Cross-border restructurings: How are creditors, shareholders and employees protected?

Cross-border restructurings (mergers, demergers and conversions) are extensive procedures that not only require intensive coordination with foreign counsels, but also raise many questions about the possibilities and interpretation of Dutch law.

A cross-border restructuring has far-reaching consequences for various parties, which means that adequate protection is essential. How are creditors, shareholders and employees protected? The rules are discussed in this blog.

Creditor protection: what are the risks?

Creditor protection is important in cross-border mergers, demergers and conversions. In mergers and demergers, the assets of the disappearing company/ies are transferred to the acquiring company under universal title. This means that contracts and claims are also transferred under universal title, without (in general) requiring the consent of the creditor. If one of the companies is in a less favourable financial position, this may reduce the recourse options available to the creditors of the other company. The consequences for creditors in the case of conversions are less far-reaching. Nevertheless, a conversion also affects the position of creditors, as different regulations may apply to the new legal form.

The above risks apply to domestic restructurings, but can cause additional problems when the transaction is cross-border, particularly in the case of outbound restructurings. This is because creditor protection regulations vary from one Member State to another. As a result, it may be unclear to creditors of a Dutch disappearing company what their rights are.

How are creditors protected?

1. Creditors' objection period

One of the rules protecting creditors is the objection period. After the merger has been published in the Dutch State Gazette, creditors have three months to lodge an objection. This is considerably longer than the one-month objection period for domestic restructurings. The objection has a suspensive effect. As long as the objection has not been withdrawn or lifted, the cross-border transaction cannot proceed.

2. Restructuring proposal

In addition, any guarantees offered to creditors must be included in the merger, demerger or conversion proposal. This ensures greater transparency and clarity for creditors of all companies involved and may influence whether or not they exercise their right of objection.

3. Registered office in cross-border outbound conversions

Cross-border conversions are subject to additional protection. The law stipulates that in the case of a cross-border outbound conversion, the registered office is deemed to be in the Netherlands for two years with regard to:

(i)              claims by creditors that arose before the date on which the company to be converted announced the filing of the conversion proposal; and 

(ii)             which are initiated within two years after the conversion has taken effect.

This prevents a creditor of the company from having to litigate before a court abroad during that period.

Shareholder protection; what are the consequences?

When a company restructures across borders, this also has major consequences for shareholders, unless simplified procedures are used. This is particularly relevant in the case of cross-border outbound restructuring, as shareholders become shareholders of a company abroad after such a transaction takes effect, to which different rules and regimes apply.

How are shareholders protected?

1.         Right of withdrawal and compensation

The law stipulates that in the event of a cross-border outbound restructuring, shareholders of the disappearing Dutch company or companies who voted against the merger, demerger or conversion proposal and holders of non-voting shares may submit a request for compensation. This must be done within one month of the date of the decision to merge, demerge or convert. The shares in question will lapse when the transaction takes effect and the shareholders will be compensated for this. In the written merger report, the boards of the restructuring companies must describe, among other things, the methods for determining the compensation and the valuation.

The auditor must state in the auditor's report whether the proposed compensation is reasonable. If a single-member company is involved in the cross-border transaction or if all shareholders of the companies involved agree, the restructuring companies may be exempted from this explanation and auditor's report.

It is important to note that this option of withdrawal with compensation does not apply to Dutch shareholders in the case of a cross-border inbound restructuring. The same rules may apply to the shareholders of the disappearing company or companies in the other Member State. If it is a simplified restructuring, the right of withdrawal and compensation do not apply either.

2.         Exchange ratio

In the case of cross-border mergers and demergers, the exchange ratio for the shares must be determined. It is important that the underlying economic value of the shares of the shareholders of the acquiring/demerging company who already existed prior to the restructuring and of these new shareholders remains the same. This exchange ratio must also be stated in the merger or demerger proposal. In addition, the auditor must state the exchange ratio in his report.

If a shareholder does not agree with the proposed exchange ratio, he may request that the exchange ratio be redetermined by one or more independent experts.

The exchange ratio also does not apply to simplified mergers and demergers.

Employee protection

The previous blog discussed the role of employees, works councils and trade unions, including the protection afforded to employees in the event of cross-border restructuring. How are employees protected? The rules governing employee participation can be found in blog 5.

Conclusion

This sixth blog focused on the protection of third parties. The law includes various protection mechanisms for creditors, shareholders and employees.

The protection mechanisms mentioned provide greater protection for creditors, shareholders and employees in cross-border restructurings than in domestic restructurings. This is desirable in view of the additional risks and consequences of a transaction involving companies from different Member States.

This blog was written by Pauline van Hecke and Julia van Reenen. If you have any questions about one of our blogs on cross-border restructuring, please feel free to contact Pauline van Hecke.

In the last blog, we will discuss a number of specific difficulties associated with outbound restructuring, such as pledged shares or restricted assets of a foundation converted into a private limited company or public limited company.