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Company: Explanation of articles of association - objective or subjective?

Publication date: 27 September 2016
What does a judge consider in a conflict on the explanation of the articles of association – the text only or will he also consider other criteria?

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When establishing an nv, bv, association or foundation, the mutual relations within the organisation will be documented in the articles of association by a civil-law notary. The articles of association form the basic rules of the legal entity. For instance, they govern the rules of the company, the appointment and dismissal of directors, the way the general meeting of shareholders is to be convened and what the rules regarding the issuance of shares are.

Explanation problem

In case of derogation from the law when drawing up the articles, a dispute on the meaning of the statutory provisions may arise. The parties may assign a different meaning to a provision. The articles of a foundation provided that board members could only be dismissed unanimously. When two board members were nominated for dismissal they voted against each other’s dismissal. So how unanimous must “unanimously” be then? How does the provision have to be explained? Does it have to be taken literally and hence explained objectively, or does the intention of the parties regarding a certain provision also play a role?

Main rule: objective explanation

The main rule is that the articles must be explained objectively. Therefore, in principle, the intention of the parties when drawing up the provision must not be considered, what must be considered is its pure linguistic meaning only.

There are several reasons for the objective explanation to be the principle in legal practice, such as:

  • The articles of association must bind a lot of people in the same way.
  • New people may join the company and people may leave it.
  • Externals may derive rights from the articles when contracting with the company which cannot be limited without good reason by a subjective explanation of the provisions.

Exception: subjective explanation

In some cases the main rule will no longer be applied or only applied to a limited extend. In these cases the court will opt for a subjective explanation where another meaning than the purely linguistic one will be assigned to the provisions. In these cases, generally the intention of the parties and reasonableness and fairness will be considered.

The intention of the parties regarding a statutory provision may play a role in the following cases:

  1. The parties were involved in the drawing up or modification of the provision, or
  2. There is a contractual relation between the parties that is linked to the provisions, such as, for instance, a shareholders agreement or a cooperation contract.

In addition to what is described above, reasonableness and fairness may also play a role for the explanation of statutory provisions. After all, the legislator has provided that the relations between the institutions shall be governed by reasonableness and fairness. This can result in a subjective explanation of the provisions. For the dismissal of the board members, the court of appeal considered that an objective explanation would lead to an unreasonable result and that the decision notwithstanding the dissenting vote of the two board members concerned was taken in a sufficiently unanimous manner to fulfil the statutory requirements.

Conclusion

The principle is therefore an objective explanation of statutory provisions, however in some cases the intentions of the parties when including the provisions in the articles and reasonableness and fairness will be considered as well and hence a more subjective explanation will apply.

More information

Are you in doubt as to how articles must be understood or applied or do you have any other questions regarding the articles? Please contact us:

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