Introduction
The shareholders' agreement is a practical instrument for establishing arrangements between shareholders. In principle, contractual freedom applies to the drafting of these arrangements, which means that shareholders can make more extensive arrangements than is possible in the articles of association. However, this entails the risk of contradictions arising between the shareholders' agreement and the articles of association. In the event of such a conflict, the question arises: which document prevails? The shareholders' agreement or the articles of association? The Kekk/Delfino judgement addressed part of this question. Below, we explain this jugdement and analyse the legal issues that may arise.
1. Effect of shareholder agreements under company law
When there are contradictions between the shareholders' agreement and the articles of association, and the company itself is a party to the shareholders' agreement, the company finds itself in a difficult position: whichever document it follows, there is a risk that it will be acting in breach of the other – a typical case of “damned if you do, damned if you don't”.
The solution to this problem is legally complex and multifaceted. The Vanka-Kawat judgement confirmed that a shareholder can, pursuant to Article 2:15(1)(b) of the Dutch Civil Code (BW), demand the annulment of a resolution that was adopted in breach of the shareholders' agreement.[1] This is known as the doctrine of corporate law (transitive effect). However, an important practical problem is that the resolution has already been adopted at that point. Initiating legal proceedings does not (always) offer an immediate solution and it can take a considerable amount of time – sometimes years – before a final judgment is obtained.
The question that then arises is whether this problem can be prevented by demanding performance of the shareholders' agreement before the resolution is adopted. The Kekk/Delfino judgement addresses this question.[2] Moreover, the judgement provides an example of a provision that can be included in the shareholders' agreement without being contrary to the articles of association.
2. Facts
The judgment centred on the proposed dismissal of director Kekk B.V. (Kekk). Kekk was a director and 25% shareholder of Redblue IT Professionals B.V. The remaining 75% of the shares were held by three other shareholders, who were also directors.
The shareholders' agreement stipulated that the dismissal of a director required unanimity at the General Meeting of Shareholders (GMS). However, the articles of association stated that such a decision could be taken by a qualified majority of two-thirds of the votes cast. Pursuant to Article 2:244(2) of the Dutch Civil Code, it is not permitted to include a more stringent voting requirement for the dismissal of directors in the articles of association.
A conflict arose between Kekk and the other directors/shareholders about the management of the company. Kekk foresaw that he might be dismissed as a director and therefore decided – in simplified terms – to take legal action to enforce the unanimity clause in the shareholders' agreement. If this claim were upheld, Kekk could not be dismissed without his approval as a shareholder.
3. Judgement of the court of appeal
Despite the conflicting provision in the articles of association, the court upheld Kekk's claim. In the court's view, enforcement of the shareholders' agreement could be demanded and this agreement was incorporated into the legal relationship between the company and its shareholders pursuant to Article 2:8(1) of the Dutch Civil Code. However, circumstances may arise in which compliance with such an agreement is unacceptable according to standards of reasonableness and fairness (Article 2:8(2) of the Dutch Civil Code), but according to the court, this was not the case here.
Contrary to the court, the court of appeal ruled that performance of the unanimity requirement was unacceptable on the basis of Article 2:8(2) of the Dutch Civil Code and dismissed Kekk's claim.
The court of appeal first made the general consideration that a claim for performance based on a unanimity requirement, while three-quarters of the directors and shareholders wish to dismiss the director, will quickly become unacceptable (in view of the interests of the company).
In the court's opinion, this was also the case in the present case. The other shareholders who wish to dismiss the directors are also directors, which would cause a lasting disruption of the relations within the board. This would impede the proper functioning of the board and thus harm the interests of the company.
4. Relevance of the judgement
It follows from this judgment that (i) it is possible to demand performance of a provision in the shareholders' agreement in order to prevent a decision from being taken, and (ii) demanding performance of a unanimity requirement for the dismissal of a director will quickly be deemed unacceptable according to standards of reasonableness and fairness. The more the dismissal is in the interests of the company, the greater the likelihood that such a claim will be rejected.
5. Our view
The law stipulates that the articles of association may not include a voting requirement higher than two-thirds of the votes cast for the dismissal of a director (Article 2:244(2) of the Dutch Civil Code). This provision protects shareholders against the practical impossibility of dismissing a director. From that perspective, it can be argued that the court's ruling is illogical. If the shareholders jointly waive this protection in the shareholders' agreement, why should compliance with it be unacceptable? Should shareholders not have the freedom to decide for themselves whether they wish to waive their protection?
The judgment shows us that the court answered this question as follows. It would be detrimental to the company if the management remained in a deadlock. In this regard, it was important to the court that there was indeed a disruption in the relations within the board. When such disrupted relations exist, a weighing of interests must be carried out: may shareholders waive their protection, even if this may later lead to a situation in which the company suffers damage as a result, or must the company be protected against this situation? In our opinion, the court of appeal decided in this weighing of interests to give greater weight to the interests of the company.
There is certainly something to be said for this. The principle of pacta sunt servanda is not absolute. Even within pure contract law, there is the exception of reasonableness and fairness (Article 6:248(2) of the Dutch Civil Code), of which Article 2:8(2) of the Dutch Civil Code is only a specific implementation. It is therefore logical that the acceptability of a provision can be assessed on a case-by-case basis.
More interesting is the question of whether this judgment means that a unanimity requirement that deviates from Article 2:244(2) of the Civil Code is generally unacceptable according to standards of reasonableness and fairness. Based on this judgment, the answer to that question can hardly be other than negative. The Court of Appeal deliberately chose not to consider whether the unanimity requirement is void because it is contrary to the law, even though this ground for nullity had been invoked. The legal basis on which the Court of Appeal based its rejection of the claim, namely Article 2:8(2) of the Dutch Civil Code, also requires an assessment of the circumstances of the specific case.
This position can be countered by the argument that in cases such as the present judgment, there is almost always a disrupted relationship, which, according to the judgment, will often result in performance being unacceptable. In our opinion, however, this is not a correct interpretation of the judgment.
The court explicitly emphasised the fact that the other shareholders were also directors, which meant that a dispute between shareholders also directly led to a conflict within the board. This leads to a deadlock, which impairs the functioning of the board and thus the interests of the company. However, if a situation arises in which, for example, three of the four shareholders who are not directors wish to dismiss the director (who is also a shareholder), a different outcome may be the case. In such a scenario, there is no disruption of relations within the board, which means that day-to-day operations are not hindered.
In such a situation, it is quite possible that the court will decide that the shareholders must “reap what they have sown”.
6. Conclusion
Shareholder agreements are crucial for laying down arrangements within a company. However, conflicts with the articles of association can lead to complex situations that entail risks for the company. The Kekk/Delfino ruling shows that compliance with a shareholders' agreement is possible in principle, but that a unanimity requirement for the dismissal of a director is quickly deemed unacceptable. It is therefore essential to draw up your shareholders' agreement carefully and have it reviewed by a lawyer. This will help you avoid conflicts and ensure the continuity of your business.