Certification of shares and change of control clauses: beware!

With some regularity, we see that so-called change of control clauses (usually included in the articles of association or in shareholder agreements) are overlooked in certification. The consequences of this are dire, according to a judgment of the Arnhem-Leeuwarden Court of Appeal that was recently upheld by the Supreme Court.

What is certification of shares?

In share certification, shares in a company are issued or transferred to a foundation (also called: "Stichting Administratiekantoor" or - abbreviated - "STAK"), which thereby becomes a shareholder of the company. Subsequently, the STAK issues certificates of shares (usually to the founder or original shareholder of the company). The board of the STAK, usually formed by again the founder or original shareholder of the company, exercises the rights attached to the shares in the company on behalf of the STAK. Depositary receipts for shares in companies are frequently issued, in part because of the tax advantages of such arrangements.

What was involved in the case?

Effectively a straightforward joint venture: two shareholders (A and B) who each held, through a personal holding company (Holding A and Holding B), 50% of the shares in a company and together formed its statutory management. Schematically, the corporate structure looked as follows:

Offer arrangement and proposal for dismissal

The Company's Articles of Association included an offering arrangement that would be triggered if there was a change from the shareholder(s) (i.e., A and B) to a shareholder legal entity (i.e., the Holdings) by other natural or legal persons joining as shareholders. In short, relevant is a change at the shareholder level of A and B. As a side note, this variant of the offering arrangement is somewhat atypical and should be distinguished from the variant in which an offering arrangement is triggered if one of the Holdings sells its shares to a third party.

Back to the factual complex in the case. At some point, B decided to certify his shares in his personal holding company Holding B, after which the corporate structure became as follows:

A short time later, A invoked the statutory offer obligation on behalf of Holding A and requested Holding B to transfer its shares in the Company. Holding B refused to cooperate. More than two months later a general meeting followed, where A put on the agenda the resignation of Holding B as statutory director. The outcome of the vote can be guessed: A voted in favor on behalf of Holding A, B voted against on behalf of Holding B.

The stakes: position as both shareholder and director

The general meeting was apparently not very constructive, as B took the matter to court shortly thereafter. There, two interests were at stake for B, namely (i) his indirect shareholding but also (ii) his indirect directorship. Indeed, in the proceedings, A argued that Holding B, as a result of not complying with the offer obligation, was not allowed to vote on the proposal for - note: his own - dismissal as a director under the Articles of Association. This was because the Company's Articles of Association prescribed that the voting rights on the shares were suspended during the offering obligation.

Judgment Arnhem-Leeuwarden Court of Appeal

B was unsuccessful in court and appealed. There, too, B was ruled against. The court of appeal compared the actual change in the corporate structure on the one hand with the (wording of the) statutory offer scheme on the other hand. On this basis, it ruled that, as a result of the certification, a third party (STAK) joined as a shareholder in a shareholder legal entity (Holding B), which triggered the offering obligation and required Holding B to transfer its shares to Holding A. The court did not stop there, as A was also vindicated on the issue of the dismissal decision. Because Holding B could no longer exercise her voting rights on the shares, the decision to dismiss Holding B (actually taken by Holding A) was legally valid, the court said. The Supreme Court upheld the judgment of the trial court and dismissed the case without further reasoning.

Somehow I understand where B is coming from. In fact, nothing had changed: B held all the certificates in the STAK, of which B was also the sole director. In other words, A was still only dealing with B, albeit through a STAK. Indeed, pending the appeal, B arranged to become the sole shareholder of Holding B again, so that the original corporate status quo (see the first schematic overview) had been maintained again.

From a dogmatic point of view, however, I consider this judgment correct. The idea behind change of control clauses in articles of association or shareholder agreements is primarily to safeguard the private form of cooperation. Especially in a "standard" company like the one in this case, in which two natural persons cooperate, one of the two must be prevented from having to deal with an arbitrary third party. And that is precisely what B seemed to have in mind with the certification. Indeed, he stated at the hearing that the reason for the certification was so that at some point he could put his brother forward. The Court of Appeal of Arnhem-Leeuwarden seems to attach substantial value to this statement.

Thoughtfulness is the motto

The discussed ruling shows that certification, as a result of (statutory) change of control clauses, can have far-reaching consequences. Not only is there a lurking risk of a compulsory share transfer, but also - as a result of the share transfer - the position of director under the articles of association may be at risk. Thus, caution is the watchword in the case of certification. Questions about certification of shares and its consequences for your case? Please feel free to contact me.