Interpretation of a right of first refusal provision in the articles of association of a B.V.
In a recent case, the District Court Midden-Nederland has ruled in a dispute about a statutory right of first refusal provision in a joint venture in the form of a Dutch private company with limited liability (B.V.) with two shareholders, each holding 50% of the shares. The articles of association of the B.V. included a right of first refusal provision, which stipulated, among other things, that if control of a shareholder changed within the meaning of the Code of Conduct with respect to mergers as adopted by the Dutch Economic and Social Council and this shareholder had direct or indirect control over the joint venture (also as referred to in that Code of Conduct), this shareholder had to offer its shares to the other shareholder.
At the moment that the control over a shareholder ("Shareholder A") actually changed, the other shareholder ("Shareholder B") requested Shareholder A to transfer its shares in the joint venture to Shareholder B. Shareholder A refused this request, on the grounds that the wording of the articles of association does not require Shareholder A to offer its shares. The term 'control' in the sense of the Code of Conduct means that control in a company is only transferred if more than 50% of the shares are held by a shareholder. In the case of a shareholding of exactly 50% or less, control would only pass if this arises from additional statutory and/or contractual rights. Shareholder A held only 50% of the shares in the joint venture and there were no additional rights, on the basis of which it could be concluded that the conditions of the offering arrangement were not met.
When Shareholder B subsequently initiates a court procedure to oblige Shareholder A to transfer the shares, Shareholder A uses the same defence in the court procedure. According to Shareholder A, the articles of association should be interpreted on the basis of the so called ‘CLA’ standard, an interpretation of contracts developed by the Dutch Supreme Court that stipulates that the interpretation of a provision must be determined according to objective criteria, such as the text of the provision and, for example, a published explanation of it.
However, the District Court does not agree with this interpretation. It considers that in the present case the statutory provision should not be interpreted on the basis of the CLA standard, but on the basis of the ‘Haviltex’ standard. This standard stipulates that the interpretation of a provision depends on the meaning that the parties could reasonably assign to the provision in the given circumstances and what they could reasonably expect from each other in this respect.
On this basis, the District Court ruled that the wording of the statutory provision does not properly reflect the parties' intentions and that decisive importance is attached to circumstances other than the text alone. The decisive factor in this case is that Shareholder B was not assisted by a lawyer during the negotiations and that Shareholder B had indicated in an email that it is of great importance to it that in the event of a change in the control of one of the shareholders, the latter must offer its shares in the joint venture to the other shareholder. Shareholder A did not respond to this email.
The District Court might have ruled in favour of Shareholder A if a literal interpretation of the statutory provision would have been followed, because strictly speaking Shareholder A did not have more than 50 percent of the control over the joint venture. However, in view of the intentions of the parties, the District Court came to the conclusion that the shares must be offered by Shareholder A to Shareholder B. The judgement and this dispute show that it is of great importance not only to proceed accurately when drawing up contracts but also when drawing up articles of association and to try as best as possible to prevent provisions from being included that can be interpreted in more ways than one.