8.3 Chapter 3 – Shareholders and preventive restructurings: the European framework

In this chapter, I examine the European framework for preventive restructuring procedures, with a focus on shareholders. The Directive on restructuring and insolvency of 2019 (EU 2019/1023) facilitates a preventive restructuring system under which a compulsory plan may be imposed on both creditors and shareholders. The Directive contains minimum requirements for this. The Dutch legislator intends to align the ACPP with the Directive. To avoid overlap with par. 7.6 (Dutch law), I will only explain a few important elements from the European framework below.

Under the Directive, a plan may directly (e.g. a change in dividend entitlement) or indirectly (e.g. a dilution of shares) amend the rights of shareholders. Shareholders may even lose their entire share interest. Because of the potentially far-reaching consequences for shareholders (and creditors), adequate safeguards are important. In this context, it is worth noting that the Directive only requires an impending insolvency (likelihood of insolvency) for the interference with shareholder rights (par. 3.3.4.1). It is up to the Member States themselves to interpret this concept. In my view, the criterion set out in the Directive is not strict enough, as the threat of insolvency is a broad concept which could cover a great deal. I believe the term ‘likelihood of insolvency’ should be understood to mean that it can reasonably be assumed that the company will no longer be able to pay its debts. The ACPP applies this requirement. Furthermore, the best interest test serves as a minimum guarantee that a shareholder or creditor is in any event no worse off under the plan than without it (par. 3.3.7.1). A shareholder involved in the plan will generally be out of the money without the plan, i.e. he will not receive any payment in the event of liquidation of the company or, depending on the choice of a Member State, in the event of the next best alternative. However, this does not mean that the plan may amend shareholder rights indefinitely. The amendment must be necessary to put the plan into effect.

The shareholders and creditors affected by the plan vote on the plan in classes. The court confirms the plan in principle if all classes vote in favour. If not all classes vote in favour, the plan can still be confirmed if the cross class cramdown requirements are not (successfully) invoked (par. 3.3.8). In a cross class cramdown the opposing class will be bound by the plan. One of the cross class cramdown requirements is the absolute priority rule or the relative priority rule. The Directive gives Member States the choice of one of the two rules. Under the relative priority rule – as prescribed by the Directive – out of the money shareholders can always retain (part of) their share interest as long as a higher ranked voting class is treated slightly more favourably under the plan. It allows out of the money shareholders to influence a plan that is favourable to them, whereas the Directive aims to ensure that shareholders cannot unreasonably block the preparation of a plan. In my view, the Netherlands has rightly opted for the absolute priority rule: shareholders will, in principle, lose their share interest if not all of the higher-ranking classes are fully satisfied (see below).

Company law should not prevent the amendment of shareholder rights under a plan. The Directive therefore allows Member States to derogate from certain provisions of the Directive relating to certain aspects of company law (EU 2017/1132) to the extent and for as long as is necessary for the preparation of a plan (par. 3.3.11). Certain resolutions of the general meeting or a meeting of holders of shares of a certain type or specification are therefore not required. For example: a resolution to reduce or increase the capital. Nor is the consent of individual shareholders required. Under the ACPP, certain resolutions are also not required (see below). However, the ACPP is silent – wrongly in my opinion – on the consent of individual shareholders.

Lastly, particularly two fundamental rights from the ECHR can play a role in the preventive restructuring of debts: the right to unfettered enjoyment of property and the (negative) freedom of association. If the plan amends the rights of shareholders, this is an interference with the right to peaceful enjoyment of property (art. 1 FP ECHR). I conclude in par. 3.4 that the preventive restructuring system set out in the Directive, as well as the ACPP, meets the cumulative requirements for justified interference (lawfulness, in the public interest and proportionality). Furthermore, the negative freedom of association plays a role when a creditor becomes a shareholder in the restructured company against his will as a result of a debt for equity swap (par. 3.5). The negative freedom of association is part of article 11 ECHR. This means that, in principle, no one can be forced to join an association, which also includes a company.