HVG Corporate/M&A. This HVG Corporate/M&A Update will inform you on recent developments in Dutch corporate law and the transactions market.

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1 Update September 2014 HVG Corporate/M&A Update This HVG Corporate/M&A Update will inform you on recent developments in Dutch corporate law and the transactions market. Contents: 1. Legislative proposal on the Continuity of Enterprises II (Wet continuïteit ondernemingen II): the compulsory composition 2. Usage of a guarantee upon the bankruptcy of a tenant 3. Digital filing on the rise 4. Support claim required for bankruptcy petition 5. The term damages in acquisition agreements 6. Company Directors Disqualification Bill nearing adoption 7. Action needed if a legal entity needs to be dissolved this year

2 1. Legislative proposal on the Continuity of Enterprises II (Wet continuïteit ondernemingen II): the compulsory composition On 14 August 2014, the legislative proposal on the Continuity of Enterprises II (Wet continuïteit ondernemingen II) was published for consultation. This legislative proposal is part of a more comprehensive amendment of the Bankruptcy Act and follows on from the previously published legislative proposal on the Continuity of Enterprises I (Wet continuïteit ondernemingen I) about the pre-pack. Based on the current legislation, a single creditor can thwart a company s attempts to settle out of court with the creditors. The purpose of the legislative proposal on the Continuity of Enterprises II (Wet continuïteit ondernemingen II) is to end this situation through an amendment of the Bankruptcy Act. Furthermore, the lenders who finance the arrangement will be protected. Inspired by similar legislation in the United States of America and the United Kingdom, the amendment aims to reduce the number of bankruptcies. The legislative proposal enables a restructuring of debts and the shareholding structure based on an arrangement between the company and its creditors and shareholders. Both the company itself and creditors may propose a composition. Many options are available with respect to the contents of the arrangement. Examples include the conversion of debts into shares, with dilution of the existing shareholders interests, renunciation of (part of) the claims by creditors, the issuance of new shares to a third party, or a combination thereof. In the event that the arrangement is supported by the majority of the creditors and shareholders who jointly represent two thirds of the total debt burden, the unwilling creditors and shareholders could be compelled to cooperate through a court order declaring the composition binding. The proposed arrangement applies to companies, irrespective of their activities and their legal form. The proposed arrangement, however, does not apply to natural persons who are not self-employed or otherwise trading on their own account. To guarantee the interests of the creditors, financial data and plans for the future have to be attached to the composition proposal. Under the current legislation, lenders who provide credit to ailing companies stipulating additional securities as collateral run the risk of cancellation of the additional securities by the bankruptcy trustee in the event that a bankruptcy ensues. As a result, lenders are reluctant to provide emergency loans. The proposed arrangement reduces this risk for lenders by creating an exception for them with respect to the provision of emergency credit and amending legislation on the actio pauliana and the right of setoff to suit their needs. The management board is fully authorized to propose a composition. Statutory or other provisions stipulating that shareholder permission is required, are nullified. The objective is to allow the management board full freedom to save the company without having to depend on disobliging or quarrelling shareholders. Thus, the bill strengthens the position of lenders and weakens the position of shareholders. 2. Usage of a guarantee upon the bankruptcy of a tenant In a recent judgment, the Romania judgment, the Dutch Supreme Court explained the effects and consequences of Article 39 of the Dutch Bankruptcy Act. This judgment is a clarification of an earlier judgment in 2011 (Aukema/Uni-Invest). In that judgment the Supreme Court found that the termination of the HVG Corporate/M&A Update September

3 tenancy agreement due to Article 39 of the Dutch Bankruptcy Act is a legal and correct way of terminating the tenancy agreement and in principle does not lead to any obligation to pay compensation. This implies that the lessor cannot recover his damages as a result of the (early) termination of the tenancy agreement due to bankruptcy of the tenant, based on Article 39 of the Dutch Bankruptcy Act, from the bankrupt estate. The interpretation of this rule was unclear for situations where a third party acts as a guarantor for the liabilities of the (bankrupt) tenant. The Dutch Supreme Court has answered this question through the Romania judgment. In this judgment, the Dutch Supreme Court reiterates that it remains impossible for the lessor to recover his damages from the estate, but states that this does not affect the compensation provision as agreed between the tenant and the lessor. This obligation will remain in force and in the event that a third party acts as a guarantor for this obligation, the lessor can simply recover his loss from the surety. Any ensuing recourse action taken by the guarantor cannot be recovered from the bankrupt estate. Aukema/Uni-Invest was an impediment to lessors if they wanted to recover loss of rent due to voids from a guarantor. This lack of clarity has now been removed to the benefit of lessors. 3. Digital filing on the rise Today, it is still required in many cases that enterprises and legal entities file their documents at the Trade Register (kept by the Chamber of Commerce) in hard copy format. Since 2007, small enterprises have had the option of filing their financial statements electronically, using the Standard Business Reporting (SBR) program. The Ministers of Public Safety and Justice and Economic Affairs have submitted a legislative bill for consultation providing that data must be filed in electronic format only. The data to be filed concern the financial statements, the annual report, the supplementary information as described in the law (including the auditors report, insofar as required) and a number of declarations and statements. The government expects a reduction in the administrative burden of approximately 33%. This step towards digitization is facilitated by the formation of one single national Chamber of Commerce on 1 January Support claim required for bankruptcy petition A creditor who wants to petition for bankruptcy of his debtor is required to demonstrate that the latter has failed to pay other debts as well, as the purpose of liquidation is to distribute the assets of the debtor to the joint creditors. A recent judgment of the Dutch Supreme Court clarifies the requirements to such a support claim (steunvordering). A support claim of a second creditor does not need to be due and payable, its value does not need to have been definitively established, and the claim needs not be monetary in nature. It is sufficient that the claim can be filed for verification in the bankruptcy proceedings, so that the creditor can share in the proceeds of the liquidation. The value of claims that are not expressed in money needs to be estimated. However, a future claim cannot constitute the requisite claim of a second creditor, because it is not sufficiently certain that such a claim will actually materialize. 5. The term damages in acquisition agreements HVG Corporate/M&A Update September

4 Warranties are used in takeover negotiations as an instrument for risk allocation between parties. If a warranty is breached, the seller will, in principle, be liable for compensation for the damage sustained as a result of that breach. Therefore, sellers will want to limit their liability to the damages suffered by the company. On the other hand, purchasers will want to minimize their risk and will also want to recover the damages they suffer from the seller. For this reason, it is of great importance to focus on the term damages when drafting the acquisition agreement. It is crucial for parties to understand which damages will, and which damages will not qualify for compensation in case of a breach of warranty. The key question is: What is meant by damages? The term damages, or loss, has not been defined in Dutch law nor in any parliamentary documentation (except for the distinction between financial loss and any other loss as referred to in Articles 6:95 DCC and 6:96 DCC). It is for this reason that acquisition agreements often further define the term damages. Acquisition agreements often define the type of damages that will or will not qualify for compensation. Frequently, reference is made to applicable Dutch law, but in general a provision is included which contains an obligation for the seller to return the purchaser to the position he would have been in if no breach had occurred. However, it also occurs that the term damages is further defined by the use of certain terminology. In the event that the term damages is linked to the legal provision of Article 6:96 DCC, the financial loss will be compensated for in case of a breach of warranty. When reference is made to this article, the problem may occur that in a share transaction, a breach of warranty may not always alter the financial position of the company or the purchaser. For a purchaser it may not be clear whether he can claim any damages from the company or whether he can claim damages consisting of the difference in economic value relative to his expectations. A common provision that is often used in acquisition agreements to solve this problem reads as follows: The damages attributable to the Seller as a result of a breach of warranty should be set at the amount required to put the Purchaser or at the discretion of the Purchaser, the company in the same position as if no breach had occurred. A definition of the term damages as stated above can be found in many variations in acquisition agreements. As indicated earlier, sellers will want to limit their liability to the damages suffered by the company and they will not want to compensate for the damages suffered by the purchaser (which possibility does exist in the above-mentioned provision). There are few judgments with regard to the consequences of such provisions. For example, in a judgment of the District Court of Noord-Holland of 16 October 2013, the inclusion of this provision had an effect that the seller had not foreseen. According to the purchaser, in a share transaction, the seller had breached the balance sheet warranty by inflating the results of operations. The purchaser claimed an amount in damages corresponding to the decrease in value of his shares, which consisted of the difference in operating results, multiplied by the multiple that was used to determine the purchase price. Although eventually an expert was appointed to assess the damages, the court was not entirely unreceptive to the point of view of the purchaser. In this case, the seller will suffer the consequences and will also have to compensate for the damages of the purchaser. Moreover, the multiple was an extra bitter pill, and in the future, the seller will want to exclude the use of a multiple from damages for which he is liable. Partly due to the influence of the Anglo-American culture, to an increasing extent we see stipulations providing that a party is not liable for indirect loss in case of a breach of warranty, for instance. Indirect loss, as well as direct loss and consequential loss are terms that are commonly used in contractual practice. However, these terms do not have a generally accepted meaning in the Netherlands. HVG Corporate/M&A Update September

5 The meaning and the explanation of these terms can, however, be of great importance because sometimes a liability cap is included for direct loss and a general exoneration may apply for indirect loss. Furthermore, these terms often do have a different meaning according to Anglo-American law than according to Dutch law. For instance, the generally perceived notion in the Netherlands is that the exclusion of indirect loss will, by consequence, exclude lost profits as well. This is not the case if we follow the Anglo-American definitions of these terms. It is, therefore, recommended to use such exotic terms with great caution. This is a short discussion of the different types of the term damages and the problems that may occur. Seller and purchaser would do well to pay attention to the term damages to prevent unpleasant surprises in case of a breach of warranty. If opting for legal certainty, make sure to determine explicitly which damages will be compensated for by the seller in case of a breach of warranty. Linking the term damages to the legal provision may well be insufficient. The use of specific terms such as direct loss, indirect loss and consequential loss is only useful when further substance is given to these terms or when these terms are further defined. Failure to do so will result in ambiguity concerning the intentions of the parties and lack of clarity regarding the interpretation of the term damages. Furthermore, pay attention to the differences in culture or legal jurisdiction as this might influence the explanation of terms. Make sure to use an accurate definition of the term damages and give it the attention it deserves. 6. Company Directors Disqualification Bill submitted The Company Directors Disqualification Bill (see the issue in our newsletter of October 2013) has been submitted to Parliament. The revisions to the draft bill are not enormous. Noteworthy is the fact that the open norm of manifestly improper management has disappeared. The grounds for imposing a ban have now been formulated exhaustively: a) established directors liability, b) repetitive bankruptcies within a short timeframe, c) acts causing serious detriment to creditors, d) tax fraud and e) non-compliance with the duty to inform or to cooperate with the bankruptcy trustee. In the draft bill, these grounds were a specification of the open norm. 7. Action needed if a legal entity needs to be dissolved this year Part of the legal procedure to dissolve and strike off a legal entity is the two-month waiting period. This waiting period gives creditors time to object against the proposed liquidation of the legal entity. So if you wish to dissolve and strike off a legal entity this year, the winding-up procedure must be started shortly. Under certain circumstances it is possible to dissolve a legal entity by means of a so-called turbo liquidation. No two-month waiting period applies in case of a turbo liquidation. Please contact us if you have any questions on the liquidation procedure or wish to eliminate redundant legal entities. HVG Corporate/M&A Update September

6 HVG Attorneys at Law Civil Law Notaries About HVG Holland Van Gijzen Advocaten en Notarissen LLP (HVG) is a leading Dutch law firm with an outstanding reputation with regard to providing legal services. Our attorneys at law and civil law notaries are active in all areas of law which are relevant to entrepreneurs and their businesses. With offices in Amsterdam, The Hague, Eindhoven, Rotterdam, Utrecht, Brussels and a legal desk in New York, we are able to provide you with fitting answers to all your legal questions. In the Netherlands, HVG has a strategic alliance with Ernst & Young Belastingadviseurs LLP. Information: If you have any questions or if you require any additional information, you are welcome to contact your contact person at HVG or go to: HVG >>Our people. Practice group leaders: Corporate & Commercial Sandra van Loon T: +31 (0) E: sandra.van.loon@hollandlaw.nl Holland Van Gijzen Advocaten en Notarissen LLP is a limited liability partnership incorporated under the laws of England and Wales with registered number OC and is registered in the Netherlands with the Chamber of Commerce Rotterdam under number Mergers & Acquisitions Sijmen de Lange T: +31 (0) E: sijmen.de.lange@hollandlaw.nl 2014 Holland Van Gijzen Advocaten en Notarissen LLP Disclaimer This publication has been drawn up with the greatest possible care. HVG is not liable for any inaccuracies and/or incompleteness of the information provided in this publication, nor can any rights be derived from its contents. HVG Corporate/M&A Update September