Expulsion of a Shareholder Under Netherlands Law

Introduction

For a request for the expulsion of a shareholder under Netherlands law to be granted, it is required that the conduct of the shareholder to be expelled harms the interests of the company to such an extent that the continuation of his shareholding cannot reasonably be tolerated. Three cumulative criteria apply for this purpose, which are discussed below:

1. conduct of the shareholder;

2. harm to the company’s interests; and

3. the continuation of the shareholding cannot reasonably be tolerated.

i. Conduct criterion

With the words “whether or not in the capacity of shareholder”, it is made explicitly clear—according to the parliamentary history—that the conduct of the shareholder, in whatever capacity, may constitute a ground for expulsion.

Examples mentioned in the parliamentary history include a shareholder who subjects the company to “unfair competition”, a 50% shareholder who is also a director and exhibits “mismanagement”,6 and a shareholder who is a director of a competing company.

This temporal limitation means that expulsion can only be based on conduct of the shareholder to be expelled that occurs or has occurred at the time the request for expulsion is made—that is, conduct in the present or in the past. The term “conduct” includes both acts and omissions. Also an insufficient effort to achieve a certain result may constitute a ground for expulsion.

ii. Harm criterion

The harm criterion can be divided into two requirements:

(i) the company’s interests must suffer or must have suffered harm; and

(ii) that harm is the result of the conduct of the shareholder to be expelled.

The mere finding that the company’s interests would benefit from the expulsion of the shareholder cannot be a ground for expulsion. For a request for expulsion to be granted, it is neither required nor sufficient that the shareholder’s conduct also or exclusively causes or has caused harm to the interests of persons other than the company, such as the petitioner(s) or other fellow shareholders.

The functioning or the continued existence of the company must be jeopardised. However, this does not go so far as to require that the continued existence of the company is, at the time the request for expulsion is made, directly in danger.

In preliminary relief proceedings (kort geding), a stricter standard applies and it is required that the continued existence of the company is acutely in danger.

A deadlock in the decision-making within the company, as a result of which important decisions for the company or the enterprise affiliated with it can no longer be taken, will generally be harmful to the sustained success of the enterprise affiliated with the company. It is, however, possible that the enterprise operated by the company continues to function properly despite the deadlock within the company.

In the parliamentary history, an example is given of a shareholder who subjects the company to unfair competition, as a result of which income intended for the company flows away.

The interests of a company that is intended to realise a joint venture collaboration are also determined by the nature and content of the collaboration agreed between the shareholders. If, for example, the company was established by the shareholders with the aim of realising certain projects together, then an insufficient effort and insufficient cooperation in the realisation of projects and the acquisition of assignments may harm the interests of the company. A shareholder who causes a more than negligible chance of obtaining an assignment to be lost thereby harms the interests of the company.

Conduct that is contrary to what is required by reasonableness and fairness does not, in itself, satisfy the harm criterion and therefore cannot lead to expulsion. After all, such conduct is not necessarily harmful to the company, let alone that such conduct would jeopardise the functioning or continued existence of the company at all times. The incompatibility of personalities, which makes cooperation between shareholders difficult, is also insufficient.

There must be a causal link between the conduct of the shareholder to be expelled and the danger to the functioning or continued existence of the company. It is sufficient that various acts of conduct of the shareholder, viewed in conjunction, jeopardise the functioning or continued existence of the company. It is not required that the shareholder to be expelled, by his conduct, intentionally aimed to jeopardise the continued existence or functioning of the company.

iii. Reasonableness criterion

A request for expulsion can therefore only be granted if the shareholder to be expelled harms or has harmed the company’s interests “to such an extent” that the continuation of the shareholding “cannot reasonably be tolerated”. In other words, the fact that the company’s interests have suffered harm as a result of the conduct of the shareholder to be expelled does not automatically lead to the conclusion that the continuation of the shareholding cannot reasonably be tolerated.

The reasonableness criterion consists of a balancing of interests between, on the one hand, the interests of the company and, on the other hand, the interests of the shareholder to be expelled. Due to the far-reaching nature and consequences of an order for the forced transfer of shares, the reasonableness criterion must be applied with restraint, in the sense that a high threshold applies in order to be able to conclude that the continuation of the shareholding cannot reasonably be tolerated.

The relationship between the shareholder to be expelled and those involved with the company—such as directors, supervisory directors, employees or contractual counterparties—may be relevant in the context of the balancing of interests. If, for example, a shareholder is closely involved in the enterprise, then a good relationship between the shareholder and the employees will be important for the sustained success of the enterprise. In case law, for example, the circumstance that shop staff no longer wish to work together with the shareholder to be expelled, and the circumstance that the shareholder has a conflict with employees who are essential to the functioning of the enterprise, have been regarded as arguments for expulsion. The relationship between the shareholder to be expelled and a contractual counterparty of the company may be relevant if that counterparty (for example, a financing institution) is of great importance to the success of the enterprise.

It is also relevant whether, at the time the request for expulsion is made, other solutions are available with which the company’s interests would be better served.

If the continued existence of the company is at stake, expulsion will be justified sooner than when the company does suffer harm, but continuity is not in danger.

The nature and seriousness of the conduct of the shareholder to be expelled are also taken into account in the balancing of interests. Intentional competition with the company, or intentionally withdrawing funds from the company without good cause, is attributed heavily to the shareholder to be expelled, as appears from case law.

A circumstance that is particularly relevant in relation to deadlocks is whether or not there is a justification for the behaviour of the shareholder to be expelled. For example, a refusal to grant approval to a particular resolution, as a result of which the company suffers harm, does not automatically lead to the conclusion that the continuation of the shareholding cannot reasonably be tolerated. The court assesses whether the shareholder refused approval reasonably—that is, on sound grounds.