Magazine DVDW | “Going Dutch?”

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“Going Dutch?” A brief legal guide to doing business in the Netherlands

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Preface Going Dutch? “Going Dutch” is a well-known and widely used expression for splitting the bill, and one that even occurs in business settings. It is not the only famous expression or idiom involving the Dutch: the English language also refers to a Dutch agreement or Dutch courage, both of which involve quantities of alcohol. Other expressions include a Dutch auction, double Dutch, a Dutch treat, a Dutch defence and Dutch gold. Clearly, none of these sayings are very flattering towards the Dutch. What they have in common, however, is that they have become part of the English language as a result of the Netherlands’ long history of global trade and international involvement. While thankfully the idioms themselves are largely outdated, international business in the Netherlands is booming. Besides tax incentives, the country also offers unique opportunities for business. The Netherlands has a proven track record as a stable, internationally oriented country with

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an open economy, a competitive business climate and a great infrastructure, strategically located at the gateway to Europe and leading the way in technology and innovation. The Dutch judiciary has a reputation for being among the most efficient, most reliable and most transparent worldwide. This makes the country a good choice for doing business. You or your clients might therefore find yourselves considering the possibility of establishing your own presence in the Netherlands or doing business with a Dutch company. With so many international groups having their holding companies in the Netherlands, you might also find yourself involved, no matter how hard you try to avoid it, in a legal dispute with a Dutch party. Whatever the case, DVDW is centrally placed to assist you, with offices in both The Hague and Rotterdam, in close proximity to Schiphol and The Hague-Rotterdam Airport, the Port of Rotterdam and Amsterdam.

aspects and the experiences with the newest Dutch restructuring tool, and discusses ESG and corporate social responsibility, voting agreements in private equity and what to expect when facing the possibility of a shareholder dispute. The guide also explains the main issues of Dutch law with respect to loan and security documentation, what to expect in connection with reasonable contract interpretation in the Netherlands and the differences between Dutch and US/English mergers & acquisitions. It provides a sneak preview, so to speak, of Dutch legal aspects for you to browse through if you or your clients are involved in or are considering entering into business in the Netherlands.

This legal guide provides an anthology of practical legal aspects of doing business in the Netherlands, bringing together information on some of the core issues that our international corporate clients and business relations have encountered in the recent past. It contains contributions on employment law, renting in the Netherlands, insolvency

We hope that you enjoy this guide and find it of practical use.

Please feel free to reach out to myself, any of the authors in this guide or anyone else at DVDW to discuss aspects of doing business in the Netherlands that are relevant to you or your clients.

All the best, Marjon Lok Partner Corporate Litigation & Dispute Resolution

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DVDW’s areas of expertise Have a look at our website (www.dvdw.nl/en) to discover more about our areas of expertise. We understand business, and we understand that what you want from your Dutch attorney is advice that is to-the-point. We make it our priority to be clear. Whatever your next move is, we are your sparring partner.

Family & Inheritance Law

Disciplinary & Professional Liability law

Corporate Governance

Corporate Litigation & Dispute Resolution

Mergers & Acquisitions

Restructuring & Insolvency

Liability & Contract

IT & Privacy

Employment Law

Property Law

Healthcare & Business

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Rotterdam Weena 690 3012 CN Rotterdam T: +31 (0)10 440 05 00 info@dvdw.nl

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The Hague Prinses Beatrixlaan 5 2595 AK The Hague T: +31 (0)70 354 70 54 info@dvdw.nl

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Contents

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Shareholder disputes in Dutch legal entities (with musical accompaniment) Marjon Lok

You have my vote! Voting agreements for private equity Anique Noordam

The link between ESG, CSR and corporate governance: Why it matters to business Rebwar Taha

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Loan and security documentation in the Netherlands Eveline Kruisifikx

The reasonable interpretation of a contract under Dutch law Rien Visscher and Stijn Houben

Buyer beware: differences between Dutch and US/ English mergers & acquisitions Luitzen van der Sluis, Martijn Lenstra and Bas Augustijn


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The best tip to prevent directors’ liability under Dutch law Marlies Siegers

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Highlights main Dutch employment law topics Rob Simons

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Insolvency in the Netherlands Juliette van de Wiel and Ruben Berghuis

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Renting and letting in the Netherlands Iris Reidsma

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WHOA! Experiences with a new restructuring tool (the Dutch Scheme) Marjon Lok interviewing Wieneke Lisman, Ruben Berghuis and Erwin Bos

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Shareholder disputes in Dutch legal entities (with musical accompaniment) Marjon Lok

Below you will find a bird’s eye view of some of the instruments available to shareholders in Dutch entities in the event of corporate disputes – with musical accompaniment, courtesy of the Rolling Stones.

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Anybody Seen My Baby?

The Dutch jurisdiction is often chosen for holding companies in international structures. Reasons vary: for its prime location for business in Europe, for operational activities in the Netherlands, for tax reasons or because it is a neutral jurisdiction. The reputation of the Dutch judiciary is ranked among the most efficient, reliable and transparent worldwide. When a Dutch legal entity is chosen (e.g. as a group’s holding company), Dutch corporate law will apply not only to the entity, but its corporate bodies as well, including the shareholders’ meeting. National and international disputes between shareholders, disputes within the group structure and disputes between shareholders and the board of directors: all may be governed at least in part by Dutch corporate law. Shareholder disputes often contain similar facets whatever the financial interests at stake, and history almost always repeats itself. One major difference with many other jurisdictions (in particular common-law jurisdictions) is that the Netherlands follows a stakeholder model rather than a shareholder model. A company’s board of directors and supervisory directors are legally obligated to pursue the company’s


corporate interests. Note that this also applies to trust directors. A company’s corporate interests are comprised of the interests of all its stakeholders, including for example the interests of its employees, suppliers and creditors, and sometimes even the public interest. The corporate interests might change in different circumstances, such as financial distress. The corporate interests of a company are therefore not necessarily the same as the interests of its shareholders or even of the group to which the company belongs. The company’s interests are usually determined primarily by what is considered necessary for the continued success of its business undertaking.

Negotiation is not about horse-trading or playing games. It is about understanding the conditions under which the other party will have an interest in reaching a particular agreement.

even be obliged to accept that the company’s interests have to be subordinated to the interests of the group as a whole. However, group management is not free to always subordinate the interests of an individual company within the group to what it sees as the interests of the group overall. And even though the shareholders may include an instruction right for the board of directors in the articles of association of a Dutch private limited liability company, that board can never be obligated to act in conflict with the company’s own interests. Equally, it is common to see shareholders agreements stating that specific shareholders may appoint one or more supervisory directors and that such directors must act in the interests of the appointing shareholders. The second part of that clause has little meaning in the Netherlands, if any at all: members of both the board of directors and the supervisory board are still legally obliged to act and make their assessments independently from the company’s shareholders.

When a group is involved, it could be argued that group policy is essential for that success. Indeed, the board of directors will not, without good reason, be allowed to pursue any policies that are wholly incompatible with the corporate group’s strategy and in some situations will

But that is not all. Dutch law states that legal entities and all parties involved in their organization (such as shareholders and directors) must behave towards each other in accordance with what is required by standards of reasonableness and fairness. Any rules that are in place

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between them have no effect as far as their consequences, in the given circumstances, are unacceptable by standards of reasonableness and fairness. This legal principle plays a major role in almost all corporate governance litigation, and should therefore be top of mind even when the merest hint of a potential dispute arises and in any efforts to settle the dispute. It also entails that, although shareholders of a Dutch entity may act in their own best interests when exercising their voting rights, to a certain extent they will have to make allowance for the company’s “own” interests and even take into account a duty of care towards other individual shareholders. However carefully aligned parties may seem initially, interests can diverge at any given time. The future might not turn out as expected, or persons or parties might not perform as expected. Cultural differences could come into play. The level of trust and confidence in each other, once essential, becomes scarce. Deadlocks might arise and decision-making be impaired. Governance disputes, investment disputes and post-acquisition or partnership disputes can emerge. Where did that golden investment go? Anybody Seen My Baby? The need to intervene arises. Enter the lawyer.

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Almost Hear You Sigh: the need for speed vs. careful drafting

The first step towards preventing disputes is careful drafting. So many misunderstandings about why parties do business with each other could be prevented with good contracts and articles of association. “Obviously,” I can already hear the reader sigh. But this is not so much about creating a legally strong position, although that of course also plays a role. Especially in international relationships where boilerplate language in one country might have a completely different impact in the Netherlands. Especially where the same language is already established through case law to have a different meaning (for example: the term “good faith”). But perhaps more than creating a strong legal position, it is about clarifying what the parties expect and want from each other. A Dutch court will always consider what the parties intended, not only in the context of an agreement, but also in the context of the workings of the Dutch legal entity itself. For example, in the case of a joint venture company, its interests are determined by the nature and content of the cooperation agreed between the shareholders. Determining the parties’ intentions is therefore of huge importance if litigation ensues in the Netherlands. Besides the above, clarifying expectations and preferences also plays a huge

role in avoiding litigation altogether, because the parties are more aware of what they should and should not expect from each other. This means looking beyond the sometimes urgent need or desire to get the deal done. Parties that trust each other – and want to avoid giving any impression to the contrary – are inclined to skip this part or to do it with a minimum of documentation. Like a couple who are engaged to be married, the parties might not want to stipulate terms that could imply that the possibility of the relationship going pear-shaped is even a serious consideration: why would you embark upon the relationship assuming that it will strand? Sometimes a shareholder thinks they can sort matters out if and when a problem arises. This is unfortunately often a misconception. Shareholders need to talk with and to each other and the board about their business principles, basic assumptions and expectations. The concern that this might come across as distrustful is misplaced. A professional and business-like approach is proper for making a business investment, and generally only inspires confidence. It is perhaps one of the greatest frustrations of lawyers: to see that a dispute that costs parties so much time and money and sleep could have been avoided quite easily.

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As an aside: the quickest and cheapest route to a forced breakup of shareholders is by enforcing contractual obligations, for instance to offer shares in certain clearly specified circumstances, or shoot-out provisions. When reviewing dispute resolution clauses, keep in mind that shareholder disputes often arise when the need for action is pressing, for example when additional financing is urgently required. A good dispute clause includes the possibility for expedient action when the circumstances demand.

You Can’t Always Get What You Want: negotiations Sometimes a dispute simply cannot be avoided – no matter how carefully the agreements have been drafted. In that situation, it is important to make the most efficient use of the instruments that are available to the shareholder in those agreements, the articles of association, whatever internal rules and regulations are in place and possibly also sector-specific codes and the law. At the same time, for the purposes of risk management it is also important to keep an eye on building a sufficient paper trail. Shareholders should consider what the achievable and desirable goals are (including in the long term) and so determine a desired strategy. Do not simply pursue the short-term goals and think that the rest will be taken care

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of later. “The rest” might turn out to be a major obstacle in settlement efforts and litigation. Good negotiations can ensure that shareholders achieve the desired solution without facing protracted and costly litigation. Negotiation is not about horse-trading or playing games. It is about understanding the conditions under which the other party will have an interest in reaching a particular agreement. This might be because you are in a stronger position from a legal perspective, but also because there are commercial interests at stake. What is important for one shareholder is not necessarily important for the other, and vice versa. If the other party is aggressive and/or litigious, it is important to anticipate their steps and take the necessary measures or carry out pre-emptive strikes. Of course, you will often need to compromise when finally settling. You can’t always get what you want – no matter how much a shareholder is willing to invest in litigation. Incidentally, all this does not mean that negotiating has to be a long process. Sometimes it can be very quick. It is possible to identify a quick route to a specific outcome, provided that you can make a good assessment of the other party, financially and psychologically. Take the Texas and Mexican shootout,


for example, or the fairest bid and Russian Roulette in the context of share transfers or deadlocks. Of course, more nuanced negotiation methods might also be appropriate – this is about breaking impasses, increasing control, enabling decision-making or investment financing opportunities, restoring relations, reaching an agreement on compensation or a definitive separation by means of an exit, demerger or transfer of shares. Like in any jurisdiction, a carefully thoughtout strategy and realistic final objectives can take you a long way in negotiations. The fact that Dutch lawyers are generally more than happy to ”put the boot in” can – at appropriate times – work very well to get matters moving.

Start Me Up: enforcing the law

If there is no room or time to negotiate, or if a purely legal question is at stake, it might be time to start legal proceedings. Here, there are a multitude of routes and possibilities for shareholders, both as a corporate body and as individual shareholders (with both majority or minority interests): for example enforcing obligations to offer shares or expel shareholders, enforcing or blocking or setting aside decision-making, denouncing mismanagement, enforcing financing (including court-mandated financial injections) and dilution, forcing a demerger or simply holding shareholders

Anique Noordam

Like a couple who are engaged to be married, the parties might not want to stipulate terms that could imply that the possibility of the relationship going pear-shaped is even a serious consideration: why would you embark upon the relationship assuming that it will strand? Sometimes a shareholder thinks they can sort matters out if and when a problem arises. This is unfortunately often a misconception.

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liable. Disputes about the scope of information rights of individual shareholders (in particular minority shareholders) are also quite common, especially when other shareholders are represented on the board of directors or possess more or other information through other means. There are different routes for realizing those possibilities too, including the Enterprise Chamber, the regular courts, arbitration and the Netherlands Commercial Court. Before initiating any proceedings, however, it is a good idea to consider what best suits you and your situation and what steps should be taken to best prepare the ground for litigation.

Play With Fire: Immediate governance interventions, forced share transfers and denunciation of mismanagement

Using the Enterprise Chamber for shareholder disputes in an international context is a common phenomenon. The Enterprise Chamber is ideally suited for all types of governance disputes. The judges possess a thorough understanding of the legal practice and are highly versed in corporate law and related areas. The company’s interests are leading for any dispute before the Enterprise Chamber, whereas in the regular courts the litigating parties’ interests are. The proceedings focus on mismanagement and

establishing who is responsible for it, but they are perhaps more frequently used – with the help of independent officers – to swiftly put matters to order. Once this is achieved, an investigation into mismanagement will then perhaps no longer be required. The Enterprise Chamber has a very wide range of immediate measures at its disposal. The Enterprise Chamber can intervene extensively, quickly, practically and effectively. One consideration, perhaps, is that the proceedings might in fact work against you as well: if you are not properly prepared, you could be playing with fire. Although the Enterprise Chamber cannot directly obligate a shareholder to transfer their shares to another party, it is still the most effective route for achieving this. The Enterprise Chamber can be quite creative in this respect. The immediate relief granted by the court could ultimately result in a finalized transfer of shares. For example, the court might appoint an independent director with the authority to commence a bidding process or initiate a forced demerger. Alternatively, court-mandated financing might result in a significant dilution of a shareholder’s stake, even in spite of contractual antidilution clauses. It might be that the shareholders have made arrangements about when shares must be transferred and who will transfer them. Discussions about the price for those

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shares can become heated. The Enterprise Chamber may also be asked to determine the price of the shares. An expert is then usually appointed. The parties can request the court to give instructions on the valuation standard to be observed, the date by which the valuation must be made and other factors. If the parties are in disagreement about this as well, the court will decide on these subjects in fairness.

Time Is On My Side: commercial disputes (national and international) and compensation claims

The regular courts are a ideally suited for more commercial disputes, investment disputes and post-takeover disputes. It is possible to claim damages in the regular courts – unlike before the Enterprise Chamber. Courts can also be used to attach assets such as shares, bank accounts and evidence. Swift action is possible via summary relief proceedings. It is generally possible to obtain a judgment within a matter of weeks, depending on the true urgency of the matter, and that judgment might be far-reaching: examples exist of shareholders being ejected or compulsory purchases of shares being ordered in summary proceedings. If the case is not suitable for summary proceedings, e.g. if a declaratory judgment is sought, ordinary proceedings will need to be brought. Ordinary proceedings can take years, especially given the possibilities for appeal up

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to and including the Dutch Supreme Court. Anyone willing to commence litigation might need to be prepared for the long haul. If an international dispute is involved and all parties prefer to litigate in English, they may choose proceedings before the relatively new Netherlands Commercial Court (NCC). The NCC also has a policy of handling business disputes more swiftly. One advantage of the NCC is that the parties may make procedural arrangements, there are clear English procedural rules and there is a somewhat closer alignment with international practices. However, all the parties involved must accept the NCC as the forum of choice.

Beast Of Burden: confidentiality and full cost recovery (arbitration)

International investors often prefer arbitration, though for some companies this is more out of habit than as a deliberate choice. A major advantage of arbitration (if successful) is that a full award of costs can be made, which is not the case in corporate law litigation. Another advantage is that the appointed arbitrators are often experts in the relevant area of the law. The greatest advantage of arbitration for investors is generally that the proceedings are confidential. That confidentiality is only relative, however, because


the names and the dispute could as yet come to light if a party tries to annul the arbitral award in court. Although the grounds for doing so are limited, the case law is public. Another disadvantage is that arbitration has its limitations. For example, decisions cannot be set aside in arbitration. An arbitration clause also does not rule out the possibility of litigating before the Enterprise Chamber, which has exclusive jurisdiction for certain corporate matters. Also, the degree of professionalism and the costs at the various arbitration institutes vary widely. An unconsidered choice for arbitration could in the end turn out not to be suitable. If you do choose arbitration, then the Netherlands Arbitration Institute (NAI) might be a good choice. The NAI is professional, has a relatively large list of experienced arbitrators and is significantly less expensive than ICC arbitration, for example, and is therefore always a relatively safe choice. It also allows for expedient summary relief proceedings. A sufficiently detailed arbitration clause is essential in order to avoid unnecessary costs and uncertainty about jurisdiction.

It’s All Over Now: conclusion

If a dispute arises or threatens to arise in the context of a Dutch legal entity, the shareholder is not left without

recourse. Shareholders have a multitude of instruments at their disposal – both judicial and extrajudicial. However experienced the shareholder is, dealing with a dispute in the most efficient and effective manner requires specialist local knowledge. We possess that knowledge in plenty, and we are happy to share our expertise with you – with musical accompaniment, if you want.

If you have any questions about shareholder disputes and how to avoid them, about the role and position of shareholders’ meetings and individual shareholders in the Netherlands, or about corporate dispute resolution in general, please contact Marjon Lok. lok@dvdw.nl You can also visit our website to find out more about the Corporate Litigation & Dispute Resolution team at DVDW.

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You have my vote! Voting agreements for private equity Anique Noordam

Introduction

Since the 1980s, private equity (“PE”) has been booming worldwide. In the Netherlands, PE has often made the news: favourably, for its unprecedented success stories, but also unfavourably, because of questionable practices that push the boundaries of Dutch corporate law. Although PE’s reputation has suffered some dents in recent years, its popularity among large institutional investors continues to grow. The rates of return on PE are often so high that investments in PE are paying off more than stock market investments. As a result, institutional investors are injecting

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large amounts of capital into PE, increasing the amount of PE investments. So what is PE anyway? PE is an umbrella term for investing venture capital in unlisted companies. What sets PE investors apart from other shareholders is that they almost always take a majority stake in a target company and openly declare that they want to sell that stake again within three to seven years (an “exit”). Because this exit should preferably be profitable, the PE investor wants to have a say in the company so that they can make the desired strategic investments and restructurings. This is often achieved by granting further powers to the PE party by agreement, on top of the legal powers that all shareholders have (and majority shareholders in particular). An example of this is the concept of a voting agreement that is the subject of this article.

What is a voting agreement?

A voting agreement is an agreement that regulates how one or more parties will exercise their voting rights. This may concern voting rights on shares, but also the voting right of a member of the board of directors or of a supervisory board member in the meetings of their respective boards. Voting agreements between shareholders are in principle


Anique Noordam

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In a voting agreement, three important quantities come into contact and sometimes into conflict: freedom of contract, the interests of the company and its business, and the shareholder’s own interests.

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always permitted. A shareholder may exercise their voting rights to serve their own interests. They may therefore also conclude agreements on how to exercise those voting rights. For voting rights among the board of directors and supervisory board it is the other way around: in principle, members of these boards may not conclude any voting agreements. There are two reasons for this. First of all, in the performance of their duties they must exclusively pursue the interests of the company and its business. Secondly, the duties of a member of the board of directors or supervisory board member are tied to the individual member’s person. A voting agreement that allows another person to determine how a member of either board votes would detract from this. Only in exceptional cases will a voting agreement between board members be deemed permissible. The situation must be specific, concrete and assessable, and the voting agreement may not jeopardize the independent performance of the duties by the individual member of the board of directors or supervisory board. This still sometimes occurs in joint ventures, for example, where the members of the board of directors might agree in advance that in the event of a tied vote they will appoint an expert. However, this article is confined to voting agreements between shareholders.


What are the boundaries of a voting agreement?

In a voting agreement, three important quantities come into contact and sometimes into conflict: freedom of contract, the interests of the company and its business, and the shareholder’s own interests. The basic premise underlying Dutch contract law is freedom of contract: in principle, everyone is free to make whatever agreements they consider desirable. Exercising that freedom can sometimes clash with the interests of the company and its business, however. In the case of a voting agreement, those interests impose limits on the freedom of contract when it comes to exercising certain rights (corporate and otherwise). A shareholder’s freedom to exercise their voting rights as they see fit therefore also means that, in principle, they may always conclude a voting agreement. However, the Dutch Supreme Court ruled as far back as in 1944, in its Wennex judgment, that concluding a voting agreement may not have “socially unacceptable” consequences: for example selling votes or making arrangements that are incompatible with the company’s articles of association. The question of whether a voting agreement is permitted for an indefinite period of time also depends on the specific circumstances. In addition,

the principle of reasonableness and fairness enshrined in Article 8 of Book 2 of the Dutch Civil Code, which applies to everyone involved in the company, also imposes limits on voting agreements. If compliance with a particular voting agreement would have unacceptable consequences, it is not permitted to enter into that voting agreement.

Examples of permitted voting agreements

In practice, voting agreements take various forms. A first example is a voting agreement that creates an exception to the offering obligation in the event of a proposed or mandatory transfer of shares. It is certainly not unusual in family companies for shares to pass from generation to generation. Often the various branches of a family participate in the joint family company through their own holding companies. To prevent a shift of shares in or behind the family branch’s holdings from leading to an obligation to offer to sell their shares in the family company, it is commonplace to agree that the general meeting may decide to approve such a move. This often includes an arrangement that “approval will not reasonably be withheld in the event that the shares are transferred to a descendant first in line”. Because PE often involves investing in companies of family-owned origin, it frequently creates encounters with such provisions.

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Another specific type of voting agreement that often occurs in PE is that a minority shareholder has the right to appoint a member of the board of directors. As a rule, the general meeting appoints the board’s various members by simple majority, and so a minority shareholder normally can do little to object. With a voting agreement, however, the minority shareholder can be granted a right of appointment that they would not normally have, contractually assuring them of the power to appoint one of the board members, regardless of the size of their shareholding. Another example that is often encountered in practice is a voting agreement that is used for what is commonly known as “blocking”. Where a majority shareholder is in opposition to two or more minority shareholders, those minority shareholders will often make an arrangement to vote as if they were a single shareholder. Block formation agreements can also be useful if there is no one majority shareholder, but several minority shareholders wish to form a single block in order to achieve the majority together. With PE, this can be useful if two or more PE parties separately acquire minority stakes in the same target company: together, they have a majority of the votes in the general meeting, and a block formation agreement is then an obvious route to take.

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The purpose and use of voting agreements for PE

As mentioned above, one of the factors distinguishing PE investors from “normal” shareholders is that they take an active, or even very active, role in the company. For example, some PE investors participate in the board of directors or the supervisory board in order to exert influence. In this shareholder capacity, PE is bound by the powers and majority thresholds with respect to particular decisions as defined by law and the company’s articles of association. These include the AGM’s powers under the articles of association to appoint members of the board of directors and to adopt the financial statements, and the AGM’s powers as set out in Article 107a of Book 2 of the Dutch Civil Code. That clause, which only applies to public companies, stipulates that the AGM’s approval is required for management decisions that lead to a major change in the identity or nature of the company or the business, such as a decision to transfer the business or almost the entire business to a third party. PE investors generally take a majority stake in the target company, and therefore usually do not experience any problems with effectuating decision-making in the general meeting. The basic principle is that resolutions require a simple majority (half of the votes cast plus one), unless the


law provides otherwise. These are usually cases where an enhanced majority is required, for example depriving the nomination to appoint a director of its binding nature. A voting agreement in which the required majority of the parties agrees to remove the binding nature may offer a solution in that case.

Deviation from the voting agreement and enforceability

Voting agreements can help to achieve results that might be impossible to realize on the basis of the shareholding alone.

Because a voting agreement is a contractual obligation, it is possible, in principle, to deviate from it and to vote in contravention of the voting agreement. While this constitutes a breach of contract under the voting agreement, it does not affect the validity of the vote cast. Although non-performance leads to an obligation to compensate the loss or damage suffered, in practice it is often difficult to prove that a vote cast in deviation from the agreement has in fact caused any loss or damage, and the other parties to the agreement are generally left with no recourse. To avoid this problem of proof, most voting agreements (and many shareholder agreements) contain a penalty clause, on the basis of which a fixed amount (the penalty) will be forfeited in the event of breach of contract. If a penalty is incurred, it can only be mitigated in court, and then only to a limited extent. As a rule, any voting agreement will need to be performed. According to case law of the Dutch

In addition, voting agreements can also be used to prevent deadlocks within the general meeting. One example is a voting agreement in which the parties agree to appoint an expert if the meeting is in deadlock. This prevents the company’s business from suffering as a result of the deadlock, which might lead to a loss of value. In summary, voting agreements make it possible to separate differences in rights and powers from share ownership. This eliminates any need to issue different classes of shares, and so makes it easier to sell the company in the event of an exit.

In view of the foregoing, voting agreements can help to achieve results that might be impossible to realize on the basis of the shareholding alone. The disadvantage of a voting agreement, however, is that a shareholder may decide not to abide by the arrangements.

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Supreme Court, where acting in compliance with a voting agreement means that the shareholder votes in a way that they would not have voted without that agreement, this does not in and of itself mean that the voting agreement is impermissible. To that extent, therefore, the principle of freedom of contract takes precedence with voting agreements. Although breaching a voting agreement does not, in principle, affect the validity of the vote cast, that does not mean that breaching the voting agreement cannot affect the validity of the resolution passed. In addition, a judgment of the District Court of The Hague also shows that a voting agreement to which all shareholders (and the company) are parties, for example in the form of a shareholders’ agreement or an arrangement agreed in the company’s articles of association, may lead to a voidable resolution if it emerges that one of the shareholders voted contrary to the agreement. The Amsterdam Court of Appeal has qualified this principle to some extent, however, ruling that enforcing the arrangements contained in the shareholders’ agreement is not permissible if this would lead to unacceptable harm to the company’s interests. However, this will occur in exceptional cases only, so that in principle a resolution is voidable if a shareholder acted

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contrary to the agreement. This problem is less likely to arise, however, if a voting agreement is used for block formation: in that case, the intended objective may be achieved by means of an irrevocable power of attorney. An irrevocable power of attorney means that one of the parties grants power of attorney to the other party to exercise the voting rights on its equity interest by proxy. As the name implies, it is impossible to revoke this proxy, and so this provides certainty that the vote will be cast in the manner agreed. An irrevocable proxy can only be granted for cases where the legal act matches the interests of the proxy or a third party. As a rule, this will always be the case, as the proxy holder will exercise the voting right in accordance with the agreement and therefore in accordance with their own interests. The disadvantage of a power of attorney, however, even an irrevocable one, is that the proxy holder remains authorized to exercise their own rights at all times, so that the risk remains of acts contrary to the voting agreement. A final option is to enforce the voting agreement in court, by means of “real execution”: the non-breaching party to the voting agreement petitions the court for authorization to cast the vote directly, or even for a court order that replaces


the vote. However, this will generally not be the preferred route. Not only is this a solution that can only be applied in extreme cases, but its use will also strain relationships within the company. It is therefore strongly recommended to make clearly defined arrangements about the purpose, performance and enforceability of the voting agreement.

Further information

Voting agreements come in many shapes and sizes, but are generally contained in a shareholders’ agreement. A voting agreement can provide a solution in various cases involving an impasse or potential future points of contention. In addition, for private equity investors and other shareholders (whether they have a large or a minority shareholding), it can also offer a useful solution to help realize certain corporate goals, such as effectuating an exit or appointing preferred members to the board of directors. Voting agreements are always custom-drafted, and are highly dependent on the specific circumstances.

If you have any questions about using a voting agreement, or if you would like to know whether a voting agreement has binding force in your situation, please contact Anique Noordam. noordam@dvdw.nl You can also visit our website to find out more about the Mergers & Acquisitions team at DVDW.

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The link between ESG, CSR and corporate governance: why it matters to business Rebwar Taha

Introduction

There have been a number of recent examples in the media of high-profile businesses focusing on topics such as sustainability, Environmental, Social, and Governance

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(ESG) concerns and corporate social responsibility (CSR). Unilever and DSM, for example, have been rewarded for their business models which are based on sustainability with a strong component of social responsibility. BlackRock, one of the world’s largest asset managers, has announced that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society” (Fink, L. (2018). Annual Letter to CEOs: “A Sense of Purpose”). Climate activist group “Follow This” is demanding that Shell reinvest all its profits from polluting fossil fuels in renewable energy. These examples and many more have been emerging in the last few years, emphasizing the increasing awareness of sustainability developments in business. In today’s business, then, concepts such as sustainability, ESG and CSR are becoming more prevalent and widespread, as evidenced by various initiatives and trends. Over the past two decades, more and more major investors have committed to incorporating ESG issues into their investment decisions by signing the UN Principles for Responsible Investment. In addition, the 17 Sustainable Development Goals (SDGs), endorsed by civil society, businesses and governments, provide a framework towards building a better and more


sustainable world. Furthermore, governments, civil society organizations and increasing numbers of consumers and employees are urging companies to bear responsibility for the society in which they operate. Although most of these and other initiatives in the area of sustainability apply to publicly traded companies, they also have an important effect on non-listed companies. After all, in today’s globalized world non-listed and listed companies are both part of the same supply chain. If a large, publicly traded supplier company has committed to sustainability goals, it will expect and demand the same from other entities in its supply chain and its business network. Any companies in the supply chain that do not meet its sustainability demands might lose their contracts or, even worse, find themselves being boycotted. In addition, companies that are not sustainabilitycompliant will struggle to obtain favourable financing terms, due to the high level of risk associated with their business practices. Finally, sustainability-compliant companies are more likely to be eligible for new financing avenues than companies that do not engage in sustainable practices. The aim of this contribution is to explore the link between ESG, CSR and corporate governance in a business context. The next section focuses on the increasing importance of

ESG from the perspective of institutional investors. In the section after that, the concept of CSR is discussed, and a link is made to the two main corporate governance models. Section 4 contains a brief description of the Dutch regulatory framework for CSR, and provides some recommendations for companies on how to implement CSR concerns in their corporate governance framework. Section 5 presents some concluding remarks.

Institutional investors integrating ESG strategies into their investment decisions

Given their size and informational advantage, and the significant amount of equity in their investment portfolios, institutional investors are considered as dominant market players, which enables them to influence corporate behaviour, increase allocation efficiency, promote management accountability and aggregate capital for businesses to grow. Equipped with these characteristics, institutional investors have, during the past two decades, also been a huge driver for including material ESG factors in investment analysis and investment decisions, in both private and public markets. ESG, the abbreviation used for environmental, social and governance concerns (as noted above), refers to a set of corporate performance evaluation criteria used by investors to evaluate the resilience

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and strength of a company’s governance mechanisms and its ability to effectively manage its social and environmental impact. Institutional investors have, for example, made significant investments towards environmental, societal and economic challenges such as safe and healthy working environments, corporate governance improvements, renewable energy and the transition to a low-carbon economy, etc.

Responsible Investment, etc.). Reputational concerns and fiduciary/contractual obligations are another factor in adopting ESG investments. Regardless of the investors’ motivations, it is important for companies, from multinationals to mediumsized local organizations, to consider the increasing awareness across the investment community of the social and environmental impact of companies’ business activities.

There are various reasons why institutional investors might decide to adopt an ESG approach. First, a substantial body of literature and multiple studies have confirmed that the main drivers for ESG investing among institutional investors are risk management/risk mitigation and financial return potential. Investors are increasingly aware of ESG risks that entail unexpected costs, which could be detrimental to long-term financial returns. That is why institutional investors, when compiling their portfolios, increasingly look at companies that are actively engaged in sustainable practices with the aim to reduce social, governance and environmental risks as much as possible. Another motive for institutional investors’ ESG investing is the increasing call for sustainability from governments, policymakers and society at large (examples include the Sustainable Finance Disclosure Regulation, the UN Sustainable Development Goals, the UN Principles for

The link between corporate governance and corporate social responsibility

Faced with the broader role of business in society (as described above), the business community can no longer ignore its increased societal accountability, and should therefore seek to generate positive externalities (e.g. alternative energy sources) while reducing its negative externalities (e.g. levels of resource depletion). This is what lies at the heart of CSR. Since 2011, the European Commission has defined CSR as “the responsibility of enterprises for their impacts on society”, going on to list a set of those responsibilities: “to fully meet their corporate social responsibility, enterprises should have in place a process to integrate social environmental, ethical, human rights and consumer concerns into their business operations and core strategy

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in close collaboration with their stakeholders, with the aim of: • maximizing the creation of shared value for their owners/ shareholders and for their other stakeholders and society at large; • i dentifying, preventing, and mitigating their possible adverse impacts. (Communication of the European Commission on its CSR Strategy 2011-2014, October 25, 2011).” According to this definition, companies that accept CSR go beyond strict compliance with the law, and need to have relevant “processes” in place to ensure that key issues are addressed. This implies that companies should create a sound governance, risk-management and internal control environment in order to integrate CSR into every part of their organization and in its daily activities. It is beyond the scope of this article to discuss all the various processes that this requires. For this reason, the focus here is on the relationship between CSR and corporate governance. To explore the link between CSR and corporate governance, it is worthwhile touching briefly on the concept and definition of corporate governance. Corporate governance can broadly be defined as a set of rules and structures (formal and informal) that shape

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managerial decision-making and accountability. This then leads to the question: how should top executives be monitored? What interests should the company serve? To answer these questions, two alternative models have been developed over the past three decades: the shareholder model (which is dominant in English-speaking countries) and the stakeholder model (which is the dominant model in Continental Europe). The shareholder model charges the directors of a company with a specific fiduciary duty towards the company’s shareholders, by reflecting the importance of primacy of the shareholders’ interests and enhancing shareholder value. By contrast, the stakeholder model represents the idea that companies exist to serve a number of different interests, not just those of their shareholders, but also those of customers, creditors, employees, local communities and suppliers. With these definitions in mind, a natural synthesis can be identified between the stakeholder model and CSR, as both concepts are based on the principle of balancing divergent interests and aiming to align as closely as possible the interests of individuals, companies and society. Sir Adrian Cadbury, who contributed significantly to the development of corporate governance, already underlined this relationship


between corporate governance and CSR by indicating that corporate governance mechanisms are part of a larger economic context in which environmental and societal interests play a major role: “Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations, and society. (Cadbury, Foreword in World Bank, Corporate Governance, a Framework for Implementation, Washington 2000).”

In light of the increasing regulatory attention and the mounting pressure from institutional investors, consumers, and society at large, it is advisable for companies to implement CSR concerns in their corporate governance framework.

To this end, therefore, corporate governance mechanisms should have incentives in place to reconcile the interests of the company with the interests of society. By contrast, the shareholder model, which encourages corporate boards to consider only interests of the shareholders, essentially ignores other interests such as environmental or social factors unless they run parallel to the shareholders’ interests.

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However, a new direction is also gaining traction in the shareholder model, as demonstrated by the Business Roundtable Statement, which expresses the business approaches of over 180 of the largest companies (mainly in the English-speaking world, and mainly oriented towards the shareholder model). It states a company’s sole and main objective or purpose is not to maximize shareholder value (which has been the basic assumption since 1997) but rather “to create value for all our stakeholders”. However, this raises the question of whether, and to what extent, this statement is empty rhetoric or whether it represents an actual tipping point where these CEOs really mean what they say.

The Dutch corporate law framework and corporate social responsibility

Dutch companies are governed by their articles of association and by statute. The relevant statutory law is enshrined in Book 2 of the Dutch Civil Code (“DCC”). In addition, publicly traded Dutch companies are also required to apply the Dutch Corporate Governance Code (“DCGC”), which contains a comply-or-explain regime. As one of its first key principles, the DCGC stipulates that companies should pursue “longterm value creation”, where stakeholder interests need to be taken into careful consideration. This derives from

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the principle of plurality: the fact that within a company a multitude of interests are pursued that are weighed against each other in order to add to the long-term value creation for the company and its affiliated enterprise. This principle of plurality can be found in Article 8 of Book 2 of the DCC, which relates to reasonableness and fairness in the Dutch corporate context, and Articles 140/250 of Book 2 of the DCC, which dictate that a company’s board of directors and supervisory board must allow their actions to be guided by the interests of the company and its affiliated enterprise, in which all the company’s various stakeholders play an important role. The fact that the Dutch regulatory frameworks place such a strong emphasis on all the various stakeholders makes it possible for corporate boards to include corporate social responsibility and sustainability in their risk management systems and corporate strategies without being bound by the demands of shareholders. This regulatory approach towards the stakeholder model, which applies both to publicly traded companies (NV: “public limited liability company”) and private companies (such as the BV: “private limited liability company”), is also echoed by various judgments in the Netherlands. For example, in the Cancun, Akzo Nobel and ABN AMRO cases, Dutch courts ruled that the


interests of shareholders do not take precedence over the interests of other stakeholders. In addition, in Fortis, the Enterprise Chamber (a special division of the Court of Appeal of Amsterdam) explicitly highlighted the interests of the community in a company’s governance. In light of the increasing regulatory attention and the mounting pressure from institutional investors, consumers, and society at large, it is advisable for companies to implement CSR concerns in their corporate governance framework. This could be given shape by considering the following points: provide incentives for the board of directors to look beyond short-term shareholder value; implement effective monitoring through objective/independent directors; share relevant streams of data and information in order to make effective monitoring possible; ensure appropriate trade-offs by redefining the role of the board, and manage conflicts of interest to ensure that personal interests do not undermine corporate interests.

Conclusion

Given society’s increased expectations of the business sector, and the financial, reputational and legal implications for companies, it is no longer sufficient for companies to focus solely on maximizing shareholder value and profits.

Therefore, both listed and non-listed companies are increasingly expected to have appropriate governance structures and processes in place to internalize CSR considerations in their business practices. Some firms have already realized this development, by acknowledging that sustainable shareholder value does not necessarily contradict or exclude the pursuit of stakeholders’ interests, and have adapted their corporate governance framework accordingly.

If you have any questions about sustainability, ESG or CSR within the Dutch corporate environment, please contact Rebwar Taha. taha@dvdw.nl You can also visit our website to find out more about the Corporate Litigation & Dispute Resolution team at DVDW.

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Loan and security documentation in the Netherlands Eveline Kruisifikx

Dutch law does not stipulate any specific requirements for loan documentation. It is important, however, to clearly set out the arrangements in the contract, in order to avoid or limit subsequent discussion. This includes arrangements about security, as lending money often goes hand in hand with negotiating collateral. Below is a brief overview of the various and most common forms of security available in the Netherlands.

Collateral

A lender may demand a mortgage right and/or a right of

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pledge on the borrower’s assets, depending on the type of asset. Establishing these security rights is subject to a number of specific requirements: Immovable property and registered ships and aircraft A right of mortgage on land, buildings, registered ships and registered aircraft is vested by a deed executed before a civil-law notary, followed by registration in the public registers of the Dutch land registry. A right of mortgage cannot be established on future assets (i.e. assets that the mortgagor does not yet own). Movable property Security on moveable assets, such as inventory and stock, is generally established as a non-possessory right of pledge, where the pledgor is still entitled to use, consume and sell the goods in the ordinary course of business and – if future movable assets are included in the deed of pledge – a new right of pledge is established on each new good so acquired. A non-possessory right of pledge is vested either by way of a privately executed deed, followed by registration with the Dutch tax authorities, or a deed executed before a civil-law notary. Unlike registration with the land registry, registration with the tax authorities is non-public and exists for stamp


Eveline Kruisifikx

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purposes only. An alternative is to establish a possessory right of pledge, in which case the pledgee takes possession of the goods.

If a borrower defaults in the fulfilment of a secured payment obligation, the lender is entitled to sell the collateral and use the proceeds towards fulfilling that obligation. This does not require a court order.

Receivables A distinction can be made between disclosed and undisclosed rights of pledge. Whereas a disclosed right of pledge is established by way of a privately executed deed followed by a notice to the debtor of the pledged receivable, an undisclosed right of pledge is established by way of either a privately executed deed followed by registration with the tax authorities, or a notarial deed. Undisclosed rights of pledge can only be established on future receivables that derive directly from a pre-existing legal relationship when the deed of pledge was executed. Professional lenders therefore frequently register, on the basis of the powers of attorney issued by their borrowers, additional pledge instruments that describe both the receivables to be pledged and the pledgors in general terms. Pursuant to the Dutch General Banking Conditions (which are applied by all banks in the Netherlands), a right of pledge (first rank) is established on a bank account with a Dutch bank (i.e. on the credit balance on that account), in favour of that bank. At the same time, Dutch banks are not keen on granting any rights

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of pledge (even with a lower rank) on such balances to third parties. Many banks’ general terms and conditions state that the balance on a bank account may not be pledged, except to that bank, with any effect under property law within the meaning of Article 83(2) of Book 3 of the Dutch Civil Code, and banks are usually reluctant to deviate from that rule. egistered shares in a Dutch limited liability company R A right of pledge on registered shares in a Dutch private or public limited liability company includes dividend distributions, and is established by executing a notarial deed. Usually the company itself is also a party to that deed, for the purpose of acknowledgement. It is common practice to agree that, unless and until a default occurs, the shareholder/ pledgor retains the entitlement to dividend distributions and the authority to exercise the voting rights on the shares. However, the company’s articles of association might need to be amended (also by notarial deed) in advance if they include any provisions prohibiting or restricting pledges of shares in the company. I ntellectual property rights IP rights are pledged either using a privately executed deed, followed by registration with the tax authorities, or else

by notarial deed. Although this is not required, it is highly recommended (i.e. in order to obtain third-party effect) to register the right of pledge with the offices where the IP right is registered (such as the register of the Dutch Industrial Property Office or the Benelux Trademark Register). The pledgor’s power of disposition ends in the event of bankruptcy: no new rights of pledge can be created on assets that the pledgor acquires after the date of its bankruptcy.

Ranking

If an asset is pledged or mortgaged in favour of two or more pledgees or mortgagees, how those rights are ranked is determined by the dates and times when they were registered in the public land registry (mortgage) or when the perfection formalities were fulfilled (pledge). It is possible for security holders with respect to the same asset (whether mortgagees and/or pledgees) to change their respective rankings.

Guarantees

Besides the rights of mortgage and pledge described above, lenders often require a guarantee from the borrower’s group companies and/or shareholders/directors. A guarantee is created by contract, and there are no specific formalities.

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Enforcement

If a borrower defaults in the fulfilment of a secured payment obligation, the lender is entitled to sell the collateral and use the proceeds towards fulfilling that obligation. This does not require a court order. Although in principle enforcement takes place by way of a public sale – and, for mortgages, before a civil-law notary – a private sale is permitted (and often results in higher proceeds) either with prior court approval (mortgage or pledge) or based on an agreement with the pledgor after the lender becomes entitled to enforce the security (pledge). The pledgee is not permitted to appropriate the collateral. However, the pledgee may request the court to rule that the asset will remain with the pledgee, as its purchaser, for an amount determined by the court. Although also pledged receivables can be sold by the pledgee, the pledgee will usually enforce its rights by collecting the receivables. With an undisclosed right of pledge, the debtor of the pledged receivable should be notified first of the existence of that pledge before the pledgee may collect the receivable. Enforcing a right of pledge on shares in a limited liability company is usually more complicated: i) shares are not well

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suited for public sale, especially if the pledge does not extend to 100% of the shares; and ii) if the articles of association contain any transfer restrictions, these must also be taken into account.

Bankruptcy, suspension of payments and the Dutch Scheme

Although mortgagees and pledgees remain entitled to enforce their rights if their debtor is declared bankrupt or is granted a suspension of payments, the court may order (if the trustee requests) a “cooling-off period” of up to two months, which may be extended for additional period of up to two months. During this cooling-off period, secured creditors are restricted in the enforcement actions that they may take. The court may also impose a coolingoff period (whether general or specific) under the Dutch Scheme (“WHOA”), if it is apparent that: a) it is necessary for the debtor to continue its business while preparing and negotiating a scheme; and b) it is reasonable to assume that this is in the best interests of the debtor’s joint creditors and that the interests of third parties (such as security holders) will not be substantially prejudiced. However, the pledgee or mortgagee may request the court to authorize them to recover their claims from the encumbered assets or to lift


that cooling-off period, by arguing that no grounds exist for imposing a cooling-off period or that a cooling-off period will materially harm their interests.

In conclusion The above provides only a limited overview of the various Dutch security rights and the issues that need to be considered when enforcing those rights. If you are planning to grant a loan to a Dutch party, if you already have collateral on Dutch assets that you wish to enforce, or if you simply wish to find out more about this subject, please contact Eveline Kruisifikx. kruisifikx@dvdw.nl You can also visit our website to find out more about the Corporate Governance team at DVDW.


The reasonable interpretation of a contract under Dutch law

however, the differences between Dutch law and the common law are not as ambiguous as they might seem.

The interpretation of a contract

Under Dutch law, how a contract is construed does not depend on its wording alone. Although the wording of a contract offers an important view on what the parties have agreed, it is not conclusive for interpreting the meaning of a contract or the parties’ contractual rights and obligations. Under Dutch law, essentially, all the circumstances are relevant.

Rien Visscher and Stijn Houben

In contract drafting, contractual freedom and business certainty are vital principles. The parties involved want to know what to expect from their contracting party and what in turn is expected of them. At a glance, the common law seems to provide greater certainty in this regard than Dutch law (being a civil-law system). For example, Dutch law and the common law have different perspectives on how to construe contracts, and under Dutch law the concept of “reasonableness and fairness” plays a key role. Ultimately,

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The principle of “reasonableness and fairness”’ also plays a prominent role under Dutch law when interpreting the parties’ rights and obligations under a contract. This principle is the Dutch equivalent of “good faith”, and in most ways the two are similar. In short, it means playing fair and being open with the parties involved. The principle of reasonableness and fairness is an independent source of obligations under Dutch law. Based on this principle, written contractual terms can be set aside and unwritten contractual terms might be inferred. The principle of reasonableness and fairness can lead to implicit terms in a contract, as demonstrated by a ruling by the Dutch Supreme Court given in 2016 (Dutch Supreme Court’s


Rien Visscher

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judgment of 4 November 2016, ECLI:NL:HR:2016:2517, at 3.6.1), where the Supreme Court ruled that a debtor who had, with justifiable reason, suspended payments and gained an interest advantage as a result was nevertheless obliged to compensate half the interest so gained. Although the sale and purchase agreement between the debtor and the creditor did not stipulate any contractual right to that effect, the Supreme Court ruled that the creditor was owed the interest by standards of reasonableness and fairness. Also, the principle of reasonableness and fairness can be used as grounds to set aside contractual arrangements, as demonstrated by a 2014 ruling by the Dutch Supreme Court (Dutch Supreme Court’s ruling of 10 October 2014, ECLI:NL:HR:2014:2929, at 3.4.2.). The Supreme Court ruled that a bank’s contractual right to terminate a credit agreement had to be acceptable according to standards of reasonableness and fairness. In this case, this meant that the contractual clause giving the bank the right to terminate the agreement was set aside on grounds of the principle of reasonableness and fairness. As these examples show, the principle of reasonableness and fairness can be of great influence on the interpretation of

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Stijn Houben


contracts and the contracting parties’ rights and obligations. However, this does not mean that under Dutch law the wording of a contract is irrelevant. Even under Dutch law, it is important how a contract is worded. However, in the construal of a contract under Dutch law, its wording is not the deciding factor. All the relevant circumstances need to be taken into account – although the circumstances that a contract was drafted with diligent care and that the parties’ intentions correspond to how the contract is worded might give the wording greater weight than other circumstances. This might be the case where professional parties are involved, for example, especially if they are assisted by lawyers. Given such circumstances, the contract will be less and less likely to be interpreted by standards of reasonableness and fairness.

The Haviltex rule

Interpreting a contract with due allowance for all the circumstances of the case is standard practice in the Netherlands. This practice is based on the “Haviltex rule”, which dictates that the meaning that the parties ascribe to a contract should be determined as follows:

The question of how the relationship between the parties is regulated in a written contract and whether that contract leaves a gap which must be filled cannot be answered on the basis of a purely linguistic interpretation of the provisions of that contract. The answer to that question depends on the meaning that the parties could reasonably ascribe to those provisions in the given circumstances and on what they could reasonably expect from each other in that regard. This rule given by the Dutch Supreme Court (Dutch Supreme Court’s judgment of 13 March 1981, ECLI:NL:HR:1981:AG4158, NJ 1981, 635) is still relevant for interpreting contracts and the contracting parties’ rights and obligations under Dutch law. The consequences of this “subjective approach” as it concerns the construal of contracts are not as ambiguous as they might seem. The Haviltex rule primarily offers a starting point for interpretation, namely to determine the contracting parties’ intentions and what may reasonably be inferred from their pronouncements towards each other. As described above, this subjective Haviltex approach is used to interpret all contracts that are governed by Dutch law, both commercial and non-commercial. Conversely, the objective approach

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used in the common law mostly relies on the linguistic meaning of how the contract is worded, as read by a reasonable third party.

For more information on this topic, please contact Rien Visscher or Stijn Houben.

Conclusion

visscher@dvdw.nl houben@dvdw.nl

In conclusion, the following differences between Dutch law and the common law should be taken into account when drafting or interpreting a contract that is governed by Dutch law:

You can also visit our website to find out more about the Contracts team at DVDW.

Common law:

Dutch law:

Differentiates between the interpretation of commercial and noncommercial contracts.

Does not differentiate between the interpretation of commercial and non-commercial contracts.

Achieves legal certainty through strict interpretation (no references to good faith).

Achieves legal certainty through interpretation by standards of reasonableness and fairness (good faith).

Takes the linguistic meaning of a contract as the starting point for its interpretation.

Takes the parties’ intentions and what can be inferred from their pronouncements to each other as the starting point for interpretation.

Contextual interpretation applies only when the contract itself is ambiguous or its linguistic interpretation has an absurd outcome.

Contextual interpretation applies when it serves to help determine the parties’ intentions and reasonable expectations.

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Let’s be reasonable!

It’s not always what you read in the contract.

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Buyer beware: differences between Dutch and US/English mergers & acquisitions Luitzen van der Sluis, Martijn Lenstra and Bas Augustijn

Introduction

As the focus of international investments has slowly shifted towards sustainable development through synergy (of acquired assets) and continued involvement of the investors, extensive M&A contracting has become even more crucial (and prevalent). As a result, international investors now,

more than ever, have to account for differences between jurisdictions in the process of closing their deals. The Netherlands has long been a fan favourite of American and British investors (with the US bringing in the big bucks, as the country with the largest yearly monetary involvement in the Netherlands1). Therefore, differences between the laws of the Netherlands and the UK and between those of the Netherlands and the US (mostly Delaware) are highly relevant to large numbers of investors seeking to acquire companies and assets in the Netherlands. This article sets out some of the differences between these jurisdictions that are especially relevant during specific aspects of M&A transactions. This article touches on some of the differences that might be considered of consequence. The article is not in any way intended as an extensive list of cautionary tips, but our lawyers at DVDW are always willing to help foreign companies and investors with their questions relating to Dutch M&A transactions and related legal matters (both national and international) in general.

1. https://longreads.cbs.nl/nederland-handelsland-2021/buitenlandseinvesteringen-en-multinationals/

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The pre-contract phase

Precontractual liability Most western jurisdictions, if not all, allow a generous amount of freedom when it comes to negotiations and contracting. It is the “liberal” view (referring to John Locke, not to any political meaning of the word), which is still held in most western countries, that each individual is entitled to as much freedom as possible, in so far as that freedom does not diminish the freedom of others. This means that, if the parties so decide, they may even stipulate extraordinary provisions within a contract, which each party may then enforce, so long as the provision does not impose on others. A general principle related to this “freedom to negotiate” is that parties are also free to break off the negotiations and say “no”. However, in some jurisdictions a party might face consequences if they choose to do so. The Netherlands is one such jurisdiction. UK/US doctrine In the United Kingdom, under English law (the common law), there is no general doctrine of good faith.2

2. See: A. Calvert, J. Bond, M. Houlihan, “Good Faith in English Contract Law”, Bracewell LLP Update.

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Therefore, parties are under no obligation during their negotiations to act in good faith. There are certain exceptions to this principle (such as if a good-faith clause is expressly imposed by the wording of the contract), but such exceptions generally only come into play if and when the parties have actually entered into an agreement. During the negotiations, either party is (at least usually) free to pull the proverbial plug, without any liability towards the other party. In the US, the general principle is similar: any party is free to negotiate a contract without being liable for failure to reach an agreement. However, a party may be liable for the other party’s loss or damage if the first party breaks off the negotiations in bad faith (“culpa in contrahendo”). This implies that there is an obligation for the parties to negotiate in good faith. An example of acting in bad faith would be to continue to negotiate despite having no intention to actually reach an agreement, while the other party is under the (justified) assumption that an agreement will be reached. Dutch doctrine Dutch precedent on precontractual liability more closely follows the US doctrine than the UK doctrine, as the parties may be held accountable for any loss or damage incurred


as a result of broken-off negotiations. However, Dutch case law has developed in such a way that liability of either of the parties (and in particular the exiting party) has become more and more difficult to prove. Currently, the measure under which pre-contractual liability can be established was defined by the Dutch Supreme Court in its judgement in the case CBB/JPO as follows (rough translation): “As a benchmark for assessing the obligation to pay compensation in the event of broken-off negotiations, each of the negotiating parties – whose conduct must be determined in part by the other’s justified interests – is free to break off the negotiations, unless this would be unacceptable on the basis of the other party’s justified confidence that an agreement would be concluded or on the basis of other circumstances of the case.”3 Any ruling on such liability would have to consider a “strict and restrained standard”, as ordained by our Supreme Court.

3. Dutch Supreme Court’s judgment of 12 August 2005, ECLI:NL:HR:2005:AT7337 (CBB/JPO).

Luitzen van der Sluis

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Nevertheless, it is still possible to claim damages as a result of broken off negotiations under Dutch law (in accordance with the development of precedent under Dutch case law). This makes the Dutch pre-contractual doctrine much different from its UK counterpart, and still more lenient than its American counterpart. Caution is advised, especially in the later stages of negotiations as the opposing party’s confidence that an agreement will be concluded becomes increasingly more justifiable.

The choice of pricing mechanism

Once the parties enter into full-fledged negotiations for their M&A deal, they will have to decide how they will establish the price of (the assets of) the target company, i.e. they need to decide what pricing mechanism they wish to use in their agreement. Two of the most common types of pricing mechanisms are: (i) the Locked Box Mechanism ( or “LBM”), where the company is bought as it was at a specific moment in time against a set price, with limited items being considered “leakage”, which may then affect the purchase price, and (ii) the Completion Accounts Mechanism (“CAM”), where accounts are drawn up, which accounts, or usually more specifically the revenues/

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profits established according to those accounts, determine the purchase price at the moment of completion. Advantages and disadvantages of the LBM The main reason for sellers to ask for the LBM to be used, is that the LBM provides greater price certainty. The price is already “fixed” prior to closing (and can only change if the seller actually enriched themselves by depleting the company’s funds and diverting them into their own pocket). As the price is pretty much set, the odds of disputes arising in connection with the purchase price are slimmer, meaning that the seller does not have to deal with (or at least prepare for) much litigation. As no post-account amendment to the purchase price takes place, the LBM produces far less complicated SPAs. The mechanism itself is far less complicated (leakage items are much easier to establish than completion accounts). The LBM therefore allows for more cost-effective negotiations (about a less complicated agreement). It also often saves time after signing, compared with the time that is usually required to establish the closing accounts if the CAM is used. On the other hand, a fairly substantial disadvantage of the LBM, as will also be explained in the following paragraph,

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is that US investors are not used to this type of pricing mechanism. Therefore, US investors can be more skittish when it comes to implementing this system in their deals. Furthermore, the LBM is difficult to use in carve-out deals, because leakage items (money leaving the company that the sellers have to pay for) are more difficult to determine for target companies that are not (or at least not entirely) financially separate from any parts of the business that the transaction does not include. Buyers will need to deal with a degree of uncertainty when opting for the LBM. The LBM creates some uncertainty about the period between the “Locked Box Date” (the reference point for the sale) and the closing date. If the operations yield a profit during this period, this works to the buyer’s advantage. However, if the operations produce a loss, that puts the buyer at a disadvantage. Usually this can be solved by “if and when” clauses, whereby it is common for sellers to demand interest compensation, if they foresee profit between signing and closing. Prevalence of the LBM in the Netherlands Whereas parties form the Netherlands frequently choose the

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LBM, parties from common-law jurisdictions (mostly USbased investors) generally prefer the CAM. There are several reasons for this difference in preference: i The M&A practice in the US has traditionally used the CAM. Lack of familiarity with the LBM and its benefits means that US investors are usually not too keen on using it. One of the reasons why the LBM has never taken off in the US can be found in the 2008 financial crisis and subsequent developments. During the crisis, investors were looking for safe assets to invest in (the “flight-to-quality”), and the scarcity of safe companies created a seller-friendly negotiating environment (i.e. the seller was in a stronger bargaining position). Because the US market was unfamiliar, or at least not sufficiently familiar, with the LBM at the time, they started to lag behind other countries in their integration of this mechanism in more M&A deals. ii As a consequence of the common-law system in the US, any form of contracting that is not used as often as other methods is considered a risk. As precedent (through case law) has had less time and fewer cases to develop, the risks related to the use of the LBM are less clearly defined. Using the LBM therefore creates a greater risk of litigation


(as lawyers will be more unsure about their odds in the courts). Disputes related to unauthorized leakage, for example, might create the possibility of prolonged litigation. The LBM would need to be brought out of its legal infancy in order to become a more reliable tool for US investors. While the risk of litigation can, of course, be diminished by clever drafting and other forms of dispute resolution, it should be noted that the LBM does indeed lower the likelihood of disputes arising from purchase price determination (which in turn lowers the odds of litigation). As such, there are pros and cons to the LBM from a risk mitigation perspective. iii A nother reason why the LBM is less prevalent in America is the steady increase of carve-out deals (i.e. deals where part of the company is not acquired). The LBM is less suitable for these type of deals: it complicates the process of determining leakage (money that should have stayed in the company), as the company might share its current accounts and other accounts with parts of the business that are not being sold.

Letters of intent and merger control regulation

Once the parties have agreed on a pricing mechanism (and, in the case of LBM deals, once a preliminary price has been

established), the parties will often want to sign a letter of intent (also called a “head of terms” or “memorandum of understanding”), as a token of being formally committed to actually reaching an agreement. Parties sometimes believe that signing a letter of intent makes an exiting party more likely liable for loss or damage (and some even believe that the terms are binding). Under Dutch law, however, a (well-drafted) letter of intent is not binding, at least not fully. It might contain confidentiality / exclusivity / non-compete undertakings (or provisions) that are binding, but a letter of intent itself does not create obligations to either sell or purchase, in and of itself. In the UK, letters of intent can be used to explicitly state the obligation for good faith negotiations, whereas such a statement is not required in the Netherlands. Caution is required when drafting the letter of intent (especially for foreign investors): generally, Dutch letters of intent contain conditionality clauses (stating that any future agreement is contingent on, for example, the results of due diligence investigation or a satisfactory outcome of negotiations). Those clauses are included in the letter of intent to ensure that there is still room for negotiation, and that the parties signing the

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International investors now, more than ever, have to account for differences between jurisdictions in the process of closing their deals.

letter of intent are not liable (or at least not immediately) if they exit while the negotiations are ongoing (as the clauses create a viable defence for the leaving party if litigation ensues).

In the Netherlands, the courts (and the law) have a much broader interpretation of contracts, where not only the literal text is important, but also the parties initial understanding as well as their intentions and expectations at the time of agreeing to the contract.

Before drawing up a letter of intent, the parties should be aware that the European Union has numerous laws related to merger control. Merger controls, or anti-trust filing/ approval requirements, also exist in the Netherlands, and the thresholds for mergers that are required to file for approval are relatively low (especially in the healthcare sector). In the UK, this regime of anti-trust filings is voluntary (even though it might be advisable to make a protective filing if the transaction potentially requires clearance), but in the Netherlands it is not. If the proper filings are not made, the buyer (not the seller) could incur a substantial fine. And it is even possible (though extreme) that the entire deal is nullified for failure to observe such regulations.

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Contractual terms

The parties’ intentions in the construal of contracts Once the parties have survived the pre-contract phase, have drawn up (and signed) a letter of intent and made it past whatever anti-trust filings were required, the parties will usually start to negotiate the contractual terms of the SPA.


In the UK (and to a certain extent the US), the wording of the contract creates obligations and rights for the parties, and in court proceedings the text is the only factor (or almost the only factor) that is given any consideration. In the Netherlands, the courts (and the law) have a much broader interpretation of contracts, in which not only the literal text is important, but also the parties initial understanding as well as their intentions and expectations at the time of agreeing to the contract. This (now standard) principle of Dutch law is known as the Haviltex principle.4 Even if a particular obligation is not explicitly included in the contract, it might nevertheless exist (that is to say a court could enforce that obligation), if the court considers that the obligation falls within the reasonable interpretation (or scope) of the contract (taking into account what the parties expected of each other). It is precisely this principle governing how contracts are construed that makes the preamble (i.e. the recitals or “whereas clause”) more important in the Netherlands than it

4. Dutch Supreme Court’s judgment of 13 March 1981, ECLI:NL:HR:1981:AG4158 (Haviltex).

is in the UK, and potentially more important than it is in the US (or at least in certain US states). The recitals describe the parties’ intentions, and those intentions in turn colour the rest of the agreement. It is therefore also advisable to draft the contract in such a way that, when it comes to provisions that could be interpreted in multiple different ways, those provisions are carefully constructed to include wording that sets out the parties’ intentions. Warranties and representations Most SPAs (whether drafted using the CAM or the LBM) contain warranties and representations by the sellers, which might give the buyer the right to claim compensation for loss or damage if those warranties later prove to be untrue. In the US and the Netherlands, these statements are generally referred to as “representations and warranties”, whereas lawyers and dealmakers in the UK will often resist referring to them as such (since defining them as such will potentially widen the scope of legal recourse available to the buyer against the seller beyond the contractual recourse that the buyer already has). As explained above, the literal wording of the contract (and contractual recourse) is paramount in the UK, where representations and warranties are extensive and detailed.

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As Dutch contracts are construed according to standards of “reasonableness and fairness”, representations and warranties in the Netherlands are often drafted to be vaguer than they would be in the UK, so as to cast a wider net of situations wherein they would (reasonably) apply.

Reasonableness and fairness

I nvolvement of employees The Netherlands (as many European countries) has long attached great importance to protecting the ‘common man’. As such, for example (and in certain cases), before a company enters into an M&A agreement it must first consult its employees (that is to say, an employee representation committee or works council). These committees/councils have mandatory rights of information/consultation. Therefore, employee engagement should be factored into any M&A process in the Netherlands. Furthermore, strict employment regulation protections are in place (within the entire EU) that may complicate the purchase, especially as employees of the target company will automatically transfer to the buyer (which is not always the case in the US). Reasonableness and fairness The protections under Dutch law, for smaller contracting parties in particular (such as consumers), extend further

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than merely considering the parties’ intentions when interpreting a contract (and its implications). Provisions that were agreed might be judged to be null and void if the court considers them to be “unreasonable and unfair”. This has an enormous impact on the freedom of contract described in the first section of this article, and it is not always possible to contractually circumvent this principle (i.e. the parties may not explicitly stipulate that they will not or cannot argue the unreasonableness of provisions in legal proceedings). This general principle (which is widely accepted and applied in the Netherlands) limits the contracting powers of some (often large) parties. What foreign investors often find frustrating about this principle is that it makes contracting a risky business that carries numerous unknowns (although any agreement comes with its own risks, even if the UK’s system is implemented and all the various obligations need to be specified in its wording). Litigation becomes less straightforward, as do negotiations. However, the principle in fact often simplifies the negotiating process, because the parties are assured that, even if the contract does not contain every single term necessary to cement their positions, they will still have some degree of protection under Dutch law. Furthermore, the principle of

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reasonableness and fairness only really comes into play if a dispute arises about (the interpretation of) the actual contract and only after the deal is closed (if and when litigation ensues).

Protection against claims through disclosed information

Once a deal is finalized, it is possible that disputes will ensue. Such disputes are often related to the representations and warranties given by the seller (or sellers). US and European (and by extension Dutch) parties to transactions are moving closer to each other in terms of their views on the influence of due diligence and disclosed information on transactions. In the Netherlands, it is common practice to include all the information that is disclosed during due diligence under the heading “disclosed information”. This implies that the buyer can no longer bring any claims on grounds of information that was, or should have been, known to them. Unlike Dutch parties, US parties are familiar with a practice in which it is often still possible to bring claims based on information that was already known to buyers. To this end, “pro-sandbagging” clauses are included in sale and

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purchase agreements. These clauses have the effect that buyers can be indemnified for a breach of the agreement, even if they were already aware of the breach in question before closing. The popularity of such clauses is declining in America, but they are still included in some sale and purchase agreements. In 2006, pro-sandbagging clauses were included in 50% of American transactions; in 2021 this was still 29%. These clauses are rarely encountered in the Netherlands. Where they do occur, they mainly relate to fundamental warranties. If the buyer detects a breach (or a potential breach) before closing, this is usually also dealt with before closing. This can be given shape by including an indemnity or by incorporating the financial risk into the purchase price. Pro-sandbagging clauses will therefore be difficult to negotiate when dealing with a Dutch party. Instead, Dutch M&A contracts usually contain clauses that explicitly rule out pro-sandbagging. Furthermore, given the Dutch principle of reasonableness and fairness (described in the previous section) a court will likely rule that a provision stating that a buyer may bring a claim if a particular warranty is untrue, but the buyer is aware that it is untrue, is null and void.


It has become increasingly important to specify the extent of protections under the warranties. Phrases such as “to the seller’s best knowledge” or “other than has been fairly disclosed” are becoming more and more commonplace.

Summary

Dutch M&A practices differ from those in the US and the UK. To comment on each aspect and difference in every step of the process would take a lifetime to write down, and would take the reader months to read, if not years. Therefore, this article contains only some relevant examples of the issues that might come up during an M&A transaction in the Netherlands. In closing we will toot our firm’s own horn by reminding the reader that our lawyers at DVDW are experts who can guide any party through the trials and tribulations of a Dutch M&A deal, and accommodate foreign investors who wish to learn more about (and benefit from) the differences between relevant laws in the Netherlands and in other jurisdictions. Caution is advised for any foreign investor wishing to enter the Dutch market, but we possess the expertise to help you understand and benefit from the Dutch legal system.

If you have any questions about these topics, please contact Luitzen van der Sluis, Martijn Lenstra and Bas Augustijn. vandersluis@dvdw.nl lenstra@dvdw.nl augustijn@dvdw.nl You can also visit our website to find out more about the Mergers & Acquisitions team at DVDW.

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The best tips for preventing directors’ liability under Dutch law Marlies Siegers

“With integrity, you have nothing to fear, since you have nothing to hide. With integrity, you will do the right thing, so you will have no guilt.” [Zig Ziglar]

Anyone running a business must be able to actually do business – this is a principle that is given great weight by the Dutch legislature, and is a central theme in Dutch

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liability law. Directors of companies must have the freedom to try to turn opportunities into successes. Dutch law fully endorses the freedom of directors of companies: the bar for directors’ liability is high. Directors should not be unnecessarily frightened or risk-averse. Taking responsible risks also means that there is a chance of failure. If things go wrong, creditors can hold the company liable; the directors are not liable, or at least only in exceptional situations. This is good for directors, particularly in financially uncertain times. It is less attractive for creditors: they are usually left empty-handed if the company goes bankrupt. That is the other side of the freedom that the law grants to directors. Just like in real life, this legal freedom is not unlimited. So where does Dutch law draw the line? In what situations can directors be held liable with their private assets? Who can hold directors liable? What tests are applied to determine whether the directors have conducted legally responsible management? How can potential risks be reduced? This article is limited to directors of Dutch private and public limited liability companies, and contains a brief sketch of Dutch law: an exploration of the many-coloured palette of legal risks inherent in doing business.


Marlies Siegers

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Who can hold a director liable and on what grounds? A director can be held liable for his1 actions by “internal” or “external” actors. Therefore, a distinction is made between “internal” (vis-a-vis the company) and “external” (vis-a-vis third parties) liability of directors. Below are some examples of internal and external grounds for directors’ liability:

Being able to present a convincing factual narrative is exactly what makes the difference in litigating directors’ liability.

1. Directors can of course be male, female, or non-binary. For brevity (although readily admitted: not necessarily inclusive) the director is referred to in the ‘he’ form here. This reference is intended to include directors of all genders.

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Internal directors’ liability:

External directors’ liability:

The company or (after the company’s bankruptcy) the bankruptcy trustee holds the director personally liable.

Creditors, the bankruptcy trustee, the Tax Receiver and/or shareholders hold the director personally liable.

Article 9 of Book 2 of the DCC2: liability for loss or damage caused by improper performance of duties (see explanation below).

Article 162 of Book 6 of the DCC; liability for loss or damage caused by a tort (see explanation below).

Other forms, such as liability for dividend payments and reductions of capital.

Article 148/248 of Book 2 of the DCC (only possible for the bankruptcy trustee): liability for manifestly improper management (see explanation below). Article 36 of the Collections Act / Article 23 of the Act on Mandatory Participation by Industry Pension Fund (only possible for the Tax Receiver / industry pension fund): liability for particular unpaid tax debts / industry pension fund participation due to manifestly improper management. Other forms, such as liability for misrepresentation of the company’s financial condition, prospectus liability, liability for legal acts performed before the legal entity’s incorporation or its registration in the trade register.

2. DCC = Dutch Civil Code.

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Being held liable by the company: not only in cases of fraud or intent

Directors are required to perform their duties “properly”. This standard sounds vague, and in fact it is. What is “proper” depends on the “circumstances of the case”, a legal concept favoured by lawyers but despised by the business sector. You could dismiss this concept as legal hair-splitting, but in this context, it is necessary to speak out in favour of the lawyers. For example, the proverbial greengrocer around the corner requires a different interpretation of a director’s duties than an international high-tech company. The law prescribes that the directors, when performing their tasks, must be guided by “the interests of the company and its associated business”. If the duties with which the board of directors is charged in the specific case are not fulfilled properly, there may be grounds for directors’ liability. The management duty can be divided among multiple board members. However, each board member remains responsible for the general state of affairs. The relevant features of liability for improper performance of duties can be summarized as follows:

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Directors’ liability for improper performance of duties Collective liability of board members.

All board members are jointly and severally liable – exculpation of an individual board member is sometimes possible if the individual board member cannot be blamed, particularly in view of the internal division of duties among the board, and if the board member has not been negligent in taking action.

Serious blame.

Negligence is not sufficient here. The test is whether the board member acted as may be expected from a board member who is capable of carrying out his duties and performs them conscientiously. There must be serious blame on the part of the director personally, judged according to all the circumstances of the case, such as the division of duties among the board, the nature of the activities carried out by the company, the risks generally arising from them, any guidelines applicable to the board, the information that the board member had or should have had at the time of the decisions or conduct for which he is held to blame, and the understanding and care which may be expected from a board member who is capable of fulfilling his role and performs his duties conscientiously. As a rule, violation of a statutory or regulatory provision intended to protect the company will constitute serious blame.

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Because the criterion of “serious blame” is interpreted according to the flexible but vague standard of “the circumstances of the case”, practice shows a wide variety of situations in which the “serious blame” concept has been adopted. Some cases speak for themselves: the situation where a director issued false invoices in order to supplement his income at the company’s expense is an obvious (and real-life) case of fraud which will establish director’s liability. But cases that are perhaps not immediately obvious could also lead to liability, even if there is no intent involved. For example, think of a hasty decision – however understandable it may be – that involves major financial risks, or lack of proper supervision of the risk management function. The line between taking responsible risks and fulfilling the criterion of “serious blame” is not clearly defined, but the addition of “serious” shows that liability is not easily assumed. There is, however, an additional snag: the question of whether a director is liable or not will ultimately need to be decided in court. The court will always pass judgement retrospectively, and assess whether the board had acted correctly at the time. This entails the risk of the court wrongly placing the director on a level playing field with the benefit of hindsight, and looks at the situation as it existed at the time with the current judicial

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wisdom (which does not always correspond to the perspective of someone running a business). It is easy to look back and identify the sore spot. That is not allowed, however, and it should not happen, but the tendency is there. That is why we urge directors to record as many details as possible in writing, for example in the minutes of board meetings. Preparing carefully and being able to put forward facts to substantiate the perspective and circumstances in which they acted might make all the difference in court. And making that difference is precisely what we love most about our profession.

Tortious conduct by the board: a serious reproach Sometimes the consequence of taking a risk is that the company cannot fulfil its obligations. Should the board members then pull out their wallet?

No, fortunately not. At least, not in most cases. The Dutch legal system guarantees that legal entities (companies) can and may participate in legal transactions. The reason for this is particularly to avoid personal liability. For that reason, if the company fails to comply with an obligation or commits a tortious act and offers no recourse, only the company is liable for the resulting loss or damage. The company’s directors are not liable with their private assets.


However, in some specific circumstances it is possible for a director to become liable, and a trustee in bankruptcy, creditors, the Tax Collector and in exceptional cases also

shareholders may hold the director personally liable for the loss or damage that the director caused them. The most important features and situations are, in a nutshell:

Liability of a director in tort Individual liability of a director.

No collective liability of the entire board: the individual liability must be established for each individual director.

Example I: an obligation undertaken by a director on behalf of the company.

Liability of the director if the director knows that the company will not be able to meet its obligations and will not offer any recourse for the resulting loss or damage.

Example II: frustration by the director of possibilities for recourse against a company with regard to an existing obligation of the company.

Liability of the director if the director knows that actions or omissions of the company that are allowed by the director would result in the company’s inability to meet an existing contractual or legal obligation or to offer recourse for the resulting loss or damage, or if the actions or omissions are otherwise negligent towards third parties (e.g. by giving promises of payment).

Sufficiently serious personal blame.

The blame must be sufficiently serious, given the obligation of the members of the board of directors to properly fulfil their duties, the nature and seriousness of the breach of standards and the other circumstances of the case. The blame must also be attributable to the specific director.

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Especially in the event of bankruptcy or foreseeable payment difficulties, it is sometimes difficult to distinguish clearly between permissible and impermissible management behaviour. Also, errors of business judgement do not necessarily lead to personal liability, but an error that is personally seriously culpable might. For example, may a director choose which creditors will or will not be paid by the company? The answer is: in most situations he may, since the freedom of the board is paramount. However, in situations where it has been decided that the company will cease operations and there is not enough money to pay all its creditors, affiliated creditors (e.g. group companies) may not be paid with priority. This also applies to payments in which the director has a personal interest (e.g. if the director has given a personal warranty). The distinction between permissible and impermissible payments is not always clear in practice. The guideline remains whether the director’s actions, given the circumstances, are so careless towards a creditor that he bears serious personal blame for his acts or omissions. An interesting scenario is the situation where there is doubt as to whether there is a “debt” (and therefore a

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creditor). For example, in practice directors often say, “There is no claim at all, the creditor has no leg to stand on,” or, “The case is in court, so there is no claim,” or, “We have a counterclaim that is many times bigger”. Are these arguments tenable in court proceedings when it comes to directors’ liability? Sometimes. As a guiding principle, directors are required to take action as soon as they have to “seriously consider” the existence of the claim. That moment might come, for example, when a judgment is rendered against the company – even if the directors wholeheartedly disagree with the judgment, rightly or wrongly. Required “actions” include recognizing provisions in the annual accounts or withholding cooperation in dividend decisions – even if the dividend decision in itself meets the requirements of company law. Again, our best tip is to record and document these actions and the reasons why certain measures are or are not taken.

Directors’ liability in bankruptcy

In the event of a company’s bankruptcy, the trustee has an additional tool for holding directors liable for the entire deficit in the estate. Important points to consider include:


Directors’ liability on grounds of manifestly improper performance of duties Collective liability of the entire board of directors.

The entire board is jointly and severally liable for the entire deficit in the estate. Dispensation is sometimes possible for an individual board member on the grounds that the improper performance of duties cannot be blamed on that member and the member was not negligent in taking appropriate measures. The court may also moderate the amount of the liability.

Manifestly improper performance of duties during the three years prior to the bankruptcy is a major cause of the bankruptcy.

The criterion is that no reasonable thinking director, given the same circumstances, would have acted as the director in question did.

Breach of an accounting obligation (Article 10 of Book 2 of the DCC) or publication obligation (Article 394 of Book 2 of the DCC): presumptions of evidence.

If an accounting obligation or the obligation to file the annual accounts in the proper time is breached, the improper performance of duties is established (the board cannot refute this anymore) and it is also presumed that this is an important cause of the bankruptcy. The board can refute the latter presumption by making a plausible case that other factors (besides the improper performance of duties) were an important cause of the bankruptcy.

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In bankruptcy situations, this is not the only danger that directors might face: the bankruptcy trustee could also bring a claim on account of tortious acts (including, for example, transactions in breach of contract) or on account of the improper performance of duties. Often the trustee will combine the various possibilities in a single action for liability. Creditors may also bring claims on grounds of tort against directors in the event of bankruptcy.

Ten tips for protection against directors’ liability

This tour d’horizon shows that in practice legal boundaries are not always clearly defined. The risk of directors’ liability cannot always be prevented or eliminated. Therefore, we have the following practical tips: 1. Act in accordance with the company’s interests, the law, the articles of association and (where applicable) shareholder agreements – know what these regulations say, and seek advice if in doubt. 2. E nsure careful decision-making and document the facts and circumstances on the basis of which management actions are taken. If in doubt, seek advice. 3. Actively intervene if management duties are not properly fulfilled. Take action to prevent or limit harmful consequences as much as possible.

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4. K eep proper accounts and records. 5. D raw up and publish annual accounts on time. Make sure they do not present any misleading information. 6. D o not enter into any commitments that the company is unlikely to be able to fulfil. 7. Take action if there is a serious possibility of a claim against the company, even if the board of directors disputes the company’s obligation. 8. Be alert in times of financial difficulty, especially with respect to payments to affiliated companies or payments in which the board has a personal interest. Notify the relevant parties on time of any inability to pay: the tax authorities, the company or industry pension fund, the Institute for Employee Insurance UWV (in Dutch: Uitvoeringsinstituut Werknemersverzekeringen). 9. E very year, ask the general meeting of shareholders to grant the board of directors discharge from liability, and stipulate final discharge from liability from the company and its shareholders in the event of resignation. 10. Take out directors’ and officers’ liability insurance. An indemnification or warranty by the company or another party might also be a solution but does not always provide effective redress.


Our best and universal tip therefore, as the opening quote but also a Latin proverb indicates, is the following:

Bene agere et nil timere (Do well and fear nothing).

If you have any concerns about potential directors’ liability, if you would like to consult about a specific situation, or if you would like to know whether you can sue a director as an unpaid creditor, please contact Marlies Siegers. siegers@dvdw.nl You can also visit our website to find out more about the Corporate Litigation & Dispute Resolution team at DVDW.

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Highlights main Dutch employment law topics Rob Simons

Introduction

If a company is planning to hire employees in the Netherlands, it needs to make several choices which might also have consequences for the future termination of the resulting employment contracts. This article highlights some of the main Dutch employment law topics.

Duration (fixed vs. indefinite)

Unlike an employment contract for an indefinite term, fixedterm contracts expire by operation of law on the agreed end date. According to Dutch law, an employer may offer an

employee a maximum of three fixed-term contracts in a period of no more than three years: for example three fixed-term contracts of 12 months (or shorter). As soon as this threeyear period ends, if the parties continue to work together the employment contract automatically converts into an openended contract, i.e. for an indefinite term. The same applies if a fourth contract is agreed, unless there has been a break of more than six months between two consecutive contracts.

Trial period

If the employment contract is entered into for a period of longer than six months, a trial period of one month may be agreed at the start of employment. If the parties immediately conclude a contract for an indefinite period, they may agree on a twomonth trial period. During the trial period, either party may terminate the employment contract with immediate effect.

Flexible working hours

In principle, the parties are free to agree on the hours of work. A fulltime working week in the Netherlands is 40 hours. Within the statutory boundaries, the parties may also conclude an “on call” contract, without a fixed number of working hours: the employee will then only paid for the actual hours worked after being called up.

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Collective labour agreements

Depending on the sector of the economy in which the company operates, a collective labour agreement (“CLA”) might apply. In the CLA, representatives of employers and employees (unions) agree on various terms of employment, such as holiday leave entitlements, working hours, minimum wages (which may be higher than the statutory minimum wages), overtime rules, mandatory pension plans etc. A CLA may also contain deviations from specific statutory provisions, such as an alternative maximum number of fixed-term employment contracts or other trial period arrangements.

Termination of the employment contract

Under Dutch law, besides summary dismissal, an employment contract can be terminated: (i) by operation of law, (ii) if the employee resigns, (iii) by mutual consent, (iv) by the employer subject to prior approval by a government authority called the Employee Insurance Agency (“UWV”) or (v) after dissolution by a Dutch court. Prior approval from UWV is required if the termination is based on an organizational or economic ground, e.g. a restructuring due to a loss-making business. If the ground for termination is related to the employee personally, such

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as inadequate performance, culpable conduct or a damaged working relationship, the employer must apply to a Dutch court to dissolve the employment contract. The UWV and the court will require written substantiation of the grounds for termination. Failure to provide proper substantiation will likely lead to the permission/termination being denied.

Statutory transition fee

In 2015, the Dutch legislature introduced a statutory transition fee for termination (or non-extension of a fixed-term contract) on the employer’s initiative. The amount of that fee is relatively minor: roughly 1/3 of the employee’s monthly salary per year of service, with a maximum currently of EUR 86,000 gross or one year’s salary, if this is more than EUR 86,000 gross; this only comes into play with very longstanding employment contracts. No transition fee is due for summary dismissal or termination on grounds of serious misconduct by the employee. However, an additional fee (billijke vergoeding: “fair compensation”) will need to be paid if the court rules that the termination of the employment contract was due to serious misconduct on the employer’s part. This is not calculated according to any predefined formula: the amount of this compensation depends on the specific circumstances of the case.


Final notes on termination of employment contracts

In general, employees are well-protected against involuntary termination of their employment contract. However, if the reasons for the termination are substantiated sufficiently, the costs of the termination (i.e. the statutory transition fee) are relatively minor.

If you have any questions about employment law in the Netherlands, please contact Rob Simons.

In general, employees are well-protected against involuntary termination of their employment contract. However, if the reasons for the termination are substantiated sufficiently, the costs of the termination (i.e. the statutory transition fee) are relatively minor.

r.simons@dvdw.nl You can also visit our website to find out more about the Employment Law team at DVDW.

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Insolvency in the Netherlands Juliette van de Wiel and Ruben Berghuis

The current economic climate: calm before the storm?

A big wave of insolvencies has been anticipated in the Netherlands ever since the COVID-19 pandemic hit Europe at the beginning of 2020. So far, those expectations have not materialized. In fact, the number of bankruptcies in the Netherlands is at an all-time low. Is this the calm before the storm? The low number of bankruptcies is at least partly the result of state aid to compensate for loss of revenue due to the measures to limit the spread of COVID-19. Even unviable companies that might not have survived under normal

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circumstances managed to stay afloat thanks to the state aid. Circumstances are changing, however. State-aid measures recently ended, inflation and energy prices are sky-rocketing, and starting in October 2022 companies will need to start repaying their deferred taxes from the past two years. Additionally, major personnel shortages are becoming an issue in almost every sector of the Dutch economy. It seems that at some point in the near future more companies will face difficulties in managing all these challenges simultaneously. Supposing the storm breaks, businesses will face an increase in applications for insolvency and restructuring proceedings by their Dutch trade partners. What follows is a brief overview of these proceedings, with a discussion of the key questions that businesses are likely to come across when dealing with an insolvent debtor.

Proceedings for insolvent legal entities

The Dutch Bankruptcy Act provides for three types of proceedings for businesses in financial distress: a courtapproved private composition, suspension of payments, and bankruptcy. For natural persons, there is also the debt restructuring scheme, which after three years provides a


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“clean slate”, or a discharge from liability for all debts, if a series of strict conditions are satisfied.

Even unviable companies that might not have survived under normal circumstances managed to stay afloat thanks to the state aid. Circumstances are changing, however.

Petitioning for a debtor’s bankruptcy is accepted as a means of debt collection.

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In addition, Dutch company law offers legal entities with debts but no assets the possibility to dissolve through a “turbo liquidation” process. Lastly, in recent years the practice of the “pre-pack” has been developed. In a pre-pack, during the weeks prior to the public bankruptcy proceedings the debtor, working under the supervision of the intended bankruptcy trustee, prepares a going-concern sale of the company. Following his formal appointment, the trustee can then immediately conclude the prepared transaction. The aim is to achieve the best proceeds by avoiding a decrease in the company’s value simply because it becomes public knowledge that the company is in bankruptcy proceedings. Dutch trade unions, however, see the pre-pack as a way to circumvent dismissal protection rules. Where employees can be dismissed without cause if the company is in bankruptcy, the possibilities for dismissing employees outside of bankruptcy are still fairly limited and expensive. Employees’ rights in relation to the pre-pack have therefore been a topic of much heated discussion in the past years, creating uncertainty about the legal sustainability of the pre-pack procedure, and consequently the procedure has fallen into


disuse. Nevertheless, following developments in European case law in the spring of 2022, the pre-pack procedure is likely set to enjoy a revival.

Dutch Scheme (WHOA)

The WHOA, introduced in 2021, is the latest addition to the Dutch restructuring framework. “WHOA” is the abbreviation for the name of the act (Wet Homologatie Onderhands Akkoord) that introduced this procedure. It is a pre-insolvency procedure aimed at restructuring through a creditor composition, with features similar to the “scheme of arrangement” in the UK. In theory, any court involvement is limited to approving the composition. The procedure is widely viewed as a very welcome addition to the existing proceedings because of the many possibilities it offers. Most prominently, where a qualified majority votes in favour of the offered composition, the WHOA enables the debtor to bind obstructing creditors to that composition. Throughout the procedure, the debtor remains in possession, he can choose to include all or only part of his creditors, including shareholders, secured and preferential creditors, he can request termination or amendment of long-term contracts, and he can request a standstill period. Further details of the WHOA are discussed elsewhere in this magazine.

Suspension of payments

The suspension of payments procedure constitutes an immediate, temporary relief of payment obligations but is only binding for unsecured creditors. Secured creditors and creditors with preferential rights such as employees and the tax authorities must be paid in full, as well as all new obligations arising on or after the suspension date, which is in fact one of the reasons why suspension of payments proceedings are not common. Another reason is that the route of suspension of payments is sometimes used by a company’s board of directors as an intermediate route to bankruptcy. The board does not need the shareholders’ approval to apply for suspension of payments, whereas it does for a bankruptcy petition. Only the debtor may apply for suspension of payments. The suspension is granted immediately on a provisional basis, without a substantive assessment by the court. The court will appoint an administrator, whose cooperation is required for any legal acts the debtor wishes to undertake. Although suspension of payments proceedings can be used to liquidate the company, the purpose is generally to ensure a continuation of the business through restructuring of the (unsecured) debts. The debtor may impose a composition

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on all unsecured creditors if a simple majority of the creditors votes in favour and a court rules that none of the statutory refusal grounds apply. The possibility to terminate or amend long-term contracts in a suspension of payments, however, is limited to lease agreements.

Bankruptcy

Of the various insolvency proceedings, bankruptcy is most commonly used. The purpose of bankruptcy is liquidation of the debtor’s assets by a trustee, under the supervision of a supervisory judge. Bankruptcy constitutes a general attachment on all assets for the benefit of the bankruptee’s joint creditors. Both the debtor and its creditors may petition for bankruptcy. As soon as the company has been declared bankrupt, the debtor loses the power to act on behalf of the company. Instead, this power is taken over by a courtappointed trustee, who exercises it in the interests of the joint creditors. Within one or two days following his appointment, the trustee will generally dismiss all employees, subject to a maximum notice period of six weeks. Wages are covered by the employee insurance agency, UWV. During this first phase of the bankruptcy the trustee reviews the possibilities for selling the business as a going concern, as this usually generates higher proceeds than sale of the individual assets.

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The proceeds are then distributed among the joint creditors, in accordance with their statutory ranking. Although the main goal of bankruptcy proceedings is liquidation, a company could in theory use bankruptcy as a means to restructure its debts, by offering a bankruptcy composition to its creditors. This possibility is rarely used, however.

Bankruptcy as an accepted means of debt collection

It may surprise foreign creditors how easy it is to apply for bankruptcy in the Netherlands. Bankruptcy proceedings will be opened if the creditor provides only summary evidence that he has a claim, that there is at least one other creditor, and that at least one of the claims has fallen due. Creditors often write to debt collection agencies and the tax authorities to inquire whether they are willing to put forward the second claim. The procedure takes only two to three weeks. The debtor may appeal the bankruptcy order, but the bankruptcy has immediate effect nevertheless. The result is often that the bankruptcy becomes practically irreversible, making it an effective means of pressurising debtors. Petitioning for a debtor’s bankruptcy is accepted as a means of debt collection. Particularly if the creditor’s claim is not


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overly complicated, there is no need for the creditor to first try to collect the debt through summary proceedings. Creditors should be aware, however, that any payments made to them under pressure of a bankruptcy request may be reclaimed by the bankruptcy trustee if bankruptcy nevertheless follows.

Recovery rate, duration and order of priority

Unfortunately, the recovery rate for trade creditors without security or preferential rights is quite abysmal. In 75% of bankruptcies, there are not even sufficient funds to pay estate creditors – who are paid before all other creditors – such as the trustee, who is compensated for his costs. The average recovery rate in bankruptcies is barely 5%. Considering the average duration of a bankruptcy, creditors will have to wait a year, or sometimes even several years, before they receive payment (if any). In terms of financial compensation, bankruptcy is therefore very rarely in the interests of unsecured creditors. The low recovery rate is at least partly the result of two developments. Firstly, the number of claims that are accepted by the Dutch Supreme Court as estate claims is growing substantially. Examples of estate claims are the salary of the trustee and his financial advisors, costs of

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temporarily continuing the business, rental obligations for three months following the bankruptcy date, and claims resulting from environmental protection measures. Secondly, it is becoming increasingly common for all the company’s assets to be pledged or mortgaged to the financing bank. Creditors with security rights may enforce their security as if the debtor was not in bankruptcy. This regularly leaves little remaining for creditors with a statutory preference, such as the tax authorities, and even less for creditors who have no preferential rights, who make up the majority.

Retention of title

A more effective means of recovery for suppliers of goods is retention of title. Normally, ownership passes to the buyer on delivery of the goods, regardless of whether the purchase price has been paid. With a contractual retention of title, however, the supplier retains ownership of the goods until full payment of the invoice. The bankruptcy trustee is obliged to respect a valid retention of title, and must offer the supplier the opportunity to collect the products. This does not apply to the tax authorities: under certain conditions, they may recover their claims on the insolvent company by taking recourse against a supplier’s goods that are located on the company’s premises. This quite


extraordinary power has been debated for many years, but so far no compromise has been reached. Suppliers should furthermore be aware of the practical implications. For example, they can only recover their goods if they can indicate (and prove) exactly which goods they delivered. This will generally not be a problem in the case of a machine, but it might pose difficulties if the supplier is one of several vendors delivering a particular product.

Director’s liability and mandatory review into fraudulent acts

As a general rule, directors of a legal entity are not liable for the entity’s debts. The threshold for director’s liability is high, to prevent defensive behaviour from directors. In addition to the grounds for director’s liability under general tort law and company law, however, bankruptcy trustees have two additional grounds for invoking director’s liability. Firstly, they may hold all members of the board of directors personally liable for the full bankruptcy deficit if they have manifestly mismanaged the company and their mismanagement is likely to be an important cause for the bankruptcy. Liability is assumed if the directors did not keep proper records or did not file the company’s annual report (or at least not on time). Secondly, the trustee may claim

liability based on an act of tort towards the joint creditors. An individual creditor may also bring a separate claim for liability towards the director, but the court will first rule on the trustee’s claim if the claims are pending simultaneously. The trustee’s statutory duties were recently extended to include a mandatory review into potential “irregularities” and fraudulent acts during the period preceding the bankruptcy. If the trustee uncovers any prejudicial acts, he is expected to notify the criminal judicial authorities accordingly. Discussion exists about whether it is fair and appropriate for the trustee’s duties to serve this public interest, given that they are financed by the creditors (who are not paid until after the trustee) or the trustee themselves (if the estate funds are insufficient).

Actions for fraudulent conveyance

Creditors should also be aware of a bankruptcy trustee’s power to nullify legal acts that were conducted prior to the bankruptcy – legal acts that the creditor knew, or should have known, would be disadvantageous to the joint creditors. Acts might be disadvantageous the joint creditors for a number of reasons, but the primary example is the situation where the act diminished the possibilities for recovery from the estate – basically, decreasing the value of

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the total assets. One can think of the a sale of goods at an excessive discount or on non-market terms, or by offsetting the purchase price against an outstanding invoice. Typically, this covers legal acts that were conducted in the vicinity of insolvency. It is, however, not uncommon for acts conducted a year before the bankruptcy declaration to be successfully nullified. Because of the trustee’s power to nullify legal acts, creditors should be aware of the circumstances and conditions under which an agreement or transaction is concluded, particularly if their contracting party is known to be in financial difficulty.

Creditor’s information and consultation rights

Bankruptcy proceedings in the Netherlands tend to last at least one year (on average). In more complicated bankruptcies, it might even take several years to liquidate the estate. During the course of bankruptcy proceedings, the trustee must file public reports on the progress of the proceedings and on his management of the estate. The first report is filed after one month, with subsequent reports being filed every three months. The reports are made available through the website of the Dutch judicial organisation. The trustee is not required to inform individual creditors about the progress, nor is he required to consult

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them. In practice, however, the trustee will occasionally consult creditors (particularly larger creditors) regarding the progress of the bankruptcy or about initiating certain actions such as legal proceedings. Moreover, creditors may in theory ask for a creditors committee to be appointed, although this is rare. That committee has broader information rights than individual creditors do, and the trustee is required to consult the committee in specific situations. In addition, non-estate creditors may also request the supervisory judge to give instructions to the trustee, but this facility is difficult to exercise since it carries strict requirements and may not be used to enforce a creditor’s individual rights. This means, then, that the trustee can manage the estate as he sees fit, without being obliged to consult the creditors.

Conclusion

Over the past two years, the global economy has suffered severe disruptions. Add the current uncertainties into the equation, and it should come as no surprise that businesses could face an increase in the number of applications for insolvency and restructuring proceedings by their trade partners in the near future. The Netherlands offers a variety of such proceedings. Bankruptcy is still the most


common of these. It is intended to be creditor-friendly, though in practice the recovery rate is low. In this light, creditors should consider whether petitioning for a debtor’s bankruptcy is the most effective means of recovering their claims. Other means of recovery exist, yet these require more advance planning. If it becomes apparent that a trade partner is facing insolvency, it is best for the creditor to ensure that their own financial interests are protected.

If you have any questions about insolvency in the Netherlands, please contact Juliette van de Wiel or Ruben Berghuis. vandewiel@dvdw.nl berghuis@dvdw.nl You can also visit our website to find out more about the Restructuring & Insolvency team at DVDW.

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Renting and letting in the Netherlands Iris Reidsma

The Netherlands has a good investment climate, which makes it attractive to invest in Dutch real estate. Reasons that investors give are the high payment morale, the low vacancy rates and the relatively low taxes on rental income. However, there are numerous rules. If you want to invest in Dutch real estate and rent out the property, you must take into account the legal rent protection rules and other laws and regulations, local and otherwise.

What rental rules apply in the Netherlands?

Residential property The precise rules depend on the type of property. The housing market is more strongly regulated than other

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rental markets. This means that tenants of housing enjoy rent protection and their lease can only be terminated with due regard for a legal ground for termination. If a tenant does not agree, the lease must be terminated through the courts. The only exception to this is temporary rental, such as renting a vacation home or a hotel room, or rental agreements that explicitly state that they are temporary and end by operation of law within one or two years. In addition, there are rules for the rent: rents of €763.47 or less are highly regulated, and may only be increased in accordance with the law, and then only by increments similarly determined in accordance with the law. There is a possibility that rents for more expensive homes will also be more regulated in the future. Stores, restaurants, hotels and craft enterprises Tenants with “location-bound” businesses, such as stores, food and beverage establishments, hotels and craft enterprises, also enjoy rent protection. In principle they rent for a period of 5 years, with a further 5 years’ extension, their lease can only be terminated with due regard for a legal ground for termination, and if the tenant does not agree to termination the lease must be terminated


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through the courts. The only exception is if a temporary lease is concluded for less than two years. Rules also apply to the rent: the tenant and the landlord may agree on whatever initial rent they want, but after the expiry of the first term (usually 5 years) the rent may be adjusted to the market rent. This can lead to a rent increase or a rent reduction. Other business space For other business spaces such as offices, factories, etc., few rent protection rules apply. Leases are terminated in accordance with the appropriate rules. The tenant may only apply to the court for an extension of the vacating period. The judge may grant a maximum of one year, and the tenant may submit a maximum of three requests.

What other laws and regulations should you take into account? In addition to rent and lease laws, other laws and regulations should also be taken into account. For example, an owner must have an energy label for all properties, building standards apply under the Dutch Buildings Decree, there is a maximum number of

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people who may live in a property, and in some cities and municipalities there are laws under which certain properties require a permit for letting. If the property is rented out in violation of these rules, a fine might be imposed. The advice is therefore to always research the applicable laws and regulations carefully.

If you have any questions about real estate, please contact Iris Reidsma. reidsma@dvdw.nl You can also visit our website to find out more about the Property Law team at DVDW.


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WHOA! Experiences with a new restructuring tool (the Dutch Scheme) Marjon Lok interviewing Wieneke Lisman, Ruben Berghuis and Erwin Bos

Introduction

The Dutch Scheme (WHOA) was introduced as a new restructuring tool on 1 January 2021. Since then, the floodgates have opened in terms of cases and case law involving the WHOA. Time to pull in the net and ask our

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experts about their experiences and the lessons learned. I asked Erwin (partner), Wieneke (senior associate) and Ruben (junior associate) for their thoughts on the main benefits, the greatest challenges, the alternatives and useful tips for shareholders and creditors.

The main benefits of the WHOA

The WHOA seems to offer benefits aplenty: a debtor-inpossession restructuring tool outside of bankruptcy, with possibilities for creditor cramdown, binding power on shareholders, a cooling-off period, amendment of onerous contracts, the appointment of a restructuring expert and special court powers that allow debtors to obtain a degree of deal certainty prior to submitting the final composition. Everything that was needed in the Netherlands to offer a viable but distressed company a second chance at life, or alternatively to offer an unsalvageable enterprise the opportunity to put in place a structured liquidation plan that benefits its creditors. I put the question to Ruben, Erwin and Wieneke: in your experience, what is the main benefit of the WHOA? Ruben: I believe that it is generally accepted that the main advantage of a WHOA composition is that it is a compulsory composition by which even uncooperative creditors can


be bound. The WHOA is therefore a big stick in respect of creditors (whether one or a few) who do not want to cooperate towards finding a solution. Erwin: The WHOA offers companies with a Dutch COMI (Centre of Main Interests) the opportunity to restructure their debts outside of insolvency proceedings. Though a relatively new legal instrument, the WHOA provides shareholders and creditors (or at least secured creditors) with a viable opportunity for restructuring distressed portfolio companies in the Netherlands. One of its selling points is the possibility of automatic EU-wide recognition of a WHOA composition under the Amended Recast EU Insolvency Regulation (EU) 2021/2260 of 15 December 2021, where the WHOA has been added to Annex A of the original Regulation. This is an attractive feature for Dutch companies operating in the wider EU. Wieneke: During the preparations for a WHOA composition, the debtor retains management and disposal of its assets (debtor in possession). This is different with compositions prepared within a moratorium or bankruptcy. In a moratorium, the debtor is only permitted to perform acts of administration or disposal together with the trustee. As soon as bankruptcy

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is declared, by operation of law the debtor loses the power of disposition and management of its assets and the trustee is independently charged with managing and disposing of those assets. Because in a WHOA procedure the debtor retains control of the day-to-day running of its business, and because the procedure may, if desired, be prepared in silence, a WHOA composition generally does not cause much disruption to the debtor’s business processes and minimizes market unrest (e.g. among suppliers and customers). This way, the going-concern value of the company is preserved as much as possible. That added value can then benefit the creditors/shareholders.

Points of attention and challenges

A year and a half in, some peculiarities have started to emerge that could pose challenges or points of attention. One example is the ongoing debate about whether WHOA ratification judgments in private (undisclosed) proceedings could be recognized in other EU Member States, and if so how. Another example is the fact that waiver of all debts through the composition could lead to a tax gain and therefore, depending on the available losses, a tax liability after the composition is settled. This principle in itself is not new, but as a result of new tax legislation the possibility to

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compensate loss for tax purposes is limited to EUR 1 million. As this might result in a serious claim, this should have the parties’ attention. A third point of attention for shareholders, at least, to keep in mind is that courts may restrict the shareholders when exercising their voting rights to facilitate an ongoing restructuring. In my experience, an ongoing challenge is the practicality of making all the necessary arrangements with the individual creditors to make the composition successful, and at the same time uphold the equality of how the creditors are treated, or alternatively sufficiently explain why unequal treatment is necessary if, for example, specific creditors might otherwise be worse off. This is especially a challenge where a liquidation composition is involved, as in that case every single legal relationship needs to be terminated. I asked Wieneke, Ruben and Erwin what they considered to be the biggest point of attention or challenge. Wieneke: Whereas the debtor can take plenty of time to thoroughly prepare a WHOA composition, creditors will often only find out at a late stage that the composition is being offered. It is then important to act quickly. After all, a creditor/ shareholder with voting rights only has a short time to decide

how to vote. The minimum period between submitting (or otherwise making known) a composition and taking the vote on that composition is only 8 days (Article 381(1) of the Dutch Bankruptcy Act). That does not leave much time for creditors and shareholders with some distance between themselves and the company. The creditors and shareholders entitled to vote must therefore act swiftly to form a reliable opinion of the proposed arrangement. And for that they need sufficient information. Article 375 of the Dutch Bankruptcy Act stipulates that the composition must contain all the information that the voter needs in order to be able to form a well-founded opinion about the composition, e.g. in order to assess (i) whether they want to vote in favour of the composition, (ii) whether there are any grounds for refusing to approve the composition, (iii) whether they need to have any interim provisions imposed (such as a cooling-off period/lifting of an attachment), (iv) whether there are grounds for refusal on the court’s initiative, (v) what the financial consequences of the composition are for each class of creditors and shareholders, what value is expected to be realised if the composition is put into effect, and what proceeds are expected to be realised in the event of liquidation.

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The creditors/shareholders are only entitled to this information once the composition is offered. So the amount of time for assessing the information and taking action if the information provided is insufficient or unclear is short. It is also important for the creditor/shareholder to lodge a complaint in time if the information is incomplete or if they suspect that there are other grounds for opposing ratification of the composition. A creditor/shareholder that fails to do so loses the right to rely on this ground for refusing approval if the composition is submitted for approval at a later date. Erwin: As with any restructuring, the challenge in successfully implementing the WHOA is to initiate the restructuring efforts at the right time and in a timely manner. The WHOA is aimed at forcing a scheme on creditors in an otherwise consensual process. In our experience, starting the process too late, without sufficient preparation or without sufficient support from major stakeholders creates very significant risks to successful implementation. Ruben: Preparing and offering a WHOA composition is timeconsuming and can therefore be an expensive procedure. The procedure demands a great deal not only of the experts (lawyers and accountants engaged by the debtor), but

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certainly also of the debtor (and their organization). One way to limit costs and work effectively would be to appoint an internal WHOA coordinator/officer (see the tips below). A second point is international recognition of a Dutch composition procedure outside bankruptcy. Now that the public arrangement procedure outside bankruptcy has been included in Annex A of the EU Insolvency Regulation, the choice between a public and a private (i.e. undisclosed) WHOA procedure has become more topical than ever. Especially when it comes to restructuring international groups, a great deal might hinge on the choice between preparing the composition in relative silence or in public. The automatic recognition of a public procedure means that, if the debtor is domiciled in the EU, all its creditors are bound by (among other factors) cooling-off periods and changes to their rights that are decreed and confirmed by the court in the Netherlands. This makes the WHOA an effective tool to bind creditors from other Member States to a composition. A final point that comes to mind is that restructuring through the WHOA has become slightly less attractive due to the Dutch Supreme Court’s recent ruling (ECLI:NL:HR:2022:328)


that arrears in pension contributions cannot be included in a WHOA composition. Therefore, in principle, the overdue pension contributions must be paid in full. For future obligations, the employer will continue to rely on regular Dutch employment law, for instance by asking the Employee Insurance Agency (UWV) for permission to terminate employment contracts if jobs become redundant due to economic circumstances (Article 669(3)(a) of Book 7 of the Dutch Civil Code).

Alternative restructuring tools in the Netherlands besides the WHOA

The sheer amount of case law that has been produced in a year and a half shows that the restructuring tool is being used creatively and pragmatically. One might ask whether there is still a need for other restructuring tools in the Netherlands. However, ratification has also been withheld for a substantial number of WHOA compositions since 1 January 2021. In the insolvency landscape, it has been whispered that the WHOA is perhaps not the answer to everything after all, and that perhaps a prepack (a tool that is once more seeing the light of day, following the European Court of Justice’s Heiploeg ruling on 28 April 2022) or the existing older restructuring alternatives under the Dutch

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Bankruptcy Act offer more feasible solutions. I asked Erwin, Ruben and Wieneke whether they see any possibilities remaining for alternative restructuring tools. Wieneke: Employment contracts are not affected by the WHOA. This means that, if the cause of the financial problems is based in part on too many employees or overly high employee costs (including pension charges), the route of bankruptcy will often be necessary. In bankruptcy, the staff can then be dismissed and a settlement offered that also includes the employee costs. Even if a thorough investigation into possible irregularities is necessary, for example because there are clear indications that funds have been withdrawn or damaging actions or legal acts have been carried out, it might in some situations be preferable to declare bankruptcy, so that the trustee can investigate the matter and redress the harm, for example by annulling legal acts in respect of fraudulent conveyance or holding directors liable. Although WHOA case law shows that the courts are also alert to such aspects and takes a critical view of them, the courts depend greatly on whatever information that comes to their attention. The bankruptcy trustee, on the other hand, has more possibilities – using the powers at their disposal – for uncovering harmful legal acts that have taken place and of redressing the loss or damage resulting from them.

Ruben: Like I mentioned, offering a composition based on the WHOA can be a process that consumes substantial amounts of time and resources. Therefore, other restructuring tools can still be very useful. What tool to engage depends to a large extent on the circumstances and on the severity of the financial or organisational distress facing the company. At a minimum, it is vital to seek legal and financial advice at an early stage, to make optimal use of the broad range of restructuring and insolvency proceedings available. Voluntary arrangements with creditors are a first step, while selling part of the company to save other parts is also an option. In situations of distress requiring temporary relief against the company’s ordinary, unsecured creditors, a company might find a safe harbour in suspension of payments – although suspension of payments is not known for its effectiveness. In fact, the opposite is true, as mostly it ends in bankruptcy. If bankruptcy is approaching, the prepack procedure might regain its once prominent position in the insolvency landscape. So there are plenty of options besides the WHOA that should not be ruled out. Erwin: As the English saying goes: horses for courses. Sometimes you need a restructuring expert, other times a bankruptcy trustee is inevitable. The WHOA is indeed

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just one of the instruments available for restructuring in the Netherlands, and it suits specific situations and needs. The potential of the prepack coming back into play is a welcome one, because is suits other specific situations and needs. In my view, these and other Dutch legal instruments complement rather than exclude each other. If bankruptcy is inevitable or even necessary, the prepack is likely best suited. Conversely, if bankruptcy can and should be avoided, the WHOA is much better suited. This is not surprising, given that the lack of an enforceable instrument for that situation was sorely lacking before the WHOA was introduced and bankruptcy was too often the only solution. In that sense, the WHOA very much fills a void and complements existing, alternative restructuring tools.

Tips and tricks when considering a Dutch Scheme

Looking at the numerous WHOA cases that we have worked on ourselves at DVDW, as well as the vast amount of case law already in existence, one of the main tips that I would give a debtor and its shareholders is to provide as much transparency as possible to creditors about why the company is in distress, what choices it has made, what settlements it has entered into and what payments have been made. Keep this as simple as possible and deviate from the norm only

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where absolutely necessary. The court and the creditors generally require a straightforward and understandable document that is carefully and clearly substantiated by underlying documents. You need to be absolutely candid and transparent. If the court or affected creditors have a gut feeling that side deals are being made, or that their information does not represent the full picture, it is likely that a composition will be rejected. In addition, I would advise limiting contact with potential candidates for restructuring experts prior to the court hearing, as the court may otherwise question their suitability and independence. I asked Ruben, Wieneke and Erwin for useful tips based on their own experience. Wieneke: WHOA procedures involve countless rules and deadlines, which it is important to be aware of as a creditor/ shareholder. The WHOA is still relatively new and the interpretation of its rules is still being crystallized every day in case law. The consequences of a successful WHOA settlement for a creditor can be far-reaching. For example, as a creditor you might be confronted with the forced termination of current agreements, forced discharge of claims and a cooling-off period that could severely curtail your possibilities for recovery. When confronted with a WHOA composition


as a foreign creditor/shareholder, it is therefore wise to engage a Dutch lawyer who understands the WHOA. This will ensure that you can make the best possible use of your rights to counter any adverse effects, and that you do not unnecessarily forfeit any rights. Ruben: This would be the appointment of a WHOA coordinator within the debtor’s own organization, as mentioned above. This could be a board member, but also someone from senior management. Preferably, it should be someone with financial, legal and operational expertise and a knowledge of the organization/group. This person will then act as the point of contact for the advisors, third parties, creditors, and possibly other entities within the group. Erwin: Our significant experience with the instrument over the past year has taught us several invaluable lessons, some of which should be mentioned here. Firstly, although the WHOA was envisaged as a debtor-in-possession process with very limited court involvement until the final stages, in practice the opposite holds true. We highly recommend involving the court at the earliest possible stage and on material aspects of the WHOA composition. Secondly, extensive due diligence prior to initiating the

Creditors will often only find out at a late stage that the composition is being offered. It is then important to act quickly.

WHOA composition generally does not cause much disruption to the debtor’s business processes and minimizes market unrest.

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process is inevitable. Stakeholders that are overlooked will obtain critical hold-out leverage that should be avoided. And lastly, rigorous preparation for the WHOA composition as a worst-case restructuring scenario creates the best understanding of how viable the restructuring will be, because it forces the company and its stakeholders to flush out all potential risks and holdout positions standing in the way of a successful restructuring.

Conclusion

The conclusion is short and sweet. Although not a universal panacea, the Dutch Scheme certainly appears to be living up to its potential, and it offers an effective and expedient restructuring tool. However, the process can be harrowing, and professional guidance from an experienced law firm and a good accountant is indispensable.

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If you have any questions about this contribution, please contact Marjon Lok, Wieneke Lisman, Ruben Berghuis or Erwin Bos lok@dvdw.nl lisman@dvdw.nl berghuis@dvdw.nl bos@dvdw.nl For more information about the WHOA, visit our WHOA portal. You can also visit our website to find out more about the Restructuring & Insolvency team at DVDW.


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Have you seen our last edition: “That will not happen to us.”? You have my vote! The private equity voting agreement Anique Noordam Fair and reasonable business What does that mean in practice? René van de Klift Temptations in the face of financial headwinds Dangers of fraud and disloyalty in difficult times as well as the necessary climbing ropes and binoculars to help you navigate Marjon Lok and Marlies Siegers Directors’ liability in pension debts Rien Visscher 108 | DVDW - Magazine - Going Dutch?

Click here to have a look at all the previous (Dutch language) editions of our magazine. Translations of articles upon request.

Footangles and snags Preparing, executing and supervising dividend payments in the BV Sjors Wahlbrinck Harmful self-interest? The extent to which a shareholder should take the corporate interest into account Wouter Buikstra and Marjon Lok Conflict of interest The law is only half the story Freek Haasjes


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110 | DVDW - Magazine - Going Dutch?


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112 | DVDW - Magazine - Going Dutch?