8.3 Mergers and acquisitions

Legal entities, in particular companies limited by shares, can merge in three different ways:

In the case of a transfer of business only the enterprise is transferred, not the legal entity. The resolution in question is proposed or adopted by the management board. It therefore presents no specific problems with regard to the works council’s right to be consulted under Section 25(1)(a) and (b). Because transfer of the entire enterprise can have major consequences for the shareholders in a company limited by shares (since the legal entity in which they are shareholders will then no longer conduct any enterprise), Section 2:107a of the Civil Code gives the shareholders’ meeting of a public limited liability company a right of consent. The works council has a right to be heard in respect of that right of consent. Also in this regard co-determination is in keeping with control (the right of consent).

The same applies to a legal merger. The ultimate decision to merge is made by the shareholders’ meeting, but is preceded by a proposal from the management board. The proposal may be made subject to the right to be consulted under Section 25 of the Works Councils Act. The works council’s powers in respect of the transfer or acquisition of control in the case of a transfer of business transfer or a legal merger therefore present no problems. However, problems under co-determination law may occur once the enterprise or the legal entity has been transferred, because in that case the control over the activities of the enterprise has changed. The employees have entered the employment of a different entrepreneur and the question is whether the works council (of the transferring party) has any right of existence after the transfer.

In the case of a transfer of undertaking within the meaning of Sections 7:662 etseq. of the Civil Code, Article 6 of the Directive on transfers of undertakings provides that the works council continues to exist if the enterprise has continued to exist “as an entity” after the transfer. If that is not the case, member states must take measures to ensure that the employees who were represented before the transfer are still represented also after the transfer. The Works Councils Act does not provide for such measures; co-determination rights of employees are therefore lost after a transfer of the enterprise. Although it is assumed in Dutch case law that the works council of the acquiring party in that case also represents the employees of the transferring party, that is not in accordance with the Directive in my opinion. Dutch legislature has yet to implement Article 6 of the Directive.

Unlike in the case of a transfer of business or a legal merger, in case of a transfer of share the shares in the legal entity are transferred and acquired, not the enterprise. Strictly speaking, such a merger is therefore not subject to the right to be consulted under Section 25 of the Works Councils Act, which refers to transfer or acquisition of an enterprise. The “Intergas doctrine” addressed above might solve that problem: when a legal entity is transferred, the enterprise is also indirectly transferred. However, a transfer of shares presents an additional problem: the merger decision is not made by the management board or by another body of the legal entity, but rather by the individual shareholders. Except in the case of joint entrepreneurship, which is rare, although not impossible in respect of a shareholder other than a parent company, no resolution or proposal of the entrepreneur is therefore involved.

In the case of a friendly takeover this problem is solved in practice by following the management board’s positive recommendation to the shareholders. The decision to transfer the shares is then allocated, as it were, to the management board, since giving a positive recommendation in itself does not come under the exhaustive list in Section 25 of the Works Councils Act. In the event of an unfriendly (hostile) takeover, this artifice is of no avail, since there is no positive recommendation from the management board in that case. In the case of a hostile takeover the works council therefore does not have the right to be consulted, in principle, but in that case the trade unions can exercise all their powers under the Merger Code.

The Merger Code includes a specific provision on hostile takeovers. In such cases the acquiring party must inform the target company’s management board of the acquisition, to enable it to consult the trade unions involved. It remains to be seen whether such a provision is tenable in the event of a public bid that comes under the Financial Supervision Act and the Public Takeover Bids (Financial Supervision Act) Decree, since those regulations make it possible to make a bid without prior notice. Fully applying Section 5 of the Merger Code would put an end to that possibility, which would be a violation of the rights of investors, who are protected by those regulations. A similar provision in the Works Councils Act or a similar approach in case law would give rise to the same conflict of interest. The fact that the employees’ interest in co-determination sometimes gives way to the shareholders’ interest (protected by securities law) becomes apparent when information or advice is provided. Trade unions, for instance, are informed under Section 3 of the Merger Code at a later stage about an imminent merger if the merger comes under a securities law regime, such as the Financial Supervision Act. During the parliamentary discussion of the implementation of the Thirteenth Directive, the Minister took the position that in the case of a public (friendly) bid the works council’s right to be consulted moves to the background. That is a substantially different approach than in the other types of mergers, of which I had in fact concluded that the works council must be consulted at an early stage, sometimes before a letter of intent is signed.

In sum, employees’ co-determination rights are limited in the event of a public bid, which in my opinion applies to any public takeover. This is due on the one hand to the manner of decision-making and on the other hand to the investors’ interests. However, the regulations on public bids also create new rights to be informed, which relate specifically to this type of acquisition. In the final section I have investigated whether the regulations on insider trading in general oppose co-determination of employees in the event of a public takeover. That is not the case in my opinion, in light of the possibility of imposing a duty of confidentiality. However, I have noted in that regard that the duty of confidentiality under the Merger Code relates only to the powers under Section 4 of the Merger Code, not to the statement under Section 3 of the Merger Code.

In the chapter on mergers and acquisitions I have also paid attention to the special possibility of using (financial) co-determination as an anti-takeover mechanism in the event of a hostile bid. By issuing shares to employees in the context of an employee participation scheme, the shareholding of the (hostile) acquiring party can be diluted. That way an acquisition can be avoided. There is a risk that the Enterprise Section will conclude in inquiry proceedings (possibly instituted by shareholders) that there are valid reasons to doubt a correct policy or to issue a mismanagement ruling, on the grounds that employee co-determination is being used for a purpose other than that for which it is intended (abuse of power; Section 3:13 of the Civil Code). The question whether abuse of power is involved depends on the extent to which employees actually participate and obtain any financial gain, and on the purpose of the scheme. If the company can prove that it had intended for some time already to allow employees to financially participate in the company, abuse of power is less likely to be assumed.