represented at the general meeting. One could assume, however, that even disputing shareholders can be of the same opinion that a demerger can be beneficial to both.5 As I have understood from several civil-law notaries, the dispute demerger is applied in practice from time to time, but not very often.

In addition, the company involved should be suitable for demerger. For instance, if the company solely exploits a tobacconist, it will probably not be suitable for a demerger. It is hard to conceive why a split as a result of which shareholder A will only be entitled to sell cigarettes and shareholder B will only be entitled to sell cigars would be reasonable.

Nonetheless, if the company is suitable to be split between the disputing shareholders, a demerger could present an attractive alternative to dissolution. Of course, this alternative should not be available at the expense of creditors or employees. Therefore, I suggest that the steps required by statute, including necessary safeguards for creditors and employees, should be followed as much as possible. On the other hand, it is not desired that shareholders or the management board block such a dispute demerger. Requirements in this respect should not apply if a court order for demerger will be given. Nevertheless, it will not be desirable to rule out the management board, especially with respect to the demerger proposal and explanatory notes. Implementation of the order in Art. 2:356 DCC requires a deliberate reflection on which requirements need to apply and which do not. For the time being, the OK could point parties to the option of a dispute demerger and suggest arranging an amicable settlement in this respect.

In legal literature, there has been a fierce debate on the question whether by means of a dispute demerger the estate of the demerging company can be acquired by the existing shareholders (being also legal entities) of the demerging company without shares being issued, instead of acquisition of the estate of the demerging companies by distinct transferee BVs in which the distinct shareholders receive shares. This type of dispute demerger is also referred to as a simplified dispute demerger. According to the leading view in legal literature, a simplified dispute demerger does not meet the statutory requirements and can, therefore, not be used.9 The main arguments are that Art. 2:334cc DCC refers to become shareholders and not to are shareholders and that the exceptions included in Art. 2:334e paragraphs 2 and 3 DCC cannot be applied cumulatively, but only separately. It is conceivable that in certain circumstances a simplified dispute demerger leads to the most desirable result. For instance, a regular dispute demerger requires the incorporation of two new entities, which is not required if a simplified dispute demerger can be used. Therefore, it is recommended that the legislator end the aforementioned debate by amending statute in order to enable a simplified dispute demerger.10