Introduction

The Court of Appeal in Amsterdam made an important disciplinary ruling regarding a notary on March 26, 2024. The notary in question was criticized for having too narrow a view of their role in a share transfer. Paul Quist wrote an article on this ruling, delving deeper into its content and its significance for the legal practice, in the Legal Journal for Notaries (JBN). His article also offers some practical recommendations and concludes with the moral of the story.

What happened?

The situation, somewhat simplified, was as follows:

X and Y are independently authorized directors and sole shareholders of Z BV. A notary, acting on behalf of Y’s accountant, executed deeds transferring two subsidiaries of Z BV to a company affiliated with Y for a purchase price of €1. X was not informed of this (proposed) transfer of shares by Y. As a result, X filed a disciplinary complaint against the notary. X argued that the notary should not have proceeded with the share transfer without further investigation. Specifically, X argued that: (i) the notary should have ensured that X had agreed to the share transfer, and (ii) the notary should have conducted further research into the necessary underlying documents.

Contrary to the Notarial Chamber (Chamber for Notarial Affairs ‘s-Hertogenbosch, July 17, 2023, SHE/2022/29/SHE/2022/38, ECLI:NL:TNORSHE:2023:12, also reported in Notamail 2023-169), the Court of Appeal ruled in favor of X and imposed a reprimand on the notary. The Court stated that a notary must ensure that the representative has the authority to act on behalf of the company in executing the legal actions in the deed. This duty to investigate generally does not extend to checking internal statutory approval or consent requirements and decision-making within the company (cf. Court of Appeal Amsterdam, September 20, 2022, ECLI:NL:GHAMS:2022:2664, FTV 2022-35 and 2023-25). However, special circumstances may require the notary to investigate the internal decision-making process in the particular case.

The Court held that such special circumstances existed in this case due to the following factors:

– The BV was established via a power of attorney, with X and Y founding a joint-venture company that could be represented by either of the founding directors;
– The transfer removed two operating companies from the joint venture for a purchase price of €1, with the (indirect) interest in the acquiring company belonging solely to one of the two co-shareholders (Y);
– The notary was well-acquainted with the (accountant of the) client (Y) but did not know the other party involved in the transfer (X);
– The notary did not have the underlying transaction documents: a board resolution or purchase agreement (with an associated balance sheet) was missing;
– The notary did not inquire about the method used to determine the €1 purchase price and did not check or verify whether X was aware of the transaction.

The Court ruled that the notary should not have limited their investigation to just verifying the external authority to represent the company. In this case, given the agreed purchase price, the lack of underlying documents, and the significant consequences for X, the notary should have ensured that all parties (including X) were informed of the proposed transaction and that they could consent to its content and consequences. This is especially true since the notary testified in the appeal hearing that they would not have cooperated if they had known that X did not agree to the transfer. The fact that the notary was unaware of the conflict between X and Y did not excuse this oversight.

What is the role of the notary in transactions like these?

First and foremost, it is the notary’s responsibility to perform all anti-money laundering checks and investigate the origin of the funds to be paid as the purchase price when opening their file. Their involvement must result in a valid, preferably irrefutable, share transfer. This involves preparing a deed and conducting all necessary investigations and collecting the supporting documents required for a valid transfer. For a valid transfer, the following is required: (a) a delivery (b) based on a valid title (c) by a dispossessing party with the authority to do so (Article 3:84 Dutch Civil Code). The notary must also verify the acquisition by the transferor (Article 2:196(2)(a) Dutch Civil Code), ensure that any blocking arrangements have been followed, under penalty of invalidity (Article 2:195 Dutch Civil Code), and verify that the legal act does not lead to a breach of the transferor’s or transferee’s company’s objectives. A breach of the objective rule would render the transfer void under Article 2:7 Dutch Civil Code. Finally, the notary is expected not to participate in the transfer if they know that third-party rights would be violated (Supreme Court, April 3, 2015, ECLI:NL:HR:2015:831 (Novitaris)). Indeed, all of this is hardly feasible for EUR 350.

Which legal rule did the notary violate here?

The Court held that the notary had failed to fulfill their duty of investigation properly. Although the specific norm violated is not mentioned, I believe the criticism of the notary can be traced back to one of the core provisions of the Notaries Act, namely Article 17(1) Wna, which states: “The notary exercises their office independently and safeguards the interests of all parties involved in the legal act impartially and with the utmost care.”

Practical recommendations

From this ruling, the following concrete recommendations can be made based on practical experience. First, a related-party transaction – i.e., a transaction between a company and a party that is functionally or economically affiliated – should be a point of focus. In such cases, it is crucial to inquire further. It is also advisable to determine whether the board has decided to proceed with the transaction, or if a board regulation specifies that this is not necessary in the particular case. Furthermore, the notary should check if other approvals are required from company organs such as the general meeting or supervisory board according to statutory provisions. The validity of the purchase price must be questioned, especially if it is clearly low (such as the minimal price of €1). In such cases, it seems that the notary should have requested a balance sheet. It might also be wise to include a clause in the deed of transfer stating that all internal decisions and approvals, where necessary, have been taken or granted. However, such a provision should only be added after the notary has made the necessary inquiries and cannot serve as a substitute for them.

Mr. Dr. P.H.N. (Paul) Quist

Civil law notary in Amsterdam