The shareholders’ resolution: common pitfalls

Most decisions in a Dutch private company (besloten vennootschap) are made by the board of directors. However, by default some decisions are the prerogative of shareholders. This article explores a few of the pitfalls regarding shareholders’ resolutions that are often overlooked.

For example, shareholders will normally decide on the dismissal and appointment of directors, dividend distributions and the issuance of shares to, for instance, employees or a new investor. The decision making process of the general meeting of shareholders is bound by certain formalities that are laid down in law and are usually customized or refined in the articles of association of the company and/or in a shareholders’ agreement.

Procedural requirements

In general there are two procedural ways for shareholders to pass a resolution. A shareholders’ resolution can either be passed during a formal meeting of the shareholders or in writing (without holding an actual meeting). Regardless of the method, the resolutions must be passed in accordance with certain statutory, and possibly contractual, requirements. Deviation from these requirements can result in shareholders’ resolutions that are unenforceable, without any effect at all (‘void’), or voidable.

Unenforceable, voidable, or void resolutions may cause delays or more serious (legal) issues in effectuation of the resolution. It will come as no surprise that this in turn, in severe situations, may lead to conflict and expensive litigation. In general, a company’s articles of association will provide useful insights as to the question of procedure, since many notaries incorporate the statutory requirements for decision making into the articles of association.

For all shareholders’ resolutions passed, the board of directors has the (often overlooked) statutory obligation to keep note of each shareholders’ resolution and make these notes available for all shareholders and also every other person that has the right to attend shareholders’ meetings. Disregarding this statutory obligation does not affect the validity of any unlisted shareholders’ resolutions. However, not keeping note of the resolutions accurately is a violation of the Economic Offences Act for which the board of directors can be punished with community service, a fine, or imprisonment of up to six months.

Resolutions in a meeting

A resolution passed during an actual shareholders’ meeting requires, first of all, that all statutory and other legal requirements for convening a meeting have been met. The articles of association of a company often provide a comprehensive list of these requirements. One pitfall comes from the fact that all members of the management board and (if applicable) the supervisory board, must have the opportunity to advise on matters decided on, before the shareholders pass any resolutions on such an issue. It is therefore important to always engage management and other corporate bodies when considering matters that are to be decided by the shareholders. Another pitfall comes from the timing of the convocation that is required to be sent to all shareholders and other persons with the right to attend the shareholders’ meetings. This invitation must also detail the agenda of the meeting, since the shareholders’ meeting cannot pass resolutions on matters that were not properly announced. The logical exception to the aforementioned rule is that this does not apply if all shareholders and other persons with meetings rights agree that such decision will be made and all members of the management board (and supervisory board), have been allowed to advise on the matter before a resolution is passed.

Resolutions passed by shareholders during a formal meeting do not have to be passed in writing, as long as the board of directors keeps notes. In practice, the company’s articles of association will also require that the minutes of the shareholders’ meeting reflect the resolutions passed.

Written resolutions

In most instances, especially in smaller companies with a limited number of shareholders, resolutions are passed without holding an actual shareholders’ meeting. The convenience of this is evident as it is not necessary to send out timely convocations for the meeting, deal with the organization of the meeting, or actually meet up somewhere.

One major formality of this manner of resolution making, is that all shareholders (and other persons with meeting rights) must agree to decide on a matter outside of a meeting. If an unwilling shareholder refuses to cooperate with the process of deciding on a matter outside a meeting, no resolution can be passed in that manner. In a sense this is not much more than a delay tactic as it forces the other shareholders to hold a formal meeting to decide on the matter at hand.

Another statutory requirement for resolutions outside of a meeting is that the resolution is passed in writing (hence they are often called written resolutions). Furthermore, it is still necessary to consult the board of directors and (if the company has one) the supervisory board before passing a written resolution.

 Overlooking required resolutions

Another potential problem occurs when a shareholders’ resolution is required and is not passed. Sometimes, this can be repaired at a later stage, but in practice this is not always possible.

The shareholders’ resolution that is probably most often overlooked is the resolution in which the shareholders provide their approval for a specific action of the management board. This approval is commonly required as a result of contractual agreements made by and between the shareholders. However the type of action that needs approval varies widely.

Another common example is the one necessary for the granting of options to shares, or any similar right relating to the future issuance of shares, such as entering into a convertible loan. (While we are on the topic, you may also want to see our blog on the ‘EPOS’ and the loan for more details regarding loans and convertible loans.)

Fortunately, well drafted shareholders’ agreements and other relevant corporate documents can provide a very helpful tool in determining whether a shareholders’ resolution is necessary or not.

BEN: your guide to shareholders’ resolutions

Should you be in need of a written resolution then you may want to consult with Ben, our easy to use online tool for contracts and other corporate documents. Ben will help you (free of charge) through the process of drafting a tailor made written shareholders’ resolution and can help you draft a sound shareholders’ resolution. You can ask Ben for help here.

For more questions on shareholders’ resolutions you can contact me or one of my colleagues.

Attorneys and Tax Advisors

Jos Meyer

Jos Meyer

+31 (0)88 30 300 35 meyer@benvalor.com