In many takeovers, an important role is played by the credit providers that finance these transactions. Such credit providers often require the enterprise that is being taken over to furnish security, including the pledging of shares. The parties also usually agree on a conditional of the voting rights on shares. If the enterprise is unable to meet its obligations towards the credit provider, the latter can take control of the enterprise. Under the Works Councils Act ("WCA"), the enterprise's works council has the right to advise on the financing before the relevant agreement with the credit provider is concluded, so that the works council's advice can have a material effect on the decision to be taken.
Where a takeover is to be financed in the manner described above, several statutory advisory rights on the part of the works council come into play. Pursuant to the WCA, the management of an enterprise must seek the works council's advice if, among other things, it wants to: (i) transfer control over the enterprise or part thereof (Article 25(1)(a) WCA), (ii) obtain a significant loan on behalf of the enterprise (Article 25(1)(i) WCA), or (iii) grant a major loan to, or furnish security for substantial debts of, another enterprise except in the ordinary course of business (Article 25(1)(j) WCA).
In the financing agreement, the parties often include an 'event of default' clause so that if the enterprise is no longer able to meet its obligations under the agreement, the credit provider can enforce its security rights in order to secure its financing as far as possible. A pledge, combined with a conditional transfer of control, is often what credit providers demand, because it allows them to take control of the enterprise as soon as an 'event of default' occurs.
It is clear that a decision to enter into a financing agreement as described above constitutes a decision which, under the WCA, must be submitted to the works council in advance for advice. If the request for advice is not submitted to the works council, and in a timely manner, the latter can – in practice often successfully – lodge an appeal with the Enterprise Chamber of the Amsterdam Court of Appeal.
Credit providers often consider the possibility of the works council lodging such an appeal to be an unacceptable risk. Therefore, they often request a 'legal opinion' stating that the enterprise complied with all the relevant statutory obligations, including those under the WCA, before the decision was taken.
In practice, enterprises often fail to consider the works council's right to advise on financing decisions, probably because they do not realise the far-reaching consequences of furnishing security to obtain financing, especially when the relevant agreement provides for a conditional transfer of control. It is possible, however, that they do not even realise that the works council has a right to advise on decisions of this type.