Veto rights in shareholders' agreements: when does invoking them become unacceptable?

Veto rights in shareholders' agreements: not always enforceable

A veto right in a shareholders' agreement gives a minority shareholder or investor considerable power: certain resolutions cannot be passed without their consent. But can such a veto right always be invoked? The District Court of Amsterdam answered that question in the negative on 5 November 2024 (ECLI:NL:RBAMS:2024:6704). In summary proceedings, the court ruled that the invocation of the veto right by two investment companies was unacceptable under standards of reasonableness and fairness.

Veto rights in practice: why and for whom?

When investing in start-ups and scale-ups, investors often stipulate a veto right over certain shareholder resolutions. This gives them — despite a minority stake — a strong position: without their consent, significant decisions cannot be made. Typical subjects covered by a veto right include:

• Dividend distributions and profit appropriation
• Issuance of new shares
• Major investments or acquisitions
• Amendment of articles of association
• Exit transactions

The veto right is a common instrument in investment agreements, but as this case shows: it has limits.

The facts: nine years without dividends, investors block distribution

StudyPortals is a successful EdTech company connecting students and universities worldwide. The company was founded by three entrepreneurs and has two external investors: VOC Capital Partners and Keen Venture Partners, who together hold 33.07% of the shares.

The shareholders' agreement (SHA) provides that dividend distributions require the consent of all investors (VOC and Keen), effectively giving them a veto over distributions.

StudyPortals has been profitable for years, but no dividends have been paid since 2015 — initially because the company was growing, later because VOC and Keen refused to consent. Their objective: to maximise the full sale value and sell the company as a whole as quickly as possible ('full exit').

On 9 July 2024, a qualified majority of shareholders (66.74%) resolved to make a distribution of €4.5 million from the free reserves. VOC and Keen voted against. Nevertheless, the distribution was made on 12 July 2024. VOC and Keen applied in summary proceedings to have the distribution reversed and future distributions prohibited.

The judgment: invoking the veto right is unacceptable

The court dismisses the claims of VOC and Keen. The reasoning:

1. Starting point: profits should be distributed

Under settled case law, the starting point is that realised profits should be distributed to shareholders, unless the corporate interest dictates otherwise. Indefinitely reserving all profits is generally not justified.

2. Nine years without dividends is excessively long

Since 2015 — almost ten years — no distributions have been made, even though StudyPortals has been profitable for years. The court considers this a relevant and weighty circumstance.

3. The veto right is a standard clause, not specifically negotiated

The parties did not specifically negotiate the veto right over dividend distributions when concluding the SHA. It was included as a standard clause. This means VOC and Keen cannot give it extra weight as leverage for their own exit strategy.

4. Use of the veto right as a coercive instrument

The court finds that VOC and Keen are effectively using the veto right as a coercive instrument to force a full sale of StudyPortals — a purpose not directly flowing from the veto right itself. This use makes invoking the veto right unacceptable under standards of reasonableness and fairness in the given circumstances (Article 6:248(2) of the Dutch Civil Code).

5. The balance of interests favours the other shareholders

After weighing all interests, the court rules that the shareholders' interest in receiving profit distributions outweighs VOC and Keen's interest in maintaining their veto as a pressure instrument for an exit.

Nuance: not for the future

The court explicitly emphasises that this ruling does not mean that future distributions may also be made without VOC and Keen's consent. That will always depend on the circumstances at the time. The veto right itself remains contractually valid — only its invocation may be unacceptable in specific circumstances.

What does this mean in practice?

1. Veto rights are not absolute

A contractual veto right does not provide absolute protection. In special circumstances, invoking it may be tested against reasonableness and fairness (Article 6:248(2) of the Dutch Civil Code). Using the veto right as leverage for a purpose outside its scope is a relevant factor.

2. Prolonged blocking of dividends is risky

As an investor who blocks every dividend resolution for years while the company is profitable, you risk the court finding your invocation of the veto right unacceptable. Profit reservation has its limits.

3. Negotiate veto rights explicitly

If a veto right is truly crucial for you as an investor — including over dividend distributions — ensure it is explicitly and consciously agreed. If it is included as a standard clause without targeted negotiation, you stand on weaker ground when it comes to judicial scrutiny.

4. Specify the exit strategy concretely

VOC and Keen had exit ambitions, but the SHA contained no enforceable mechanism for achieving a full sale. An independent drag-along right had been taken off the table during negotiations. If exit objectives are essential for you as an investor, specify them as concretely and enforceably as possible — and do not rely on indirect levers such as the veto right over dividends.

5. Take account of the corporate interest

Corporate law starts from the premise that realised profits are distributed. A policy of permanent profit reservation requires a convincing justification based on the corporate interest — growth ambitions alone are eventually insufficient.

Conclusion

The ruling of the District Court of Amsterdam makes clear that a contractual veto right cannot always be invoked. When the veto right is used as a coercive instrument for purposes outside its true scope — resulting in an excessively prolonged blockade of dividend distributions — the court may find its invocation unacceptable. For investors, the lesson is: use your contractual rights for the purposes for which they were intended, and specify exit ambitions as concretely and enforceably as possible.

Ruling

This blog post is based on ECLI:NL:RBAMS:2024:6704, judgment in summary proceedings of the District Court of Amsterdam of 5 November 2024.