Anticipating shareholder conflicts

Your company’s articles of association or a shareholders’ agreement can play an important role in preventing shareholder disputes. In order to prevent conflicts, it is advisable to make clear agreements about:

1. The rights and obligations of the shareholders
   Provisions in the articles of association or in the shareholders’ agreement can further elaborate on the legal rights of shareholders, such as voting rights, dividend rights and information rights. In addition, they may also impose obligations such as transfer restrictions (e.g. the obligation of a shareholder to offer his shares in the event of a certain event such as dismissal or death) or financial obligations towards the company or other shareholders.
2. Decision-making
   Rules on, among other things, the majority required for certain decisions, the granting of a veto right to certain shareholders, rules on the organisation of shareholders’ meetings.
3. The transferability of shares
   Provisions in the articles of association or in a shareholders’ agreement may impose restrictions on the transfer of shares (such as approval clauses, pre-emptive rights, tag-along and drag-along rights).
4. Balanced control and protection of minorities
   This can be achieved through voting agreements, veto rights and board representation, among other things.
5. Conflict resolution
   Mediation or arbitration, exit arrangements and deadlock clauses in the event of deadlock.

As always, a provision in the articles of association or shareholders’ agreement offers clear advantages, but also raises a number of points for consideration. It is striking that these points often represent the flip side of the strengths. What is an advantage in one context can be a disadvantage in another.

Articles of association

Advantages:

• Legally binding: the articles of association of the company are binding on all shareholders, including future shareholders.
• Opposable to third parties: third parties can invoke the contents of the articles of association.
• Public: transparency through filing with the commercial court and publication in the Belgian Official Gazette.

Points to note:

• Less flexible: w amendments require a notarial deed and a qualified majority.
• No confidentiality: the articles of association are public, so personal obligations or confidential arrangements should not be included in the articles of association.

Shareholders agreements

Advantages:

• Tailor-made: a agreements can be fully tailored to the specific needs of the shareholders.
• Flexible: w ijzigingen require only the consent of the parties concerned. No notarial deed is required. The shareholders’ agreement can be concluded privately.
• Confidential: a Shareholder agreements are not made public. Sensitive agreements remain private.
• Great contractual freedom: shareholders can arrange matters such as voting agreements, exit mechanisms, dividend policy, non-competition obligations, etc.

Points to consider:

• Not legally binding: a automatic protection for shareholders who do not sign the agreement.
• Not enforceable against third parties: the agreement is only binding on the signatories. Third parties (such as new shareholders or the company itself) are not automatically bound by it.
• Possible conflict with the articles of association: a ls there are contradictions, legal problems may arise.

If neither the articles of association nor the shareholders’ agreement provide an adequate solution to the conflict that has arisen between shareholders, recourse may be had to the statutory dispute resolution procedure provided for in the Companies and Associations Code. This procedure allows another shareholder to be excluded or to withdraw in the event of serious conflicts, without the company having to be dissolved. A claim for exclusion or withdrawal can only be brought on ‘valid grounds’ (e.g. serious breach of trust between shareholders, structural blocking of decision-making, harmful or unethical behaviour by a shareholder and abuse of majority).

As indicated above, this procedure may only be invoked when all other (less drastic) solutions (e.g. negotiations, mediation, statutory or contractual exit mechanisms) have been exhausted or proved insufficient. Furthermore, this procedure only applies to shareholders of unlisted private limited companies and public limited companies. Other types of companies are not covered by the scheme.

Despite recent improvements, the dispute resolution procedure remains costly and time-consuming. Moreover, the court has broad discretion in determining these ‘valid reasons’ and the value of the shares, which makes the outcome of the procedure uncertain. Prevention therefore remains the best approach!

***

At deminor NXT, we are happy to assist you in developing a tailor-made preventive arrangement — both contractually and through the articles of association — to prevent shareholder disputes. In this way, we help you avoid costly legal proceedings and ensure that any disputes are managed in a constructive and efficient manner. Please do not hesitate to contact us.