Management and mismanagement

Directors of a private limited company often have multiple roles, as a result of which they sometimes have different interests in what goes on in the company. A director is often also a shareholder and his interests as a shareholder may conflict with the interests of the company. Shareholders, for example, wish to distribute as much profit as possible within a short period of time, while the company would benefit more from a long-term strategy. A director can also (through another company run  by him) be a supplier of the company he manages, so that it is in his interest to accept conditions that are favourable for the supplier.

These are just a few examples of the various interests: the director’s own interests, the company’s interests and the interests of the shareholders. These interests are often, but by no means always, in line with each other.

Statutory duties and conflict of interests

Under the law, in performing their duties directors of a private limited company must be guided by the interests of the company and its business. If a director has a direct or indirect personal interest which conflicts with the interests of the company, he cannot take part in deliberations on the matter at hand.

That’s clear, isn’t it? Unfortunately, in practice things quite often go wrong and many legal actions are brought against directors who, in the opinion of shareholders or fellow shareholders, have overstepped the mark.

But what is mismanagement and what can be done about it? As explained above, the interests of shareholders are not always in line with the interests of the company. Directors therefore do not necessarily have to serve the interests of the shareholders.

According to the law, mismanagement exists in the case of negligent or objectionable acts of such serious nature that they must be considered contrary to the elementary principles of sound business practice. A rather broad description which must be assessed on the grounds of the specific circumstances of the case.

In situations where a conflict has arisen between the shareholders in a joint venture, there is a danger of dissatisfied directors putting their interests above those of the company or their partners, thereby taking matters into their own hands in a manner that does not benefit the company. Similar situations occur where siblings are at odds with each other as shareholders of the family business inherited from their parents.

Corporate governance

Prevention is better than cure, which is why it is important for all parties involved to keep each other on their toes and to raise the alarm in good time when the situation threatens to get out of control. It is important in this respect to make arrangements in the shareholders’ agreement on the provision of information and the way in which the management conducted is accounted for. Directors must furthermore comply with the statutory regulations for keeping proper records, holding general meetings and adopting and filing financial statements.

Investigation proceedings

If things do indeed go wrong, there is always the option of invoking the right of investigation. Interested parties may submit a request to the Enterprise Court at the Amsterdam Court of Appeal to appoint one or more persons to conduct an investigation into the policy and affairs of a legal entity. Should this investigation uncover any mismanagement, the Enterprise Court can take the following measures:

  1. suspend or annul a resolution by the directors, supervisory directors, general meeting or any other body of the legal entity;
  2. suspend or dismiss one or more directors or supervisory directors;
  3. temporarily appoint one or more directors or supervisory directors;
  4. temporarily depart from the provisions of the articles of association stipulated by the Enterprise Court;
  5. temporarily transfer the management of the shares;
  6. dissolve the legal entity.

All these measures will have a serious impact on the company’s affairs and may even bring the company to a standstill. We therefore recommend, in order to prevent any of the situations described above, to consider the set-up of the management board in advance and have the relevant arrangements laid down in the articles of association and the shareholders’ agreement. We will of course be happy to help you. And if you do find yourself in a conflict situation, we can also assist you or act as mediator.