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Since the 2000/2001 Skygate decisions we have seen a steady stream of case law that has become known under the name of emergency funding (in Dutch: noodzaak financiering). According to Doorman the current body of case law gives a reasonably good impression of the circumstances in which the Enterprise Chamber is willing to facilitate emergency funding (see his recent annotation to the Rhodes Holding decision, JOR 2011/288). In his view only two underlying questions remain to be answered:
(i) whether or not the Enterprise Chamber can only facilitate emergency funding if it would be unacceptable – considering the circumstances of the case at hand and the principles of reasonableness and fairness – to respect the rights of the shareholder who does not wish to cooperate with the proposed funding arrangement; and
(ii) to what extent the Enterprise Chamber’s room for manoeuvre is boxed in by this shareholder’s entitlement to the peaceful enjoyment of his possessions provided by Article 1 of Protocol No. 1 to the Convention for the Protection of Human Rights and Fundamental Freedoms (“P1”).
I endorse Doorman's appeal to the Enterprise Chamber (and the Dutch Supreme Court) to answer these questions (in a forthcoming article in Ondernemingsrecht I argue on the basis of Article 1 P1 what the answer to question (i) should be in my view). However, I’m afraid that these aren’t the only questions that still need to be answered.
As far as I am aware all emergency funding case law pertains to private limited liability companies (in Dutch: besloten vennootschap met beperkte aansprakelijkheid, "BV/LLC"). One of the questions that still need to be answered is whether this case law can be applied as well to public company limited by shares (in Dutch: naamloze vennootschap, "NV/PLC"). A crucial difference could lay in EU rules with regard to NV/PLCs, such as the First Council Directive 68/151/EEC and the Second Council Directive 77/91/EEC (“Second Directive”). Although I admit that the Dutch legislator has voluntarily applied most of these rules to the BV/LLC as well, it has refrained from the wholesale application thereof. That has led to the situation in which some rules applicable to the BV/LLC closely resemble EU based rules applicable to the NV/PLC, but still differ in some aspects. An interesting question is to what extent these rules should be applied in accordance with the relevant council directive. It would furthermore be interesting to know whether such an obligation would be based on Dutch law and/or EU law (cf. Wissink, Richtlijnconforme interpretatie van burgerlijk recht, Serie Recht en Praktijk, 115, nr. 15).
One relevant example with regard to emergency funding concerns Article 25 of the Second Council Directive, which reads as follows:
1. Any increase in capital must be decided upon by the general meeting. Both this decision and the increase in the subscribed capital shall be published in the manner laid down by the laws of each Member State, in accordance with Article 3 of Directive 68/151/EEC.
2. Nevertheless, the statutes or instrument of incorporation or the general meeting, the decision of which must be published in accordance with the rules referred to in paragraph 1, may authorize an increase in the subscribed capital up to a maximum amount which they shall fix with due regard for any maximum amount provided for by law. Where appropriate, the increase in the subscribed capital shall be decided on within the limits of the amount fixed, by the company body empowered to do so. The power of such body in this respect shall be for a maximum period of five years and may be renewed one or more times by the general meeting, each time for a period not exceeding five years.
3. Where there are several classes of shares, the decision by the general meeting concerning the increase in capital referred to in paragraph 1 or the authorization to increase the capital referred to in paragraph 2, shall be subject to a separate vote at least for each class of shareholder whose rights are affected by the transaction.
4. This Article shall apply to the issue of all securities which are convertible into shares or which carry the right to subscribe for shares, but not to the conversion of such securities, nor to the exercise of the right to subscribe.
Article 25 of the Second Directive was implemented in Article 2:96 of the Dutch Civil Code (“DCC”), which provides as a general rule that share issues by a NV/PLC require a shareholders' resolution. Article 2:96 DCC furthermore allows for the delegation of the authority to issue shares for a period up to five years at a time. The requirement that the general shareholders’ meeting should fix the maximum amount of subscribed capital another corporate body can resolve to issue, is met by Article 2:67 DCC. Article 6:67 DCC requires that the company's articles of association, which can only be changed by the general shareholders' meeting (Article 2:121 DCC), should provide the amount of the authorized capital.
The relevant section with regard to the BV/LLC (Article 2:206 DCC) was modeled on Article 2:96 DCC. Article 2:206 DCC also provides as a general rule that share issues require a shareholders' resolution. However, Article 2:206 DCC does not exactly match Article 2:96 DCC (and hence Article 25 of the Second Directive), since it allows for the permanent attribution of this authority to other corporate bodies such as the board of directors.
As will be explained below these sections are highly relevant with regard to emergency funding case law, although the significance of Article 25 of the Second Directive in this respect is still largely unknown. This case law concerns the situation, in which a company urgently needs new funds, and there is a possibility to obtain these funds, which however (inter alia) requires the company to issue new shares, whilst one or more of the shareholders block the required share issue. The basis on which these shareholders manage to block the required share issue varies, but often their vote is necessary to reach the required majority in the general shareholders’ meeting. The Enterprise Chamber is then applied – for instance by a shareholder in favor of the concerned funding arrangement – to lift this blockade. In case the Enterprise Chamber is willing to do so, it has various instruments at its disposal. To name a few examples from the Cools/Kroeze report: the suspension of the voting rights of the blocking shareholder, a transfer of his shares to a temporary fiduciary owner who has to put the company’s interest first (in Dutch: tijdelijke overdracht van aandelen ten titel van beheer), or a temporary change in the articles of association (for instance the authority to issue shares is transferred by the Enterprise Chamber from the general shareholders’ meeting to the board of directors, or the Enterprise Chamber removes a qualified majority requirement). In the mentioned Rhodes Holding decision for example the Enterprise Chamber provisionally ordered that the company’s board of directors could issues shares and could increase the amount of the authorized capital (which was necessary since this share issue exceeded the company’s authorized capital).
It remains to be seen whether such a provisional order would be in line with Article 25 (1) and (2) of the Second Directive. It is true that the Enterprise Chamber can temporarily change a company’s articles of association and yes, Article 25 (2) of the Second Directive allows for the articles of association to provide that the board of directors can resolve to issue shares. However, this seems to be based on the assumption that it is up to the shareholders to determine the contents of the articles of association, and hence to delegate this authority to the board of directors. Moreover, the aim of Article 25 of the Second Directive seems to be to place the authority to issue shares in the hands of the shareholders (cf. Scholten, ‘Emissie van aandelen’, in: Het vennootschapsrecht en de Tweede E.E.G.-Richtlijn, Serie Monografieen vanwege het Van der Heijden-Instituut 18, p. 40 and 41 and H.J. de Kluiver, ‘Noodzaakfinanciering en de rol van de rechter’, in: De financiering van de onderneming, Serie Van der Heijden Instituut 88, p. 40 and 41). The same applies with regard to the increase of the authorized capital.
Now, in the Inter Access case it was argued in cassation that the Enterprise Chambers facilitation of emergency funding was in breach of Article 25 of the Second Directive (see ARO 2011/41 under beroepschrift g.c). However, the Dutch Supreme Court did not explicitly respond to this argument, nor did it ask prejudicial questions to the European Court of Justice. Instead it found that the Enterprise Chamber can derogate from Article 2:206 DCC. Hence the Dutch Supreme Court seems to imply that – if Article 2:206 DCC should be applied in accordance with Article 25 of the Second Directive – this obligation is not based on EU law, but solely on Dutch law. That would mean that not the European Court of Justice, but the Dutch Supreme Court would have the last word as to Article 2:206 DCC. Since the law firm I work for was involved in the Inter Access proceedings, I will leave the question whether this decision was correct unanswered. The point I want to make here is that the Dutch Supreme Court reasoning re Inter Access cannot be applied with regard to the NV/PLC. It is beyond doubt that there is an EU law based obligation to apply Article 2:96 DCC in accordance with Article 25 of the Second Directive (cf. the Pafitis decision quoted below).
It furthermore remains to be seen whether the Enterprise Chamber can circumvent Article 25 of the Second Directive by – not touching the general shareholders’ meeting authority to issue shares and to increase the authorized capital and instead – suspending the obstructing shareholder’s voting rights, or transferring his shares temporarily to a person who can be depended upon to vote in favor of the share issue. The Enterprise Chamber’s (and Dutch Supreme Court's) obligation to apply Dutch law with regard to the NV/PLC in accordance to text and aim of Article 25 of the Second Directive is not limited to Article 2:96 DCC, but also applies to all other provisions, including Article 2:349 (2) DCC (cf. Asser/Hartkamp 3-I* 2011/181).
A further interesting question is whether there is some EU doctrine which would allow the Enterprise Chamber to derogate from Article 25 of the Second Directive in the circumstances in which it usually facilitates emergency funding (cf. Snijders, ‘Beperkende werking van redelijkheid en billijkheid: de Europese dimensie’, in Het Europese recht en het Nederlandse contractenrecht (Serie Onderneming en Recht 42-I). However, the case law (quoted below) of European Court of Justice with regard to Article 25 of the Second Directive leaves that open to doubt. De Kluiver (loc.cit.) thinks that this option is not open to the Enterprise Chamber.
This leads to another interesting question: how should the Enterprise Chamber deal with the fact that the above mentioned questions merit prejudicial questions, whilst that would take an amount of time that a company in need of emergency funding simply does not have. I note that Enterprise Chamber may ask prejudicial questions, but it has no obligation to do so (Article 267 of the Treaty on the Functioning of the European Union). Given the fact that in cases regarding emergency funding the Enterprise Chamber is asked to save the company from bankruptcy, it might be tempting to argue that the company should be saved first and prejudicial questions asked later. However, it should be kept in mind that undoing the consequences – in case the European Court of Justice in the end decides that Article 25 of the Second Directive precludes the Enterprise Chamber’s case law with regard to emergency funding – would lead to a very messy situation in which with lots of difficult questions would need to be answered.
European Court of Justice 12 March 1996, case C-441/93 (Pafitis):
Article 25 of the Second Council Directive (77/91/EEC) of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent precludes national legislation under which the capital of a bank constituted in the form of a public limited liability company which, as a result of its debt burden, is in exceptional circumstances may be increased by an administrative measure, without a resolution of the general meeting.
European Court of Justice 12 May 1998, case C-367/96 (Kefalas):
Community law does not preclude national courts from applying a provision of national law in order to assess whether a right arising from a provision of Community law is being exercised abusively. However, where such an assessment is made, a shareholder relying on Article 25(1) of the Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, cannot be deemed to be abusing the right arising from that provision merely because the increase in capital contested by him has resolved the financial difficulties threatening the existence of the company concerned and has clearly enured to his economic benefit, or because he has not exercised his preferential right under Article 29(1) of that directive to acquire new shares issued on the increase in capital at issue.
European Court of Justice 12 March 1996, case C-373/97 (Diamantis):
32. The preliminary point must be made that, as the Court has already held in Case C-367/96 Kefalas and Others v Greek State and Others  ECR I-2843, paragraph 28, the objective of Article 25(1) of the Second Directive is to ensure, for the benefit of shareholders, that a decision increasing the capital of the company and, consequently, affecting the share of equity held by them, is not taken without their participation in the exercise of the decision-making powers of the company. According to the case-law, that objective would be seriously frustrated if the Member States were entitled to derogate from the provisions of the directive by maintaining in force rules - even rules categorised as special or exceptional - under which it was possible to decide by administrative measure, outside any decision by the general meeting of shareholders, to effect an increase in the company's capital (Karella and Karellas, cited above, paragraph 26).
33. However, Community law cannot be relied on for abusive or fraudulent ends (see Kefalas and Others, cited above, paragraph 20, and the case-law cited there). That would be the case if a shareholder, in reliance on Article 25(1) of the Second Directive, brought an action for the purpose of deriving, to the detriment of the company, an improper advantage, manifestly contrary to the objective of that provision (Kefalas and Others, cited above, paragraph 28).
34. Although national courts may, therefore, take account - on the basis of objective evidence - of abuse on the part of the person concerned in order, where appropriate, to deny him the benefit of the provisions of Community law on which he seeks to rely, they must nevertheless assess such conduct in the light of the objectives pursued by those provisions (Case C-206/94 Paletta  ECR I-2357, paragraph 25). The application of a national rule such as Article 281 of the Civil Code must not, therefore, detract from the full effect and uniform application of Community law in the Member States (Pafitis and Others, cited above, paragraph 68).
THE COURT (Sixth Chamber), in answer to the questions referred to it by the Polimeles Protodikio Athinon by order of 24 June 1997, hereby rules:
Community law does not preclude national courts from applying a provision of national law which enables them to determine whether a right deriving from a Community law provision is being abused. However, in making that determination, it is not permissible to deem a shareholder relying on Article 25(1) of the Second Directive 77/91/EEC of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, to be abusing his rights under that provision merely because he is a minority shareholder of a company subject to reorganisation measures, or has benefited from reorganisation of the company, or has not exercised his right of pre-emption, or was among the shareholders who asked for the company to be placed under the scheme applicable to companies in serious difficulties, or has allowed a certain period of time to elapse before bringing his action. In contrast, Community law does not preclude national courts from applying the provision of national law concerned if, of the remedies available for a situation that has arisen in breach of that provision, a shareholder has chosen a remedy that will cause such serious damage to the legitimate interests of others that it appears manifestly disproportionate.