The Cancun ruling: company interest, joint ventures and the duty to inform upon share transfer

The Cancun ruling: company interest, joint ventures and the duty to inform upon share transfer

What is the 'company interest' in a joint venture? And may a shareholder silently transfer shares without informing fellow shareholders? The Dutch Supreme Court answered these questions on 4 April 2014 in the landmark Cancun ruling (ECLI:NL:HR:2014:804, Inversiones c.s./Cancun Holding I c.s.). This judgment remains a cornerstone of Dutch corporate law and continues to govern how directors and shareholders must operate within joint ventures.

The facts: a hotel in Cancun, two families and a broken balance

Holding I (belonging to a Dutch family) and Inversiones (belonging to a Spanish family) each held 50% of the shares in Cancun Holding II B.V. ('the Company'), which in turn operated a hotel complex in Cancun, Mexico through its Mexican subsidiary Efesyde S.A.

The problems unfolded in two steps:

Step 1: the first dilution

Inversiones held a claim of over USD 14.5 million against Efesyde for construction work on the hotel. Banco Sabadell, Efesyde's lender, required as a condition for additional financing of USD 12 million that this claim be removed from Efesyde's balance sheet within 15 days — otherwise the existing USD 60 million syndicated loan would become immediately payable.

To prevent this, Inversiones and Holding I agreed that Efesyde would issue new shares to Inversiones, to be paid up by set-off against the claim. As a result, Inversiones' interest in Efesyde rose from 0% to 78%, while the Company's interest fell from 99.9% to 22%. When Banco Sabadell ultimately refused the additional financing anyway, Holding I sought to restore the original shareholding ratio. Inversiones refused to cooperate.

Step 2: the second dilution and secret transfer

Financier Invernostra had earlier obtained a 7% interest in the Company through conversion of a loan. On 1 October 2009, Invernostra silently transferred its shares to Inversiones, giving Inversiones a majority interest of 53.5% in the Company. Holding I was not informed. The original equality between the two joint venture partners was now completely broken.

On 3 November 2009, an extraordinary shareholders' meeting of Efesyde was held in Mexico, further diluting the Company's interest from 22% to 0.13%. Holding I had no knowledge of this meeting and did not attend.

The proceedings: Enterprise Chamber and cassation

Holding I petitioned the Enterprise Chamber (Ondernemingskamer, 'OK') for an inquiry into the policy and conduct of the Company. The OK concluded that mismanagement had occurred on several grounds:

1. The board had failed to adequately document the arrangements surrounding the first dilution and had not considered the risks.
2. Inversiones and Invernostra had not informed Holding I of the share transfer, in violation of the standards of reasonableness and fairness.

Inversiones argued that in a joint venture the company interest coincides with the interests of the shareholders — all shareholders had, after all, agreed to the first issuance. The Supreme Court rejected this argument.

The Supreme Court's ruling: two core principles

Core principle 1: company interest in a joint venture

The Supreme Court restates and refines the general rule:

Directors must, in the performance of their duties, act in the interest of the company and the enterprise connected to it. Where the company is connected to an enterprise, the company interest is in principle determined by promoting the sustainable success of that enterprise.

For a joint venture, the Supreme Court adds a specific dimension:

In the case of a joint venture company, the interest of the company is further determined by the nature and content of the cooperation agreed between the shareholders. The nature and content of the cooperative relationship in a joint venture company in which the shareholders hold equal shares may mean that the company interest is also served by the continuation of balanced relations between the shareholders; this may mean that the relations between the shareholders may not change further than is required in the light of the circumstances.

The company interest is therefore not identical to the interest of the (majority) shareholder. In an equal joint venture, it also encompasses the interest in maintaining a balanced shareholding structure.

Core principle 2: duty to inform upon share transfer under Article 2:8 of the Dutch Civil Code

A second fundamental rule concerns the duty to inform. The Supreme Court holds:

The duty of care under Article 2:8 of the Dutch Civil Code may mean that directors — even in the absence of a statutory or articles-based obligation — are required to inform shareholders of an intended share transfer by one of the shareholders.

In other words: even without statutory transfer restrictions or pre-emption rights, a duty to inform fellow shareholders may exist on the basis of the standards of reasonableness and fairness under Article 2:8.

What does this mean in practice?

1. Document joint venture arrangements in detail

The Cancun ruling underlines that the board in a joint venture has an independent responsibility to adequately document the arrangements between shareholders. Who is entitled to acquire what interest? To what extent? Under what conditions? What if the planned financing falls through? All these questions should — preferably in a shareholders' agreement — be addressed before the cooperation begins.

2. Company interest is not the same as the majority's interest

Directors in a joint venture company cannot simply act in the interest of the shareholder who appointed them. They are bound by the company's own interest, which in an equal joint venture includes the continuation of balanced shareholding relations. This also means that instructions from a dominant shareholder cannot be followed unquestioningly if doing so would damage the interests of minority shareholders.

3. Inform fellow shareholders of an intended share transfer

A transfer of shares in a joint venture company without notifying the other shareholder may violate Article 2:8 of the Dutch Civil Code. This applies even if the articles of association contain no transfer restriction or pre-emption right. When in doubt, always consult the other shareholder before completing a transaction.

4. Inquiry proceedings as a tool in joint venture disputes

When a joint venture becomes deadlocked and a shareholder believes mismanagement has occurred, the inquiry procedure before the Enterprise Chamber provides a powerful instrument to compel investigation and obtain interim measures. The Cancun ruling demonstrates that this can be effective even when the counterparty is involved at multiple levels of the corporate structure.

5. Pay attention to international structures

In the Cancun ruling, a Mexican subsidiary played a central role. In internationally structured joint ventures, it is important to determine which law applies to which layer of the structure and where decisions can be challenged.

Conclusion

The Cancun ruling (ECLI:NL:HR:2014:804) is a landmark in Dutch corporate law. The Supreme Court clarifies that in a joint venture the company interest is partly determined by the nature and content of the cooperation between shareholders, and that the board — even without a statutory or articles-based obligation — may be required under the duty of care of Article 2:8 to inform shareholders of an intended share transfer. For directors and shareholders in joint ventures, this ruling provides both a warning and a guide.

Ruling

This blog post is based on ECLI:NL:HR:2014:804, judgment of the Dutch Supreme Court of 4 April 2014 (Inversiones c.s./Cancun Holding I c.s.).