How a stock lien can land you in the Enterprise Chamber

The role of the Enterprise Chamber of the Amsterdam Court of Appeal has already been highlighted repeatedly in our publications. See, for example, this contribution.

The consequences of transferring voting rights

It is more widely known that directors, supervisory directors and shareholders (with an interest of at least 10%) have the right to request the Enterprise Chamber to intervene in a company if there are well-founded reasons to doubt correct policy. Less well known is that holders of share pledges are also authorized to submit such a request to the Enterprise Chamber under certain circumstances. This is because the law stipulates that pledgees with voting rights have the rights of a depositary receipt holder with meeting rights, and they have so-called power of inquiry. Financiers who obtain a pledge on shares in a BV do not always realize what powers such a pledge may entail, and conversely, a business owner does not always realize what it is getting into when it issues a pledge on shares. The judgment of the Enterprise Chamber of the Amsterdam Court of Appeal (OK), to be discussed below, shows how important it is to pay attention to the moment at which voting rights on shares are transferred from the pledgor (i.e., the shareholder) to the pledgee (read: the financier).

Survey procedure

A recent ruling by the Enterprise Chamber of the Amsterdam Court of Appeal shows what influence a pledgee can have over shares. What was going on?

At some point, a business owner undertook towards a supplier of the company to provide security for unpaid invoices. The supplier demanded additional security in the form of a first lien on shares in the BV in which the company was operated. The voting rights on the shares were transferred under the suspensive condition of the occurrence of a default. Moreover, as is not unusual, the deed of pledge contained a provision requiring the prior written consent of the pledgee for certain decisions. Such consent was also required for alienation of all or a material part of the company's property. This makes sense in a sense, because if the business owner in question were free to dispose of all assets from the company in question, the lien on the shares could then be eroded.

After a period of negotiation between the parties to find a solution, which was ultimately not reached, all assets were subsequently sold to a BV affiliated with the business owner. The supplier was left unpaid. Based on the lien on the shares, the supplier then turned to the Enterprise Chamber with a number of accusations. The supplier believes that the assets were transferred at an underpriced purchase price, even more so to an entity affiliated with the business owner . In addition, financial statements were not filed on time, the arrangement in the deed of pledge was not complied with, and requests for information were not fulfilled.

The Enterprise Chamber (OK) is not lenient. First, according to the OK, it is impossible to see how the corporate interest was served by the sale of the assets, which amounts to a material liquidation. Moreover, there was a personal conflict of interest with the business owner as director of the company, without careful handling. Moreover, it is alleged that financial statements from the 2015 fiscal year onwards were not adopted and filed until December 2019, while the voting rights on the shares had already passed to the supplier and the supplier was not involved in decision-making regarding adoption of these financial statements. The years of non-compliance with the publication requirements (Section 2:394 of the Dutch Civil Code) combined with finally stating per publication, contrary to reality, that the annual accounts have been adopted, also provides, according to the OK, well-founded reasons to doubt a correct policy. In conclusion, the Enterprise Chamber orders an investigation.

The interest of the pledgee will be that, based on the findings of the investigation, he would want to prove mismanagement and that the director is liable for it. This can only be determined after the investigation has been completed and the investigator's report has been filed with the Enterprise Chamber. If there is mismanagement, the business owner in question may also be ordered to pay the costs of the investigation. The question that lingers is whether the business owner realized what powers the supplier had as pledgee when the pledge was established and voting rights on the shares transferred.

Conclusion

It is for this reason that when a share pledge is established, particular attention should be paid to the answer to the question of under what conditions the voting right passes to the pledgee. The starting point is often that there must be a deficiency, and sometimes the shareholder is still given the opportunity to rectify the deficiency. As a financier, the transfer of voting rights not only has the advantage that influence can be exercised, but also that if there are doubts as to whether the company is not being eroded, the financier can then use horsepower by going to the OK with a request for an investigation and intervention in the company's policy.