Conflicts between shareholders
You are a shareholder in a company together with your current partner. Everything is going well and the company is profitable. But then you and your partner split up. Working together in the company no longer works and the business suffers.
What can you undertake?
In case of serious disagreement between shareholders, you can initiate exclusion or exit proceedings under certain conditions. In these proceedings, you ask the court to take over the other shareholder's shares (exclusion) or that the other(s) should take over your shares (exit).
In this Wanted Fact, we give you an insight into these procedures applicable within unlisted private limited liability companies and public limited companies.
The exclusion
The shareholder exclusion procedure is a procedure that one or more shareholders can initiate to force another shareholder to transfer their shares to them for good cause.
Thus, in case of a blockage in the operation of the company due to quarrels or disagreements between shareholders, this procedure can provide a solution.
The shareholder or group of shareholders can initiate this procedure provided they own at least 30% of the shares.
These proceedings take place before the President of the corporate court of the registered office of the company.
During the proceedings, the plaintiff shareholder requests that it can take over the other shareholder's shares at a certain price. The judge determines the price of the shares to be transferred, while respecting any existing contractual agreements. The judge often seeks help from an expert for the valuation, who makes an opinion on the matter.
If there is discussion about the valuation, the court can order the transfer of the shares in advance against payment of a provisional price, so that the company's blocking is lifted in advance, pending the expert investigation.
If you plan to file a foreclosure action, it is advisable to have your accountant prepare a detailed valuation in advance so that you have an idea of the value of the shares.
The valid reason
The shareholder must demonstrate valid reasons justifying the requested exclusion.
This reason is present if there is a lasting and irrevocable disagreement between the shareholders, which makes further cooperation impossible and paralyzes the operation of the company.
Thus, no fault is required on the part of the addressed shareholder. It is sufficient for you to show that there is a blockage within the company in view of the lasting bad relationship between you and the shareholder sued.
Exit
If you yourself wish to leave the company given disagreements with one or more shareholder(s), you can initiate an exit procedure.
The exit procedure between shareholders is a procedure that any shareholder can initiate to force another shareholder to take over his/her shares for good cause.
You can only require the shareholder(s) to whom the valid reason relates to take over.
Different “ valid reason” from exclusion
A “valid reason” is also necessary in the exit claim. It is important to note that the valid reason for exit is different from that for exclusion.
For an exit, you must show that the good cause is such that you can no longer reasonably be required to remain a shareholder. In practice, however, this is also often the case if there is a lasting and irrevocable disagreement between the shareholders involved. So both in the case of exclusion and exit, the ground of the claim is the final impossibility of being able to “go through the same door together” any longer.
Also, there is no fault required on the part of the challenged shareholder for exit.
Otherwise, this judicial process proceeds in exactly the same way as the exclusion, with the judge determining the value, often based on an expert report.
Belang van goede statuten
The legislator has provided private limited companies with an alternative to these legal dispute procedures.
Indeed, you have the possibility to provide in the articles of association of your limited liability company for exit or exclusion at the expense of the company's assets.
Specifically, the articles of association may provide, on the one hand, that the shareholders have the right to resign from the company under certain conditions whereby the company pays the compensation and the shares are subsequently destroyed.
At that time, the exiting shareholder is entitled to payment of a separation share. The bylaws determine the amount of this share. So it is best to include an appropriate valuation formula in your bylaws to ensure that the separation share corresponds to its value. You can also equate the value to the original contribution.
On the other hand, the articles of association can also provide that the company can exclude a shareholder for a legal or other explicitly defined reason, which is then already described in advance in the articles of association. Beware, the actual decision to exclude can only be taken by the general meeting, which you then need to convene. Also in this case, the excluded shareholder is entitled to payment of a separation share paid by the company, unless the bylaws provide otherwise.
By including these mechanisms in your bylaws, you will avoid long and expensive court litigation when your company is locked out and you can move faster.
So, in addition to these mechanisms, you can also define in your bylaws the value of the separation share in case of a judicial exclusion or exit procedure, or you can mutually agree on what facts you will consider as the “ valid reason ”.
Your articles of association are therefore a very interesting way to lay down the rules in the event of disagreement between the shareholders within your company.
Contact Wanted Law!
If you have additional questions about these procedures, do not hesitate to contact us. Our Wanted Lawyers are at your service!