Effective 1 July 2015 many of the Dutch rules governing the termination of employment contracts will be amended by the new Work and Security Act (Wet werk en zekerheid). These amendments will also have consequences for shareholders' agreements and investment agreements pursuant to which a manager (which for the purpose of this newsflash could also include directors) employed or engaged by a company has an equity stake in that company. These agreements almost always contain leaver provisions, i.e. contractual undertakings which oblige a manager to offer his/her shares in the company to one or more other shareholders – often the investor(s) – at the end of his/her employment or engagement. In addition, leaver provisions typically determine the amount of compensation that the manager will receive for those shares. A distinction is often made between "good leavers" and "bad leavers", with the former being entitled to more compensation than the latter. To determine whether a manager is a bad leaver, such provisions often refer to article 7:685 of the Dutch Civil Code ("DCC") and/or the concept of "serious reasons" referred to therein. "Serious reasons" constitutes a ground for the termination (specifically, rescission) of employment agreements by the subdistrict court. Among other things, the Work and Security Act will repeal article 7:685 without introducing any transitional provisions. We therefore recommend that you review and possibly amend your existing leaver provisions.
What situations will be affected by the Act?
The Act in any case affects situations in which management has a stake in the company's share capital and where the equity documents relating to that stake (e.g. a shareholders' or investment agreement) contain leaver provisions which, for the purpose of determining whether the manager is a bad leaver, refer to article 7:685 DCC and/or "serious reasons" (gewichtige redenen) and/or whether the termination is attributable to the manager or to the company. This applies not only where a manager is actually employed by the company on the basis of an employment contract but also where he/she is engaged by the company on the basis of a management or consultancy contract, as in the latter case the above article and concepts are typically applied mutatis mutandis. Since the amount of compensation to be received by a manager for his/her shareholding in the company is normally established on the basis of whether he/she is considered a good or bad leaver, it is important to be able to give an unambiguous answer to this question. After 1 July 2015, this will no longer be possible in many cases.
What will be changed by the Act?
As already stated, leaver provisions are typically linked to article 7:685 DCC ("serious reasons") and, in addition, often attach significance to whether the termination is attributable to the manager. If it is, he/she will typically be considered a bad leaver. If the manager and other shareholder(s) are unable to reach agreement on whether the manager is a good or bad leaver pursuant to the leaver provisions, the parties have up to now been able to seek guidance from the subdistrict court. By interpreting the correction factor applied by the court to the formula used to calculate the compensation, if any, payable to the employee in termination proceedings, it has been possible to settle the question of attribution (C <1 = attribution to the employee/manager). As a result of article 7:685 DCC being repealed (and, among other things, the above formula being replaced by a "flat-rate transition compensation"), this guidance will no longer be available. In addition, certain other amendments as a result of the Act will also affect existing leaver provisions.
What does this mean for your shareholders' or investment agreement?
If your leaver provision now refers to article 7:685 DCC or to "serious reasons", it will therefore soon refer to a non-existent statutory provision/concept. Because of the substantive changes made by the Act, a reference to article 7:685 DCC and/or "serious reasons" cannot simply be replaced by a reference to another statutory provision or concept. Consequently, existing leaver provisions – which were drawn up to avoid discussion and disputes as to whether a manager is a good or bad leaver to the maximum extent possible – will, after 1 July 2015, in any event be unclear and are likely to lead to discussion and possibly disputes. As the very purpose of these provisions is to avoid such discussion and disputes by establishing in advance, on the basis of more or less objective criteria, when a manager will be considered a good leaver and when a bad leaver, the existing forms of leaver provisions will no longer serve their intended purpose and need updating.
What can we do for you?
In our experience, most leaver provisions in equity documents (e.g. shareholders' agreements and investment agreements) governed by Dutch law refer to article 7:685 DCC ("serious reasons") and/or attach significance to the identity of the party to whom the termination is attributable. In view of the above, we recommend that you review or have someone review your leaver provisions. Our specialists will gladly assist you with this review and, if you wish, propose various tailor-made approaches to future-proofing your current leaver provisions.