The shareholders’ agreement, alongside the articles of association, is the principal document governing the mutual relationships between shareholders. In private limited companies, such agreements typically include provisions designed to safeguard the private character of the company. However, these provisions can also become a source of dispute. Read on to learn more:

What Are Permitted Transfer Clauses?

Shareholders’ agreements often impose strict rules on the transfer of shares. These restrictions aim to ensure the stability of the company and to prevent shares from being freely sold to third parties. Nonetheless, in some instances it may be desirable for a shareholder to transfer their shares freely—such as to a wholly owned subsidiary—without triggering obligations towards other shareholders. In such cases, a so-called “permitted transfer” clause provides a solution. However, if such a clause is drafted too broadly or ambiguously, it can lead to conflict. A recent judgment of the District Court of The Hague illustrates the importance of careful drafting of such provisions.

The case in brief

In June 2022, an investor acquired 30% of the shares in a company for an amount of EUR 1,000,000. The remaining 70% of the shares were held by the company’s founder. At a certain point, a corporate restructuring took place within the investor’s group. As a result, with the founder’s consent, the investor transferred his shares to a wholly owned subsidiary. This consent was given on the condition that the investor would retain ultimate control over the shares. This agreement was recorded in a permitted transfer clause.

Subsequently, the investor’s subsidiary transferred the shares to a cooperative established by the investor. This cooperative was managed by both the investor and a third party. The third party acquired a minority interest in the investor’s company. When the subsidiary later merged with the cooperative, the founder claimed that this constituted a change of control. The founder therefore invoked the exception to the permitted transfer clause, arguing that a right of first refusal should have applied—meaning the shares ought to have been offered to the founder prior to the transfer. On this basis, the founder initiated legal proceedings.

The court’s decision

The District Court of The Hague ruled that the transfer of shares to the cooperative fell within the scope of the agreed permitted transfer clause. A decisive factor in this determination was that the transfer occurred within the investor’s group, and that the clause had been drafted in broad terms. Specifically, it stated that transfers to “any entity” within the shareholder’s group were permitted and that such transfers would explicitly not trigger a right of first refusal.

The fact that a third party obtained a minority interest within the cooperative did not, according to the court, affect the application of the permitted transfer clause. The court found it determinative that control remained, in essence, with the original investor—as had been contractually agreed and reflected in practice.

The court implicitly indicated that economic interest and actual control carried more weight than legal form or the involvement of a third party with a relatively minor shareholding.

You can read the full judgment here.

Practical implications

This case highlights the importance of drafting permitted transfer clauses with precision and clarity. The following considerations are key:

• Be clear and specific: Vague terms such as “group entity” or “retention of control” can invite disputes. Clearly define key concepts such as “control,” “subsidiary,” and “economic interest” within the shareholders’ agreement.
• Exercise caution when introducing third parties into the corporate group: The admission of a third party into a group entity (as occurred here with the cooperative) may raise questions regarding the transfer of control. Consider including additional conditions in the clause to address this risk.
• Set boundaries: Clearly delineate the situations in which a permitted transfer is allowed and when the right of first refusal, as provided under the articles of association or shareholders’ agreement, must still apply. For example, consider setting a maximum threshold for indirect third-party interests, or explicitly excluding certain legal forms (such as cooperatives or trusts) from permitted transfers—or subject such transfers to specific conditions. This helps prevent broader interpretations than originally intended by the shareholders.
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Conclusion

Permitted transfer clauses offer flexibility for companies and shareholders, but poor drafting can lead to legal disputes. The case heard by the District Court of The Hague underscores the importance of making clear and comprehensive arrangements concerning the scope of such clauses and identifying what constitutes a change in control.

Do you wish to have your shareholders’ agreement reviewed or have questions about a permitted transfer clause? Feel free to contact one of our specialists.