Exit rights and forced exits in Belgium

Hans De WulfGhent University –Financial Law Institute

Belgium

background

• Very often conflicts in closed companies between shareholders– Between different branches of a family– Between husband and wife who jointly control

company– Minority versus majority– 50% shareholder vs other 50% shareholder (joint

ventures)

Reasons for conflicts

• Personal conflict between brothers (jealousy), husband/wife (divorce) spills over into company

• Differences over strategy:– Dividend policy:Distributing vs retaining profits– Attracting new partner necessary for financial

reasons vs fear of being diluted by other shareholder

• …

Background cont’d

• Netherlands had for a long time had a rule in companies Act allowing one shareholder to force opponent to sell his shares to him– Forced exit

• Or for shareholder to demand that he be bought out by opponent– Forced buy-out

• Belgium copied the rule, with changes, in 1997 and procedure became enormously popular in Belgium, whereas it’s never been much used in Netherlands

Belgian rules (art. 635-644 CA)

• In private (BVBA/SPRL) and public (NV/SA) companies (ltd)

• But not in listed companies: shareholder can exit through stock market

• Principle of subsidiarity: expulsion, buy-out only if no other solution possible:– E.g. shareholder does not pay up shares=> simply

ask court to force him to; no expulsion

• It’s shareholder against shareholder, company not involved– In coperative company: exit right against company

• So no buy-back by company• Always judge involved: determines whether there

are “just grounds” for demand and determines price to be paid for shares

• Summary proceedings: speedy resolution of conflict• Mandatory rules: articles may not deviate

expulsion

• May be demanded by shareholder who owns at least 30% of shares or votes– People may band together to obtain 30%

• On “just grounds”• Ultimum remedium• Not necessary to show that defendant comitted

breach of duty/fault– E.g. frequently used in deadlock situations where

nobdoy is to blame/both parties equally to blame– But plaintiff may not be the major cause of problem

exit

• =shareholder forces opponent to buy his shares

• Any shareholder can ask this on justified grounds, no minimum percentage required; also majority shareholder

• No fault of defendant required• Interest of plaintiff not really limited by interst

of company

• Plaintiff must be full owner: not merely “ususfructus” or having limited rigts in share, like being beneficial owner

• Judge can take preliminary measures:– Settle disputes about who owns shares– Suspend voting rights– Appointing court trustee over defendant’s shares • Often asked in separate high speed and unilateral

procedure before exit/expulsion procedure

Procedural remarks

• Defendant may not transfer shares anymore as soon as he has been notified through citation

• Company must also be cited, but is not real party to proceedings– Company itself may not exclude shareholder

(except in partnerships and cooperative company)• Plaintiff must provide court with all

shareholder agreements plus articles

What are “just grounds” ?

• serious threats to interests of the company and when expulsion is necessary to safeguard the continuity of the company– => not after insolvency filing: no continuity

• Three main categories:– Breach of duty by shareholder– Permanent and serious disagreement – Abuse of majority or minority voting power

Abuse of majority/minority

• Cf. “unfair prejudice”• “manifestly unreasonable exercise of voting

rights” = abuse of right as in civil law– Can also give rise to annullment of AGM/board

decision• Recurring nature• Minority abuse: using blocking minority to block

initiatives that are necessary in company’s interest– Eg capital increase when C. urgently needs funds

Just grounds continued

• Must always relate to relationship between shareholders– Will usually affect functioning of general meeting– Issues at board level alone are not sufficient

• Since these can usually be solved by general meeting

– But rows at board level can be additional factor in convincing judge

– Dismissal of director who is also important shareholder without any reasonable grounds is often held to be “just grounds” for exit or expulsion

Price determined by judge

• Often after interim judgment on “justified grounds” and exclusion/exit

• Usually with help of expert• Summary proceedings (faster)=> judge may

only deal with exit/exclusion, not with related issues– E.g. force party to pay back loan from company– E;g. directors’ liability

• Is unfair to minority shareholder who wants to exit: value of shares depressed by majority abuse, but minority needs to start separate procedure before different judge to claim damages

• => judges sometimes instruct expert to value shares at moment before value was depresssed by majority abuse

Some procedural remarks

• Once you have filed a claim for expulsion/exit, you cannot drop it because you do not like the price for the shares determined by judge

• Appeal against judgement does not suspend initial judgement

• “partial” exit or expulsion not possible– Would pertain to only part of the shares involved

Reciprocal claims

• Very frequent phenomenon• A demands expulsion of B; B reacts with a

demand for expulsion of A– If A demands its own exit and B reacts with

expulsion of B, parties are in agreement; still judges needs to check whether both can invoke just grounds and determine price• Parties can reach settlement and have it approved by

court

Reciprocal claims cont’d

• Judge will first check whether both parties can invoke “just grounds”

• If yes, then looks at “interest of company”– E.g. which shareholder can provide company with

financial means– Sometimes: know-how of shareholder-director crucial

for company• Judges also take into account whether

shareholder wil be able to pay counterparty’s shares

Relationship to shareholder agreements

• Judge may disregard “approval rights” in articles or shareholder agreements– Situation where articles/SHA imposes approval of

board/sharehlder /third party before one can transfer (sell, donate, …) shares

• In case of preemption right (first offer or first refusal), judge may determine price instead of contractually indicated party, and may shorten periods for exercise of preemption right

Relationship to dissolution and insolvency

• After opening of insolvency: no initiation or continuation of proceedings

• What about situation where – a.expulsion/exit is asked after filing for dissolution with court,

or– b. dissolution is asked for as reaction to expulsion/exit claim ?

• B indicates shareholder does not xwant to continue with company: wil be to his disadvantage

• A indicates sharehodler wants to avoid negative consequences of dissolution/equal treatment: will not be accepted

conclusion

• Very often used and “popular” procedure• Not as fast as expected, because lot of time is

spent on determining price• Inefficient that judge cannot rule on any

related matters

Some other non-contractual techniques

• Court trustee who temporarily replaces director or board– Usually limited to certain decisions or veto right– Not provided for in companies act, but courts have developed this

• Unilater demand for sequestration of assets or documents• Derivative action• Individual inspection rights of shareholders in companies

without official external auditor• Right to ask questions at AGM• Individual right to have decisions of GM or board annulled

– Formal reasons (procedural rules for GM have been violated: only if it affected outcome of vote)

– Substantive reasons