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Shareholder disputes

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Aandeelhouders die in conflict zijn (aandeelhoudersconflict)

Shareholder disputes

They seem to have become a trend: shareholder disputes. Until last year, I occasionally assisted a shareholder in a shareholder dispute; now I’m faced with fighting shareholders all the time in my corporate law practice. That appears to suggest more than coincidence. I will not discuss the cause of these quarrels here. In this blogpost I am going to discuss:


What (improper) actions often recur in a shareholder dispute? How does a majority shareholder deal with the minority shareholder in a conflict situation?

Common problems arise in situations where the shareholders perform several roles at the same time. For example an advertising agency, where 4 partners start a company and – in addition to their individual role as shareholder – they each fulfil a role as director, and work full time for the company to generate a monthly income as well. Having 3 roles (shareholder, director and worker) involves a great deal of responsibility. Fulfilling all those roles properly over a longer period of time, and staying connected with your fellow shareholders, is a challenge. In practice, I have often seen shareholders to grow apart, which does not always end without a conflict.

I will continue with the example described above. A “3-against-1” situation may arise at some point for any reason. I will mention a few obvious examples that may cause such a situation:

  • disagreement on the direction of the company and/or clashing characters;
  • too much difference in the commercial successes between the partners, or a partner who spends money like water;
  • “improper action” such as submitting false declarations, a relationship in the workplace or working additional jobs outside the company.

Yet in other situations, the reason may be completely elusive and all it seems to be is the lack of sympathy or opportunism (33% of the pie is more than 25% of the pie).

Getting a shareholder to leave a company when he doesn’t want to, is a rather difficult job. Although nowadays most companies with more than one shareholder have a shareholders’ agreement, I still come across situations where a shareholders’ agreement is lacking (learn more about the shareholders’ agreement here). In those situations, a management agreement is often in place (for tax reasons), but the mutual relationship is mainly determined by the provisions in the law and the articles of association (and any resulting standards).

Let’s continue my example by assuming that a shareholders’ agreement is in place, which provides that the shareholders’ meeting can dismiss directors with a majority of 2/3 of the votes. And let’s assume that this shareholders’ agreement also stipulates that, should such dismissal take place, the dismissed shareholder must offer his shares for sale to the other shareholders. This compulsory offer of shares will then create the possibility of solving the shareholder dispute through a forced buy-out. The example of a shareholders’ agreement on our website contains such an instrument. However, in order to use this exit option, the 3 remaining shareholders must take over the offered shares from the dismissed director. That often poses a problem.

The remaining shareholders don’t always have the desire or the resources to take over the shares of the dismissed shareholder. Some examples of situations that might give rise to this:

  • the shares are too expensive;
  • the remaining shareholders begrudge the departing shareholder to “get away with it” in this way
  • the remaining shareholders are unable to finance the buy-out without a loan, or they do not want to increase their risk profile.

If the remaining shareholders do not take up the offered shares, the shareholder dispute just keeps dragging on, usually much to the frustration of the three remaining shareholders, since they have to continue sharing the results of their activities with a fourth shareholder who is no longer committed to the company.


Ways for the majority shareholder to frustrate the minority shareholder

Majority shareholders can be very creative in developing ways to make life so unappealing for a minority shareholder that, in the end, the minority shareholder chooses to accept a payment for his shares that is too low. Here are a few examples of situations I have encountered in recent years as a corporate lawyer:

  • The most common action after the dismissal of a shareholder/manager, is for the remaining shareholders/managing directors to increase their management fee in an unusual way. This results in less profit for in the company, while the 3 remaining shareholders/managing directors benefit from a higher net income with the higher management fee.
  • Another common action is when profits are provided to the remaining shareholders, but in the form of loans instead of dividends. These loans tend to be unsecured and are not payable in the short term.
  • Sometimes, the remaining shareholders find an opportunity to have the company buy advice or goods externally from another third party associated with them, often at a too high price, and consequently reducing the company’s result in favour of such third party (from which the remaining shareholders then benefit).
  • If the premises in which the company is established are owned by a remaining shareholder, another common action is to increase the rent. In this way, less profit remains in the company while the remaining shareholder/landlord benefits from this.
  • I have also known remaining shareholders to set up parallel or competing structures to accommodate their new customers or business opportunities in order to make sure that the exiting shareholder cannot benefit from them.
  • Another action is when a company sold off its assets and operating company to an entity that the remaining shareholders had created for themselves. Obviously, this sale was made at a too low price, so that the acquiring entity benefited at the expense of the disposing entity.

The financial constructions I described above are often combined with not paying out or hoarding dividends, or increasing investments, so that the exiting minority shareholder is financially drained. In addition, the minority shareholder is cut off from a proper and complete information supply, and at the same time is being provided with information about all the risks and setbacks of the company, to make sure the exiting minority shareholder is given an extra incentive to leave in order to avoid a possible loss.


Tunnelling or ‘digging tunnels’

The manipulation methods used by majority shareholders to put a minority shareholder on the spot are numerous, many more even than the few examples I have cited above. The few financial constructions as described above are often referred to in corporate law practice as ‘tunnelling’. This term refers to the routes constructed by the remaining shareholders – out of sight – in order to have capital or business opportunities that actually belong to the company drained off in an apparently bona fide manner to another entity. It subsequently turns out that this other entity is directly or indirectly linked to and/or owned by the remaining shareholders (or family members), and consequently the remaining shareholders receive the benefit.

Tunnelling is not a very familiar concept. Even so, every shareholder is familiar with one or more of the examples of tunnelling mentioned above, if only because these are ways that stir the imagination for a majority shareholder to achieve a desired goal. Although the law does not contain an explicit provision tailored to tunnelling, everyone’s sense of justice (and this is also the general opinion)  is that prejudicing the company or a (minority) shareholder through tunnelling cannot take place without consequences. I refer to A-G Assink’s statement of 8 May 2020, who also recently addressed this issue regarding squeeze-out proceedings. In my next blogpost, I will describe the possible consequences of prejudicing a minority shareholder (e.g. by tunnelling).


The corporate attorneys of Penrose in Amsterdam are happy to assist. Please feel free to contact Lukas Witsenburg if you have any questions.

Law firm Penrose, Amsterdam.

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