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The Netherlands

On May 7 2004 the Netherlands Supreme Court (Hoge Raad) rendered a judgment with respect to a private limited liability company (a besloten vennootschap or B.V.) providing financial support to third parties for the purpose of buying shares in a B.V. This issue is regulated by article 2:207c of the Netherlands Civil Code (the NCC), the purpose of which is to protect the creditors of a B.V. against a large withdrawal of capital for the benefit of the shareholders of a B.V.

Article 2:207c (1) of the NCC states that a B.V. is not allowed to provide third parties with security or give them a price guarantee for the purpose of acquiring shares in a B.V. A B.V. is, however, allowed to grant loans to third parties for the purpose of buying shares in that B.V., as long as: (i) those loans do not exceed the distributable reserves; and (ii) the articles of association (statuten) allow it. Lastly, article 2:207c (3) of the NCC states that, when a loan is granted, a B.V. must maintain an undistributable reserve for the outstanding amount of the loan.

In the case ruled on by the Supreme Court, X B.V. acquired all the shares in Y B.V. in 1989. X B.V. had financed this acquisition with a loan granted by Y B.V. To be able to provide the loan, Y B.V. obtained a loan and an overdraft facility from a bank and pledged its movables and receivables to the bank. In 1995 Y B.V. went bankrupt and, by executing its security, the bank got full payment of its claim. The trustee in bankruptcy (curator) of Y B.V. claimed that the construction described above violated article 2:207c (1) and (2) of the NCC, that as a consequence the financing and security agreements should be annulled, and that the payment to the bank should be paid back to the bankruptcy estate.

The Supreme Court ruled that article 2:207c (1) of the NCC, in view of article 2:207d (2), must be interpreted in such way that the prohibition of a B.V. granting security for the purpose of acquiring shares in that B.V. does not apply in cases where a B.V. has granted a loan to a third party for the purpose of acquiring shares in that B.V. with funds obtained through an own loan from a bank. Consequently, a B.V. is allowed to grant security for its own loan even though this money is subsequently on-lent to a third party for the purpose of buying shares in that B.V. The prohibition of granting security for the purpose of buying shares in a B.V. as laid down in article 2:207c (1) of the NCC therefore only applies to security granted by a B.V. to secure loans of third parties for the purpose of buying shares in that B.V.

Furthermore, article 2:207c (2) of the NCC states that a B.V. is only allowed to grant loans to third parties for the purpose of buying shares in that B.V. as far as the articles of association allow it. In this case the question arose whether or not the articles of association should explicitly state that the B.V. may grant loans to third parties for the purpose of buying shares in that B.V. or if it is enough that the articles of association do not explicitly prohibit the granting of such loans. Although the Supreme Court did not rule on this issue, the advocate-general (who advises the Supreme Court on how to rule) stated that it is likely that the legislator did not want to restrict the possibility for a B.V. to grant loans to third parties for the purpose of buying shares in that B.V. to cases in which the articles of association explicitly state so.

The judgment of the Supreme Court has clarified a complicated issue that often arises in corporate transactions. The decision looks to be in line with the intended (but not yet carried out) liberalization of the corporate law regime for B.Vs.

Annelies Wilken and Matthieu Ph van Sint Truiden

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