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The Netherlands Enterprise Court at the Amsterdam Court of Appeal blocks sale of shares

The Netherlands Enterprise Court at the Amsterdam Court of Appeal blocks sale of shares

A recent ruling from the Amsterdam Court of Appeal (ECLI:NL:GHAMS:2017:4123) shows once again how important it is to involve the Works Council in a sales process and provide it with sufficient information in connection with its right to be consulted on the basis of the Works Councils Act (‘WOR’). The Netherlands Enterprise Court at the Amsterdam Court of Appeal held in the aforementioned ruling that the selling legal entity (and its underlying shareholders) could not have decided within reason to sell that company as result of the fact that they breached their duty of care towards the Works Council of the company that was sold. This decision therefore has to be withdrawn, its consequences must be undone and the decision may not be implemented.

The facts

Uniface B.V. (‘Uniface’) is a software supplier that is active all over the world. Uniface’s shareholder M4 Global Solutions Holding (‘M4’) decided to sell Uniface at the start of 2016. The Uniface board did not inform the Uniface Works Council of the possible sale until 26 September 2016. The Works Council was informed that the sales process was at a very early stage at that time and that no specific buyer had yet been identified. The Works Council expressed its ideas and concerns regarding the sale of Uniface by Marlin Equity Partners LLC. (‘Marlin’) with the Uniface board on 12 December 2016.

Uniface informed the Works Council on 21 April 2017 of the interest shown by Idera Inc. (‘Idera’) and indicated that it would therefore be wise to have the Works Council procedure concerning the sale commence as soon as possible. On 26 April 2017, M4 and a buyer formed by Idera signed a Signing Protocol, which includes among other things that the parties will continue the transaction irrespective of the advice issued by the Works Council.

On 28 April 2017, Uniface requested the Works Council to issue its advice concerning the intended decision pertaining to the (in)direct change of control of Uniface, without adding underlying documents. The Works Council subsequently complained among other things about the term that is too short, the lack of clarity and incompleteness of the request for the Works Council’s advice, about the absence of the underlying documents and the fact that it had not been able to exercise an essential influence on the intended decision to sell.

The Works Council therefore issued a negative advice concerning the intended sale on 23 June 2017. This advice is based on the fact that (i) the Works Council was unable to exercise an essential influence on the intended decision, (ii) the Works Council was incorrectly not requested to provide its advice with respect to the instructions issued to the external parties in preparation for the sale, (iii) consultation with the Works Council did not take place in a timely manner before the Works Council was requested to provide its advice on the basis of Section 24 subsection 1 WOR, (iv) the request for the Works Council’s advice was not properly documented or substantiated, (v) the Works Council was not provided with sufficient information and (vi) the employee participation process was not conducted with due care.
Uniface informed the Works Council on 5 July 2017 that Marlin decided to sell Uniface to Idera that same day despite this negative advice.

Violation of the duty of care

An entrepreneur is obliged under Section 24 subsection 1 WOR to discuss the general course of affairs and decisions being prepared with the Works Council. Agreements have to be made in this connection concerning when and how the Works Council will be involved in the decision-making. On the basis of Section 25 subsection 1a WOR, the Works Council must in any event be afforded the opportunity to provide its advice concerning an intended decision to transfer control over the company. Subsection 2 provides that this advice must be requested at such a time that this advice can have a material effect on the decision to be taken.

The Netherlands Enterprise Court at the Amsterdam Court of Appeal holds in this case that both provisions were violated (legal ground 3.5 et seq.). For example, the facts show that the Works Council was not requested to provide its advice on time. This means that the advice that was issued could not have had an actual influence on the substantive decision-making.
The Works Council should also have been involved in the preparation of the sale sooner. Informing the Works Council of the intended sale at the moment the bidding process had effectively already been completed and there was only one buyer left is too late in any event and constitutes a violation of Section 24 subsection 1 WOR.

Furthermore, the Works Council’s rights during the sales process were guaranteed insufficiently by determining that the sale would go ahead irrespective of the advice issued by the Works Council.
And finally, the Netherlands Enterprise Court at the Amsterdam Court of Appeal holds that the provision of information within the context of the (late) request for advice was subpar. Uniface provided insufficient insight into and substantiation of the intended decision. Moreover, the terms imposed on the Works Council were not realistic, the ideas and concerns expressed by the Works Council did not receive a substantive response and it is unclear why the draft purchase agreement was not shared with the Works Council.

The Netherlands Enterprise Court at the Amsterdam Court of Appeal holds on the basis of the matters set out above that Uniface failed to comply with its duty of care as regards the proper course of the advisory process. This ground means that Uniface was not able to reach the contested decision to sell within reason. In addition, the decision was not substantiated sufficiently according to the Netherlands Enterprise Court at the Amsterdam Court of Appeal.

The decision therefore has to be withdrawn, its consequences must be undone and the decision may not be implemented. However, this ‘internal dispute’ does not prejudice the rights of third parties in principle, see Section 26 subsection 5 WOR 1.

Consequences for you

This decision by the Netherlands Enterprise Court at the Amsterdam Court of Appeal makes it clear how important it is to involve the Works Council in an (intended) sale of a company in a timely manner. It is clear that the consequences may be considerable. The decision to sell can be reversed, which means that the entire sales process and the costs involved therein may have been for nothing. This is very undesirable, but also unnecessary. You should therefore always obtain sound advice concerning the obligations towards your company’s works council in case of an (intended) sale of your company. This will allow you to avoid a potential disruption of the sales process.

1 The question is whether in the present case the purchasing party can be qualified as a third party in view of its involvement in the decision-making, see: Groene Serie Rechtspersonen, 7 Rechten van derden worden niet aangetast bij: Wet op de ondernemingsraden, Section 26 [Right of appeal Works Council] and JOR 2000/1 under 5

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