On 23 September 2009, the district court of Amsterdam granted the holder of a pledge over the shares in the capital of Schoeller Arca Systems Services B.V. authorisation for foreclosure on the pledge by way of a private sale pursuant to Article 3:251(1) of the Dutch Civil Code. Foreclosure on a pledge over Dutch shares is rare. The court decision appears to open up interesting avenues for a secured lender to either wipe out subordinated mezzanine debt or implement a loan-to-own strategy.
Foreclosing on a Dutch Share Pledge
Under Dutch law, a pledgee may not appropriate the pledged property. Foreclosure on a pledge must take place by way of:
- a public auction: a public auction of shares is extremely rare.
- a private sale by the pledgee to a third party with the consent of the pledgor, which consent is valid only if it is given by the pledgor after the pledgee has become entitled to enforce the pledge; generally this is how a pledgee forecloses on a Dutch share pledge; or
- a court authorised private sale by the pledgee to a third party;
Also, the pledgee may request the court to decide that the pledgee becomes owner of the pledged property for a price which the court is to determine. The court will do so on the basis of evidence presented to the court by the pledgee in respect of the value of the pledged property (in case of shares: the value of the company).
It is not necessary for the pledgee to apply for the opening of insolvency proceedings in the Netherlands against either the pledgor or the debtor of the secured debt. Enforcement of a pledge can take place outside insolvency proceedings, provided that the borrower is in default with its payment obligations.
Foreclosure on a share pledge by way of a court approved private sale by the pledgee to a third party without cooperation by the pledgor is rare. The requirement of court authorisation serves to protect the interests of the party entitled to potential surplus proceeds. This is usually the pledgor, but it can also be a pledgee second in ranking, or, as was the case in the Schoeller Arca decision, the mezzanine lender. However, clear precedents were lacking.
To obtain court approval of a private sale it is generally assumed that the pledgee has to submit to the court (i) a share purchase agreement between the pledgee and the intended buyer, either signed conditionally upon court approval, or in agreed form, as well as (ii) a valuation report by one or two reputable independent auditors which establishes the value of the company, and, indirectly, the fairness of the price offered by the buyer.
Lessons from Schoeller Arca
The decision of 23 September 2009 in respect of Schoeller Arca provides valuable guidance to senior secured lenders seeking to foreclose on a pledge of Dutch shares:
- The court will seek evidence that the price offered by the buyer in the foreclosure sale is fair. The offer for which authorisation is requested should represent the most optimal bid, which normally means: the maximum price available.
- The court will rely on the valuation reports. However, the offers which have actually been made for the shares by potential alternative buyers, for instance as part of a market testing, carry more weight than a valuation report.
- The court will be extra cautious in case the buyer is related to the current ultimate shareholders or to the senior lenders, and the interests at stake are only those of the mezzanine lenders.
- If another bidder intends to offer a higher price, the court will investigate whether the alternative bid is a realistic, firm and unconditional bid. Such investigation will merely serve to determine whether or not the price offered in the bid for which the pledgee is seeking court approval, is fair.
- The court will either give or refuse the approval requested by the pledgor. The court cannot order the intended buyer to pay a higher price, or order the pledgee to sell to an alternative bidder. In case the court refuses approval of the sale, the pledgee is free to decide whether to suspend the foreclosure, submit a new bid for approval, or choose another foreclosure procedure.
- The court will not judge whether the timing of the foreclosure sale is right. It is up to the pledgee to decide when to foreclose on the pledge and how, provided that the borrower is in default with respect to the secured payment obligations. The court will not, as part of the application for court approval, order the pledgee to suspend or postpone the foreclosure on the pledge.
- The court will invite and hear all interested parties. Subordinated lenders without a realistic prospect of receiving part of the foreclosure proceeds will not be heard as interested parties. An alternative bidder will not be recognised as interested party, but it will be heard by the court as part of the court's investigation whether the price for which the pledgee is seeking court approval, is fair.
- Upon a request for approval of a sale, the court will set a date for a hearing within two to three weeks, and render a decision two weeks after the hearing. However, more time will be involved if the court finds that not all interested parties have been heard, or when the court requests further information for determining whether the price is fair. Appeal within three months is possible only on very limited procedural grounds.
The court decision of 23 September 2009 has made the foreclosure on a share pledge by means of a private sale by the pledgee a realistic scenario in the Netherlands. Depending on the applicable credit documentation, in particular the debt release provisions contained in an intercreditor agreement between senior and mezzanine lenders, foreclosure on a share pledge could provide a way to wipe out the mezzanine debt and deleverage the borrower. That the buyer is related to the existing shareholders need not be an obstacle for this type of financial restructuring.
This means that a pre-packaged arrangement for the sale of the company can be effected by the holder of a share pledge with or without the cooperation of the company by requesting the court's approval for a private sale to a third party. Provided the sale is carefully prepared by the pledgee and the price offered is fair, this way of realising a pre-pack is relatively fast, assuming the court has no reason not to approve the sale. In the Schoeller Arca case two hearings were held and the final decision granting authorisation for the sale was rendered eight weeks after the initial filing of the petition.
The share pledge foreclosure procedure in the Netherlands may also prove interesting for a senior secured lender wishing to implement a loan-to-own strategy. If there is a payment default, it is free to either sell the borrower to a related party, or to ask the court to set a price for which it may itself become owner of the pledged shares.
In comparison with the laws of many other jurisdictions the laws of the Netherlands, including the insolvency laws, are generally considered to be creditor-friendly.