With the coronavirus affecting the financial position of many companies throughout the Netherlands, sometimes to a very considerable extent, additional equity funding may be needed. And while withholding dividends is often a first step, this may not always provide the necessary financial headroom. In more challenging cases, new shares may need to be issued. Depending on the size of the share issue and any previously granted authority, shareholders will have to give their consent. But what to do when the equity raise is needed to prevent a potential bankruptcy and one or more shareholders refuse to cooperate with the necessary share issue to make emergency funding possible? Shareholders are not generally required to facilitate any issue of shares and are free to block this by voting against the relevant resolution. There are, however, ways around this, depending on the circumstances.
We outline when and how shareholders in the Netherlands may either be compelled to cooperate with an equity raise or to allow this to happen, despite their shareholding being diluted as a result.
When a company is in financial distress, the need for additional equity funding through a share issue may arise. Not only does this provide a direct financial injection, it often has an indirect positive effect as well, such as giving the company access to additional debt funding. Lenders may require equity funding as part of a larger bail-out package. Or a third-party investor might be willing to provide the required funding — but only in return for an equity stake in the company.
While a share issue often requires shareholder approval, problems arise when one or more shareholders refuse to vote in favour of the resolution at the general meeting, thus creating a deadlock. Often, obstructing shareholders are either unwilling to pay for these new shares, or financially incapable of doing so. At the same time, they are hoping to prevent the – sometimes significant – dilution of their stakes. They may argue that there are other, better alternatives or that there is time to investigate these alternatives.
A more radical approach is needed when the company’s interests require existing shareholders being forced out and, for example, the company’s lenders converting their loans to shares and continuing as shareholders of the company. This can be achieved in various ways, ranging from lenders exercising security rights (pledges) on the shares or transferring the business to a subsidiary that is subsequently sold, to diluting existing shareholder(s), followed by a statutory squeeze-out. These situations fall outside the scope of this briefing.
There is a wide range of possible scenarios that result in an emergency funding deadlock, for example:
Under Dutch law, if shareholders have not assumed any prior commitments to provide additional equity funding to the company – in the articles of association or in a shareholders agreement – they cannot be forced to participate in the equity raise or to allow others to do so. As a general rule, a shareholder does not have to facilitate any issue of shares to other shareholders or third parties and is free to block any resolution to that effect by simply voting against it. Moreover, shareholders may have statutory pre-emptive rights, and additional protective provisions against dilution can be included in the articles of association or in a shareholders agreement.
However, this may change when companies face financial distress or imminent bankruptcy. After all, companies have other stakeholders as well, such as employees, finance providers with varying levels of priority and other creditors. Each of these stakeholders depends on the continuity of the company and the business. To address financial difficulties, the interests of the company and of its business may require that a restructuring take place and that shareholders cooperate or accept the inflow of fresh equity capital. It can be contrary to standards of reasonableness and fairness, or even constitute misuse of power, for a shareholder to hold out at the expense of the company, its business and its other stakeholders.
Courts can break through a shareholder deadlock about emergency funding, if warranted by the interests of the company and its business and, therefore, of all stakeholders involved. According to case law, for a court to provide relief, the following circumstances are generally required:
The courts have far-reaching powers to ensure emergency funding for the company and its stakeholders. The extent of these powers depends on the circumstances of each case which, in turn, determine the type of relief required to ensure emergency funding. The various types of relief granted by courts include:
Parties can apply for relief to the Enterprise Chamber of the Amsterdam Court of Appeal or to the preliminary relief court. The choice of court depends on the circumstances of the case. Both courts apply the same legal standards (see above) and can grant emergency funding relief.
The Enterprise Chamber has specific expertise and experience in dealing with these types of matters and has often shown its willingness to take quick and decisive action when necessary. This court can only grant relief where a request has been made to order an inquiry into the policy and the course of affairs of the company. The persons authorised to request an inquiry include:
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