The legal position of the management board and supervisory board in the share transaction in bankruptcy
As part of the Blog series: the legal positions of the corporate bodies of the private limited company in financial dire straits, in this blog we address the legal position of the management board and supervisory board in the share transaction in bankruptcy.
No or minor role for the management and supervisory boards
In the restart structure of the share transaction in bankruptcy, one or more sitting shareholders sell their shares by agreement to the intended, purchasing shareholder(s). This is often accompanied by a capital injection by the buyer and/or a bankruptcy agreement to restructure the company’s debts.
Because the share transaction takes place at shareholder level and not company level, in principle, the management board does not have any powers other than perhaps recognising the share transfer on behalf of the company. Because the management board plays only a minor role, the role of the supervisory board is also minor: supervision and possibly assisting the management board with advice therefore remains limited. Private companies may find it disadvantageous that their boards cannot directly influence a share transaction, as they will not have control over who becomes the owner of the company.
Obligation to offer the shares
Nevertheless, it is possible that the board at the time of incorporation of the company exerts a certain influence on a later share transaction. If the management board has failed to deviate from Section 2:195 of the Civil Code at the company’s incorporation or has explicitly – whether at a later stage or not – laid down an offering arrangement, the shareholder is restricted in his transfer options. The offering arrangement obliges the shareholder to offer the shares to his co-shareholders first in a share transaction, in proportion to the number of shares they hold at the time of the offer. These co-shareholders can only claim shares of the kind they are already going to hold at the time of the offer. The board can thus indirectly influence subsequent share transactions, subject to subsequent amendments to the articles of association by the shareholders’ meeting.
While it is desirable for private limited companies to keep the shares within the closed circle, in bankruptcy the board may be forced to look outside this circle. Should the board be willing to do so, the board can order a shareholders’ meeting at which a vote will be held on the proposed decision to drop the offering arrangement. The board can then use its advisory vote to advise shareholders to vote in favour of lifting the offering scheme. If shareholders do not agree to such an amendment to the articles of association, the board can go to court and the court can rule that reasonableness and fairness require the shareholder to set aside its own interest. However, lifting an offering arrangement by amending the articles of association or filing an application with the court costs money that is usually not available in a bankruptcy situation. So this is something to think carefully about when drafting the deed of incorporation or an amendment to the articles of association.
Are you involved in an insolvent or bankrupt company and do you want to know what your options are? Or would you like advice on setting up a company, a share transaction (whether or not in connection with a shareholder dispute) or amending the company’s articles of association? If so, please feel free to contact us. We will be happy to advise you.