Investor veto rights, Dutch reasonableness and fairness, and the corporate interest
Category: InsightsInvestor veto rights, Dutch reasonableness and fairness, and the corporate interest
VC investors often receive consent rights in shareholders’ agreements. These rights protect the investor against decisions that may affect the value or risk profile of the investment, such as issuing new shares, selling key assets, amending the articles, taking on major debt or making dividend distributions.
In a Dutch BV, a dividend veto can be important. A growth company may need cash for runway, product development, hiring, acquisitions, international expansion or a future financing round. A minority investor may therefore want the right to block distributions that take cash out of the company.
But an investor veto is not always absolute. Even if a shareholders’ agreement states that dividends require investor consent, the exercise of that veto may be tested against Dutch standards of reasonableness and fairness, the company’s interest and the specific circumstances.
For international founders, VC investors and counsel, the lesson is not that veto rights are ineffective in the Netherlands. The lesson is that they should be drafted, justified and exercised carefully.
This article is part of Dutch BV Governance for US and International Investors and Venture Capital Insights: Dutch BV Financing, Investor Rights and Growth Company Governance.
Why VC investors ask for dividend veto rights
A VC investor often holds a minority position. It does not control the company, but it has contributed risk capital and expects the company to pursue growth.
That is why investor consent rights are common. They give the investor protection against decisions that could affect its economics, governance position or exit prospects.
Dividend distributions are a clear example. A founder or majority shareholder may prefer to distribute excess cash. A VC investor may prefer to keep cash inside the company to fund growth or preserve optionality.
A dividend veto allows the investor to prevent cash leaving the company without its consent. But the right should be tied to a legitimate investment protection rationale, not used as an arbitrary blocking tool.
Dutch BV dividend mechanics
Dividend distributions by a Dutch BV involve both shareholders and the board.
The general meeting may resolve to make a distribution, subject to statutory and articles-based reserve requirements. However, the resolution has no effect unless the board approves it. The board must refuse approval if it knows or should reasonably foresee that the company will not be able to continue paying its due and payable debts after the distribution.
This creates two layers.
The shareholder layer: has the distribution been approved under the articles and shareholders’ agreement, including any investor consent rights?
The board layer: can the board approve the distribution under the Dutch distribution test?
A VC veto usually operates at the shareholder-consent level. The statutory distribution test operates at board level. Both matter.
Dutch reasonableness and fairness
Dutch corporate law includes a general standard of reasonableness and fairness between the company and those involved in its organization. Article 2:8 of the Dutch Civil Code provides that they must behave towards each other in accordance with what reasonableness and fairness require, and that an applicable rule may be disapplied if its application would be unacceptable in the circumstances.
This can become relevant where an investor relies on a contractual veto right.
A veto right is a serious contractual and governance right. Dutch law does not treat it as meaningless simply because it limits the majority. But the way the right is exercised may matter.
Relevant factors may include the wording of the shareholders’ agreement, the purpose of the veto, whether the clause was specifically negotiated, the company’s financial position, the amount of the proposed distribution, growth plans, financing needs, the interests of all shareholders and whether the investor uses the veto to protect its investment or for an unrelated purpose.
The corporate interest and growth financing
In startups and scale-ups, dividends are often unusual. Many growth companies reinvest available cash. VC investors usually invest for capital appreciation, not annual dividend yield.
Still, dividend discussions can arise. A Dutch company may be profitable, cash-generative or overcapitalized relative to its business plan. Founders may argue that shareholders should receive distributions if the company can afford them.
The investor may respond that the cash is needed for expansion, product development, acquisition opportunities, future financing leverage or market uncertainty.
The Dutch board should focus on the company’s interest and financial position. Does the company need the cash for its strategy? Are there concrete investment plans? Is a future financing round expected? Are there covenants, liabilities or operational risks? Would the company remain able to pay its debts after the distribution?
A veto is more defensible where the investor can explain why the cash should remain in the business.
Drafting dividend veto rights
A dividend veto should not be treated as a generic boilerplate reserved matter.
The shareholders’ agreement can explain the purpose of the right. It can tie the veto to runway, budget, minimum cash levels, the business plan, solvency, future financing or growth investment.
The parties can also agree on a dividend policy. For example: no distributions before certain milestones; distributions only above a minimum cash buffer; distributions only if consistent with the approved budget; or distributions only after board confirmation that the Dutch distribution test is satisfied.
It may also be useful to distinguish between ordinary dividends, liquidation proceeds, exit proceeds, recapitalizations and other distributions. These are not the same economic events.
A well-drafted clause reduces the risk that the veto later looks arbitrary.
Role of the Dutch board
The Dutch board should not be treated as a passive implementation body.
Even if shareholders approve a distribution, the board must perform its own Dutch-law assessment. It should consider liquidity, forecasts, working capital, liabilities, financing, operational risk and claims.
Where founders and investors disagree, the board should not simply follow the majority or the investor. It should consider the company’s position and document the analysis.
For international investors, this is an important Dutch implementation point: investor rights operate within a Dutch BV governance framework, not outside it.
Practical conclusion
A VC investor can receive a contractual veto right over dividend distributions in a Dutch BV. That right can be important to protect runway, growth financing and investor economics.
But the right is not a license for arbitrary blocking. Its exercise should fit the shareholders’ agreement, Dutch reasonableness and fairness standards, the company’s interest and the actual financial circumstances.
For founders, the key point is that dividend is not only a majority vote. For investors, the key point is that a veto is stronger when its rationale, conditions and process are clearly documented.
A good dividend veto protects investment strategy. A vague veto may become the source of the next shareholder dispute.
FAQ
Can a VC investor block a dividend in a Dutch BV?
Yes, if the articles or shareholders’ agreement give the investor a valid consent or veto right. The exercise of that right must still be assessed in the relevant circumstances.
Is a dividend veto always enforceable?
Not automatically. Dutch reasonableness and fairness may limit the exercise of contractual rights in exceptional circumstances.
Who decides on dividends in a Dutch BV?
The shareholders resolve on distributions, but the board must approve the distribution under the Dutch distribution test.
Why do VC investors object to dividends?
Because cash may be needed for runway, growth, R&D, hiring, acquisitions or future financing rounds.
How should dividend veto rights be drafted?
They should be tied to a clear rationale, such as minimum cash levels, runway, budget, business plan, growth financing or solvency.
About Dirk de Waard
Dirk de Waard is a Dutch corporate, M&A and venture capital lawyer and partner at Venture Lawyers in Amsterdam. He advises founders, Dutch startups, scale-ups, VC investors and international counsel on Dutch BV governance, shareholders’ agreements, reserved matters, investor veto rights, dividend policies and shareholder disputes.
ViottaLaw is Dirk’s personal insights platform. Legal services are provided through Venture Lawyers.
Reviewing Dutch investor veto rights?
Investor veto rights should be drafted and applied within the Dutch BV governance framework. Dividend policy, reserved matters, board approval, reasonableness and fairness, and the corporate interest should fit together.
Dirk de Waard advises founders, investors and international counsel on Dutch shareholders’ agreements and investor rights. Contact Dirk at dirk.dewaard@viottalaw.com to review a Dutch BV governance structure or dividend veto right.
