Shareholders can come into conflict with one another, especially when a shareholder harms the company’s interests. In that case, the law offers the possibility of ‘squeezing-out’ the shareholder who is no longer wanted. This is to prevent the interests of the company from being seriously damaged by a shareholder who misbehaves.
The legal requirements for a squeeze-out procedure
The squeeze-out procedure is laid down in Article 2:336 of the Dutch Civil Code. The law requires that the shareholder(s) who want(s) to use this option hold(s) at least one-third of the shares in the company. In addition, there must be:
a shareholder whose conduct harms or has harmed the company’s interests to such an extent that the continuation of his shareholding cannot reasonably be tolerated”.
In that case, the other shareholders can initiate proceedings for a compulsory transfer of shares by the misbehaving shareholder.
The court thus tests whether a shareholder’s act or omission goes against the interests of the company. In addition, it must be considered whether the shareholder did so in the capacity of shareholder and not, for example, as a director. Often, the director of the company is also (one of) the shareholder(s).
The course of the squeeze-out procedure
Among other things, by initiating (preliminary relief) proceedings, a claim can be filed to force the misbehaving shareholder to transfer his/her shares. If the claim is granted, the shares must be transferred to the shareholder(s) who filed the claim.
The proceedings basically has two stages:
- The court must assess whether the misbehaving shareholder can be squeezed-out. This involves showing that the shareholder to be ejected is not acting in the interests of the company. This is not an easy task.
- If the court finds that the claim can be granted, the value of the shares must be determined. For this purpose, the court will appoint an expert who will value the shares. The shares should be transferred at the determined value.
The Enterprise Chamber of the Amsterdam Court of Appeal
When a shareholder upsets the balance within the company to such an extent, proceedings can also be brought before the Enterprise Chamber of the Amsterdam Court of Appeal. Often, the shareholder’s misconduct will also give well-founded reasons for doubting a correct policy within the company. Especially when this shareholder is also a director. The advantage of initiating proceedings before the Enterprise Chamber is that the Enterprise Chamber can make interim provisions, such as transferring the shares by way of administration.
The road to an actual exit by the misbehaving shareholder can be a long one. Especially in larger companies, it is important not to jeopardise the continuity of the company. A point to note here, however, is that proceedings before the Enterprise Chamber cost a lot of money. Proceedings in the Enterprise Chamber are therefore not easily preferable compared to proceedings before the ‘normal’ civil courts.
Questions about a (possible) squeeze-out procedure?
A squeeze-out procedure is a lengthy and complex procedure. It is therefore advisable to be assisted by a (company law) lawyer. You will have to prove that the misbehaving shareholder is damaging the interests of the company. It is therefore best to seek legal advice before initiating proceedings.
Should you have any questions about the legal dispute resolution procedure or do you intend to make use of this legal possibility? If so, it is wise to contact one of LexQuire’s specialists. They will be happy to assist you in both the amicable and judicial process.
Do you want to know more about the about the dispute resolution process? Then read the first part of this blog series here.
