This newsletter discusses the draft legislative proposal for a Financial Institutions (Special Measures) Act (Wet bijzondere maatregelen financiële ondernemingen; "Intervention Act") that was recently published for consultation along with a draft explanatory memorandum and a document containing specific questions. The draft proposal would broaden the powers of the Dutch Central Bank (De Nederlandsche Bank; "DNB") and the Minister of Finance to intervene at financial institutions that are experiencing "serious problems". This broadening would be accomplished by amending the Dutch Financial Supervision Act (Wet op het financiëel toezicht; "DFSA") and the Bankruptcy Act (Faillissementswet). The deadline for comments on the three consultation documents, which were prepared by the Ministry of Finance and the Ministry of Public Security and Justice, is 6 May 2011.Contents
According to the draft explanatory memorandum, the financial crisis has shown that the existing intervention possibilities are insufficient with respect to financial institutions that already have serious problems. The current supervisory regime emphasises prevention. Supervisors may, at an earlier stage, attempt to steer a financial institution by issuing a formal directive (aanwijzing) or appointing a special administrator. Should a financial institution nevertheless find itself in serious difficulties, the DFSA provides tools that focus primarily on the institution's imminent bankruptcy, but does not offer the government any means of bringing about a timely and orderly resolution of the institution without resorting to bankruptcy – which would reduce the social costs.
According to the same explanatory memorandum, another disadvantage of the existing measures is that they are too focused on individual financial institutions and the interests of those directly involved with them, such as their creditors. The financial crisis has highlighted the fact that the public interest in maintaining the stability of the financial system may also necessitate intervention.
The draft Intervention Act is intended to change this situation by adding two new categories of statutory powers:
- •a new Chapter 3.5.4A, "Transfer", of the DFSA would grant DNB powers to procure that a financial institution which is experiencing irreversible problems is transferred, in whole or in part, to a third party; and
- •in order to safeguard the stability of the financial system, the Minister of Finance would be granted extensive powers to intervene at financial institutions; these powers are included in the draft proposal as a new Part 6 of the DFSA entitled "Special measures regarding the stability of the financial system."
These aspects of the proposal are consistent with the plans of the European Commission (see EU Framework for Crisis Management in the Financial Sector, Communication published by the Commission on 20 October 2010, and the consultation document about such a framework published on 6 January 2011), as well as with comparable crisis instruments adopted by various other countries, such as the United Kingdom (Banking Act 2009) and Germany (Restrukturierungsgesetz).
To increase the effectiveness of supervisory measures, the draft proposal also includes a new Chapter 3.5.8 of the DFSA entitled "Post-measure counterparty rights" ("Rechten wederpartij na maatregel"). This Chapter restricts certain rights of a financial institution's counterparties, after the institution has been subjected to a DFSA measure.
Transfer Regime: Resolution of Distressed Financial Institutions
Once a credit institution, an insurer or a special purpose vehicle for risk acceptance (referred to collectively in this newsletter as "financial institutions") is experiencing serious problems, DNB has no authority under current law to procure the transfer of its activities (in whole or in part) to a third party as a going concern. Although such a transfer can in some cases be effected within the context of insolvency proceedings – the emergency regime (noodregeling) and bankruptcy (faillissement) – in practice the institution in question will by then have become a "gone concern". In addition, DNB cannot direct the transfer process, because it has no influence on the administrator appointed under the emergency regime or the bankruptcy trustee.
The transfer of a distressed financial institution (or a part thereof) as a going concern would have a number of advantages. With this in mind, the draft Intervention Act would authorise DNB to procure the transfer of a financial institution experiencing "irreversible problems" ("problem institution") especially in the absence of an emergency regime or bankruptcy (but also if either of these have been ordered). If DNB concludes that a financial institution is a problem institution, it can initiate a transfer of all or part of that institution by preparing a transfer plan. The draft explanatory memorandum assumes that DNB will "generally" search for a private sector purchaser for all or part of the institution, but the draft Intervention Act also provides for the use of a special "bridge institution".
The draft Intervention Act distinguishes three types of transfer that DNB may prepare:
- (in the case of a bank) a transfer of deposit agreements, in which context the draft explanatory memorandum notes that this would "usually" be financed with funds from the deposit guarantee system;
- a transfer of other assets and liabilities; and
- a transfer of shares in the problem institution.
A financial institution would be considered a problem institution if the following criterion is met:
- there are signs of a dangerous development regarding:
- the financial institution's equity capital, solvency, or liquidity/technical provisions, or
- its management or integrity such that there are reasonable grounds for fearing that its equity capital, solvency or liquidity/technical provisions are in danger and
- there is a reasonable probability that this development cannot be fully reversed.
This criterion is based on the criterion for applying the emergency regime to banks under the current Section 3:160 of the DFSA, but several aspects of it have been broadened. Under the draft Intervention Act, the broadened criterion (hereinafter the "intervention criterion") would also be used for the application of the emergency regime to a financial institution and for declaring it bankrupt.
If DNB prepares a transfer plan, it may notify the relevant financial institution of that fact, but it is not obliged to do so. In the event of notification, the problem institution and its corporate bodies and representatives would have to cooperate in the preparation of the transfer plan. In addition, after that notification, DNB could require the problem institution to provide the necessary information to certain third parties, such as a potential acquirer or experts assisting DNB with preparing the transfer plan.
The actual implementation of a transfer plan prepared by DNB would begin with DNB’s request to the district court to approve the plan and declare that the transfer regime applies. The district court could only withhold that approval if the plan fails to satisfy a number of pre-conditions regarding its contents or if the transfer price included in the transfer plan is unreasonable. In the case of a transfer of assets and liabilities, the district court could also withhold its approval if the transfer would be detrimental to the problem institution’s remaining creditors.
If the district court approves the transfer plan, it will also declare the transfer regime (overdrachtsregeling) applicable, unless it finds that DNB cannot reasonably have concluded that the situation described in the intervention criterion had arisen. This amounts to a limited judicial review of DNB’s assessment. The draft Intervention Act would also, through amendments to the DFSA and the Bankruptcy Act, restrict the district court to applying a similar limited test using the intervention criterion if DNB requests a court order subjecting the financial institution to the emergency regime or declaring the institution bankrupt.
Through the judicial approval of the transfer plan and the judgment declaring the transfer regime applicable, the shares, deposit agreements, assets and/or liabilities would be transferred to the acquiring party, unless the plan provides otherwise. In its judgment on the transfer regime, the district court will also appoint one or more "transferors". This would, by operation of law, deprive the problem institution of its powers of disposal and management over the portion of its assets to which the transfer plan pertains. The court-appointed transferor(s) would transfer the shares, deposit agreements, assets and liabilities that were not transferred through the court's declaratory judgment, to the acquiring party or parties.
Interventions intended to safeguard the stability of the financial system
The draft Intervention Act includes a new Part 6 of the DFSA that would grant two new powers to the Minister of Finance in the interests of safeguarding the stability of the financial system. If the Minister is of the opinion that that stability would be "in serious and immediate danger as a result of the situation of a financial institution having its seat in the Netherlands"; he could:
- take "immediate measures" (onmiddellijke voorzieningen) regarding the relevant institution, which measures may, if necessary, deviate from statutory provisions or from the articles of association; or
- proceed to expropriate the assets of, or shares in, the institution (or other securities that have been issued with the institution’s cooperation).
The Minister of Finance must consult DNB in advance and, given the importance of the measures, take the decision in agreement with the Prime Minister.
The draft explanatory memorandum lists as examples of immediate measures the temporary revocation of shareholder voting rights, deviation from the articles of association and suspension of a management board or supervisory board member. The power of expropriation is intended to be invoked as a last resort and may only be used if immediate (or other) measures would not work, would no longer work, or would be insufficient. In accordance with Section 14 of the Dutch Constitution (Grondwet), expropriation under the new Part 6 of the DFSA would only permitted in the public interest and in exchange for compensation.
Post-Measure Restriction of Counterparty Rights
The draft explanatory memorandum notes that financial and other agreements that financial institutions enter into often contain provisions regarding events of default and notification events. If an event of default occurs with respect to one of the parties, such provision usually confers upon the counterparty the right to terminate the agreement with immediate effect, to accelerate claims and/or to unwind the agreement in another manner. Provisions about notification events usually oblige a party to notify its counterparty if certain events occur or certain circumstances arise. The taking of certain supervisory measures in respect of a financial institution may, in some cases, also constitute an event of default or notification event under the terms of that institution’s current contracts and could lead to early termination of those contracts or to the counterparty’s becoming aware of the preparation for or taking of such a measure.
The draft explanatory memorandum notes that the exercise of such acceleration and early termination rights and the notification of counterparties could have a negative impact on the effectiveness of the measures. The core of the proposed new Chapter 3.5.8 is that such rights cannot be exercised and the financial institution’s obligations to notify cannot be invoked to the extent those rights and obligations are "triggered" by the taking of a number of the aforementioned measures (or transactions that are performed to prepare for, implement or are otherwise related to such a measure). The term "measure" in this context does not refer merely to the new measures that will be introduced in the Intervention Act, but also includes, for example, a number of supervisory measures that may already be taken pursuant to the DFSA, such as issuing a formal directive and the appointment of a special administrator (pursuant to Sections 1:75 and 1:76 of the DFSA, respectively).
The draft Intervention Act clearly provides for a number of far-reaching new measures, including those that would essentially constitute the forced expropriation of property (of the problem institution itself or its shareholders). The draft explanatory memorandum therefore devotes a considerable amount of attention to the right to the uninterrupted enjoyment of ownership as defined in Article 1 of the First Protocol of the European Convention on Human Rights and the manner in which attempts have been made to have the proposals be consistent with that Article and with the relevant case law. In that context, particular attention has also been paid to protecting the rights of affected "owners".
Should DNB submit a share transfer plan to the district court for approval, the shareholders will not be heard by the court unless they are (a) "major" shareholders (with a stake of more than 10%), (b) a representative of shareholders who jointly hold a stake of more than 10% or (c) a person charged with promoting the shareholders’ interests. Shareholders who have not been heard may, however, object to a district court judgment approving the transfer plan. Shareholders may only object to DNB’s assessment that the situation defined in the intervention criterion has arisen in respect of the relevant financial institution and to the transfer price for their shares that has been proposed in the plan.
The problem institution itself may not object to the share transfer plan (the rationale behind this being that the shares are not part of the institution’s assets), but may do so if DNB requests the district court to approve one of the other two types of transfer plan. However, the problem institution may only object to DNB’s assessment that the situation defined in the intervention criterion has arisen.
Any interested party may lodge an appeal with the Administrative Jurisdiction Division of the Council of State (Afdeling bestuursrechtspraak van de Raad van State) within ten days of a decision taken by the Minister of Finance, pursuant to the proposed Chapter 6 of the DFSA, to take immediate measures or to proceed with expropriation. Moreover, those whose property has been expropriated may request the Enterprise Chamber of the Amsterdam Court of Appeal (Ondernemingskamer van het Gerechtshof te Amsterdam) to award compensation that differs from the amount determined by the Minister.
In a separate consultation document, the ministries concerned request market participants to comment on a number of specific issues.
The draft Intervention Act refers to this entity only briefly, and contains no substantive provisions. Market participants are therefore asked, among other things, to indicate what the precise rules regarding the bridge institution should be. More specifically, market participants are being asked to state their views on the issues of financing method and shareholder status.
The document also notes that the reorganisation variant of the emergency regime does not work in practice and that, as a result, the emergency regime is almost always converted into bankruptcy proceedings. Market participants are therefore asked whether it would not be better simply to abolish the emergency regime and whether, in that context, a distinction would need to be made between banks and insurers.
Position of shareholders
As explained above, the shareholders in a problem institution (with the exception of, in particular, major shareholders) are not heard by the district court when it considers a share transfer plan prepared by DNB. Shareholders who have not been heard may object to the district court’s approval of such a plan, and the proposal also provides that the district court may hear a person "who has been charged with promoting the interests of the shareholders" (an amicus curiae). The drafters of the Intervention Act are interested in hearing the views of market participants regarding these aspects of the proposal in particular.