Summary

Netherlands corporate law contains an instrument to resolve disputes among shareholders. Since 1 January 1989 the regulation of disputes is found in Part 1 of Title 8 of Book 2 of the Netherlands Civil Code (CC). It involves the putting an end to disputes by means of a transfer of shares by court order. This book contains an integral analysis of the statutory dispute resolution procedure under current law and law in the future. That statutory dispute resolution rules are useful is, in my opinion, unquestionable.

There are several basic principles with which a statutory regulation of disputes has to comply. In this connection I should note that the statutory disputes resolution procedure is explicitly not a type of expropriation. It does not infringe Art. 14 of the Netherlands Constitution. After all, when a shareholder is expelled or when he resigns there is no public law act involved. The procedure puts the infringement of private law interests and standards at the forefront. Consequently, I consider a comparison with a (private law) order to remedy damages to be more apposite. The statutory dispute resolution procedure does not lead to an unjustified infringement of the treaty right to 'the peaceful enjoyment of his possessions' under Art. 1 of the First Protocol of the European Convention on Human Rights, either. The regulation of disputes procedures comply — also according to the Netherlands Supreme Court with the assessment framework for national regulations laid down by the European Court of Human Rights.

The basic principles that apply to a transfer of shares by court order follow from one of the important aims of corporate law. The disputes that may arise between those involved in a company have to be capable of being channelled in the right direction by devising jurisdiction rules and by prescribing standards of conduct. There are always various interests in a corporate relationship. The court, when hearing dispute regulation procedures, should take such pluralism of interests into account in the motivation of its decision. Standards of conduct will find expression in the way the court interprets the criterion for expulsion and resignation. In addition, it is important that a mandatory transfer of shares may not take place imprudently. Providing legal certainty is called for, but respect for this principle should not lead to a lengthy procedure full of delays. Thus, the statutory dispute regulation procedure should find a good balance for the communicating vessels "legal certainty" and "speed".

The last of the basic principles is flexibility. As the name suggests, flexibility forms the basis of the Flex-BV (introduced by the `Law on liberalization of the rules on share capita' and governance in private limited liability companies'), whereby the autonomy of shareholders is given a more central position. The action for resignation thereafter protects the minority shareholder from the far-reaching consequences entailed by that flexibility and the possibility of making own arrangements. Flexibility also characterizes such an action (and the resignation). Arrangements made by the shareholders on dispute resolution take precedence over the statutory dispute regulation procedure (Art. 2:337 CC).

The statutory dispute resolution procedure under current law applies to the private limited company (BV) and the public limited company (NV) with a closed character (Art. 2:335(2) CC). The more difficult transferability and saleability of shares may also arise for this kind of NV, just as for the BV. However, the third criterion in Art. 2:335(2)(c) CC is unclear. There is discussion about how to deal with the situation when the articles of association do not permit the issue of bearer depositary receipts with the cooperation of the company.

In my opinion, the requirement in Art. 2:335(2)(b) CC that the articles of association of an NV must contain transfer restrictions can be revoked once the Flex-BV is introduced. Otherwise, the dispute resolution procedure would be applicable to an open Flex-BV without transfer restrictions, but not to an open NV with registered shares. Ultimately, in my view, the dispute resolution procedure should apply to all joint stock companies in which the registered shares are not easily transferable (for example, on the stock exchange).

The standards for the granting of an expulsion or resignation action are not identical. It follows from the case law that the kind of conduct that can lead to an expulsion (Art. 2:336(1) CC) is interpreted narrowly. At stake is conduct 'in the capacity of shareholder' only. The draft Flex-BV Law does not broaden this. In my view, this is regrettable. The standard I would recommend is: Does the conduct of the shareholder prejudice the company to such an extent that the shareholder cannot reasonably be expected to be allowed to stay?

The 'in the capacity of' restriction does not apply to the interpretation of the standard on resignation (Art. 2:343(1) CC). All kinds of behaviour can lead to resignation, whereby all the rights prejudiced and all interests are taken into account. It can be seen from case law that the behaviour does not have to be culpable. From the case law one can distil types of resignation, of which the first has to do with a decrease in the shareholder's participation, as a consequence of changed circumstances. In practice, this often entails a minority shareholder who gets into a difficult position, partly because of having been fired as director. I think this is less than ideal. In my view, some kind of reproach with respect to the shareholder being sued has to be able to be made in order for the action for resignation to be granted. The second and third types of resignation (culpable, illegal actions/conduct in conflict with company law rules) do contain elements of culpability.

The standards applied in the test are in part the reason why the statutory dispute resolution procedure is rarely used. There is, in my opinion, an alternative form available that should apply to both the actions for expulsion and for resignation. I prefer application of the standard in Art. 2:8(1) CC. In my proposal, a mandatory transfer of shares would not be the sanction for any kind of behaviour that is in conflict with the requirements of reasonableness and fairness in that article. The breach of the standard of conduct should be serious enough or "be such" that the situation is no longer tenable. Then, it is necessary for a court to intervene. The question should be: Would a shareholder behaving reasonably also have acted in the same way in similar circumstances? I propose to revise the standards of Art. 2:336(1) CC and Art. 2:343(1) CC accordingly.

It is not only shareholders who are involved in the dispute resolution procedure. However, it is always a shareholder who initiates the expulsion or resignation procedure. Under Art. 2:336(1) CC, the plaintiff must contribute a minimum of a third of the issued shares. It is not clear why such a high threshold has been chosen. I therefore argue that the legai admissibility thresholds of 10% for the other powers of the minority shareholder should be used. In this way the dispute resolution procedure would be closer to the right of inquiry procedure and Book 2 Civil Code would be less of a 'jungle of minimum thresholds'.

Moreover, I recommend making it possible to transfer convertibles in an expulsion action in order to prevent a shareholder who has been forced out from once again being able to create disrupted relationships after the conversion. The resignation procedure — in my view, rightly — does not contain a minimum capital requirement as admissibility threshold. Any minority shareholder who has gotten into difficulties may put an end to his predicament by means of the procedure in Art. 2:343 CC.

A foreign shareholder who is being sued may challenge the competence of the Netherlands court. In order to avoid possible jurisdictional disputes, I think there are good grounds for bringing the dispute resolution procedure under the provision on exclusive jurisdiction of Art. 22(2) of Council Regulation (EC) 44/2001 of 22 December 2000. The Netherlands court, as court of the seat of the company where the shares are held, would then be competent to hear the action. However, as the Colin of Justice of the European Union has not yet shed any light on this matter, it is to be recommended that a forum selection clause be included in the articles of association of the company in which the shares are held.

In the current statutory dispute resolution procedure the company plays only a supporting part. It can be ordered to pay the costs of the expert opinion (Art. 2:340(1) CC) and it functions under Art. 997(a) of the Code of Civil Procedure (CCP) as the intermediary for passing on various procedural documents to shareholders who are not involved in the proceedings. Finally, the company plays a role if there is stagnation in the transfer of the shares (Art. 2:341(4) CC and Art. 2:343(6) CC).

A company that holds its own shares may not initiate the action for expulsion (Art. 2:336(2) CC). The argument that because the company does not have voting rights it is not affected is not convincing. After all, what is at stake in an expulsion is the prejudice to the company's interest. If my suggestions on revising this standard are not adopted, I do not see any good reasons why the company should not be allowed to use an expulsion. The solution I recommend entails a change of the standard (`in conflict with Art. 2:8(1) CC') and the granting of a right of inquiry to the company. In this way the company will have a means to put an end to the abuses.

Under the current statutory dispute resolution procedure, an action for resignation may not be brought against the company. The draft Flex-BV Law will change this and will make it possible to order the company being sued to acquire the shares. The provisions that have to be taken into account for such an acquisition (Art. 2:98 CC (public limited company) and Art. 207 of the draft Flex-BV Law) contain many unclear points. The huge amount of text in Art. 343(1) of the draft Flex-BV Law creates confusion. In my opinion, a court order prevails over a clause in the articles of association excluding such an acquisition, even though Art. 343(1) of the draft Flex-BV Law might suggest otherwise. Moreover, the court itself has to assess the consequences of the not-very-easy payment test in Art. 207( 2) of the draft Flex-BV Law. I propose including the acquisition restrictions in a separate sub-section of the article and ignoring the restrictions in the articles of association.

In addition to shareholders and company, there are sometimes other parties involved in a statutory dispute resolution procedure. The pledgee and the beneficial owner can appear on the stage in various roles. First, an action under Art. 2:342 CC can be brought against a holder of such a restricted right if his voting behaviour prejudices the intererts of the company to such an extent that this reasonably can no longer be tolerated. This article has no practical usefulness. It does not fulfil any needs. Up until now no actions have been initiated. In my view, the action under Art. 2:342 CC can be revoked. In addition, it is conceivable that a right of pledge or usufruct rests on shares that are being transferred. The restrictive right thus runs with the share. It is not necessary to provide more protection than this — or a different kind of protection — for the pledgee or beneficial owner.

The law has also taken the holder of the depositary receipts and the shareholder who holds shares as a nominee (often a trust office) into account. The basic principle is that the issue of depository receipts for shares should not make it impossible to apply the dispute resolution procedure. The rules are anything but simple, however. I therefore propose to clarify the position of the holder of depository receipts and the position of the shareholder who holds shares as a nominee in a separate article of the law. In addition, I am of the opinion that a consenting depository receipt holder must be given the powers to initiate an action for expulsion or resignation.

With respect to the valuation of shares, the text of the law provides that an expert opinion is required (Art. 2:339(1) CC). In its Hoffmann decision the Netherlands Supreme Colin held that the appointment of an expert is no longer obligatory. An expert opinion is unnecessary if the value of the shares can unequivocally be seen from the articles of association. In my view, this can be interpreted broadly under the current law. Not only the articles of association but also a shareholders agreement can contain a price or a method for determining the price. The draft Flex-BV Law codifies the Hoffmann rule in this same broad sense.

If an expert is appointed, he has to fulfil his task 'to the best of his ability'. The Enterprise Chamber gave a more precise definition of such responsibilities in the Hooymans case. The expert must indicate how he arrived at his assessment by giving grounds in concrete terms. He has to justify the valuation method he used. I think that this should be used as the general standard — in addition to Art. 198 CCP for every expert in the statutory dispute resolution procedure.

The expert also has powers under Art. 2:351 CC and Art. 2:352CC on the right of inquiry. In my opinion, clarification of how an expert can rely on these provisions is needed. He should file an application with the court before which the action is being brought. I think that the powers under Art. 2:352(a) CC should also be added.

The valuation of the shares has two important components. The first one is the calculation method. Which calculation method gives the correct price depends on the nature of the company and the business it is running. The second component is the date on which the shares are valued, or the reference date. From the case law it can be seen that a flexible reference date is not used. The draft Flex-BV Law also assumes that valuation takes place at a date as close as possible to the date of the transfer. This is a missed opportunity, in my view. A flexible reference date would make it possible to avoid interrelated procedures (such as an action for damages).

My proposal is to use the reference date used at present as the standard reference date. The parties may agree on their own reference date — whether in the past or in the future. The limit to a date in the future would be the date of the final and irrevocable judgment. However, I believe that under current law — given the possibilities offered by Art. 2:337 CC — an own reference date is already possible. In my proposal the court may deviate from the standard reference date but it must then give reasons for its choice.

The procedure for transfer and payment of the shares is too complicated. I do not see good reasons for making it obligatory to follow the statutory regulation on share offerings. This is all the more a problem because the mandatory transfer restrictions will disappear in the Flex BV. I recommend deleting Art. 2:341(2) and (3) CC and Art. 2.343(4) and (5) CC. Further, the provision dealing with the shareholder who refuses to make a transfer (Art. 2:341(4) and (5) CC and Art. 2:343(9) CC) is unnecessarily complex. A constitutive judgment would appear adequate. Finally, the extra application procedure under Art. 2:341(7) CC and Art. 2:343(9) CC is superfluous. It would contribute to clarity if the statutory transfer provisions were to be adapted, deleted and clarified on the basis of my suggestions.

The most important reason that expulsion or resignation is so seldom used in practice is the length of the procedure. The summons procedure in the statutory regulation of disputes is complicated. It is necessary to adapt and simplify the procedural rules in order for the dispute resolution rules to function adequately.

I basically recommend (as do many other authors) a procedure that is initiated with an application before the Enterprise Chamber as first and sole instance. This has the advantage that the position of the company is no longer unclear since the law defines it as an interested party. Third-party actions, joinders of parties or third-party interventions are avoided. The shareholder making the application must include in his application a list of the names and addresses of all shareholders and also that of the company.

If the summons procedure is maintained, then simplification is inevitable. Instead of the current two fact-fmding instances, one fact-finding instance will be sufficient in order to achieve the expeditious solution being sought. Here too I recommend that the Enterprise Chamber be chosen as the competent court. It goes without saying that the route to cassation will remain open.

At present, the dispute resolution procedure consists of two phases. First, the court decides on whether (or not) to grant the claim (first judgment). The second phase involves the price of the shares. The second judgment contains (in addition to an expert opinion) an order to transfer the shares at the price that has been determined. The current statutory dispute resolution procedure requires that both judgments must be final and irrevocable. A judgment with immediate effect is not permitted. Because the current situation leads to unnecessary delay, I am happy with the provision in the draft Flex-BV Law with respect to this point. In the new law all judgments may be provisionally enforceable. Art. 341(a) (in conjunction with Art. 343(b) of the draft Flex-BV Law contains a balanced regulation on the consequences on the reversal of a judgment that had already been enforced. Moreover, interim appeal from the first judgment is in principle prohibited under Art. 339(1) of the draft Flex-BV Law. In the draft Flex-BV Law the provisions on the two judgments are not worded in an identical fashion. It would seem to be necessary to re-write Art. 340(3) of the draft Flex-BV Law.

Finally, it would seem that the separate procedural rules in the current statutory dispute resolution procedure create more confusion and incorrect procedural steps than clarity and speed. I recommend staying as close as possible to the rules of general procedural civil law. Hence, the provision that the court may attempt a settlement (Art. 2:336(4) CC) can be eliminated. The immediate relief under Art. 223 CCP makes it possible to achieve the same result as the suspension of the right to vote under Art. 2:339(2) CC. Fortunately, a reference to Art. 223 CCP has been included in the draft Flex-BV Law. The unnecessary procedure in Art. 2:341(7) CC, which will continue to be valid after the enactment of the draft Flex-BV Law, completes the trio of provisions to be eliminated. For clarity's sake, I think that the procedural rules should not be — as they are at present (and as they will continue to be after the enactment of the draft Flex-BV Law) — scattered here and there in the law. Grouping them would provide a better overview. The provisions in Art. 997(a) CCP deal only with the dispute resolution procedure and thus belong in the first part of Title 8, Book 2 CC.

I have to conclude that the procedural changes in the draft Flex-BV Law unfortunately do not lead to the needed improvements for speeding up the procedure. The procedure will still be a summons procedure in two instances. A number of procedural pitfalls that should have been removed have not been. This is a missed opportunity.

Because the dispute resolution procedure in practice does not offer the desired (speedy) solution for disputes between the parties, shareholders can choose alternative procedures. They often do so. The first option is for the parties to make their own arrangements, included in the articles of association or in an agreement. If such an arrangement has been agreed, then the statutory dispute resolution procedure has a subsidiary nature (Art. 2:337 CC). This article is unclear and should be re-written. The variations in the arrangement agreed may be both substantive as procedural. The shareholders may also choose arbitration. The dispute resolution procedure in its totality can be applied in an arbitration procedure, but an own arrangement that leads to transfer of shares recommended by the arbitrator is possible as well.

Research has shown that in practice the shareholders often choose the right of inquiry in order to try to resolve their disputes. Unfortunately, a right of inquiry procedure does not lead to a final solution. The Enterprise Chamber can only recommend the temporary transfer of shares to a trustee (Art. 2:356(e) CC), while awaiting the result of the expulsion or resignation proceeding that has been initiated. Having two procedures is undesirable. I recommend including the mandatory share transfer as a final remedy in Art. 2:356 CC. The final nature of the transfer does call for extra (procedural) guarantees.

Another possibility is the analogous application of the dispute resolution procedure in interlocutory proceedings. The remedy under Art. 254 CCP could include an order to transfer shares, provided eleven conditions are met.

In addition to the above alternatives, it is possible that an expulsion or resignation procedure is joined with an action for damages. The shareholder's conduct in such a case must also be wrongful (within the meaning of Art. 6:162 CC). In the case of resignation in exceptional circumstances there can be said to be an exception to the rule that in principle the damages incurred do not have to be compensated.

In the draft Flex-BV Law the procedural aspects of the concurrent actions have been streamlined. Examination of the actions is concentrated at the same courts. Another, but to my mind more attractive, option would be to maintain a flexible reference date.

My conclusion is that for various reasons the dispute resolution procedure is not a regulation that will allow shareholders to obtain a meticulous and efficient resolution of their dispute. The alternatives that are available ultimately do not lead to the desired result, either. If it is to be a useful instrument, the statutory dispute resolution procedure must be revised with regard to various points. The same conclusion can be drawn for proposed changes in the draft Flex-BV Law. With the exception of a few points, such as the pos sibility of getting a judgment that is immediately enforceable, unnecessary delays in the procedure will clearly be reduced; however, more is needed. I predict that the statutory dispute resolution procedure will not grow in popularity once the draft Flex-BV Law is enacted. Expulsion and resignation are poor tools for settling disputes among shareholders and they remain so.