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 March 2015 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. Sanction of personal liability for violation of the prohibition on involvement in direct management by limited partners mitigated? 2. Three bills on mediation 3. A letter of intent, binding or not? 4. Bankruptcy of a general partnership does not necessarily lead to bankruptcy of the partners 5. Lessors of movable property better off in bankruptcies

2 1. Sanction of personal liability for violation of the prohibition on involvement in direct management by limited partners mitigated? A limited partnership (CV or commanditaire vennootschap) is entered into by one or more general partners and ditto limited (silent) partners. In most cases, the general partners are active in the affairs and management of the CV and they are jointly and severally liable for all obligations of the CV. A limited partner merely invests in the CV; he is prohibited from directly managing the CV (the prohibition on involvement in direct management) and is not liable for the obligations of the CV. For years and years (since 1807), the sanction for violation of the prohibition on involvement in direct management has been personal liability of the limited partner concerned. This is laid down in the law. Established case law holds that this applies in relation to all creditors of the CV, with retroactive effect and irrespective of the circumstances of the violation. Particularly the latter is found to be overly burdensome, harsh, disproportionate and unjust. In a recent partnership bill, the liability was limited to commitments undertaken during or after the violation. In addition, the bill contained a fairness correction. However, the bill was withdrawn for unrelated reasons. The Dutch legal system has an instrument that advocates general of the Supreme Court can use to contest a decision without affecting the position of the parties to the action: cassatie in het belang der wet (appeal to the Supreme Court in the interest of the law). This purely involves further development (or clarification) of the law. Advocate General Timmerman takes the view that if the counterparty knows that the acting partner is a limited partner, this fact should be taken into account in the ruling on the personal liability of the limited partner. He demonstrates that the sanction originally did not exist. When reading his argument, you can almost hear the shouts of the sans-culottes and the swishing of the guillotine. He explains that the sanction is a French reaction to the behavior of (former) French aristocrats, who, after loss of their privileges, participated as limited partners in a CV and represented that partnership without revealing their status within the partnership. Such behavior needed to be curbed and the sanction of personal liability found its way through the French Code de Commerce into the Dutch Commercial Code as Article 21. Timmerman holds that Article 21 of that Code, which lays down the sanction, should only apply in case of abuse. We think that the Supreme Court is likely to follow Timmerman and that the sanction of personal liability in the event of violation by the limited partner of the prohibition on involvement in direct management will soon be a thing of the past. This will turn the CV into a slightly more attractive legal form, also in international group structures. We will keep you informed. 2. Three bills on mediation Mediation is a method of dispute resolution on the rise as an alternative to dispute resolution by the courts. In mediation, a neutral third party (the mediator) mediates between the parties, tries to reveal the real interests of the parties and to reach the best possible solution for all those concerned. The mediator facilitates the process but makes no decisions. Mediation is particularly well-suited to cases in which parties seek a quick resolution of their dispute, especially in the event HVG Corporate/M&A Update March

3 of an ongoing business relationship. Examples include long-term trading relationships, conflicts in construction projects, industrial disputes and disputes between parties in a joint venture. The register of the Mediators Federation Netherlands (MfN register, formerly known as NMI register) that is currently in place contains mediators who comply with certain quality requirements, operate under defined conditions and have successfully completed an approved mediation training program. These mediators are required to observe specific rules of professional conduct and they are subject to a complaints procedure. The proposed Registered Mediators Act provides a more formal framework for these aspects, imposing more quality requirements. The purpose of two other bills is to widen the use of mediation in legal practice and encourage parties to use this tool. These laws would require certain agencies, bodies and authorities to opt in favor of registered mediators whenever they initiate a mediation process. Furthermore, parties who wish to engage a mediator on the basis of government-funded legal aid will equally be assigned a registered mediator. In addition, the initiation of a mediation process will interrupt the limitation period of a legal claim. Mediation may result in a settlement agreement, in which case the mediator can submit this agreement to the court in digital format, making it easy for the court to declare it enforceable (similar to an arbitral award). The success of mediation depends on the parties free choice to opt in favor of this type of conflict resolution. This is at odds with the fact that the bills can (softly) coerce parties into mediation. In the originating documents, for instance, the plaintiff is required to state whether mediation has been tried or give reasons why it has not been considered. The court may subsequently decide to defer the proceedings and refer the parties to a registered mediator if in the opinion of the court the option of mediation should not have been rejected. This may undermine any chance of successful mediation. HVG provides legal advice and assistance in mediation. Please contact Maarten Vis Azn (mediator) or Anne van Onna. 3. A letter of intent, binding or not? The precontractual phase is the phase that precedes the actual conclusion of a contract. During negotiations, parties often sign a letter of intent (also known as a memorandum of understanding or a heads of agreement). In a letter of intent, parties lay down in writing the key elements of their arrangements. The breaking off of negotiations during the precontractual phase will often give rise to discussions about the letter of intent and its binding force. What one party considers to be merely an intention to sign an agreement, can easily be construed as an actual (purchase) agreement by the other party. Recently, the Midden-Nederland District Court delivered an interesting judgment on the content and interpretation of a letter of intent. A customer signed a letter of intent (LOI) with an aircraft supplier for the purchase of 25 aircraft. A few months later, the parties signed a letter of amendment (LOA) to introduce a number of amendments to the LOI. At some point after the formation of the agreements mentioned above, the supplier took the position for reasons of his own that the LOI was no longer in effect. In court, the customer requested (i) a declaration that the LOI is a binding agreement, and demanded (ii) HVG Corporate/M&A Update March

4 specific performance of the obligations contained within the LOI since the LOI must be considered a purchase agreement. After all, the LOI contains all essentials of a purchase agreement since it reflects arrangements regarding the number of aircraft, a detailed description of the aircraft model to be delivered, the price, payment arrangements and the final purchase agreement under which the supplier has to deliver the 25 aircraft. The court did not follow the position of the customer for several reasons. First of all, the aircraft is still in the design stage and it is uncertain whether the aircraft model will eventually be produced. Moreover, the necessary approval of the aviation authorities has not yet been obtained and parties have not yet agreed on a delivery schedule. In addition, the court was of the opinion that the LOI, given its text, cannot be considered a binding purchase agreement. A subject to contract clause is included in the agreement. This clause reflects that the terms are not binding until a final contract is signed. Further negotiations, possibly followed by a final contract, are necessary. The court was of the opinion that the stipulations of the LOI show that parties did not intend to sign a perfect agreement because negotiations, possibly followed by a final touch, were necessary. The nature of the agreement furthermore dictates that in this case, no purchase agreement can be entered into without negotiations. The customer and supplier had not yet reached agreement on topics such as the performance of the aircraft and warranties in connection thereto, maintenance, repairs and aircraft documentation. All these issues are important components of a purchase agreement with respect to aircraft and in the aircraft industry it is common practice that final negotiations are completed beforehand. Based on the above, the court held that the LOI does not constitute a purchase agreement. The court did find, however, that it constitutes a binding agreement, creating rights and obligations. One of those obligations is the duty of the supplier to continue negotiations until a final purchase agreement has been signed. The question is, of course, whether and to what extent this obligation can be enforced. In principle, a letter of intent appears quite harmless but this and other decisions show that a letter of intent can be used by one of the parties to argue that it implies a purchase agreement. In this case, for the supplier this resulted in an obligation to continue negotiations. As letters of intent are susceptible to multiple interpretations, which makes them prone to disputes, it is important to ensure that they are carefully drafted and that the intentions are expressed in correct legal terms. Serious thought should be given to the purpose of the letter of intent and its binding force. 4. Bankruptcy of a general partnership does not necessarily lead to bankruptcy of the partners Until recently, the bankruptcy of a general partnership (VOF) automatically led to the bankruptcy of the members of the partnership. In a recent ruling, the Supreme Court has parted with this doctrine. The doctrine, which prevailed until February 2015, was introduced by the Supreme Court in 1927 and was confirmed by the same body in District courts had been divided over the matter in their judgments, and members of a partnership who had submitted a petition for debt adjustment HVG Corporate/M&A Update March

5 under the Debt Management (Natural Persons) Act were not always declared bankrupt when their general partnership had gone bankrupt. In its ruling of 6 February 2015, the Supreme Court formulated a new general rule. It judged that a general partnership s bankruptcy does not necessarily have to lead to the bankruptcy of the partners. The Supreme Court s decision rests on the following arguments. Although a general partnership does not have separate legal personality, it does have separate assets. For this reason, various parts of the law treat it as a distinct legal subject. Moreover, Article 4, Paragraph 3 of the Bankruptcy Act states that a bankruptcy petition must contain the names and domiciles of the partners. This does not, however, imply that the bankruptcy of the partnership necessarily leads to the partners going bankrupt as well. Although the partners are jointly and severally liable for the partnership s debts, this does not necessarily mean that the individual partners are in a state of insolvency as well. A partner, unlike the partnership, may have sufficient (private) assets to settle both the partnership s and his personal debts. Here it is crucial that a general partnership s assets are separated from those of the partners. The Supreme Court added that the 1927 ruling is now dated, due to the introduction of the Debt Management (Natural Persons) Act. This is because a bankruptcy petition for a general partnership will be suspended if, at the same time, a petition has been submitted for debt adjustment under the Debt Management (Natural Persons) Act. Finally, the Supreme Court considered that automatic bankruptcy of a partner is at odds with the fair trial principle of Article 6 of the ECHR if it has not been separately established that the individual partner is also, privately, in a state of insolvency. In practice, it is now important to realize that a creditor who is aiming for the bankruptcy of both the general partnership and its partners must submit a bankruptcy petition for each of the partners separately. If a petition has only been submitted for the partnership s bankruptcy, the petition may still be supplemented in the first instance. Each partner then has an individual right to put forward a plea. 5. Lessors of movable property better off in bankruptcies The bankruptcy of a tenant often has undesirable consequences for landlords. As the tenant stops paying rent, the landlord is left wondering when he will be able to regain control of the property and whether his claim will be satisfied. The Dutch Bankruptcy Act states that the rent due from the tenant from the day of the bankruptcy order until the day the lease is terminated constitutes a priority claim (in Dutch: boedelschuld). This means that the receiver in bankruptcy must pay the rent immediately, provided there are sufficient liquidation assets. For a long time, it was unclear whether this also applies to movable property. Recently, this situation has been clarified. The Supreme Court has ruled that in the event of bankruptcy of a lessee of movable property, the rent due from the day of the bankruptcy order until the day the lease is terminated constitutes a priority claim as well. This includes plant, equipment, cars and other durable objects that are used for business operations. This means that the lessor will be labeled a prioritized creditor (in Dutch: boedelschuldeiser) in the lessee s bankruptcy, giving him a slight advantage. However, the lessor still has to wait in line. The costs of bankruptcy proceedings (including the receiver s fees and HVG Corporate/M&A Update March

6 disbursements, and costs of auctions and bailiffs), as well as unpaid employees wages counting from the day of the bankruptcy order, will still be paid first. Pledgees and mortgagees also have priority over the lessor, because they have direct recourse against the assets of the lessee. They may exercise their rights as if there were no bankruptcy. Should a lessor find himself confronted with the bankruptcy of a lessee, there are several possible remedies: termination under the Bankruptcy Act, in accordance with a contractual clause, or under the Dutch Civil Code. The manner of termination may impact the time it takes for a lessor to regain control of his property, as well as the amount he can feasibly claim from the receiver. For instance, only when a lease is terminated under the Bankruptcy Act can the lessor lay claim to rent due from the day of the bankruptcy order (as a priority claim) as well as before (as an unsecured claim, in Dutch: concurrente vordering). This is classified as regular termination, which means an additional damage claim cannot be made against the bankrupt assets. Termination on the basis of a contractual clause, on the other hand, does allow for a damage claim during bankruptcy. This damage claim will then be classified as a non-priority claim. This should be carefully considered when deciding on a way to terminate the lease. HVG Corporate/M&A Update March

7 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 hvglaw.nl>>our people. Practice group leaders: Corporate & Commercial Sandra van Loon T: +31 (0) E: sandra.van.loon@hvglaw.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@hvglaw.nl 2015 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 March