Private surety in acquisitions: ask through!

Andreas Burnier (pseudonym of Catharina Irma Dessaur) once wrote: "Families are the cornerstone of society, at the same time they are often the most dangerous place where children can find themselves." This quote touches directly on a recent ruling by the Limburg District Court, in which Article 1:88 of the Dutch Civil Code was at issue.

Protection of the family

Dutch law contains several provisions to protect the family. One of these is article 1:88 BW. In brief, it stipulates that certain legal acts by the spouse require the consent of the other spouse. The regulation thus aims to protect the spouses, in the interest of the family, from each other against performing legal acts which, in view of the object of the legal act or its nature, are prejudicial or entail a great financial risk. This provision resonates not only in family law, but precisely outside of it. So too in my acquisition practice, where the provision is overlooked with some regularity.

Article 1:88 BW in takeover practice

What role does article 1:88 BW have in takeover practice? In takeovers, a private guarantee is regularly required from one or more of the ultimate shareholders. For example, as additional security for payment under an earn-out or as additional security for payment under breach of warranties. After all, the contracting party to an acquisition is usually a personal holding company of an underlying shareholder or operating company.

Article 1:88(1)(c) of the Civil Code requires the spouse's consent if an underlying shareholder acts as a private guarantor (other than in the normal course of a profession or business).

The escape of Article 1:89 of the Civil Code

But what if the consent is not granted or - worse - advisors do not have Article 1:88 of the Civil Code sharply in mind and forget to include it in the transaction documentation? The spouse from whom consent should have been obtained can nullify the legal act of guarantee. In practice, such an annulment is often only invoked when the guarantor (read: the spouse) is actually sued. Only then does the financial risk materialize for the guarantor (and his spouse). The other party to the takeover then has nothing to worry about, with all its (financial) consequences.

In acquisition practice, I frequently encounter resistance when it comes to the legal requirement of Article 1:88 of the Civil Code. Frequently heard feedback is that an acquisition " concernsonly the company and not the spouse" or that "marital status is irrelevant. What is legal if a guarantor simply conceals the fact that he is married (and thus his spouse must consent to the guarantee)?

Deposit conceals marriage

This question came up in the decision of the Limburg District Court to which I referred above. In brief, the court ruled that it is irrelevant whether a guarantor has declared, contrary to the truth, that he is not married. In view of the protective nature of the consent requirement of Section 1:88 of the Civil Code, the other spouse should not suffer as a result of an obligation entered into by the guarantor without the required consent, according to the court. The result? The reliance on Section 1:89 DCC succeeds, the surety goes under and the surety goes free. The court attached value to the fact that the party for whose benefit the surety was provided had only made a brief investigation into the marital property regime of the surety.

Tips for practice

Dogmatically speaking, this judgment is easy to follow, but the judgment underscores the impact that Section 1:88 of the DCC can have on practice. This judgment emphasizes that the party for whose benefit the security is provided (and above all their advisors!) may be expected to make some inquiry into the civil status of the intended guarantor. Therefore, to mitigate the risk of unpleasant surprises, the advice is to ask for an extract from the Basic Registration of Persons (BRP) if an intended guarantor declares not to be married. In my opinion, in that case it is more defensible that the spouse is not entitled to invoke article 1:89 of the Civil Code.

Do you have questions about escrow in an acquisition? Please feel free to contact us.