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Case law M&A

Court of Appeal Amsterdam, 27 February 2014
Case number 200.138.560/01 OK

Works Councils Act proceedings: The company could not reasonably come to the contested decision to participate in the hospital concerned, taking into account all interests. The Enterprise Division of the Amsterdam Court of Appeal concurs with the position of the works council that the company has not taken adequate care of the fulfilment of the ‘risk mitigating’ conditions that were agreed in writing. The Enterprise Chamber judges that the company must revoke the decision and nullify all consequences thereof. Furthermore it prohibits any actions regarding the (further) implementation of the decision or parts thereof.

The works council of the company has requested the Enterprise Chamber to declare that the company could not reasonably come to the decision to participate in the hospital, to order the company to withdraw this decision, to nullify all consequences thereof and to prohibit the company from any actions to further implement the decision.

The Enterprise Chamber states that in principle, the decision of the company to participate in a different healthcare business is a business decision of the company.

However, the company must take into consideration the various interests of the enterprise and its stakeholders, amongst whom the employees, and balance the reasons for the intended participation and the consequences thereof.

 

This means that the company should not only take into account the conditions under which the company will participate but also the (other) circumstances in which the investment/participation will be effectuated.

The Enterprise Chamber rules that the company could come to the conclusion that the reasonable foreseeable risks for the company were not of such magnitude that the company should decide not to participate. However, the Enterprise Chamber concurs with the position of the works council that the company has not taken adequate care of the fulfilment of the ‘risk mitigating’ conditions that were agreed in writing. When the company made its definite decision to participate in the hospital, various conditions were not fulfilled and were (apparently) wilfully left unfulfilled.

Furthermore, various arrangements had not been laid down in writing yet. The company states that (oral) commitments exist. The Enterprise Chamber finds the conduct of the company irresponsible; given the identified risks, it cannot be accepted that the fulfilment of certain conditions (precedent) of the transaction are disregarded.

After taking into account the interests involved, the company could not reasonably come to the contested decision to participate. The Enterprise Chamber judges that the company must revoke the decision and nullify all consequences thereof. Furthermore it prohibits any actions regarding the (further) implementation of the decision or parts thereof.


Supreme Court, 7 February 2014
Case number 13/00707

Company takeover – Interpretation of the agreement in accordance with the “Haviltex” standard. It follows from this Court ruling that the so called “Haviltex” standard still plays a big role when it comes to the interpretation of agreements, which means that even where a stipulation has far-reaching consequences or where it concerns an agreement between two professional parties assisted by their legal advisors, the circumstances may entail that a different meaning than a linguistic interpretation should be given to the stipulations of the agreement.

Seller gives warranties to purchaser in a share purchase agreement. In relation to the warranties the agreement stipulates that purchaser must inform seller of a possible breach of the warranties “as soon as possible”. A year and a half later, purchaser informs seller of a number of breaches and claims damages. Seller states that purchaser is too late.

The Court of Appeal rules that the wording of the article in question leaves no room for interpretation and rules that the rights of purchaser have lapsed. The wording “as soon as possible” indicates a greater urgency than the wording “within a reasonable period” of article 7:23 section 1 DCC.
According to the Court of Appeal, a reasonable interpretation of the article indicates that purchaser must indeed have knowledge of the breach. For that purpose it is necessary but also sufficient that purchaser may conclude with a reasonable assurance, not necessarily being absolute certainty, that and why there is a breach of a warranty.

Purchaser appeals to the Supreme Court and states that the wording of the agreement is decisive and that the far reaching sanction of lapse of right may only be given to the late informing of the seller if that sanction is explicitly stated in the agreement.

The Supreme Court does not go along with the argument of purchaser. When it comes to the interpretation of agreements, even though the linguistic meaning of the chosen wording is of great importance, the circumstances may still imply that a different meaning must be given to the stipulations of the agreement.
It comes down to the meaning that parties could reasonably give to each other’s statements and conduct. This does not change if a stipulation has far reaching consequences or if it concerns an agreement between professional parties assisted by external, professional legal advisors.

A far reaching expiry clause can also apply if it is not stipulated in the agreement in literal wording.

The Supreme Court does go along in the allegation that the judgment is defective in its reasoning; without further motivation of the Court of Appeal it cannot be argued that the wording of the article induces lapse of right instead of a different consequence (such as an obligation to compensate damages). Furthermore, the extent to which the seller has suffered a loss from the late notification is relevant.


Court of Appeal Arnhem-Leeuwarden
Date: 3 September 2013
Case number 200.094.764

Company takeover – violation of the best efforts obligation arising from an earn out results in liability for damages.

Parties entered into a purchase agreement, including an earn out pursuant to which seller will receive an earn out based on turnover in the financial year 2005. Purchaser made however a loss in that particular year and therefore seller did not receive the earn out. Seller went bankrupt one year later.

Although the earn out did not specifically stipulate the obligation for purchaser to make as much profit as possible, the Court assumes this best efforts obligation of purchaser and emphasizes that the question as to what parties have agreed cannot only be answered through a purely linguistic interpretation of the agreement. It comes down to the meaning that parties could reasonably give to each other’s statements and conduct.

Based on the circumstances, seller could reasonably expect that purchaser would use its best efforts to continue the activities in the best possible way. Factors the Court finds decisive are that, during the takeover discussions, purchaser spoke to clients of seller about the content of the contracts and the projects, purchaser employed staff of seller to continue the ongoing projects, both parties assumed that a considerable turnover would be achieved and parties based the (relatively low) purchase price on the profit that would be achieved with the assets, contracts and staff that purchaser has taken over from seller in 2005.

The Court concludes that purchaser breached its best efforts obligation resulting from the earn out-arrangement and has neglected and frustrated the projects, contracts and clients, resulting in the situation that the turnover threshold has not been met, while a turnover could have been achieved through a correct performance.

The Court decides that the bankruptcy trustee is entitled to compensation for damages.


District Court Amsterdam
Date: 10 July 2013
Date publication: 1 October 2013
Case number: C/13/518487 / HA ZA 12-676

Sale of subsidiary – Sale without approval of the general meeting of shareholders (as prescribed by the articles of association) does not constitute serious mismanagement pursuant to section 2:9 Dutch Civil Code. Further, the claimant in his capacity of shareholder can also not invoke a breach of the articles of association. The principles of reasonableness and fairness make such claim inadmissible.

One of the two directors of the company had decided to sell all shares held by the company in a subsidiary. Pursuant to the articles of association of the selling company, such sale requires prior approval by the general meeting of shareholders of the seller. The transaction was effected without such prior shareholders’ approval.

The other director (claimant) claimed damages on the basis of section 2:9 DCC on behalf of the company.  In principle, a breach of the articles of association does constitute serious mismanagement. When determining whether or not specific conduct can be qualified as serious mismanagement, all circumstances of the matter are to be considered. Based on the following circumstances, the court considered that there is no serious culpability: (i) the whole group of companies was indirectly management by two persons; the claimant and the defendant jointly, (ii) the claimant barely shown any interest in the participation which was transferred, (iii) the claimant previously approved the sale of another subsidiary, (iv) it did not appear that the director in question had intentionally not consulted the claimant in respect of the disputed sale and (v) the shares were sold at nominal value.

Subsequently the question was answered as to whether the conduct of the director could constitute a wrongful act (tort) towards the claimant in his capacity as shareholder. Although the shareholders’ approval as prescribed by the articles of association does serve to protect the shareholder’s interest, the principles of reasonableness and fairness determine that it would be unacceptable that the claimant in his capacity of shareholder in the given circumstances could successfully invoke breach of the articles of association. Therefore the court had also concluded that the director was not liable on the basis of a tort.

The court’s reasoning is not new, but confirms the current line of ruling.


Court of Appeal Amsterdam, 6 November 2012
JOR 2013/265
LJN: BY8291

Acquisition of business – the knowledge of the target company’s management team is not to be attributed to the purchaser in respect of warranties given in the share purchase agreement. The non-disclosure of essential information relating to product volume constitutes as an act of willful intent or gross negligence, which sets aside any limitations of liability.

It is common for a seller to warrant that – in relation to a share transaction – all the disclosed company information is correct, accurate and not misleading and that no essential information has not been provided. Several weeks after signing of the purchase agreement it appeared that the turnover of the target had decreased by more than half. The seller and the target’s management knew that this would happen, but had not disclosed any information relating thereto. The buyer had therefore claimed damages on the basis of a breach of the aforesaid warranty.

Pursuant to the purchase agreement the buyer is obliged to notify the seller of any breach within 45 days after the buyer and/or the management of the target “becoming aware” of such breach of the warranties. The buyer had informed the seller 55 days after the signing date. The defense of the seller was therefore that the buyer had not notified its complaint within the agree timeframe as set out in the claim procedure.

According to the Court it is not evident to attribute the knowledge of the management of the target to the buyer as of the signing date. The Court ruled that the wording of the claim procedure can only relate to the knowledge of the management team being attributable to the buyer which still is to be obtained after the closing. Thus, the 45 day complaint term has only commenced as of the moment that the buyer became aware of a breach of the warranties.

In addition the Court ruled that not disclosing such important company information constitutes as a willful act or gross negligence of the seller. The contractual limitations of liability therefore do not apply. 

Rob Faasen

Miriam Ee, van

Tom Wijngaarden, van