The leonine clause in the CCA – risk-free shareholdership henceforth possible

To limit the risk which is inherent to entrepreneurship, entrepreneurs can choose to conduct their business through the use of a company. Depending on the type of company, the shareholders can benefit from a limited liability. This implies that their loss, if any, will be limited (in principle) to the loss of their contribution in the company. Is it possible for a shareholder to go even further and even safeguard his contribution in the company? In other words, can he participate as a risk-free shareholder in the company?

The most common strategy to create a risk-free participation makes use of put options. Shareholder A (the risk-free participating shareholder) holds a put option on his shares, which gives him the right to sell his shares to shareholder B, while shareholder B commits himself to buy these shares. The transfer price is determined as equivalent to the subscription price at which shareholder A acquired his shares. If the suffers losses, resulting in a reduction of its net assets, and subsequently in a drop of the shares’ book value, shareholder A can exercise his put option and safeguard himself against contribution in the loss. After all, he will be paid the contribution price by shareholder B.

The legal validity of this construction has been subject of much discussion, because the freedom of shareholders to agree on the allocation of the company’s losses and profits, has been restricted by the twofold prohibition set out in article 32 of the former Company Code (CC), the so-called “Leonine clause” (“Leonijns beding/Leeuwenbeding”). This clause prohibited to 1) allocate the entire profit to one of the shareholders and 2) to exempt one or more shareholders from any contribution in the losses. Agreements that were executed in violation of this twofold prohibition were considered null and void.

Some case-law and legal doctrine considered the put option construction described above as an infringement to the second prohibition and therefore null and void. The Court of Cassation, however, acknowledged the legal validity of the put option construction in two of its judgements, provided that certain conditions are fulfilled, and thus restricted the scope of application of the Leonine clause. However, some uncertainty still remained about the exact interpretation of these conditions, and therefore the legal validity of this construction could not be guaranteed.

The legislator has clarified this issue by deleting the second prohibition of the Leonine clause in the Code for Companies and Associations (CCA). Henceforth, only agreements allocating the entire profit to one shareholder or depriving one or more shareholders of his/their share in the profits are prohibited. It is however no longer prohibited to exempt one or more shareholders from his/their contribution in the losses. The legislator justifies this modification in the Explanatory Memorandum by referring to the theory of qualified disadvantage (“gekwalificeerde benadeling”) which should provide adequate protection to non-risk-free participating shareholders. However, it remains to be seen whether the theory of qualified disadvantage will provide adequate protection for those shareholders, given the fact that in the past courts seldom accepted a situation to constitute a qualified disadvantage.

Daan Born, intui lawyers