May a shareholder independently claim loss caused by a third party relating to a decline in value of shares?
The Court of Appeal in Amsterdam recently ruled on the question whether individual shareholders may independently, without involving the board, claim loss caused by a decline in the value of their shares because a third party was in breach of contract in respect of the company or committed an unlawful act. This is known as derivative loss. The consistent position adopted in case law is that an individual shareholder may not independently file a claim, this must be done by the company.
The Supreme Court found that this underlying principle may only be deviated from if the shareholder suffered derivative and direct loss, and if the third party also violated a specific standard of care in respect of the shareholder. This is not often the case.
Violation of a specific standard of care against a shareholder exists, for example, if the company is harmed through the preconceived purpose of harming the shareholder in his private capacity. A preconceived purpose must therefore exist whereby the intention is to also harm the shareholder’s interests.
The shareholder must prove this which is often quite difficult. Furthermore, the Supreme Court ruled in 2007 that because the companies are unable or have declared themselves unable to claim loss compensation and as a result such derivative loss has become irrefutable, this, in itself, does not mean that the shareholder can claim that loss. In itself this does not imply that the conduct of a third party vis-à-vis the shareholders should be deemed unlawful.
Consequently, very few judgments have been given in which the claim of an individual shareholder has been granted. One of the rare exceptions is the case in which the shareholders Kip and Sloetjes claimed loss suffered as a result of the decline of the value in their shares from the Rabobank. The Supreme Court found that the bank had personally acted unlawfully vis-à-vis the shareholders. This judgment also took account of the fact that the value of the shares declined drastically as a result of the bank’s conduct but, in particular, because the shareholders were pressurized by the bank to sell their shares to a third party at a very unfavourable time. As a result the ensuing devaluation of their shares was deducted from their equity and could therefore not be corrected by possible compensation by the bank to the company. Some hold the view that in this case the loss was actually caused by the fact that the price for which the former shareholder had sold the shares was too low and, for this reason, it was not or no longer a consequence of direct loss caused to the company, or derivative loss for the shareholders.
Hence, as shareholder, it is extremely difficult to claim loss suffered as a result of the devaluation of your shares from a third party. If an exceptional situation exists and the shareholder is able to claim the loss, then the shareholder must do so without delay. In the recent ruling given by the Amsterdam Court of Appeal referred to above, in which the shareholder asserted that the third party from whom he was claiming compensation had sold him a volume of shares under false pretences for € 4 million, which shares later appeared worthless, the Court of Appeal found that even if the shareholder had had an own right of action, the shareholder should have informed the third party in good time of his failure in his obligation to provide information. Failure to notify in good time could result in the lapse of the right to complain and claim loss.
What action can be taken if the shareholders do not have their own right of action and the company’s board refuses to file a claim for compensation of the loss? The Supreme Court finds that the law of legal entities provides sufficient safeguards enabling the shareholder to coerce the board to file a claim against the other party for compensation of the loss it has suffered. The possibilities cited in the literature are (1) the dismissal of the unwilling director by the Shareholders’ Meeting, (2) immediate relief in inquiry proceedings before the Enterprise Division comprising an order that the board must claim the loss from the third party, (3) a prohibition order for the filing of the claim in preliminary relief proceedings, and (4) the dispute settlement rules with the aim of having the company take over the shareholder’s shares and with a fair increase on the value of the shares in connection with the conduct of the company comprising the refusal to claim loss from the third party.
A shareholder still too often attempts to claim the derivative loss itself. Nevertheless, the courts are strict and claims are consistently dismissed if exceptional circumstances do not exist. Fruytier Lawyers in Business will gladly advise you on action to be taken to achieve results. For more information please contact MMeermans@flib.nl.