Subjective interpretation of articles of association has consequences for other contracts

In principle, articles of association are interpreted objectively (linguistically): the judge looks at what the text means, not at what the founders originally intended. However, in exceptional cases, the judge does take the parties' intentions into account – and such a subjective interpretation can affect other agreements between shareholders. For you as an entrepreneur, this means that the wording of your articles of association and your shareholders' agreement requires careful consideration: what the parties originally intended can play a role later in a conflict. On this page, we explain when which interpretation applies, what risks are associated with it, and how to prevent this.

In a previous blog, we already discussed the difference between the articles of association and the shareholders' agreement. What they have in common: both record agreements regarding the operation of the company. However, because articles of association are rigid and have an effect on new shareholders and third parties, an objective interpretation seems obvious. Nevertheless, there is sometimes room for subjectivity – with consequences that extend further than you might think.

What does the interpretation of the articles of association mean?

By “interpretation,” we mean the manner in which a judge determines the meaning of a statutory provision when the parties disagree on it. Broadly speaking, there are two approaches:

• Objective (linguistic) interpretation – the judge looks primarily at the text itself and at the meaning that an outsider may reasonably attribute to it, regardless of exactly what the founders intended at the time.
• Subjective interpretation – the judge also takes into account the intention of the parties involved and the context in which the provision was established.

The difference is not a formality. The standard the judge chooses can determine the outcome of a dispute regarding, for example, a redundancy scheme or a dismissal.

Objective explanation is the main rule

With regard to articles of association, a purely linguistic interpretation as the starting point: in principle, the court does not take into account the subjective intentions of the parties. There are two good reasons for this.

Firstly, third parties – such as a subsequent shareholder, a financier, or a counterparty – may derive rights from the articles of association, while they are unaware of the founders' original intentions. It would be unreasonable to make their position dependent on agreements of which they could never have been aware.

Secondly, a fluctuating, subjective interpretation is detrimental to the functioning of the company. Shareholders enter and exit, each with their own intentions. The articles of association must provide a framework independent of who is a shareholder at any given time. Moreover, the articles of association are public via the Commercial Register, whereas mutual intentions are not.

When is there room for subjective interpretation after all?

Only in exceptional cases does the judge deviate from the linguistic interpretation and take the parties' intentions into account. This is more likely if the shareholders also have a mutual contractual relationship closely linked to the articles of association. In conflicts involving a shareholders' agreement , the likelihood of a more subjective approach is greater.

A more subjective explanation is particularly appropriate when:

• it essentially concerns a collaboration between a limited number of founders, structured in the form of a company;
• all parties involved were closely involved in drafting the articles of association;
• the dispute exclusively between those founders , without third parties being involved;
• the subjective outcome is in line with what the text already allows linguistically.

Practical example: the conflict between two pharmacist-board members

A striking example is a dispute between two pharmacists who each held 50% of the shares through their holding companies and served as joint directors. One believed that the other should have tendered his shares pursuant to the tendering provision in the articles of association. Subsequently, one director dismissed the other, arguing that the “erroneously acting” director could no longer exercise voting rights due to a violation of the tendering obligation. The dismissed director challenged this.

The court ruled that there was room for a subjective interpretation. The decisive factor was that, at its core, it concerned a partnership in which both founders were involved in the entire drafting process of the articles of association, and that the dispute was fought out solely between them. The fact that the subjective interpretation aligned with the linguistic reading played a role in this.

The lesson for practice: as soon as a dispute takes place within a small, closed circle of founders, there is a real chance that a judge will look beyond just the literal text.

The role of reasonableness and fairness

Reasonableness and fairness can also influence the interpretation and effect of statutory provisions. A dismissal may formally comply with the statutory rules and yet not be reasonable and fair. In such a case, reasonableness and fairness correct the strict application of the statutory provision.

In this case, an opinion by Advocate General WL Valk of the Supreme Court was also issued. An important point from it is that a subjective interpretation of the articles of association can have consequences for other agreements between the shareholders . The core question then becomes: what conduct may the parties reasonably expect of each other , in view of the subjective interpretation of the articles of association ?

Consequences for other contracts between shareholders

This is where the practical catch lies for entrepreneurs. Many private limited companies (BVs) draw up supplementary agreements between shareholders or founders within the framework of the articles of association. This is a convenient way to circumvent the rigidity of the articles. However, a subjective interpretation of the articles can—via the principles of reasonableness and fairness— imply affect those supplementary agreements.

The consequence: a purely linguistic reading of the articles of association is no longer sufficient to understand where you stand. Those who rely solely on the letter may face surprises once a judge takes the original intent into account. Therefore, it is wise to have the articles of association, a shareholders' agreement, and, for example, a management agreement drafted as a coherent whole.

How to prevent problems: practical next steps

1. State intentions explicitly. A judge no longer needs to “read into” what you write in the text. Vague or implicit agreements actually increase the likelihood of a dispute over interpretation.
2. Align the articles of association and the shareholders' agreement. Contradictions between the two documents are a source of conflict.
3. Handle offer, termination, and voting rights carefully. Particularly in 50/50 arrangements, disputes can quickly escalate because neither party can outvote the other.
4. Have the documents drafted by a lawyer. The interplay between objective and subjective interpretation is not a simple matter.

Frequently asked questions regarding the interpretation of articles of association

Are articles of association interpreted objectively or subjectively?

In principle objective, that is, based on the linguistic meaning of the text. This protects third parties and subsequent shareholders who are unaware of the original intentions. Only in exceptional cases does the judge also take the parties' intentions into account.

When does a judge actually consider the parties' intentions?

Especially if it effectively concerns a collaboration between a limited number of founders, they were all involved in drafting the articles of association, and the dispute takes place solely between them – without third parties being involved.

Can the interpretation of the articles of association affect my shareholders' agreement?

Yes. A subjective interpretation of the articles of association can, through the principles of reasonableness and fairness, influence other agreements between shareholders. Therefore, it is advisable to align the articles of association and the shareholders' agreement.

What is the difference between articles of association and a shareholders' agreement?

Articles of association are public and have effect on third parties and new shareholders; a shareholders' agreement is a mutual agreement between the current shareholders. You can read more about the difference between the two in our blog

Does subjective interpretation also apply to a private limited company with many shareholders?

Much less quickly. The larger and more open the circle of shareholders, the more weight the protection of third parties carries and the more strongly the judge adheres to the linguistic text. Subjective interpretation is primarily an issue in small, closed partnerships.

What do I do in the event of a conflict regarding the interpretation of my articles of association?

Have the text, the shareholders' agreement, and the legislative history legally reviewed early on. The sooner you know which interpretation is likely to apply, the more targeted your negotiations or litigation can be.

Legally securing articles of association and shareholder agreements

An objective assessment of the articles of association makes it possible to draft supplementary agreements between shareholders within those frameworks. However, because a subjective interpretation can have repercussions, a purely linguistic approach is insufficient. MKB Juristen helps you align the articles of association, shareholders' agreement, and associated contracts.

• Need advice regarding an ongoing conflict between shareholders? View our legal assistance for entrepreneurs.
• Questions about the broader corporate legal context? Read more about our corporate law.

Do you want your shareholder agreements properly put on paper? Schedule an intake meeting today and have the agreements between shareholders legally watertight.