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The shareholder’s right to issue instructions to the director

The shareholder’s right to issue instructions to the director

Based on the law (Article 2:239 (4) of the Dutch Civil Code), a company’s articles of association may stipulate that the management must follow the instructions of another company body. This will generally be the meeting of shareholders. Currently this authority to issue instructions can only pertain to the general lines of the policy to be pursued. In the context of making private limited company law more flexible, in all likelihood a new law will take effect that no longer limits the right to issue instructions to general lines, but also enables the right to issue concrete instructions.

This provokes the question of to what extent a company’s director must follow the shareholder’s instructions. This question is not an easy one to answer. In this context, it depends on whether the director is director of a company that is part of a group or not. Dutch law assumes that every company in principle acts independently and autonomously. If a company is part of a group, this assumption is not very useful. That is why it is increasingly recognised in case law that if the company is part of a group, the director will more likely have to follow the instructions from the shareholder.

A good example of this is if the parent company enters into group financing which requires that the director of the underlying company must accept that the company must furnish securities in that context, even if the company does not profit directly from the financing arranged. In all cases the director must keep in mind the interest of the company and its business. That is also where the line is drawn: if following the instruction would conflict with the company’s interest, the director does not have to follow the instruction. If a company is part of a group, the ‘interest of the company’ means that account must also be taken of the interest of the group. Whatever is in the interest of the group is deemed also to be in the interest of the company.

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