1.4 Exit right at will?

The aforementioned developments show a worldwide interest in the exit rights of shareholders in private limited companies. Available systems of exit rights have become more sophisticated throughout the years. In contrast with this tendency towards a more sophisticated exit rights regime some legal authors have recently expressed their support of an exit right at will. In the Netherlands, the first to support an exit right at will is De Kluiver, who criticizes the:

In drawing a parallel between shares and long-term contracts, he notes that their features are very similar and might even be identical. He states that many countries, including the Netherlands, allow parties to terminate long-term contracts, provided that a notice period is observed and damages resulting from the termination are paid. Further to this contractual view on the relationship between the company and its shareholders, De Kluiver argues that an exit right at will should be afforded, which can be enforced against the company.2 However, as the shareholders must be given the freedom to organise their relationships, he believes this exit right should not be of a mandatory nature, but rather have a default nature.3

According to De Kluiver, an additional reason for introducing an exit right at will concerns the fact that the application of the oppression remedy is the alternative, in which proceedings a fürness test is applied. As case law shows, the application of this test is not necessarily successful and can be costly and time-consuming. An exit right at will does not require such test, which means it can overcome these criticisms in a practical way.4

De Kluiver acknowledges that an exit right at will that can be exerted at any time would lead to such a level of uncertainty that a paralyzing effect could occur. Therefore, he proposes a reasonable notice period of twelve to eighteen months. This would make the exit right at will more predictable. Moreover, he is of the opinion that it would be reasonable to hold the exiting shareholder accountable for the costs of refinancing and the company accountable for the costs of experts for the valuation of the shares. Thirdly, he considers that in the case of unfür prejudice, the shareholder should be allowed to take legal action. Consequently, he does not plead to abolish the exit proceedings.

Willems wholeheartedly agrees with all De Kluiver 's suggestions, stressing that the exit proceedings, at least the exit proceedings in force in 2008, do not offer a suitable solution for disputing shareholders.5 Although I concur with De Kluiver and Willems that the exit proceedings, at least the former exit proceedings, do not constitute a good and effective solution for resolving ongoing disputes between shareholders, I am not convinced that the exit right at will is the most appropriate solution either.

By rejecting an exit right at will, I am in good company. Clearly, onder current Dutch law no exit right at will exists. Almost all legislators throughout the Commonwealth, the United States of America and the European continent reject an exit right at will. I concur with McCahery and Vermeulen, who submit that a general tendency towards restricted exit rights can be discovered instead of unrestricted exit rights. In their view this is a:

I draw attention to the experiences of Russia and Italy with an exit right at will. These experiences do not seem very promising. In Russia, the exit right at will has been abolished. In Italy, the company at which the exit right at will applies is seldom used. As this study will demonstrate, in England and Wales as well as in Germany, the legislator and a large majority of English and German legal authors appear not to be in favour of the introduction of an exit right at will.7

For the reason that De Kluiver's contractual view of the company does not take into regard the pluralism of interests involved in a company, I do not favour his view. Although a notice period may afford the company and co-shareholders protection for a certain period, the exiting shareholder has no incentive to take the interests of his co-shareholders, the company, or creditors into regard. It is wholly conceivable that a shareholder opportunistically promotes his own interest. From this point of view, I think that all interests described form part of the balance that must be struck. The interest of a minority shareholder in exiting the company should not prevail.

The more general view that a company represents an organization involving various interests is widely adhered to in Dutch company law. I concur with Timmerman, who argues that an exit right at will is somewhat incompatible with Dutch company law.8 This view is also in line with Art. 2:207 DCC. This provision includes several (crucial) safeguards with respect to creditors in the situation of acquisition of own shares by the company. If an exit right at will is to be introduced it should at least be subject to the rules of Art. 2:207 DCC. In this respect, it is important to notice that in contrast to the withdrawing partner in a Dutch partnership, in principle a former shareholder is not liable for debt of and claims against the BV made by and towards third parties.

I acknowledge that in certain circumstances refinancing can provide a solution to the loss of shares of the exiting shareholder. All parties involved in the company may profit from this solution, as it could potentially end a dispute. Nonetheless, it seems like a remedy that only works for minority shareholders with an insignificant stake. For example, what if a 40% shareholder invokes his exit right at will? Is this a burden an average company can bear? Besides, difficult questions may arise. What if more than one shareholder invokes his exit right at will, but the company is only able to buy out one? First come, first served? Or does the rule apply that in principle the company has to treat all shareholders the same way?

Furthermore, it is doubtful whether refinancing is a serious option onder all circumstances, similar to the fact that probably no liquid market exists for the shares. In the current economie conditions, refinancing may be difficult. Moreover, refinancing adversely affects the financial ratios of the company, which may make it more difficult for the company to attract loans in the future and may make it more difficult to conduct business with third parties. Refinancing, or, more accurately, replacing equity by debt, may even endanger the future prosperity of the company.

One could also question what happens if refinancing appears to be impossible after the notice period has expired. Should the company then be liquidated in order to provide an exit, such as in Italy? This scenario is far from appealing, as it would bring us back to times when a winding-up remedy was considered the only appropriate safeguard for minority shareholders. Alternatively, should the co-shareholders be obliged to purchase the shares? It is conceivable that they are not willing to assume this obligation in the first place.

I also point to the fact that a refinancing agreement can also be reached by shareholders without the application of an exit right at will. In my view, bargaining for such an agreement is preferable to conferring an exit right at will.9Obviously, this agreement does more justice to the freedom of contract. In addition, an alternative can be found in the irrevocable, unconditional and für offer for the shares.10 In this situation, it is clear that the co-shareholders are willing to purchase the shares at für value.

With an exit right at will, the private limited company may become less attractive and more vulnerable as a corporate vehicle. Majority shareholders may be less willing to invite minority shareholders into the company if minority shareholders are entitled to withdraw from the company at any time. De Kluiver points to the American authors Rock and Wachter, who argue that an exit right at will increases the credit risk of close corporations, which makes it even more difficult to raise equity or debt capital than it already is. De Kluiver opposes their view by stating that one may also argue that raising capital in close corporations is so difficult because investors cannot easily withdraw their investment and that an exit right at will may alter this situation.11

I doubt De Kluiver's view, taking into consideration that an exit right at will can already be provided for in the articles of association or in a shareholders' agreement. Therefore, evidence of a preference of an exit right at will should already be found in practice. However, this evidence is not found as far as I can see.

With the introduction of an exit right at will, minority shareholders may easily withdraw their funds from private limited companies. It is questionable whether these funds will be reinvested in private limited companies. Consequently, this may have an impact on the Dutch economy as a whole. As it is hard to assess these aforementioned economic hypotheses, I recommend this matter for further economic research.

A final important argument against an exit right at will is the risk of abuse of such rights by opportunistic minority shareholders. The laffer may threaten to use the exit right if particular resolutions are proposed. In order to prevent withdrawal of the minority shareholder, the majority shareholder can be (effectively) forced to give up the proposals. This may make the important majority rule practically ineffective. In addition, it increases the risk of a deadlock in the decision-making process.12 This shift in control within the company is not justified by the size of the contribution of the minority shareholder compared with that of the majority shareholder.