Unknowingly give up your statutory veto power as a shareholder?

Shareholder agreement vs. bylaws

Shareholder agreements may contain the obligation to amend the articles of association if they conflict. The District Court of Gelderland recently ruled in a case where something different had been agreed in a shareholders' agreement than was described in the articles of association. Although the shareholders' agreement contained a so-called conflict of law provision to the effect that in the event of a conflict with the articles of association, the shareholders' agreement would prevail, a disagreement had arisen between the parties as to how certain provisions in the shareholders' agreement should be interpreted.

The court in this case sought to reconstruct what the intent of the parties was in drafting the shareholders' agreement and whether it did indeed result in the need to amend the bylaws.

The case study

Three shareholders (one of whom was also the sole director) had entered into a shareholders' agreement. This agreement stipulated that all resolutions at the general meeting were taken by a two-thirds majority. This provision deviated from the articles of association which stipulated that some resolutions could only be passed with a majority of at least 75% of the votes cast, in a meeting at which at least 75% of the issued capital was represented. This implies that the three shareholders had a veto right under the statutory provision and not under the shareholders' agreement.

The shareholders' agreement contained a provision to the effect that, in the event the articles of association deviated from the agreement, they had to be brought into line with the shareholders' agreement. Two of the three shareholders wanted to align the agreed decision-making in the shareholders' agreement with the bylaws. The director/shareholder did not intend to amend the articles of association in accordance with the agreement. This was because he believed that the adjustment to a two-thirds majority only applied to "normal (day-to-day) resolutions." In addition, in his opinion, adjustment was not in line with the interpretation of the agreement. He also feared the loss of his equal position vis-à-vis the other shareholders in the event of a share issue. The fear of losing his equivalent position is somewhat understandable in light of the events preceding the proceedings. After all, the other two shareholders were already forming a block against the director/shareholder in the context of the additional payment in connection with liquidity problems of the company.

The judge in this case rejected the director/shareholder's argument and put the text of the agreement first. The judge considers that, given the wording of the agreement, there can be no misunderstanding that all shareholder resolutions must be taken by a two-thirds majority. In addition, the court does not attach any value to the possible (future) dilution since there was no concrete risk of it. As a result, a fairly standard provision in the shareholders' agreement can have far-reaching consequences. The director/shareholder may have sincerely thought that he had a veto right but had apparently (unwittingly) abandoned it when concluding the agreement.

Conclusion

The interpretation of a shareholders' agreement is generally aligned with the interpretation of commercial contracts. Since shareholder agreements are often agreements drafted with the help of legal specialists, the court may give great weight to the linguistic meaning of the chosen wording when interpreting the wording.

In a case like the one described above, a conflict of laws provision helps determine whether a shareholder agreement prevails in the event of a conflict with the bylaws. Nonetheless, shareholders should be careful what they contractually agree among themselves. If you fail to do so, you may just (unwittingly) give up your veto power. Are you planning to draft a shareholder agreement? If so, it is important to pay extra attention to exactly what you want to agree with each other and how this is then worded in the agreement. In this way, no misunderstandings about the agreements made will arise at a later date. After all, a short standard sentence can have major consequences....