(No) more restrictions on financial assistance?
Jeroen den Hamer
The Dutch statutory prohibition on financial assistance for Dutch private limited liability companies (BVs) prohibits a BV – and its (foreign) subsidiaries – from granting security, providing a price guarantee or otherwise supporting or binding itself jointly and severally with or for third parties for the purposes of the subscription or acquisition by others of its shares, or depository receipts thereof. It also prohibits a BV from providing loans for these purposes (acquisition loans), unless certain statutory requirements have been met.
Currently, an amended legislative proposal (Private Company Law (Simplification and Flexibilisation) Act) which aims to simplify and increase the flexibility of regulations applicable to BVs is being dealt with by the upper chamber of the Dutch parliament. An important feature of the proposal, which is expected to enter into force at the end of 2012, will be the repeal of the financial assistance prohibition for BVs, which would meet objections against the prohibition raised by the market and legal practitioners. According to legislative history, the reasoning behind the repeal is that the prohibition is unclear and has led to a lot of confusion in day–to-day practice. Also, it is deemed not to be necessary for achieving creditor protection in relation to capital maintenance.
It has been emphasised in the proposal's explanatory memorandum that, essentially, the providing of financial assistance does not differ from other business transactions such as the granting of loans to shareholders other than for purposes of acquiring shares. A specific statutory arrangement is therefore no longer deemed justified. As is the case with such other transactions, it would be for the board of directors of a BV to assess if the providing of financial assistance is in the benefit of the BV, and what the consequences are for the BVs' financial position. This entails that when the board does not act with due care when making its assessment, individual directors may risk personal liability. Therefore, the envisaged repeal of the financial assistance prohibition for BVs, although acclaimed by the market, does not mean that in the future providing financial assistance by BVs will be without issues.
From a – criticised – decision of the Utrecht District Court (October 12 2011, JOR 2011/382) it appears that personal liability for BV directors in light of financial assistance may not be a theoretical issue these days. In this decision, the position of a bank involved in a debt-pushdown structure was also touched upon. In a debt-pushdown structure, a target (group) acquires secured external (bank) debt, which is subsequently upstreamed (in the form of an acquisition loan, for example) to an acquisition vehicle for purposes of facilitating the purchase of the target shares. Although this is a structure generally considered to fall free of the financial assistance prohibition, it was in the case at hand questionable if for the upstreaming by the BV target and its BV subsidiaries (the latter bankrupted) the aforementioned statutory requirements for providing acquisition loans were taken into account.
The District Court postulated that the directors of companies (such as BVs) could be held personally liable if loans would be granted to insolvent debtors under conditions which would not be at arms' length, or in a scenario where the financial position of such company would make the granting of such loans troublesome. Remarkable is that, moreover, the District Court provided that under circumstances a bank facilitating the granting of such loans by means of providing (external) debt could be held liable towards company creditors on the basis of tort. In summary, these circumstances were in the case at hand that the bank knew/should have known that: (i) the debt provided by it would be used for financing the purchase price of the target shares; (ii) the providing of such debt was troublesome in relation to the financial assistance prohibition; (iii) the upstreaming would cause that the relevant target group companies involved would no longer be able to perform their obligations; and (iv) their other creditors would be prejudiced.
The Utrecht District Court decision has been criticised as it appears that the court failed to appreciate that the financial assistance prohibition is in principle not geared towards a bank involved in a leveraged buy out, but to the (directors of the) BV. Focusing on the role of the bank rather than on the role of the (directors of the) BV seems not to correlate with the anticipated repeal of the financial assistance prohibition for BVs. Having said this, the lesson to be learnt from the decision is that, aside from the directors of the BV, it appears that banks should consider the possible impact and complications of financial assistance on the financial position of the target (group) in particular. Obtaining a solvency statement from the directors could be useful in this respect.
Jeroen den Hamer and Joost Volkers