Drafting a shareholders' agreement: SME practical guide

Anyone establishing a BV together arranges two things: the articles of association with a notary and, ideally, a private shareholders' agreement between the parties. In practice, we see that the second is often missing, too superficial, or was drafted years ago on a late afternoon and has been lying in a drawer ever since. That works fine as long as it works. However, it is only when one of the shareholders falls ill, gets divorced, wants to leave, quarrels with their fellow shareholder, or faces the threat of bankruptcy that it becomes apparent what was *not* agreed upon. And that is precisely the moment when proceedings before the Enterprise Chamber or a dispute resolution procedure based on Article 2:335 et seq. of the Dutch Civil Code can easily cost hundreds of thousands of euros in legal fees and years of time.

This contribution sets out the purpose of a shareholders' agreement, why it differs from the articles of association, and — more importantly — which clauses repeatedly arise in conflicts in Dutch SME practice.

Articles of association or shareholders' agreement: what to regulate where

The articles of association are public and can be consulted in the Trade Register. Any third party may inspect them. They contain the rules of corporate law: share capital, blocking provisions, decision-making, and the powers of the Board of Directors and the General Meeting. Since the introduction of the Flex-BV Act in 2012, much more customization is possible than before, partly because Article 2:192 of the Dutch Civil Code allows for the statutory attachment of obligations of a contractual nature to shareholding. However, there is a downside to this: such statutory obligations cannot be imposed without the consent of the shareholder concerned, and what is stated in the articles of association is out in the open to the outside world.

A shareholders' agreement is a private agreement between the shareholders, often with the company as co-signatory. In it, you regulate matters you prefer not to make public, matters that cannot be regulated in the articles of association, and matters you wish to keep more flexible than an amendment to the articles of association allows. Examples include profit retention policies, exit scenarios, personal obligations such as work for the company, and the financial settlement upon withdrawal. A shareholders' agreement may also contain penalty clauses, thereby offering its own enforcement mechanism that is lacking in the statutory route.

In the event of a conflict between the articles of association and the shareholders' agreement, the general principle is that the articles of association take precedence under corporate law. However, between the parties themselves, the agreement continues to have contractual effect. This sounds innocuous, but in disputes it gives rise to surprisingly difficult questions regarding interpretation and enforcement, which must ultimately be settled using the Haviltex standard (Supreme Court, 13 March 1981, NJ 1981, 635). This is all the more reason to draft the two documents in conjunction and to explicitly stipulate which document takes precedence on which point.

The clauses that really matter in a conflict

A sound shareholders' agreement regulates at least five matters: decision-making, transfer of shares, price determination upon withdrawal, exit mechanisms, and personal obligations. The real pitfalls lie under each of those headings.

In decision-making, the key question is which decisions require a qualified majority or unanimity. A 50/50 split without a breakthrough mechanism is a time bomb: in the event of disagreement, you are stuck in a stalemate, and the only way out is often proceedings before the Enterprise Chamber or under the dispute resolution scheme. A well-thought-out deadlock clause with an escalation ladder (consultation, mediation, binding advice, or a Russian roulette/Texas shoot-out mechanism) prevents this. In doing so, do not forget to clearly define the veto rights of minority shareholders, because otherwise exactly the opposite problem arises: a minority shareholder who can block any strategic decision.

Share transfers revolve around the blocking clause, drag along, and tag along. Drag along grants a majority seller the right to drag the minority shareholder along in a sale to a third party, while tag along grants the minority the right to piggyback on the same terms. Both must be carefully formulated, with attention to threshold percentages, equality of conditions, and settlement periods. An unconditional drag along clause can, under certain circumstances, be reversed via Article 6:248 paragraph 2 of the Dutch Civil Code if it has an unacceptable effect according to standards of reasonableness and fairness.

Price determination upon exit is the subject of most legal proceedings. A reference to “fair market value” or “an independent expert” is insufficient. Who determines that expert? Which valuation method is applied: discounted cash flow, multiples, intrinsic value? What applies as the reference date? Does a discount apply for a minority interest or for a lack of liquidity? In a good leaver/bad leaver arrangement, it must be explicit which events trigger which price. Retirement, long-term disability, and death are generally considered good leaver events, while dismissal for urgent cause or a serious breach of the agreement may give rise to a bad leaver discount. Without clear definitions, one can spend years litigating over exactly what was agreed upon.

Exit mechanisms deserve special attention. What happens upon the death of a shareholder, in the event of a divorce resulting in shares falling into the community of property, in the event of the bankruptcy of a personal holding company, or in the event of long-term disability of a working shareholder? For all these cases, an obligation to offer the shares can be included, possibly linked to an adjusted price. Be aware that the consent of the spouse is required in a number of cases pursuant to Article 1:88 of the Dutch Civil Code, and that doing so without such consent may lead to the voidability of certain legal acts. This is a real risk in the case of sureties and legal acts affecting the community of property.

Finally, personal obligations. A non-compete clause between shareholders differs from an employment law non-compete clause pursuant to Article 7:653 of the Dutch Civil Code: in shareholders' agreements, a broader scope is permitted, provided it is proportionate to duration, geographical scope, and domain of activity. A confidentiality clause naturally belongs, as does an agreement regarding work input when shareholders are simultaneously employed by the company. Penalty clauses can be linked to a breach, whereby we formulate as standard that the penalty applies in deviation from Article 6:92 of the Dutch Civil Code, without prejudice to the right to performance, compensation for damages insofar as the damage exceeds the penalty, and without prejudice to the judge's right of mitigation.

What entrepreneurs systematically forget

In practice, we observe three blind spots. The first is the tax dimension. A shareholders' agreement governs civil law relationships, but its implementation has tax consequences regarding the substantial interest levy in Box 2, the question of whether a payment qualifies for tax purposes as share value or wages, and, in the case of transfers within a family context, the application of the business succession scheme. A fine civil law arrangement that turns out poorly for tax purposes is not a fine arrangement.

The second blind spot is alignment with the management agreement and, where applicable, the employment contract. Working shareholders are often simultaneously statutory directors and employees or self-employed professionals. When the shareholders' agreement stipulates that the loss of directorship leads to an obligation to offer the position, while the management agreement cannot be easily terminated, a vacuum arises. The same applies to agreements regarding incapacity for work: if the shareholders' agreement refers to six months of incapacity for work and the management agreement to twelve, it is no longer clear in the event of a conflict which term applied.

The third blind spot is UBO registration and the AML/CFT position of the advisors involved. When shares are held via a STAK or a family holding company, the interest shifts to the underlying natural persons who must be registered in the UBO register. In the case of cash flows or sectors subject to the AML/CFT, an arm's length substantiation of transactions between shareholders is advisable to prevent subsequent discussions with the Tax Authorities or a potential bankruptcy trustee regarding a fraudulent conveyance risk under Article 42 or 47 of the Dutch Bankruptcy Act.

When is it time for a new shareholders' agreement

A shareholders' agreement is not a static document. It must be updated upon the entry of a new shareholder, a fundamental change in shareholder structure, an external investment, the introduction of a management incentive plan, or a major strategic shift. An agreement from 2014 that has never been revised, while the company has since tripled in size and has a private equity investor on board, simply no longer covers its intended purpose.

For SME entrepreneurs, the rule is: force yourself to review the shareholders' agreement at least once every three years, and always with every transaction involving the issuance, transfer, or cancellation of shares. By the time things threaten to go wrong, it is too late.

Follow-up action

Do you not yet have a shareholders' agreement, do you have an outdated one, or are you unsure whether your current arrangement can withstand scenarios you would rather avoid? Contact one of our corporate lawyers. We draft shareholders' agreements for both start-up entrepreneurs and established SMEs, assist minority and majority shareholders in disputes, and litigate where necessary before the ordinary courts or the Enterprise Chamber. Usually, a pragmatic solution is the quickest option, but if litigation is unavoidable, we know the way.