Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/6.5.9.6:6.5.9.6 Dilution

Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/6.5.9.6

6.5.9.6 Dilution

Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.

Dilution is present if not all existing shareholders participate pro rata parte in an issue of shares, provided that the price paid for the shares is lower than the actual price of the shares. In this situation, the shares of the shareholders not participating in the issue of shares, or participating less than pro rata parte, will decrease in value. Moreover, those shareholders will have lower percentage of the voting rights than before the issue of shares.1 In general, as a default rule, Dutch law prescribes the rule that all shareholders have a pre-emptive right to any issue of shares pro rata to the aggregate number of shares held by the shareholder. This rule is found in Art. 2:206a DCC. To a certain degree, this rule safeguards minority shareholders from dilution of their stake.

Nonetheless, for any single share issue the pre-emptive right may be limited or precluded by a resolution adopted by the general meeting, unless the articles of association provide otherwise. In principle, a resolution for limitation or preclusion of the pre-emptive rights can be adopted by an ordinary majority of the votes cast in the general meeting. In combination with a subsequent issue of shares, this enables the majority shareholder to dilute the shareholding of minority shareholders. Moreover, a resolution for amendment of the articles of association in order to enable preclusion of the pre-emptive rights also requires a resolution adopted by an ordinary majority in the general meeting.

In addition, it is possible to exclude the pre-emptive rights in the articles of association of the company. Art. 2:206a DCC is a default provision and not a mandatory provision. As the articles of association can be amended by resolution adopted by the majority of the votes cast in the general meeting, this may weaken the position of the minority shareholder as well.

It is recognized in legal literature that a resolution for the issue of shares aiming at the dilution of shares of a minority shareholder can be held contrary to the principles of reasonableness and faimess.2Whether a resolution is contrary to the principles of reasonableness and fürness depends on the circumstances of the case. In my opinion, in the situation that dilution is contrary to the principles of reasonableness and fürness, it could also form ground for rewarding an exit claim. On the other hand, if the exclusion of pre-emptive rights does not contravene the aforementioned principles, there is no reason to reward an exit claim.

In the Gorilla Park case, the Court of Appeal of Amsterdam was of the opinion that a shareholder could not appeal on a (contractual) anti-dilution clause taking into regard that the parties involved put in considerable efforts in finding new funding but did not succeed, that 97% of the shareholders favoured the new issue of shares, that the company was at serious risk of insolvency due to the Jack of funding and that the complaining shareholder would be diluted from 3.03% to 2.86%.3 Consequently, the court held that an appeal on the anti-dilution clause is contrary to the principles of reasonableness and fürness.

As appears from the Inter Access case, in exceptional circumstances even a majority shareholder is not entitled to appeal on its pre-emptive rights provided for in the articles of association.4 The company involved, with over 700 employees, was in severe financial difficulties. One of the creditors of the company, a bank, indicated to withdraw its credit facility if the company would not undertake restructuring steps. The 30.2% shareholder proposed a restructuring plan, involving amongst other things the conversion into share capital of a considerable Joan of this minority shareholder to the company. The 59.5% shareholder opposed this restructuring plan, inter alia for the reason that his shareholding would be diluted to 11.9%, but did not propose a feasible alternative that would save the company from becoming insolvent. The OK was of the opinion that the interest of the company, and all interests concerned with its group of companies, far outweighed the interest of the majority shareholder to maintain its 59.5% stake. For as far there were pre-emptive rights pursuant to a shareholders' agreement, the OK considered that these rights would remain inapplicable pursuant to the principles of reasonableness and fürness (Art. 6:258 DCC).5 In order to enable the issue of shares to the minority shareholder, the OK designated the management board of the company as the authorised body to issue shares, in deviation of the articles of association. Moreover, in order to facilitate the amendment of the articles of association required for an increase of the authorised capital, the OK ordered that the management board was allowed to convene a general meeting within three days. Lastly, the OK suspended the voting rights of the majority shareholder with respect to this meeting.

In this context the rule of equality, embodied in Art. 2:201 paragraph 2 DCC is also of relevance. This provision stipulates that a company must treat in the same manner shareholders and holders of depositary receipts for shares whose circumstances are equal. This rule is based on the principles of reasonableness and fürness. Regardless of whether the pre-emptive rights are precluded, the company must take the equality rule into regard. Nonetheless, according to the Dutch Supreme Court, there is no conflict with the equality rule if there is a reasonable and objective justification for unequal treatment of the shareholders.6

Deze functie is alleen te gebruiken als je bent ingelogd.