8.6 Chapter 6 – Shareholders and preventive restructurings: the Netherlands

Under Dutch law, certain rights of shareholders can only be altered against their will in exceptional circumstances where the company is threatened with bankruptcy. This concerns the concept of corporate emergency funding (par. 6.2). With the arrival of the ACPP, it is possible to amend all rights attached to a share directly or indirectly when it is reasonably plausible that the company will not be able to continue paying its debts (par. 6.5.11.1). The party proposing the plan must append to the plan a description showing which restructuring measures form part of the plan and how they contribute to solving the financial problems of the company. The modification of financial rights attached to a share is the most obvious but depending on the circumstances of the case it may be necessary to modify (also) the rights of control. Consider the situation in which creditors are not prepared to acquire shares in the context of a debt for equity swap where a meeting of holders of shares of a certain type remains entitled to decide on a dividend payment. In pars. 6.5.11.2-6.5.11.3 I discuss how the existence of a shareholders’ agreement relates to amending shareholder rights under a plan and how shareholder rights that are not (yet) attached to a share, such as the right to subscribe for shares, can be amended under a plan.

Creditors and shareholders whose rights are amended under the plan vote in classes on the plan. The criterion for the formation of classes is based on the requirement of the English scheme. In England, good experience has been gained for decades with a formation of classes that is not predetermined. Under the ACPP, shareholders and creditors vote in different classes if they have rights in the liquidation of the company’s assets in bankruptcy or obtain rights under the plan that are so different that they are not in a comparable position (par. 6.5.3). For shareholders, one voting class is sufficient, unless the plan procedure treats them differently. The latter is permitted, provided that the class of shareholders receiving less favourable treatment agrees or the unequal treatment is reasonably justified and their interests are not affected. Reasonable grounds exist, for example, where crucial shareholders are allowed to retain a larger share interest than the other shareholders. A crucial shareholder is a shareholder that is necessary for the continuation of the (company’s) business. It is a person who also contributes to the company in a way other than purely financial contributions, such as someone who is also a manager or director. For example, the experience, knowledge, reputation or business contacts of the crucial shareholder are necessary for the restructuring.

The shareholders affected by the plan must be called upon to vote on the plan. The convocation to vote is not subject to the company law requirements for the convocation of a general meeting, but to the requirements of the ACPP. In the case of a private limited company, the party proposing the plan knows who he must convene because the register of shareholders states who holds shares in the company. Voting does not necessarily have to take place in a physical meeting of shareholders. This saves time and cost.

When voting, the economic interest that a shareholder holds in the company is paramount (par. 6.5.4). A plan is adopted by a class of shareholders if shareholders represent at least two-thirds of the total amount of issued capital (belonging to the shareholders who voted). Company law is not a factor in determining the voting rights. For example, holders of non-voting shares also vote on the plan. In the case of depositary receipts for shares or usufruct, the party proposing the plan may invite the beneficial owner to vote instead of the shareholder. After all, the financial risk lies with the beneficial owner. It depends on the circumstances of the case, such as contractual arrangements, whether the beneficial owner is allowed to vote or whether the legal owner is allowed to do so (whether or not on the voting instructions from the beneficial owner). The plan binds both the shareholder and the beneficial owner. In England and Germany this is not the case; it is only the legal owner who votes on the plan. If the legal owner is not allowed to vote, I believe he should be able to challenge confirmation by the court (par. 6.5.6), as the plan also binds the legal owner. This should be amended in the ACPP. Hearing both sides of the argument is a fundamental principle in the Dutch legal system.

The court must refuse a request to confirm the plan if one or more of the general or supplemental grounds for refusal arise. The best interest test is one of the general grounds for refusal. The best interest test constitutes a minimum protection: shareholders and creditors are in any case no worse off under the plan than they would be without it. In line with the Directive, the court does not review this ground for refusal on its own initiative, as well as the supplemental grounds for refusal that apply if not all of the voting classes have voted in favour of the plan. Because of the speed and cost of a plan procedure, there are substantial advantages to the ‘squeaky wheel system’ if a (large) majority of each voting class have voted in favour of the plan. This is no longer the case with a cross class cramdown. In my opinion, the court should, as is the case in Germany, apply the best interest test on its own initiative in a cross class cramdown (par. 6.5.6). Safeguarding the minimum protection should outweigh speed and cost. This merits adaptation under the ACPP.

The supplemental grounds for refusal are the most interesting in terms of the position of shareholders. The absolute priority rule is one of the supplemental grounds for refusal (pars. 6.5.8.1-6.5.8.3). In principle, shareholders lose their share interest if the claims of the higher-ranking classes are not paid in full. However, shareholders may retain (part of) their share interest if there are reasonable grounds for doing so and the interests of the creditors or shareholders of the class(es) voting against the plan are not prejudiced by it. It is possible, for example, that a crucial shareholder may retain a share interest. Furthermore, in my opinion, shareholders may under circumstances retain (part of) their share interest under the plan if they contribute additional financing or receive value from another voting class (gifting). In Germany there is a debate as to whether such derogations are possible (par. 5.4.6.2).

The other supplemental ground for refusal implies that creditors from the dissenting class under the plan have the right to opt for a cash payment equal to the amount they would receive in cash if the company’s assets were liquidated in bankruptcy. In this research I questioned this supplemental ground for refusal, because it creates a holdout position for in the money creditors (par. 6.5.8.4). The Directive does not require a payment to be made in the form of cash. Also, there is no such requirement in the Insolvenzordnung.

Micro, small and medium-sized enterprises occupy a special position under the Directive and also under the ACPP. The consent of the SME must be obtained on two occasions. Firstly, consent is required if it is not the company, but a restructuring expert appointed by the court at the request of a creditor, works council or workplace representation, who proposes a plan (par. 6.5.4). Out of the money shareholders can put pressure on the board, for example by threatening to dismiss directors, so that the board does not give its consent. This, in my view, puts them in an undesirable dominant position. The ACPP offers a solution to this, which requires active intervention by the restructuring expert. The ACPP stipulates that shareholders may not unreasonably prevent the board from giving its consent and that the restructuring expert may request an early decision from the court on the issue of whether the board has no good reason to refuse consent.

In addition, where not all of the voting classes have voted in favour, the consent of the SME is required when the confirmation of a plan is requested (par. 6.5.5). Again, shareholders should not unreasonably impede consent.

Shareholders whose rights are amended under the plan may vote on the plan and challenge its approval prior to the confirmation meeting. No appeal is possible against the confirmation of the plan; only an appeal by the Procurator General to the Supreme Court in the interest of the law is possible. There is a strong case to be made for this: the speed (and cost) of the procedure, legal certainty and the actual implementation of an effective plan all benefit from the exclusion of appeals. Nevertheless, I would argue that appeals should be available against the decision to confirm the plan (or its refusal) (par. 6.5.10), as is the case in England and Germany. This merits adaptation under the ACPP. Indeed, the plan can make far-reaching changes to the rights of shareholders and creditors. Preference should be given to the German regulation laying down conditions for appeals. In Germany, a shareholder or creditor can only appeal against court confirmation if he can demonstrate that the plan puts him in a substantially worse position than without it. In my opinion, a provision to this effect should be included in the ACPP. It offers a minimum guarantee to creditors (and shareholders) who do not consent to the plan, but who still have an economic interest in the company and are worse off under the plan than in the event of liquidation of the company’s assets in bankruptcy.

Shareholders vote on the plan in one or more classes, not as shareholders in a general meeting. Certain resolutions of the general meeting or a meeting of holders of shares of a certain type or specification are not required for proposing and implementing the plan. Insofar as and for as long as necessary, Title 5.3 of Book 2 of the Dutch Civil Code (‘the company’s assets’) and the contractual and statutory regulations regarding decision-making shall not apply (par. 6.5.11.4). This concerns, for example, the decision-making process on a share issue or the exclusion of a pre-emptive right. Without the provision of the ACPP, decision-making by the general meeting would be necessary to achieve debt restructuring. A plan confirmed by the court will replace the resolutions required for implementation of the plan. Since the content of the plan relates to debt restructuring, there is no need for decision-making beyond that extent. In Germany, on the other hand, the plan may contain any company law provisions, and the resolutions of the general meeting and the individual shareholders’ consents which are part of the plan are considered to have been adopted and delivered in the prescribed form by the confirmation of the plan. As mentioned above, I do not consider this broad approach to be desirable outside of formal insolvency proceedings. However, it would be advisable to include in the ACPP, as outlined in the Insolvenzordnung, that the consent of individual shareholders, such as the consent on a withdrawal of shares, is not required for the implementation of a plan and that the judgment confirming the plan acts in its place. As mentioned, this is missing in the ACPP.

In order to enhance transparency and prevent abuse, I think it is advisable that the party proposing the plan, as is the case with the German plan procedure, explicitly states which resolutions of the general meeting (or a meeting of holders of shares of a certain type or specification) are not required. Moreover, such a requirement does justice to the fact that interference with the property rights of shareholders under article 1 FP ECHR must be proportional. This merits adaptation under the ACPP.

Certain resolutions of the general meeting are not required for the implementation of a plan. Shareholders cannot therefore frustrate the preparation of the plan. Shareholders can nevertheless frustrate the formation of an agreement in some other way. The general meeting and individual shareholders may continue to exercise their powers or rights, with due observance of the principles of reasonableness and fairness, during the plan procedure. In my opinion, company law should be respected as much as possible. After all, unlike the German procedure, the plan procedure is a pre-insolvency procedure.

By exercising their rights, shareholders may hinder a preventive restructuring (par. 6.5.11.4(e)). The primary competence of the general meeting in this respect is that it can dismiss or suspend the board if it proposes a plan that is unfavourable to the shareholders. Precisely for the reason that shareholders can put pressure on the board not to offer a plan or a plan that is favourable to the shareholders, a restructuring expert can offer a plan instead of the company. This expert is appointed by the court at the request of a creditor, works council or workplace representation. The company itself or a shareholder can also make such a request.