The all-powerful shareholder and the right of inquiry

October 4, 2023

The right of inquiry was designed for enterprises with multiple shareholders. Sometimes, however, mismanagement stems from the sole shareholder’s conduct. Job Staal and Stefan Holterman have written an article on what solutions the right of inquiry offers in such situations, with recommendations on how to protect the interests of the company and its enterprise.

The judgment in the ‘Sanderink case’

The Enterprise Division of the Amsterdam Court of Appeal considered Gerard Sanderink’s conduct reason to take action at Strukton and Oranjewoud. Sanderink was the indirect holder of all (or virtually all) the shares in those companies, and as an immediate measure the Enterprise Division transferred all but one of Sanderink’s shares in Oranjewoud to a nominee.

Using the judgment rendered by the Court of Appeal as an example, Job Staal and Stefan Holterman discuss the right of inquiry in such situations in the newsletter Bedrijfsjuridische berichten 2023/55. They address the particulars of this case, and how effective the right of inquiry is in cases where the conduct of the sole shareholder forms the basis for the allegations of mismanagement. They conclude their article with several practical guidelines.

What solutions does the right of inquiry offer where the sole shareholder is the cause of mismanagement?

The right of inquiry was originally designed to create openness and to restore relationships at enterprises with multiple shareholders. This is reflected, inter alia, in the final remedies that the Enterprise Divisions can impose if it decides that a situation involves mismanagement. The only remedies available are suspending or setting aside a resolution, suspending or dismissing an officer, instructing a temporary deviation from the enterprise’s articles, temporarily transferring shares to a nominee, or a combination of several of these remedies. A final possibility is to dissolve the legal entity.

Although these remedies can have far-reaching consequences and so move the case forward, most of them are temporary in nature and generally have no permanent implications for the shareholder (at least not without offering something in return, e.g. proceeds from the sale of operating assets). The question arises of whether the Enterprise Division may impose final remedies that end mismanagement resulting from the sole shareholder’s conduct.

Since the available final remedies are mostly temporary in nature, or can subsequently be reversed by the sole shareholder, Staal and Holterman believe that the right of inquiry cannot offer a satisfactory permanent solution. The only scenario where this might be different is if the Enterprise Division were able to hold the shares hostage, as it were, until the shareholder sells them, or dies.

However, they do see possibilities outside the realm of the right of inquiry. In so far as the shareholder is incapable of making ‘rational decisions’, where necessary, the shares may placed under regular or protective administration. Administration is a measure that is in fact intended as a long-term solution, or even a permanent one if necessary, and the proceedings are consistent with the private interests of the person concerned.

Practical recommendations

Clearly, a sole shareholder has a great deal of power in their enterprise. If that person frustrates the normal business operations, refuses to adopt the necessary resolutions or makes it difficult for the board of directors or the supervisory board to do their work, the enterprise could find itself in trouble, which could prejudice the interests of its employees and other stakeholders. If the internal controls are not sufficient to eliminate the problems, it might sometimes be advisable to bring the matter before the Enterprise Division.

Staal and Holterman therefore recommend that, as long as the law does not provide for this, provision must be made either in the company’s articles or in a contract that someone other than the shareholder themselves, or a body appointed by the shareholder – e.g. the board of directors – is authorised to submit an application for an inquiry. That authorisation may then be granted to parties that have an interest in the continued success of the enterprise, including:

  • the works council
  • lenders
  • joint-venture partners
  • important customers or vendors

To create long-term stability, the partners could opt to record the power to request an inquiry in a contract (unilaterally or by mutual consent). The Sanderink cases demonstrate how important it is to arrange this while the relationships are good, to ensure that a request for an inquiry is possible if matters deteriorate unexpectedly.

If you have any questions about the matters discussed in this blog, or if you would like to discuss the possibilities for resolving your business dispute, please feel free to contact us.

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