As a construction company, do you want to have an investor on board?

With increasing sales comes an increasing need for (working) capital. This can be financed through borrowed capital, or by attracting more capital in the form of equity. What does it mean for a construction company if an investor is found who joins as a shareholder and thus participates in the capital?

Majority/minority interest

Most construction companies are incorporated into a limited liability company (B.V.). The first question here is whether it still matters what percentage of the shares is acquired by the investor. Everyone knows that transferring the majority of the shares normally results in the control of the company being in the hands of the investor. One usually wants to avoid this by giving an investor a minority stake. But what influence will an investor with a minority stake have? Much case law has developed in recent years (and is still evolving) in the area of minority shareholder protection, and the countervailing obligation of majority shareholders to treat minority shareholders' interests with care. It would take us too far to go into this in detail, but it is advisable to keep in mind that for all decisions that have to be made, the majority shareholder cannot simply do as he pleases. A majority shareholder (especially if he is also a director) must also bear in mind that he must be transparent about the course of events and that he must be able to explain decisions well to the minority shareholder, especially when decisions involve personal interests. So it is definitely not the case that a majority shareholder can do as it pleases.

Percent

As for the percentage, it further depends on agreements made by the parties regarding decision-making. An investor will often require a so-called blocking vote for certain important decisions, giving him a right of veto on certain subjects. These subjects can be far-reaching and, in practice, can significantly restrict the freedom of the board/majority shareholder. One should also keep in mind that if the investor acquires more than 10% of the shares, the investor will then have more influence in connection with meeting rights. Also, this is the threshold to go to the Enterprise Chamber in case of disputes should he disagree with the policy and course of action of the company. Another threshold to keep in mind is that of 5%. If a shareholder gets 5% or less shares, then even if he does not want to, he can be bought out.

business owner

In practice, the financing associated with the investor's entry is usually related to the person of the business owner behind the construction company. This often results in the investor placing conditions on the involvement of the business owner in the construction company. So it may be that the investor wants control over the management of the company even in the event of the unexpected incapacity for work or death of the business owner, but also in the event that the director, in the opinion of the investor, does not function or functions inadequately. What the parties mean by this can sometimes lead to difficult discussions that one would prefer to have settled before the investor joins.

Decision-making

The incumbent shareholder must also realize that if he has an investor on board, decision-making processes will be different. After all, the investor will want to be involved in important decisions, which is also not incomprehensible depending on his financial involvement. Sometimes this is through one of the investors also becoming a director of the construction company, or the investor being given the right to appoint one of the members of the Supervisory Board. The challenge in such a case is to agree on a structure of decision-making that is also sufficiently effective in practice.

Exit investor

When it comes to the interests of the investor, it is worth bearing in mind that many investors are not only interested in dividends, but also in the possibility of selling the shares again at any time, assuming that the value of the shares has risen by then. Therefore, many investors make it a condition that they have the right to sell the company in its entirety at any time, in which case the incumbent shareholder is obliged to sell his shares as well. Such a condition in itself is not incomprehensible (for how else can the investor monetize his shares, especially in the case he has a minority stake) but it does of course have far-reaching consequences for the other shareholders, not to mention the construction company itself.

Sale

When it comes to possible sale of the company at some point, it is important to keep in mind that most B.V.s are organized in such a way that shares must first be offered to the co-shareholder, and the price is determined by experts. In short, the freedom to sell shares in the market is limited (even for the incumbent shareholder) if there is an investor on board. Moreover, the investor will usually want to have contractual influence on that sales process.

Disputes

If things do not work out in the end between the building contractor and the investor, it is advisable to make arrangements in advance about how disputes will be handled, and how they can part company with each other if disputes prove impossible to resolve. Arranging nothing is unwise because a shareholder simply cannot be bought out against his will (as long as his interest exceeds 5%, see above). Moreover, there are hardly any legal means available (barring high exceptions) to "eject" a shareholder from the company in case a conflict situation gets out of hand and threatens the continuity of the construction company. Often such conflicts are submitted to the Enterprise Chamber, a judicial body specializing in conflicts within private limited companies, but such proceedings are often time-consuming and costly. A good contractual arrangement under which shareholders can buy each other out in case of conflicts is therefore preferable. The building contractor could also reserve the right to always be able to buy out the investor, against which the investor in turn wants to see sufficient "return on investment" before he could agree.

Lock

Some broad outlines have been outlined above of the possible consequences for the construction company and its shareholders if an investor joins to strengthen equity. The impact on legal relationships within the company should not be underestimated. Such investment trajectories require time and attention, and not least customization when it comes to legal elaboration.