The significance of shootout clauses in Dutch agreements

In a ruling of the Dutch Enterprise Court, a stakeholder requested the insertion of a shootout clause in the articles of association A document, drawn up when a Dutch company or legal person is set up, and which regulates the operations of the company and defines its purpose.
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Articles of Association
. Such a clause could force a breakthrough for shareholders who are in a stalemate situation. The request was rejected on the grounds that it was too far-reaching. Nevertheless, a shootout clause is an interesting mechanism for forcing a solution. Dutch Corporate Law Lawyer Sander Schouten explains this mechanism in view of the Enterprise Court’s ruling.

Request for a Texas Shootout Clause in the Netherlands Enterprise Court

In the proceedings before the Enterprise Court, an immediate provision was requested to the effect that a Texas Shootout Clause should be inserted in the articles of association. This clause is one of the possible deadlock clauses.

Shareholders’ dispute resulted in request for shootout

The above was proposed by one of the parties because of a deadlock in the general meeting of shareholders regarding, among other things, the question whether dividends should be paid. This shareholders’ dispute ultimately resulted in the company becoming rudderless because all resolutions were being blocked.

Insertion of Texas Shootout Clause not made sufficiently plausible

The Enterprise Court rejected the request because the need to make such a provision (read: insertion of a Texas Shootout Clause) was not made sufficiently plausible, partly because this provision actually amounts to a forced transfer of the share The portion of registered capital of a private or public limited company
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determined by the Enterprise Court.

Shootout clauses in articles of association or shareholders’ agreements

Although the request was rejected in this ruling, it is interesting to take a look at the various mechanisms. In the Netherlands, these clauses often have to be included in articles of association or shareholders’ agreement in advance to be able to force a transfer of the shares from one shareholder to another in the event of an ‘impasse’ or ‘deadlock’ on the part of shareholders.

Four different types of shootout clauses

Shootout clauses come in different shapes and sizes. For example, the (a) ‘Texas Shootout Clause’, (b) ‘Mexican Shootout Clause’, (c) ‘Russian Roulette Shootout Clause,’ and (d) ‘Fairest Bid Shootout Clause.’

Texas Shootout Clause: Shareholder has to make an offer

The Texas Shootout Clause, which was proposed in the proceedings, is known for its speed. One shareholder is obliged to make an offer, whereas the other shareholder is obliged to either accept this offer or make a higher counteroffer. Then, either this new offer will be accepted or a higher counteroffer will be made, and so on.

Mexican Shootout: Obligation to make an offer

The Mexican Shootout Clause is similar to the Texas Shootout Clause but the difference is that both shareholders are obliged to make offers and deposit them with an independent third party (often a civil-law notary). The shareholder offering the highest value will acquire the shares against payment of the price offered by him.

Russian Roulette Shootout: 1 offer, quickest breakthrough

The Russian Roulette Shootout Clause ensures the quickest breakthrough. Only one offer is made. After that, the other shareholder may choose to acquire the shares against the offer price or sell his shares for the same amount. This is an interesting option because it has an effect of an offer being made that is the most reasonable.

Fairest Bid Shootout: In the presence of an independent expert

Finally, it is possible to include the Fairest Bid Shootout in the articles of association or shareholders’ agreement. When this clause is triggered, an expert will be called in as an independent third party to determine a price. Although the independent price determination can be considered an advantage, it does entail additional costs.

Possibilities of shootout clauses

Although the Netherlands Enterprise Court put aside the request for the Texas Shootout Clause in its ruling, this does show the possibilities of such a clause. A joint enterprise could be compared to a marriage: Things will go well initially but may come to a deadlock at some point. In such a case, it is better to be prepared by including such clauses.

New agreement? Clauses? Corporate Law Lawyer!

If you are going into business with someone, it is essential to make sound agreements in advance in case things go wrong later. If you do not have proper agreements, you may end up with lengthy procedures with all the associated costs. When you are going into business and would you like to lay down all agreements properly or you would like more information about this, the Dutch lawyers with AMS are considered specialists in corporate Law.