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Many shareholders' agreements include provisions for the event that a shareholder leaves. It is usually agreed that this shareholder is obliged to transfer their shares to the other shareholders or the company. The price that a shareholder receives from the other shareholders or the company often depends on the reason for their departure. A shareholder who has proven their value to the company and has adhered to the agreements ('good leaver') usually receives a higher price than someone who leaves due to, for example, fraud, theft, dismissal as a director or employee, or failure to comply with the agreements ('bad leaver'). A recent ruling by the Amsterdam District Court confirms the importance of properly documenting such agreements in the shareholders' agreement.
The situation was as follows. Company X has three shareholders: Shareholder I (53 shares), Shareholder II (32 shares), and Shareholder III (15 shares). The nominal value of the shares is €1 per share. The shareholders have entered into a shareholders' agreement with each other, in which Company X is also a party. The shareholders' agreement includes the following:
Article 8 Encumbrance and Transfer of Shares
Paragraph 3. In addition to the provisions in the Articles of Association, each of the Shareholders is obliged to offer the Shares they hold in writing and irrevocably to the Company within 30 days after one or more of the following circumstances occur: […]
1. if the employment agreement or management agreement of the Shareholder, natural person, or Ultimate Beneficial Owner, with the Company is terminated.
Article 9 Valuation in Case of 'Good Leave' and 'Bad Leave'
Paragraph 1. In all cases mentioned in Article 8 paragraph 3, the price of the Shares will be determined at the nominal value of the relevant Shares. […]
The shareholders are also the directors of Company X. Management agreements have been concluded between Company X and the individual directors. At a certain point, the management agreement between Shareholder/Director III and Company X ended. Therefore, Shareholder III is obliged under Article 8 of the shareholders' agreement to offer their shares to Company X.
A dispute then arises between the parties about the price that Company X must pay for the shares of Shareholder III. Shareholders I and II refer to Article 9 of the shareholders' agreement and believe that Shareholder III must transfer their shares to Company X for the nominal value (€15). However, Shareholder III believes that they are entitled to the actual value of the shares. They argue that the parties intended to agree on a different arrangement for a departure as a 'good leaver'.
The court does not follow Shareholder III's position and rules that Shareholder III must transfer their shares to Company X for the nominal value. The main considerations of the court are:
Read the full judgment here.
This ruling makes it clear that it is important to be careful when drafting a (shareholders') agreement. With a correct and complete recording of the agreements made, surprises, disputes, and (costly) procedures can be avoided later. It is therefore advisable for a shareholder to seek good advice to ensure they fully understand the agreement they are signing.
Do you have questions about your shareholders' agreement, or do you need help drafting it? Contact Jarno de Graaf, Corporate Law Attorney.
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