The act amending the rules on inquiry proceedings was passed on 12 June 2012. The new legislation will enter into force on 1 January 2013. This newsletter describes the most important changes under the act.
The main changes in a nutshell:
- the criteria for initiating inquiry proceedings will be made stricter: shareholders of companies with an issued capital of more than EUR 22.5 million will be required to have a larger shareholding than is currently the case in order to qualify (this applies to both public limited liability companies – NVs – and private limited liability companies – BVs);
- companies and other legal entities will be allowed to request an inquiry into their own affairs;
- the rules on immediate measures will be supplemented;
- the procedural safeguards (due process protections) will be strengthened;
- the liability of investigators will be limited and additional rules on costs will apply.
The right of inquiry
Based on the right of inquiry, disputes within companies and other legal entities can be submitted to the Enterprise Chamber of the Amsterdam Court of Appeal. If the Enterprise Chamber determines that there are well-founded reasons to doubt the correctness of the entity's management, it can order an inquiry. Based on the result of that inquiry, the Enterprise Chamber will then decide whether mismanagement has occurred and, if so, can order a range of measures. In addition, the Enterprise Chamber can, on request at any stage of the proceedings, order immediate provisional measures if required in connection with the entity's situation or in the interests of the inquiry.
In the last few decades the number of inquiry proceedings has increased significantly. This is because they are fast and solution-oriented, and thus fill an important need in the corporate world. Following an evaluation conducted by the Ministry of Justice and Security, recommendations were made for certain improvements to the rules on such proceedings; these recommendations have now been incorporated in the act.
Who can initiate inquiry proceedings?
Shareholders and depositary receipt holders
In this regard, the act introduces a distinction between smaller and larger companies, the line being drawn at an issued capital of EUR 22.5 million. In the case of smaller companies (those with an issued capital of EUR 22.5 million or less), the current rules will remain unchanged; for shareholders/depositary receipt holders of larger companies, it will become more difficult to request an inquiry.
Under the proposed new rules (to become Article 2:346(1)(b) and (c) of the Dutch Civil Code):
for companies (NVs and BVs) with an issued capital of more than EUR 22.5 million, inquiry proceedings may be initiated by one or more shareholders or depositary receipt holders who, alone or together, hold:
- at least 1% of the issued capital; or
- shares/depositary receipts with a market value of at least EUR 20 million or
any lesser amount laid down in the articles of association.
This alternative criterion will apply only if the company is listed.
For example: for a company with an issued capital of EUR 250 million, the threshold under the new rules is a shareholding of 1% (= EUR 2.5 million). In the case of a listed NV with an issued capital of EUR 3 billion, the new rules require a shareholding with a market value of at least EUR 20 million. Under the current rules, it is in both cases sufficient if the shareholding has a nominal value of EUR 225,000 (or amounts to 10% of the total issued share capital).
for companies with an issued capital of EUR 22.5 million or less, the rules will remain unchanged. An inquiry may be requested by one or more shareholders or depositary receipt holders who, alone or together, hold:
- at least 10% of the issued capital; or
- shares/depositary receipts with a nominal value of at least EUR 225,000,
or any lesser amount laid down in the articles of association.
The entity in question
The act contains a new provision (to become Article 2:346(1)(d) Dutch Civil Code) entitling the entity itself to request an inquiry into its own affairs. Among other things, this will enable the management board and/or supervisory board to have the conduct and decision-making of the general meeting of shareholders reviewed by the Enterprise Chamber. In this way, a 50-50 deadlock preventing the shareholders from making important decisions can be broken. The Enterprise Chamber can also be called upon to help overcome an impasse between the management board and the general meeting of shareholders.
The act also expands the test to be applied by the Enterprise Chamber when determining whether or not to grant a request for inquiry proceedings. Such a request may only be granted if there are well-founded reasons to doubt the correctness of the entity's management or of the course of affairs (to be set out in Article 2:350(1) Dutch Civil Code). The alternative criterion was added in order to ensure that the conduct of individual shareholders outside the general meeting can be raised before the Enterprise Chamber if that conduct sufficiently affects the course of affairs within the entity. However, even if the Enterprise Chamber finds that this criterion has been met, this does not mean that the shareholder in question is liable. For that, a separate legal action is required.
For the purpose of requesting an inquiry into its own affairs, the entity must in principle be represented by the management board, which is required to act in the entity's interests. The supervisory board and works council must be informed of the request. The act also grants the supervisory board (or, in the case of a company with a one-tier board structure, the non-executive board members) an independent right to initiate inquiry proceedings in the entity's interests, even if the management board does not consent.
The act does not make an exception for companies that form part of a group. A subsidiary may thus request an inquiry into the decision-making of its general meeting of shareholders or the conduct of a shareholder, even where this is the subsidiary's own parent company. According to the explanatory memorandum to the act, the subsidiary's management board has an independent responsibility for the management and course of affairs within the subsidiary, irrespective of the latter's position within the group.
Another new feature is that if an entity is declared bankrupt, its bankruptcy trustee may initiate inquiry proceedings (this rule is to be set out in Article 2:346(3) Dutch Civil Code). The trustee may, after all, have an interest in a finding by the Enterprise Chamber of pre-bankruptcy mismanagement. The costs of the inquiry are not a debt of the estate; the trustee will, as a general rule, have to provide security for those costs.
Parties designated in the articles of association or by agreement
As is the case under the current rules, other parties that are designated for this purpose in the entity's articles of association or by agreement will also have the right to initiate inquiry proceedings (this rule is to be set out in Article 2:346(1)(e) Dutch Civil Code). For example, the works council can be designated as having this right (as explained below, works councils do not have a statutory right to initiate inquiry proceedings).
Other parties entitled to request an inquiry
Besides the parties mentioned above, there are a few other interested parties who are entitled to request an inquiry. These are (i) the advocate-general of the Amsterdam Court of Appeal, (ii) members of associations, cooperatives and mutual insurance societies (where the inquiry concerns the relevant entity) and (iii) trade unions. For these parties, the current rules will continue to apply.
It is noteworthy that the act does not give works councils a statutory right to initiate inquiry proceedings. According to the explanatory memorandum, works councils have their own specific access to judicial process through the advice and appeal rights laid down in Articles 25 and 26 of the Works Councils Act, and granting them the right to initiate inquiry proceedings would be incompatible with those rights. The fact that a works council has no resources of its own, and therefore cannot be ordered to pay legal costs, is also relevant in this regard. Furthermore, under the current rules the works council is already permitted to participate in ongoing inquiry proceedings as an interested party. In addition, trade unions – which are also responsible for representing employees' interests – do have the right to initiate inquiry proceedings.
Supplementary rules on immediate measures
Under rules that have been developed in case law, the Enterprise Chamber must carefully weigh the interests of the entity – and those with a role in its organisational structure by law or under the articles of association – when deciding whether or not to impose immediate measures. The act lays down these rules in statutory law. The explanatory memorandum emphasises that immediate measures should only be imposed with restraint and in accordance with the principle of proportionality. As is the case under the current rules, immediate measures may only be imposed if required in connection with the entity's situation or in the interests of the inquiry.
It will remain possible for the Enterprise Chamber to impose immediate measures before ruling on a request for an inquiry. However, under the act it may only do so if it has provisionally decided to grant the request. The act also provides that the Enterprise Chamber must, within a reasonable period after imposing the immediate measures, actually take a decision on the request.
Increased procedural safeguards during inquiry phase
- The due process rights of parties named in the draft inquiry report will be laid down in law: investigators must give such parties the opportunity to respond to any essential findings which relate to them. The sole fact that a party is mentioned does not, therefore, entitle him/it to respond. The investigators are not required to provide such parties with the entire report but may limit themselves to the relevant passages. The investigators remain responsible for the content of the report and are not obliged to amend it to reflect any feedback received.
- The Enterprise Chamber will be required to give each interested party the opportunity to file a defence until a specific date before the hearing.
- An examining judge, to be appointed at the same time as the investigators, will be responsible for supervising the proceedings during the investigation phase. At the request of interested parties (such as the entity itself or the party/parties that requested the inquiry), the examining judge may issue instructions about the manner in which the investigation is to be conducted. The instructions may only relate to procedural matters such as protecting due process rights, making recordings and the like. The investigators must be given the opportunity to inform the examining judge of their views. The examining judge's decisions are not subject to appeal.
Amendment of rules on liability and costs
The act limits the liability of investigators. Only in the event of a "serious breach" (intentional misconduct or gross disregard of the obligation to properly perform his duties) may an investigator be held liable for damage resulting from the investigation report.
Under the act, the entity may have to bear the reasonable defence costs of individuals appointed as investigators or temporary management/supervisory board members in the event they are held liable. The same applies to the reasonable defence costs of a third party appointed to hold and manage shares on a temporary basis (which includes exercising the voting rights on the shares), for example in order to break a shareholder deadlock.