Essays on Private and Business Law : A Tribute to Professor Adriaan Dorresteijn [1 ed.] 9789462748101, 9789462368187

Citation preview

e s s a y s

o n

PRIVATE & BUSINESS LAW P R O F E S S O R a

t r i b u t e

t o

ADRIAAN

DORRESTEIJN

Harold Koster Frans Pennings Catalin Rusu (eds.)

Many companies today face international influences, and many more will follow suit. A scenario that was recognised early on by Prof. Adriaan Dorresteijn (Utrecht University). To honour his innovative research, teachings, and administration work, this Liber Amicorum includes capita selecta of recent business and private law publications. These articles discuss, inter alia, the relationship between mother and daughter companies, the protection of actors working for companies, cross-border company structures, and educational programmes about corporate law.

ISBN 978-94-6236-818-7

9 789462 368187

Essays on Private and Business Law

Essays on Private and Business Law A Tribute to Professor Adriaan Dorresteijn

H a r o l d K o s t e r, F r a n s P e n n i n g s a n d C ata l i n R u s u ( e d s . )

Published, sold and distributed by Eleven International Publishing P.O. Box 85576 2508 CG The Hague The Netherlands Tel.: +31 70 33 070 33 Fax: +31 70 33 070 30 e-mail: [email protected] www.elevenpub.com Sold and distributed in USA and Canada International Specialized Book Services 920 NE 58th Avenue, Suite 300 Portland, OR 97213-3786, USA Tel.: 1-800-944-6190 (toll-free) Fax: +1 503 280-8832 [email protected] www.isbs.com Eleven International Publishing is an imprint of Boom uitgevers Den Haag.

ISBN 978-94-6236-818-7 ISBN 978-94-6274-810-1 (E-book) © 2017 The authors | Eleven International Publishing This publication is protected by international copyright law. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. Printed in The Netherlands

Table of Contents Preface by the editors

vii

Preface by the dean

ix

1 Substance over Form and the European Prospectus Regime Tomas Arons

1

2 Parent and Subsidiary: For Better or for Worse? Steef Bartman

9

3

The Paradox of the Dutch Class Action and the Fear of a ‘Compensation Culture’ Eddy Bauw What’s in a Name? Names and Conceptual Frameworks for the Design of, and Approaches to, Law Programme Courses on Undertakings Ernst van Bemmelen

19

4

Judicial Protection for Credit Institutions under the Single Supervisory Mechanism Ton Duijkersloot & Rob Widdershoven

29

5

Kelly v. Fraser Compared to the Allocation of Risk in Agency Law in the Netherlands Anka Ernes

53

6

Changing the Causation Requirement and Its Impact on Companies Faced with Tort Claims Ivo Giesen & Rianka Rijnhout

71

7

8 Towards a European Commercial Code? Ewoud Hondius Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment Anthonie W. Jongbloed

83

107

9

v

117

Table of Contents 10

Substance over Form in Various Aspects of Cross-Border Company Groups Bastiaan Kemp & Mieke Olaerts

145

11 The Societas Europaea (SE) Revisited Harold Koster

163

12 Who Is in Control in Public Procurement? Pieter Kuypers

177

13 Enforcing Annulled Arbitral Awards in the Netherlands Vesna Lazić

195

14

What Is the Difference between a Worker and an Undertaking? New Developments in EU Labour Law and Competition Law Frans Pennings Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control Catalin Rusu

209

15

Cross-border Conversions after Vale – the German Experience Christoph Teichmann

221

16

249

17

Shareholders’ Fundamental Rights in Listed Companies Some Relevant and Some Undesirable EU Initiatives Erik Werlauff

271

Contributors

289

vi

Preface by the editors This Liber Amicorum is in honour of Adriaan Dorresteijn. Adriaan has been Professor of Transnational Aspects of Corporate Law at Utrecht University since September 2000, and before that, from 1991 to 2000, Professor of Private Law at the Open University of the Netherlands. Therefore, a few years ago he had already reached the milestone of a 25-year professorship. He has also been visiting professor at St. Louis School of Law at Washington University and Jean Monnet Professor of European Corporate Law at the Universität Bielefeld in Germany. Adriaan was born in the village of Werkhoven, which is nowadays part of the municipality of Bunnik. He attended secondary school in Zeist, and graduated there from the Katwijk De Breul High School. He studied for his law degree in Dutch private law at Utrecht University, where he graduated in 1974. He started his academic career in Amsterdam, at the University of Amsterdam, where he lectured from 1975 until 1988. During his time in Amsterdam, he worked closely together with Professor Boukema. In 1988, Adriaan returned to his alma mater Utrecht University as associate professor, although not for long, as in 1991 the Open University of the Netherlands offered him a full professorship in private law, which he accepted. Thus, he again left Utrecht. But also not for long. In September 2000, he rejoined Utrecht University for the second time, this time for good. It was also in Utrecht where Adriaan defended his PhD thesis. His PhD supervisor was Professor Van Schilfgaarde. His thesis on a conflict of interest regarding members of the board and members of the supervisory board, which is such an important topic nowadays, was, with hindsight, ahead of its time. Remarkably, the same can be said about the topics of his inaugural lectures in Heerlen (OU) and in Utrecht (UU). The first, in 1994, dealt with corruption and private law, the latter, in 2003, with substance over form in corporate law. Both topics are in the spotlight nowadays. An example is the SNS bank expropriation that led to a farreaching substance over form decision by the Dutch Supreme Court in November 2016. Adriaan has also been among the first to recognise the importance of groups of companies, as is evidenced by the handbook ‘Van het concern’ written with his co-author and friend, Professor Bartman, now in its 9th edition, and with a new co-author, Professor Olaerts. Another important handbook which Adriaan has co-authored since its first edition published in 1995 is the book on European corporate law. The second 2009 edition was written together with Professors Teichmann and Werlauff and the lawyer Monteiro and it provides an in-depth examination of the developments regarding European corporate law. Moreover, since 1983 Adriaan has also been co-authoring a handbook on the vii

Essays on Private and Business Law legal form of organisations with Dr. Van het Kaar, now in its 13th edition. Nowadays, another high-profile topic is risk management, and it will no longer come as a surprise that this was indeed a subject on which Adriaan already wrote an academic article some years ago. He also wrote about co-determination, shareholders’ contracts, takeover issues and many other topics. It has to be said that his overview and understanding of the field of corporate law is really impressive. Adriaan also holds editorial positions in academic journals. We can mention Onderneming & Financiering, Maandblad voor Accountancy en Bedrijfseconomie, and European Company Law. He was also a founding board member of the Dutch Corporate Litigation Association. Moreover, for many years now Adriaan has also been counsel at the Dutch law firm AKD, where, amongst other things, he is involved in the firm’s educational programme for young lawyers. It is education that is truly Adriaan’s passion. He loves teaching and he is widely recognised, by students and colleagues alike, for his excellence in teaching. He has also transmitted his joy of teaching to others, for example by inviting them as guest lecturers. During a major part of his academic career, Adriaan fulfilled important organisational roles. A leading management role he had was that of Dean of the Faculty of Law at the Open University of the Netherlands from 1994 to 1999. Moreover, in Utrecht he was Dean of the Faculty of Law from 2000 to 2003, and in 2003 he became the first Dean of the new Faculty of Law, Economics and Governance (REBO), a position he held until 2008. Thus, remarkably, maybe even uniquely, he has been Dean for almost fifteen years, and of three different faculties. During his tenure as Dean in Utrecht, he was responsible for the introduction of the bachelor’s/master’s degree system and for the start of Utrecht Law College. Furthermore, from 2008 until 2016 Adriaan was programme leader of the master’s in Business and Law. Adriaan is well known, respected and much liked in Utrecht. His resumé is long and comprehensive. For his colleagues, and there have been many, working with Adriaan is a pleasure. He has an amazing quality to make you feel comfortable and to do just whatever there needs to be done. Whatever Adriaan does, he seems to enjoy it, especially when he is doing it in collaboration with others. Adriaan also loves music. His band is famous amongst his colleagues and whenever he can play the guitar, he will do it. Although we now have to say goodbye to Adriaan as a colleague, the friendship will certainly continue and we still expect to receive invitations to attend his musical performances. The show will go on! Harold Koster, Frans Pennings and Catalin Rusu

viii

Preface by the dean Adriaan Dorresteijn, a dream of a dean On faculties, sub-faculties and unity in diversity Dear Adriaan. We are bidding you farewell as professor of Transnational Aspects of Corporate Law, as a lecturer in the Master’s degree programme in Business and Law and as chairman of the board of Utrecht Law College Sirius. But you are quite familiar with farewells. Nine years ago, you said farewell as dean of the Faculty of Law, Economics and Governance. You were the very first dean of this newly-merged faculty. You might say that you were the dean that built it. The Executive Board gave you the task of merging three strong faculties into one. You became one of the founding fathers of the new faculty that went on to be known by its Dutch acronym REBO. Initially, there was still talk of three sub-faculties. For the faculties of Law, Utrecht School of Economics and the Utrecht University School of Governance, the label 'department' was still a step too far. Everything had to happen gradually. Sub-faculties as a temporary compromise, complete with their own sub-faculty boards and councils. In addition to your role as dean of the faculty, you continued to provide leadership to the sub-faculty of Law. Your business card must have been quite impressive in those days.

And if you were keen on Law (‘Zin in recht’) in 2002, a year later you were also keen on Economics as well as Governance (Adriaan in 2002 at a conference on the setting up of the degree programme in Law)

Cooperation and teamwork are running themes throughout your career. Both within and beyond the University. As professor and also as dean, you knew just how important contact with external parties was (and still is). But, of course, also cooperation within ix

Essays on Private and Business Law the University, including with our sister, the Humanities faculty, in the city centre. Were you not one of the driving forces behind a single city-centre library together with Humanities? A single city-centre faculty of REBOGOFILET (the Dutch acronym for law, Economics, Governance, Organisation, Theology, Philosophy and Arts) dreamt of by you and Wiljan van den Akker has not (yet) come into being. But we are cooperating extremely closely in increasing numbers of different ways. Only recently, we have joined forces with Humanities in launching the new initiative UGlobe, a multidisciplinary platform for both research and education. During your time as dean, good foundations were laid for this collaboration.

Dreamerz and dreamers: What did Adriaan dream about as first dean of the new faculty? As lead guitarist in the band Dreamerz & Co, you know exactly how important rhythm, harmony and melody are, the interplay between band members, with the occasional amazing solo. I believe many parallels can be drawn between being the dean of a faculty like ours and the role of lead guitarist in a band. Everyone must take a turn, but ultimately we are all playing the same song. The lead guitarist literally takes the lead. Without a band that there is no lead guitarist. Without a lead guitarist perhaps there is no band??

On 1 September 2008, five years after REBO was founded, you held a farewell address as you handed over the reins as dean to Henk Kummeling. Jokingly, you said that being

x

Preface by the dean dean regularly means knowing hardly anything about what is going on, not being involved in any of it and, nevertheless, everything running extremely smoothly. But your words also expressed pride. Pride in what has been achieved, pride in the students and the staff. And many of the reasons for your pride remain remarkably relevant today. You spoke of the enormous resilience and adaptability of the people in the faculty and said that we ‘not only responded well to what faces us from outside and from the University, but are also capable of autonomous innovation and reform’. Some nine years later, all of this is very much still the case. Our new faculty strategic plan for the years 2017 to 2021 has the title ‘Connection and Balance’ (‘Verbinding en Balans’). It is a title that sums you up perfectly. When you read the contents, you can see your fingerprints all over it. Key to the plan is the relevance to society of what we do in the faculty. Working from a strong disciplinary basis, together we are able to make a difference and deliver an active contribution to resolving issues in society. Part of your dream has become a reality and hard work is still needed to achieve another part.

New initiatives In many areas, we are a faculty that takes the lead within the University, with numerous new initiatives. Initiatives in which you have played a major role, often as initiator and with boundless energy. This is how Utrecht Law College came into being, because you were increasingly getting signals from the professional world that lawyers qualified in the Netherlands fell short compared to lawyers who had qualified abroad. You took these signals very seriously. In the U-blad (1 February 2007), you told the journalist: ‘I recently spoke to a former student who works at an international law firm in Amsterdam. Her boss is German and she told me that he prefers to appoint German rather than Dutch graduates because they are not only better qualified but have a better work ethic. That shocked me, especially since I have frequently heard such rumours. I also receive regular signals from Dutch law firms that our new law graduates vastly underperform compared to their colleagues from the UK, Germany, America and so on. Of course, there are exceptions, but overall people find Dutch law graduates below standard. If we do not take rapid measures to turn the tide, it will not be long before major Dutch law firms and banks will only appoint Dutch lawyers who have at least done their Master’s, and in the long-term even their entire degree, at a foreign university.’ This is characteristic of you: an acute vision of developments in society, partly based on your own contacts and activities, one foot within the University and one foot outside it. xi

Essays on Private and Business Law Good contact with students and alumni. And with a clear perspective on educational reform. Adriaan, as dean, you have been compared to a trapeze artist, balancing the interests of the faculty, the department and the University. You provided leadership to the essential first phase in the faculty’s existence and laid firm foundations for future developments. We owe you a debt of gratitude, admiration and respect. But I have one final question, Adriaan: REBO!!!! Could you not have thought of a better name for our faculty? Annetje Ottow

xii

1

Substance over Form and the European Prospectus Regime

Tomas Arons

1.1

Introduction

A leitmotiv in Adriaan Dorresteijn’s corpus is ‘substance over form’. In his inaugural address on 24 November 2003 as Professor in the chair of ‘Transnational Aspects of Company Law’ at Utrecht University, Dorresteijn set out this accounting principle and applied it to various company law issues, amongst others the inquiry procedure1 by the Enterprise Chamber (Ondernemingskamer) of the Amsterdam Court of Appeal and the doctrine of company identification2.3 Besides, the European dimension always held Dorresteijn’s academic interest.4 Both issues, substance over form and the European dimension, are also important for one of the cornerstone of financial law, i.e. the provision of relevant company information to investors. Substance over form is a generally accepted accounting principle. Reliable financial statements must reflect the economic substance of transactions, other events and conditions, and not merely the legal form according to the EU-IFRS doctrine.5 It is an economic realities test. It is not the formal or legal structures, but the economic impact, purpose and reality of the transaction or event that are determinant.6

1 2 3 4

5

6

Enquêteprocedure. Vereenzelviging. A.F.M. Dorresteijn, Substance over form in het ondernemingsrecht? (oratie Universiteit Utrecht) Kluwer 2004. Without pretending to be complete, I refer to the following: A.F.M. Dorresteijn & V.N.J. Snijder, ‘Oil Disaster Spills over BP Europa SE’, European company law 2011 8 (1), (pp. 23-26; A.F.M. Dorresteijn et al., European Corporate Law (2nd ed.), European Company Law Series Vol. 5, Kluwer Law International 2009; A.F.M. Dorresteijn, ‘De Europese dimensie van het ondernemingsrecht’, MAB 2007, p. 638; A.F.M. Dorresteijn & S. van den Braak, ‘Het Ondernemingsrecht in een stroomversnelling’, MAB 2005, p. 108. Commission Regulation (EC) No. 1126/2008 of 3 November 2008 adopting certain international accounting standards in accordance with Regulation (EC) No. 1606/2002 of the European Parliament and of the Council [2008] OJ L320/1, IAS 8 ‘Accounting policies, changes in accounting estimates and errors’ 10(b)(ii). See further: H. Beckman, ‘Overpeinzingen naar aanleiding van het 'substance over form'-beginsel in het Jaarrekeningenrecht’ Ondernemingsrecht 2009, 21; M.N. Hoogendoorn, ‘Substance over form’, in K.M. van Hassel & M.P. Nieuwe Weme (eds), Willems wegen (Serie vanwege het Van der Heijden Instituut te Nijmegen deel 102), Deventer: Kluwer 2010, p. 171.

1

Tomas Arons To what extent does this principle apply or should apply in the EU prospectus regime? A prospectus is the document which an issuing company has to publish when offering its securities to the public or listing its securities on a regulated market.7 The prospectus needs to provide the information that is material and relevant for investors when making an investment decision. The EU prospectus regime is a somewhat highly formalised process. Extensive and detailed duties are prescribed as to which items of information should be published.8 Even the format is provided by law. The risk of such an approach is that the issuer and/or the syndicate banks including the lead manager switch to simple ‘box ticking’ rather than focusing on economic aspects and the legal relevance or materiality of the information disclosed in the prospectus. Applying checklists and ticking boxes incurs the risk that substance may be overlooked for form. This has an impact on the due diligence investigation, since all relevant and material information has to be provided in the prospectus, including all the economic, financial and reputational risks of the issuer. The European legislator is aware of this risk. After consultation, the European Commission published a proposal in November 2015 to reform the Prospectus Directive (hereafter, the reform proposal).9 The prospectus rules are regarded by the European Commission as an important part in accomplishing a Capital Markets Union (CMU). In the CMU it is expected that companies will be able to raise money/investments on capital markets more easily. Traditionally, companies in Europe have been financed by banks. In its response to the consultation on the review of the Prospectus Directive, ESMA recommended that the principle of substance over form should be applied. This principle should be adhered to in determining the form and content of a prospectus.10 A central tenet underlying the EU prospectus regime is that adequate information assists (consumer) investors in their decision-making process. Liability for misleading information in prospectuses serves as a tool to enhance consumer protection. However, the effectiveness of detailed information duties and the liability incurred by the issuer (and/or the

7

Art. 3 Directive 2003/71/EC [2003] OJ L345/64, last amended by Directive 2010/73/EU [2010] OJ L327/1 from mid-2019 (COM(2017) 292 final, p. 5.) to be replaced by Art. 3 Prospectus Regulation. 8 Commission regulation (EC) No. 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements [2004] OJ L149/1. The Q&As and reports by the European Supervisory Authority ESMA can be retrieved from https://www.esma.europa.eu/regulation/corporate-disclosure/prospectus. 9 COM (2015) 583 final. 10 ESMA’s response to the European Commission consultation on the review of the Prospectus Directive, 13 May 2015 | 2015/ESMA/857, p. 4-5.

2

1

Substance over Form and the European Prospectus Regime

syndicate banks) when these duties are violated is questionable. If they are not effective, issuers incur significant compliance costs to no avail. In its reform proposal, the European Commission finds that the detailed prospectus provisions in the (amended) Prospectus Directive11 do not provide adequate investor protection. The aim of adequately informing investors is undermined by the fact that a lengthy prospectus is primarily intended as a shield against the issuer’s liability.12 There is a discussion in the legal literature as to the usefulness of a prospectus as a tool for investor protection.13 This article assumes that adequate information about the issuing company and the offer of its securities is relevant and material in (consumer) investors’ decisionmaking. The central issue in this article is the EU prospectus (liability) regime. Concerning the liability question, Dutch private law is considered in particular. The article is structured as follows. Section 2 contains a brief overview of the current and prospective EU prospectus regime. Section 3 provides an overview of the prospectus liability regime under Dutch law. The impact of substance over form issues on the due diligence procedure conducted by the issuer and/or the syndicate banks or other advisers such as accountants and lawyers is dealt with in section 4. Section 5 concludes with a summary and closing remarks.

1.2

Current and future EU prospectus regime

The main legislation in the current EU prospectus regime is the (amended) Prospectus Directive. The Prospectus Directive is part of the Financial Services Action Plan adopted in 1999. In order to complete the harmonisation of the financial markets, the European legislator adopted directives which maximised harmonisation. This maximisation means that Member States cannot impose, by way of national legislation, additional require11 Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC [2003] OJ L345/64, last amended by Directive 2010/73/EU of the European Parliament and of the Council of 24 November 2010 amending Directives 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading and 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market [2010] OJ L327/1. 12 COM(2015) 583 final, p. 11. 13 J. Armour et al., Principles of Financial Regulation OUP 2016, chapter 10 Regulating Consumer Finance; T. van Dyck, De Geharmoniseerde Prospectusplicht, Kritische analyse van de geharmoniseerde prospectusplicht in de Prospectusrichtlijn 2003/71/EG en haar omzettingswetten in België, Nederland, Frankrijk, het Verenigd Koninkrijk en Duitsland (PhD thesis KU Leuven), Bruges: Die Keure 2010, no. 89; Moloney, How to Protect Investors, CUP 2010, p. 291-296.

3

Tomas Arons ments regarding the drawing up, approval and distribution of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market situated or operating within a Member State.14 Regarding the disclosure of information, the starting point is that the provision of the necessary relevant information concerning the securities and their issuers promotes the protection of investors.15 The information regarding the financial circumstances of the issuer and the rights attached to the securities needs to be sufficient and as objective as possible.16 Furthermore, it has to be easily analysed and in a comprehensible form. The prospectus summary must contain the essential characteristics of and the risks associated with the issuing company.17 With regard to the specific information that must be disclosed, the European legislator has taken into account the particular nature of the issuer and the securities offered to the public or admitted to trading on a regulated market. In theory, the overarching question that the issuer and the syndicate banks assisting the issuer with the issuing of the securities have to consider is whether the information disclosed is necessary to enable investors to make an informed assessment of the assets and liabilities, the financial position, profits and losses, and the prospects of the issuer and of any guarantor, as well as the rights attached to such securities.18 However, in practice the secondary legislation (e.g. Prospectus Regulation 809/2004, the regulatory technical standards (RTS) and the implementing technical standards (ITS)) piles up. These rules determine in detail what items of information should be disclosed and how this should be done. As already mentioned in the introduction, in 2015 the European Commission published a reform proposal. The basic features regarding the information duties remain unaltered. However, the exceptions to and exemptions from the duty to publish a prospectus have been extended. Furthermore, special regimes for Small and Medium-sized Enterprises (SME) and frequent issuers have been introduced. And the burden on secondary issuers has been alleviated. The reform proposal, which was amended after consultation between the European Parliament (EP), the Council and the Commission, has been adopted by the EP on 5 April 2017 at first reading.19 After approval by the Council, the adopted Prospectus Regulation 14 15 16 17 18 19

Art. 1(1) Directive 2003/71/EC. Recital 18 of the Preamble. Recital 20 of the Preamble. Recital 21 of the Preamble. Art. 6(1) Prospectus Regulation (new); Art. 3(1) Directive 2003/71/EC. P8_TA-PROV(2017)0110, 2015/0268 (COD).

4

1

Substance over Form and the European Prospectus Regime

is waiting to be signed into law and published in the Official Journal.20 This regulation will be directly applicable. Therefore, in principle no implementation in the respective Member States’ legislation is needed.

1.3

Prospectus liability under Dutch law

The new Prospectus Regulation as well as the Prospectus Directive address private law liability issues. Article 11(10) of the new Prospectus Regulation, just like Article 6(1) of the Prospectus Directive 2003/71/EC, requires Member States to ensure that responsibility for the information given in a prospectus (and its supplements) is attributed to at least the issuer or its administrative, management or supervisory bodies, the offeror, the person requesting admission to trading on a regulated market or the guarantor, as the case may be. The persons responsible shall be clearly identified in the prospectus by their names and functions or, in the case of legal persons, their names and registered offices, as well as declarations by them that, to the best of their knowledge, the information contained in the prospectus is in accordance with the facts and that the prospectus makes no omission which is likely to affect its import. With respect to the consequences of a misleading statement or omission, Member States must ensure that their laws, regulations and administrative provisions on civil liability apply to those persons responsible for the information given in a prospectus. Member States shall ensure that their laws, regulations and administrative provisions on civil liability will apply.21 In short, investors must be able to hold persons responsible for prospectuses liable and the latter will then have to pay damages for any misstatements or misrepresentations, i.e. misleading information, contained therein. Given the detailed nature of the prospectus rules, the question arises whether it suffices to mention all items as required by these detailed prospectus rules. I will come back to this issue in section 4. Even though the new Prospectus Regulation is directly applicable, Member States need to ensure that their laws comply with these two provisions. This is because these provisions are not dissimilar to the requirements already imposed by the Prospectus Directive of 2003, and therefore it is likely that no new legislation will be required. This liability provision in the EU prospectus regime has consequences for the private law liability position of those persons responsible for the contents of the prospectus. In principle, the general tort law principles of the various Member States determine this liability. However, the principle of effet utile (the effectiveness of rights granted by EU law) also

20 Brussels, 17 May 2017, 9209/17, 2015/0268 (COD), VOTE 23 INF 92 PUBLIC 27 CODEC 815. 21 Article 11(2) of the new Prospectus Regulation/Article 6(2) of the Prospectus Directive 2003.

5

Tomas Arons applies. Legislators and judges in the Member States have to ensure that an effective remedy is provided to investors so as to ensure the rights conferred by the EU prospectus regime. Various national private law prospectus liability regimes can be observed throughout the EU. Especially the issues of reliance (or causation) and the burden of proof vary to a large extent. The issuer is only liable to pay damages insofar as causation is established by the alleged claimant. For example, the United Kingdom’s Financial Services and Markets Act of 2000 establishes liability for misrepresentations made by securities issuers.22 In order to recover damages under this statute and under the Misrepresentation Act of 1967, as well as under the common law of deceit or tort in negligence, investors must prove that they relied on the alleged misrepresentations when purchasing the securities. No reversal of the burden of proof is applicable. In contrast, under Dutch law, investors can bring claims alleging misleading statements in a prospectus under the Unfair Commercial Practices Act of 2008.23 The burden of proof regarding the misleading nature of the information statements and the attribution of prospectus liability shift to the issuer and/or the syndicate banks. Applying a doctrine which is reminiscent of the U.S.-style ‘fraud on the market’ presumption of reliance, the Dutch Supreme Court has held in the World Online judgment that the issuer and the syndicate banks have to prove that the misleading statements were not in any way connected to the investor’s decision to purchase the securities.24 The Dutch Supreme Court noted that defendants may be able to demonstrate this where, for instance, the shares were purchased prior to the dissemination of the prospectus. The Dutch Supreme Court justified its decision to shift the burden of proving reliance onto issuers and managers with respect to consumer investors based on the aforementioned principle of effet utile.25 Consumer investors are deemed to be incapable of demonstrating that they had relied on the information in the prospectus when making their investment decision. Because of their knowledge and experience, however, institutional or professional investor plaintiffs still bear the burden of proving reliance and the fact that the alleged statements were misrepresentations. 22 Section 90 FSMA 2000. 23 The Unfair Commercial Practices Act is based on Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No. 2006/2004 of the European Parliament and of the Council (‘Unfair Commercial Practices Directive’) [2005] OJ L149/22. In Dutch law, the Unfair Commercial Practices Directive has been transposed in Chapter 3A of Book 6 of the Dutch Civil Code (Art. 6:193a – 6:193j DCC). 24 Dutch Supreme Court 27 November 2009, ECLI:NL:HR:2009:BH2162 (VEB/WorldOnline), par. 4.11.14.11.2. 25 Dutch Supreme Court 27 November 2009, ECLI:NL:HR:2009:BH2162 (VEB/WorldOnline), par. 4.11.14.11.2.

6

1

1.4

Substance over Form and the European Prospectus Regime

Substance over form and prospectus liability

To what extent is the issue of substance over form or the economic realities test applicable in the EU prospectus (liability) regime. Even though the detailed EU prospectus regime may encourage issuing companies and their advisers (syndicate banks, accountants and lawyers) to perform due diligence by using a checklist and ticking off whether all information items are dealt with, their potential liability provides an incentive for a far more rigorous scrutiny and involvement in drawing up a prospectus.26 Furthermore, a ‘ticking the box’ mentality risks that the principle of substance over form may be overlooked. Issuers and syndicate banks are liable for misstatements or misleading information in the prospectus. Under the aforementioned Unfair Commercial Practices Act of 2008, information is deemed to be misleading if it does not comply with the standard required by Article 6 of the new Prospectus Regulation (Article 3 Prospectus Directive). Furthermore, the burden of proof rule in Article 6:193j of the Dutch Civil Code (DCC) means that the issuer and/or the syndicate bank has to provide evidence that the information disclosed in the prospectus is sufficient to enable investors to make an informed assessment.27 Mere compliance with the detailed rules is not sufficient. All information which is necessary to enable investors to make a reasonable investment decision is required. Issuers and their advisers should engage in a thorough and investigative due diligence process to ensure that the prospectus not only complies with the law but also promotes informed decision making by investors and their advisers. The reference to an average investor which has to be taken into account when deciding on questions of disclosure means the presumed expectations of an average investor who is reasonably well informed and reasonably observant and circumspect.28 In order to provide the information that the average investor needs, the issuer and the syndicate banks have to conduct a reasonable due diligence investigation so as to be able to report in the prospectus all the economic, financial and reputational risks associated with the issuer and the securities on offer. The reasonableness of the investigation conducted is an important element in the defence of the issuer and the syndicate banks. They 26 Dutch Supreme Court 27 November 2009, ECLI:NL:HR:2009:BH2162 (VEB/WorldOnline), par. 4.10.1. 27 Art. 6:193j(1) DCC in conjunction with Art. 6:193b DCC, Art. 6:193c DCC, Art. 6:193d,Art. 6:193f(e) DCC and Art. 5:13 of the Dutch Financial Supervision Act (Wet op het financieel toezicht). Article 5:13 DFSA transposes Article 3 of the Prospectus Directive. Note that because of the direct effect of the EU regulation, Article 5:13 DFSA has to be repealed when the new Prospectus Regulation enters into force. Thus, Article 6:193f(e)DCC has to be amended in that it refers to Article 6 of the Prospectus Regulation instead of Article 5:13 DFSA. 28 Dutch Supreme Court 27 November 2009, ECLI:NL:HR:2009:BH2162 (VEB/WorldOnline), par. 4.10.3 referring to ECJ 16 July 1998 Case C-210/96, ECLI:EU:C:1998:369 (Gut Springenheide).

7

Tomas Arons will allege that even though some material information was not (correctly) mentioned in the prospectus, the nature of their due diligence investigation was reasonable in the circumstances. Therefore, the investor’s losses may not be attributed to them. In order to fulfil their burden of proof29, they must be able to provide documentation that the due diligence process and the verification process were carried out in accordance with the applicable standards, e.g. the International Standards on Auditing (EU) or the generally accepted auditing principles (USA).

1.5

Concluding remarks

Issuers and syndicate banks incur liability risks when the issuers’ securities are listed on a regulated market or offered to the public. EU law imposes a duty to issue a prospectus. Since the adoption of the Prospectus Directive in 2003, Member States are required to ensure that the persons responsible for the contents of the prospectus can be held liable for any misstatements, i.e. misleading information, in the prospectus. Investors must have an effective remedy to recover their losses from the issuing company and/or the syndicate banks. Under the principle of effet utile, EU citizens granted particular rights under EU legislation must have an effective legal remedy to ensure these rights. The Dutch Supreme Court in its landmark ruling of 27 November 2009 in the VEB/WorldOnline case held that the principle of effet utile applies to prospectus liability. In order to ensure an effective remedy, consumer investors claiming damages from the issuer and/or syndicate banks do not have to prove reliance. Defendants must show that the investor did not rely on the prospectus including the misstatements when making his investment decision. The information to be disclosed under the EU prospectus regime is substantial. Besides the detailed prospectus rules, the overarching principle in the Prospectus Directive is that all information which is necessary for an investor to make an informed investment decision has to be included. Especially the detailed provisions and prescribed formats incur the risk that the issuer and/or the syndicate bank apply a simple check list and tick the required items off. As Dorresteijn would undoubtedly confirm, neglecting substance over form or not applying the economic realities test is not only inadvisable in company law, but in financial law as well!

29 Art. 6:193j(2) DCC.

8

2

Parent and Subsidiary: For Better or for Worse?1

Steef Bartman

2.1

Introduction

Earlier this year the Bankruptcy journal Tijdschrift voor Insolventierecht published an interesting article by Van Andel & Ten Brinke, entitled ‘Wetgever, maak de curator slagvaardiger in concernverhoudingen!’2, urging the Dutch legislature to grant bankruptcy trustees more powers in intra-group relationships. The authors describe a situation involving a bankrupt holding company with one (or perhaps more) solvent subsidiaries. All the companies are Dutch legal entities. The operations of the parent and the subsidiary are closely linked, and in consequence so are their assets and liabilities. The trustee in the holding company’s bankruptcy, perhaps with plans to restructure and potentially relaunch the group, wishes the subsidiary to perform a series of legal acts, for example transferring real estate or intellectual property rights or distributing a final or interim dividend. The bankruptcy trustee might also wish the subsidiary to request a formal suspension of payments (in Dutch: surséance van betaling), with the possibility of subsequent bankruptcy, for example with a view to combining the liquidation of the separate estates. However, the subsidiary’s board of directors does not wish to cooperate: this might be the immediate director under the subsidiary’s articles of association, or perhaps the holding company itself holds that office and its director refuses to cooperate or is busy elsewhere and currently unavailable. So how should the bankruptcy trustee proceed? The quickest and most obvious route is to use the bankrupt parent company’s position as the subsidiary’s shareholder to appoint himself as the subsidiary’s director or otherwise exercise the authority to carry out legal acts on the subsidiary’s behalf. However, this met with objections in the Hama Rent proceedings before the Court of Appeal of Arnhem.3 In their article, Van Andel & Ten 1

2

3

The present contribution is based on a presentation that I gave on 21 April 2017, at the conference in Cologne to celebrate the twenty-fifth anniversary of Insolad, on the subject of Bankruptcy Trustees and Groups. Tijdschrift voor Insolventierecht 2017/1. See also R.G. Roeffen & F.F.A. Smetsers, ‘Heeft de curator van de moedervennootschap de niet-failliete dochters aan een touwtje?’ in the collection De curator en het concern, Insolad jaarbundel 2017, Wolters Kluwer, 2017, p. 121. Cf. the judgment of the Court of Appeal of Arnhem of 23 March 2012, JOR 2012/203, with commentary by Schuijling (Hama Rent). See also Wessels Insolventierecht I, 2016/1027a.

9

Steef Bartman Brinke found that the ever-present risk of directors’ liability or tortious liability for exceeding their authority means that bankruptcy trustees rarely, if ever, dismiss the directors of subsidiaries and appoint themselves or another member of their law firm in their place.4 This risk is amplified if the solvent subsidiary has significant non-group creditors and/or minority shareholders, where a bankruptcy trustee self-appointed as director might cause conflicts of interest and blur the lines between official roles. An additional problem is that the professional liability insurance of the bankruptcy trustee (or his firm) will not cover acts as a director. Similarly, it is generally difficult to find an independent third party for these jobs, which bring little satisfaction and in some cases generate negative publicity. Even if the bankruptcy trustee finds someone, that person’s insurance premiums will then be disproportionately high and be costly for the estate. A quick informal survey among experienced bankruptcy trustees reveals that some of them agree that this is a real problem. Others, I should add, do not see any issue here: they simply hire an interim director from among their circle of acquaintances from whom they receive a yearly Christmas card. In the article by Van Andel & Ten Brinke, who obviously fall into the first category, the legislature is urged to resolve the identified lack of options available to trustees in the bankruptcy of holding companies. They put forward a solution as part of the legislative project for a third Dutch Business Continuity Act (in Dutch: Wet continuïteit ondernemingen III): supervisory judges should be able, on request, to grant these bankruptcy trustees the authority to perform particular legal acts on behalf of solvent subsidiaries. The concrete text of their proposal, which I refer to in this contribution as ‘intrusion on directors’ authority’, reads as follows translated in English: If the bankrupt holds a position on the board of directors of a group company that is not bankrupt and that has not been granted a suspension of payment, at the bankruptcy trustee’s request the supervisory judge may determine that the bankruptcy trustee has the authority to perform legal acts on that group company’s behalf. The supervisory judge will afford the board of directors of the bankrupt the opportunity to be heard with regard to the request. The supervisory judge’s decision will specify what juristic acts of the group company fall within the scope of the bankruptcy trustee’s authority.

4

For example, see the judgment of the Court of Appeal of Arnhem-Leeuwarden of 13 April 2015, JOR 2015/117, with commentary by Moulen Janssen (ML Investments/X q.q.).

10

2

2.2

Parent and Subsidiary: For Better or for Worse?

Should intrusion on directors’ authority be arranged by law?

I disagree with the solution put forward by Van Andel & Ten Brinke, for a number of reasons. First, it is uncertain whether the bankruptcy trustee’s professional liability insurance will in fact cover acts that he or she performs (as the authors argue) in the capacity of trustee in the parent company’s bankruptcy. I do not believe that it will: the company’s interests will at all times take precedence,5 even where the bankruptcy trustee has been authorised to perform legal acts on the subsidiary’s behalf. While he or she might formally, i.e. as defined by law, be acting as the holding company’s bankruptcy trustee, substantively only the subsidiary’s interests should be represented. The bankruptcy trustee is effectively no more than the subsidiary’s representative, acting pursuant to an extraordinary power of attorney granted by the supervisory judge. It seems likely that insurers would therefore be inclined to refuse to pay out, by applying the principle of substance over form. This brings me nicely to my main objection to intrusion on directors’ authority as advocated by Van Andel & Ten Brinke. If they suppose – as I believe they do – that the bankruptcy trustee is permitted to allow the interests of the group or the holding company to take precedence over those of the solvent subsidiary, their proposal would be in complete contravention of the principles of our legal system. Holding companies do not have total control of their subsidiaries, either under corporate law or under bankruptcy law. Bankruptcy law works on the principle of one legal entity, one estate, one set of proceedings and one competent court.6 The solution put forward by Van Andel & Ten Brinke seems to rely on the assumption that ultimately the subsidiary’s assets simply belong to the parent company, or else to the group as a whole, and fall within the scope of the bankruptcy trustee’s control and discretion. However, that assumption is not borne out by the prevailing laws. This is illustrated by the case law – currently only handed down by lower courts – on the nature and scope of the recordkeeping obligation (Article 10 of Book 2 of the Dutch Civil Code) of a holding company’s board of directors.7 That obligation does not cover – in the sense that it does not replace – the recordkeeping obligation of the subsidiary’s board of directors. While these obligations are closely linked in a group context, each has its own individual character based on the separate positions that the parent and the subsidiary occupy within the group and the associated responsibilities of their respective boards. Hence, a breach of the recordkeeping obligation at the level of the subsidiary does not 5 6 7

Cf. the judgment by the Dutch Supreme Court of 4 April 2014, NJ 2014, 286 (Cancun Holding). Cf. M.J.E. Geradts & A.E. de Vos, ‘Het concern en de faillissementscurator’, in De curator en het concern, Insolad-jaarboek 2017, Deventer-Kluwer, 2017, p. 551. See Bartman/Dorresteijn/Olaerts, Van het concern, 9th edition, Wolters Kluwer-Deventer, 2016, pp. 82-83.

11

Steef Bartman automatically imply that that obligation has been breached at the holding company level as well. At present, groups have no comprehensive recordkeeping obligation that places responsibility exclusively with the group management – although it could well be argued that this should be the rule for closely associated group companies.8 What I will call Van Andel & Ten Brinke’s ‘preoccupation’ with the holding company’s position is also apparent from the fact that the task of deciding whether the bankruptcy trustee should be able to perform legal acts on the subsidiary’s behalf is placed with the supervisory judge in the holding company’s bankruptcy. To my mind, this is a structural flaw in their proposal, given that the supervisory judge’s scope is limited to the bankrupt parent company. It could be possible to introduce the advocated intrusion on directors’ authority as part of a general overhaul of the system of Dutch group law; purely as a means of facilitating bankruptcy trustees in situations such as the one described, it is like taking a sledgehammer to a nut. Moreover, a more precise solution is already available within the existing statutory framework. I explain below.

2.3

A practical three-step solution

The laws governing intra-group companies are undergoing significant changes. I have previously highlighted the importance of the 2012 introduction of the possibility to include a concrete right of instruction in the subsidiary’s articles of association, pursuant to the provisions set forth in article 239(4) of Book 2 of the Dutch Civil Code. At the time, I argued that the importance of this product of the Dutch Private Limited Liability Companies Rules (Improved Simplicity and Flexibility) Act (Wet vereenvoudiging en flexibilisering van het bv-recht) appears to lie principally in the legal consequences that the courts can attach to a holding company’s decision not to adopt this right of instruction. This deliberate continuation of distance between parent and subsidiary will unavoidably carry over to the resolution of disputes within the group in legal proceedings.9

8

9

Cf. Verboom’s commentary on the judgment of the District Court of Midden-Nederland of 19 June 2013, JOR 2013/237 (Landis). Conversely, see the judgment of the Court of Appeal of Den Bosch of 26 May 2015, JOR 2015/227, with commentary by Hekman & Goethals, Ondernemingsrecht 2016/18, with commentary by Nass (X/Westerhof q.q.). See also M.J.F. Goethals & T. Hekman, ‘De administratieplicht van het bestuur bij holdingmaatschappijen’, FIP 2016(8) 333, who believe that the bookkeeping obligation should be attributed greater scope than is commonly assumed, in that it should also include reliable management information, for example with a view to central control of the subsidiaries. A view that is more closely linked to the statutory definition as presented by J.B. Huizink, ‘De administratieplicht van art. 2:10 BW voor groepsmaatschappijen’, Tijdschrift voor Insolventierecht 2017/16. Cf. my essay entitled ‘Hoge Raad weet zich niet goed raad met het concern’, Ondernemingsrecht 2016/77.

12

2

Parent and Subsidiary: For Better or for Worse?

However, the reverse is also possible. By utilising this new option, the parent company will draw its subsidiary a little closer for purposes of corporate law. Adopting the right of instruction will tie the group more closely together, as it were. This holds true even if the parent company has been declared bankrupt. The first step that I recommend to bankruptcy trustees would therefore be to amend the articles of association of the solvent subsidiary by granting the general meeting extensive powers of instruction pursuant to article 239(4) of Book 2 of the Dutch Civil Code, immediately following their appointment. I believe that creating this authority through voting in the subsidiary’s general meeting will make it easier for the bankruptcy trustee to do his job from the start and properly manage the holding company’s estate.10 If the bankruptcy trustee wishes the subsidiary’s board of directors to perform particular legal acts, he or she can then give the appropriate instructions based on this new authority of the general meeting of shareholders. While giving such instructions might not directly qualify as managing the bankrupt holding company’s estate, similar to a request for an inquiry, it is very well possible that the bankruptcy trustee ‘can intend’ them acting in the interests of the holding company’s estate, in the capacity of the subsidiary’s sole, or most important, shareholder.11 To my mind, the authority to give such instructions can similarly not be seriously questioned, even by standards of bankruptcy law (Section 68 Dutch Bankruptcy Act (Faillissementswet)). According to the Dutch Supreme Court’s judgment in De Haan Beheer/Hamm q.q., the question is decided by the intention with which the instructions are given. If that intention can reasonably be argued to qualify as managing the holding company’s estate, the bankruptcy trustee possesses the authority necessary to give the instructions. By corporate law standards, it is then the responsibility of the subsidiary’s director to assert and if necessary prove that carrying out the instructions will be contrary to the interests of the subsidiary and its business, within the meaning of Article 239(4) of Book 2 of the Dutch Civil Code. If that director fails to do so, is unavailable or simply refuses to carry out the instructions, I believe that it can be argued that this provides valid grounds for querying whether the subsidiary’s policies or affairs are in proper order, within the meaning of Article 350(1) of Book 2. Lastly, pursuant to Article 239(4) of Book 2, the director has an obligation in principle to follow the instructions, unless he can argue that

10 Cf. the key paragraph 3.3.3 from the Dutch Supreme Court’s judgment in Air Holland, NJ 2009, 220, repeated in the Dutch Supreme Court’s judgment in De Haan Beheer/Hamm q.q., NJ 1999, 670. On the question of whether the parent company possesses the authority to convene a general meeting of its subsidiary, see the judgment of the Court of Appeal of Den Bosch of 11 December 2014, JOR 2015/95 (Crescendo), and the commentary by Roeffen & Smetsers, op.cit., p. 130. 11 See par. 4.2.1 in the Dutch Supreme Court’s judgment in De Haan Beheer/Hamm q.q., with commentary by Ma, NJ 1999, 670 and 671.

13

Steef Bartman he is compelled to object on the grounds that those instructions are contrary to the interests of the subsidiary and its business. As the third step, the bankruptcy trustee could then submit a request for an inquiry to the Enterprise Chamber of the Amsterdam Court of Appeals on the holding company’s behalf, combined with a request to appoint (by way of an immediate relief) a temporary representative of the subsidiary, who will be charged with carrying out the instructions required by the bankruptcy trustee. Whether the incumbent director should be suspended at the same time depends on the precise circumstances and should be decided by the bankruptcy trustee. I imagine that this might be useful if the director has announced that he will fight the bankruptcy trustee’s plans tooth and nail and at all costs. In other situations, less drastic measures might be preferable. As is common knowledge, the Enterprise Chamber is capable of reacting quickly and it should not take more than a few days to appoint the extraordinary representative. I can also imagine situations where the bankruptcy trustee puts forward the candidate – for example an employee who is familiar with the subsidiary’s business and will pursue its best interests. Unless either the bankruptcy trustee or the subsidiary insists, the performance of the inquiry itself can then be omitted. Again, this reflects standard practice of the Enterprise Chamber.12 Naturally the subsidiary’s director will have sufficient opportunity to put forward a defence before and during the hearing before the Enterprise Chamber. If the director fails to take that opportunity, the request may be awarded. However, if the director puts forward arguments that satisfy the Enterprise Chamber, the bankruptcy trustee – having encountered the limits that are inherent in the autonomy of legal entities, even subsidiaries – will need to discuss whether to change the management plans or not. Involving the Enterprise Chamber provides a safeguard against the interests of the holding company, or the group as a whole, automatically taking precedence – which I believe is a risk in Van Andel & Ten Brinke’s proposal. Where the intra-group relationship is one of close operational history and intertwined finances, the subsidiary’s director will need to put forward exceptionally strong arguments to succeed with this defence. As demonstrated by the judgment rendered recently by the Enterprise Chamber in Kaal Masten, in those types of intra-group disputes the court applies an assessment framework that gives precedence to the interests of the group as a whole, unless a manifest and acute risk threatens the subsidiary’s continuity.13 That

12 For a recent example, see the Enterprise Chamber’s judgment of 29 May 2017, ECLI:NL:GHAMS:2017:1965 (Elliot c.s./Akzo Nobel). 13 Enterprise Division’s judgment of 23 January 2017, JOR 2017/96, with commentary by Bartman (Kaal Masten).

14

2

Parent and Subsidiary: For Better or for Worse?

case involved a ‘self-inquiry’ deriving from Article 346(1)(b) of Book 2 of the Dutch Civil Code, which Kaal Masten BV used in an attempt to fight the central group management’s policies. The Enterprise Chamber also showed that it attributed significant weight to the fact that in the past – i.e. in better days – Kaal Masten had benefitted greatly from its relationship with the group, for example through the possibility of utilising the group credit facility. For better or for worse seems to be the overall line of reasoning in this important judgment by the Enterprise Chamber. In many cases, the argument of ‘temporal reciprocity’, as I will call it, could also be put forward by the trustee in the holding company’s bankruptcy in the request to the Enterprise Chamber to appoint an extraordinary representative for the subsidiary, as I advocate in this contribution.

2.4

Conclusion

The present contribution addresses the position of a trustee in the bankruptcy of a holding company, whose management plans demand a series of legal acts at the level of a solvent subsidiary. In most cases, the bankruptcy trustee can use powers of concrete instruction in the subsidiary’s articles of association – an option that was first introduced in the Netherlands 2012 – and combine this authority with the possibilities offered by the right of inquiry to achieve what he wants. To my mind, this does not require any amendments to existing laws. It might be wondered whether using the right of inquiry is not a slightly excessive, and moreover improper, way of ensuring that the solvent subsidiary conforms to the policy plans of the trustee in the holding company’s bankruptcy. Is this in fact the purpose of the Enterprise Chamber? To ask this question is to answer it; of course it was not its original purpose. However, the same can be said of other tasks that it has taken on over time: to start with, the possibility of subjecting a bankrupt legal entity to inquiry proceedings as such.14 Another example is the explosively increased range of immediate relief that the Enterprise Division may impose pursuant to Article 349a of Book 2 of the Dutch Civil Code, some of which in fact deviate from mandatory legal provisions,15 not to mention the considerable number of new possibilities for gaining access to the right of inquiry that have been introduced under the Enterprise Chamber’s auspices, under the banner of

14 Cf. Gerard van Solinge’s inaugural lecture, in Drie Nijmeegse redes, Beschouwingen over financiering, enquêterecht en privatisering, vol. 59 in the series commissioned by Van der Heijden Instituut, Deventer-Kluwer, p. 37, who on this topic refers to an ‘inquiry in an improper sense’ (enquête in oneigenlijke zin). 15 Cf. Chapter 10 in the recent PhD dissertation by F. Eikelboom, De (onmiddellijke) voorzieningen van de enquêteprocedure, vol. 105 in the series commissioned by Instituut voor Ondernemingsrecht, DeventerKluwer, 2017, p. 319. See also M. Josephus Jitta’s arguments for immediate relief to provide a period of calm to listed companies that are under attack but lack sufficient means to protect themselves, Ondernemingsrecht 2017/62.

15

Steef Bartman ‘economic reality’.16 If the Enterprise Chamber still allowed its judgment to be guided by the legislature’s original intentions for the right of inquiry, that right would never have evolved into the turbocharged engine of modern Dutch corporate law that it now is. There is more, though. I believe that bankruptcy trustees who dismiss uncooperative directors of subsidiaries without further thought and replace them by accommodating officers – whether a member of their own law firm, or an interim manager of their acquaintance – are, in a way, acting irresponsibly. Again: the motives by which a trustee in the bankruptcy of a holding company is guided are not the same – nor should they be the same – as those guiding the subsidiary’s directors. The latter’s corporate interests take precedence: this holds true in a bankruptcy, and all the more when the subsidiary is not bankrupt. In the interests of brevity, I refer the reader to the judgment in Juno, which is required reading for students – at the University of Leiden at least – among the case law handed down by the Dutch Supreme Court.17 Appointing an officer who the bankruptcy trustee knows will do as he says creates a risk of violating the subsidiary’s interests. It increases the inherent conflict of interests, which obviously cannot be resolved by just setting up a creditors’ committee.18 In that respect, if a separate bankruptcy trustee is appointed who is not the trustee in the holding company’s bankruptcy, the subsidiary’s interests are better served in bankruptcy than if it is solvent.19 I am aware that the bankruptcy reports of holding companies generally contain profuse references to the manner in which the intra-group relationships and accounts were settled, and I firmly believe that most bankruptcy trustees handle these matters with the utmost integrity.20 Nevertheless, I occasionally have the feeling – and I admit that it is nothing more than a feeling – that this process lacks sufficient checks and balances. This sense is amplified in cases involving solvent subsidiaries. As such, I believe that it would be wise for the Enterprise Chamber to keep an eye on these situations, by appointing an official of its own choosing at these subsidiaries. This would also be in the bankruptcy trustee’s interests. I see no reason whatsoever to assume that the Enterprise Chamber would reject this manner of involvement out of hand – particularly in cases, as I advocate, that involve valid grounds for querying the soundness of the subsidiary’s policies if its 16 B.F. Assink, ‘De ‘economische werkelijkheid’ in het Nederlandse ondernemingsrecht’, WPNR 2014/7037. For a critical voice on this topic, see J.M. Blanco Fernández, ‘De rechter en de economische werkelijkheid’, Ondernemingsrecht 2015/21, p. 128. 17 Dutch Supreme Court’s judgment of 26 October 2001, JOR 2002/2, with commentary by Bartman (Juno). 18 See R.J. van Galen, ‘Belangenconflicten bij groepen van vennootschappen in faillissement’, in De curator en het concern, Insolad-jaarboek 2017, Deventer-Kluwer, 2017, p. 103. 19 On policies for appointments by the judiciary in this context, see M.J.E. Geradts & A.E. de Vos, op. cit., p. 555. 20 See E.J.R. Verwey, ‘Afwikkeling van groepsfaillissementen: van consolidatie tot verificatie’, in De curator en het concern, Insolad-jaarboek 2017, Deventer-Kluwer, 2017, p. 461.

16

2

Parent and Subsidiary: For Better or for Worse?

director refuses to carry out an instruction from the trustee in the holding company’s bankruptcy without reasonable ground or explanation. The problems outlined here are purely a matter of Dutch group company law. I have devoted the past twenty-seven years to this fascinating area of the law, working and deliberating in close partnership with my dear friend Adriaan Dorresteijn. The product of our efforts comprises nine editions of our book Van het concern, the most recent of which came about with help from Professor Dr. Mieke Olaerts. This creates a bond, as well as filling me with pride. I have also learned a great deal from Adriaan during this time, not least the art of writing clearly and concisely. Ius est ars boni et brevi. I hope that this is reflected in my contribution to this anthology.

17

3

The Paradox of the Dutch Class Action and the Fear of a ‘Compensation Culture’

Eddy Bauw

3.1

Introduction

The debate in the Netherlands on whether or not to introduce a class actions has recently taken a historic turn. At the time of the introduction of the collective action regime in 1994 there was broad political consensus that the introduction of a class action was ‘a bridge too far’.1 A proposal to allow for the possibility to claim monetary compensation of damages in a collective action was rejected by a majority in Parliament. An important reason for this was the fear of an ‘American-style’ compensation culture. In 1999 the Dutch government had firmly committed itself to preventing such a culture in the Netherlands.2 In 2005 the aversion against a class action was still strong and played an important role in the creation of the unique Dutch legislation on the collective settlement of mass damages. The government wanted to create the possibility to bind all potential claimants to a collective settlement, but at the same time did not want to introduce a full-blown class action. The result of this balancing act was the Collective Settlement Act3 which turned out to be an international success:4 ‘In die beschränkung zeigt sich der meister’. The political tide turned however in 2012 with the acceptance of a parliamentary motion that called for the introduction of a class action.5 This led to the bill of November 1 2

3

4

5

Kamerstukken II (Parliamentary Papers, Lower House), 1991/92, 22 486, no. 3, p. 13 and p. 19 e.v. Kabinetsstandpunt Claimcultuur, Kamerstukken II 1998/99, 26 630, no. 1. See also E. Bauw, Naar een nieuwe eistijd?. In: J.M. Barendrecht & E. Bauw, Privaatrecht in de 21e eeuw, Deel Aansprakelijkheidsrecht, Deventer: Kluwer 1999, 11-56. Wet collectieve afwikkeling massaschade (Collective Settlement Act), Staatsblad (Netherlands Official Gazette) 2005, 340 and 380 and Wet tot wijziging van de Wet collectieve afwikkeling massaschade, (Act to amend the Collective Settlement Act), Staatsblad (Netherlands Official Gazette) 2013, 255. H.B. Krans, ‘De wervende kracht van het Nederlandse privaatrecht: op naar een systematische benadering?’, NTBR 2011, p. 8 e.v. T. Arons en W.H. van Boom, ‘Beyond Tulips and Cheese: Exporting Mass Securities Claim Settlements from the Netherlands’, EBLR 2010, p. 857 e.v. Kamerstukken II 2016/17, 34 608, nos. 1-3. For a brief summary in English see I.N. Tzankova, ‘New Dutch bill on collective damages action’ on conflictoflaws.net/2016/new-dutch-bill-on-collective-damages-action accessed 26 March 2017. For a first critical analysis see E. Bauw & S. Voet, ‘Van stok achter de deur tot keurslijf? Een eerste verkenning van het wetsvoorstel tot invoering van een collectieve schadevergoedingsactie’ Nederlands Juristenblad (NJB) 2017 (206). The bill is largely based on recommendations from a group of lawyers (‘de juristengroep’), published in Maandblad voor Ondernemingsrecht 2016, nos. 3-4, p. 74-80.

19

Eddy Bauw 2016 that proposes the introduction of a class action and is currently under discussion in Parliament. The development outlined here raises certain questions which I will address in this contribution. What were the reasons for this reversal of views? What measures are taken in the bill to prevent the proliferation of a compensation culture? What effect of the class action can be expected? I will first deal with the existing possibilities for collective action and the reasons for the bill (section 3.2). Next, I will describe the main features of the bill (section 3.3) and address the question of what this will mean for the compensation culture in the Netherlands (section 3.4). I will end with some conclusions and final remarks (section 3.5).

3.2

Existing legislation and the reasons for the bill

Under existing Dutch legislation there are several options to bring a claim against a defendant6 on behalf of a group of injured parties (‘claimants’). Firstly, there is the possibility of the voluntary pooling of individual claims. In this case the claimants assign their respective claims for compensation to or give a mandate to a representative (in most cases a special purpose foundation or an association, hereafter collectively referred to as a ‘(claim) organization’) to initiate a civil procedure to seek compensation or to negotiate a settlement. The common rules regarding mandate and assignment are applicable. This means that in the case of court proceedings for each individual claim it will have to be determined whether all the criteria for liability, causation and damage are met. A judgment will only have effect for the claims that are assigned or mandated. If a decision is delivered in favour of the plaintiffs all members of the group have the right to enforce their rights separately.7 The second, and more common, option is to make use of the possibilities for collective action that Dutch law has offered since 1994. Article 305a of Book 3 of the Dutch Civil Code (Burgerlijk Wetboek, hereafter ‘BW’) allows a (special purpose) foundation or association with full legal capacity that, according to its articles of association (‘by-laws’) or its

6 7

The term ‘defendant’ is used in the (broad) sense of an ‘alleged wrongdoer’, a ‘responsible party’ or, more neutral and factual, ‘the party being sued’, also outside the context of a court case. See for an overview of the various legal concepts which are applied see: J.M.K.P. Corengoor, ‘Collectieve acties en belangenorganisaties in hun verschijningsvormen’, in: F.M.A. ’t Hart, Collectieve acties in de financiële sector (NIBE-SVV – Financieel Juridische Reeks 1), The Hague: DeltaHage 2009, p. 13-34 and I.N. Tzankova, C.J.M. van Doorn, ‘Effectieve en efficiënte afwikkeling van massaschade: terug naar de kern van het collectieve actierecht’, in: F.M.A. ’t Hart (eds.), Collectieve acties in de financiële sector (NIBE-SVV – Financieel Juridische Reeks 1), The Hague: DeltaHage 2009, p. 95-126.

20

3

The Paradox of the Dutch Class Action and the Fear of a ‘Compensation Culture’

constitution (in the case of an association), has as its objective to protect specific interests, to bring to court a legal claim that intends to protect similar interests of other persons.8 The available remedies are injunctions, the publication of court decisions and declaratory judgments. Before a representative organization can file a claim it must have made sufficient attempts to reach a settlement concerning its claim through consultations with the defendant (paragraph 2). This requirement is in any case fulfilled when the defendant has not reacted within two weeks after receiving a request for such consultations indicating what is being claimed. According to paragraph 3 claims for monetary compensation – a ‘damages class action’ – are excluded from the collective action. For this reason organizations acting as a plaintiff in collective actions in most cases file for a declaratory judgment, e.g. a declaration by the court that the defendant has acted wrongfully. With such a judgment a representative organization can try to come to a collective settlement with the defendant. The Collective Settlement Act (WCAM) provides for the possibility to declare such an out-of-court settlement binding for all (potential) claimants.9 This is done by a joint request to the Amsterdam Court of Appeal (that has exclusive jurisdiction). The claimants who disapprove of the settlement can opt out. The procedure that follows normally takes between 18 and 24 months and is largely modelled on Rule 23 of the American Federal Rules of Civil Procedure.10 In the more than ten years of its existence the WCAM has been successfully used to settle seven cases of mass damages, mainly against Dutch companies, but incidentally also against non-Dutch companies.11 Considering the different options for claimants and the success of the WCAM, why is there a need for a class action? According to the parliamentary motion of 2012 which called for the introduction of a class action, practice had shown that in most cases parties 8

Most claim organizations are a (special purpose) foundation. See J.M.K.P. Core Goor, J.M.K.P. Corengoor, ‘Collectieve acties en belangenorganisaties in hun verschijningsvormen’, in: F.M.A. ’t Hart, Collectieve acties in de financiële sector (NIBE-SVV – Financieel Juridische Reeks 1), The Hague: DeltaHage 2009, p. 13-34, p. 26 and J.H. Lemstra, ‘Belangenorganisaties als procespartij’, in dezelfde bundel, p. 40. 9 The WCAM is laid down in Articles 7:907 to 7:910 Dutch Civil Code and Articles 1013 to 1018a Dutch Code of Civil Procedure. On the workings of the WCAM system in practice see J. Fleming and J.J. Kuster, ‘The Netherlands’ in P.G. Karlsgodt (ed.), World Class Actions. A Guide to Group and Representative Actions around the Globe, Oxford University Press, New York 2012, pp 286-300 and C.H. van Rhee and I.N. Tzankova, ‘Collective Redress in the Netherlands’ in: V. Harsagi and C.H. van Rhee (eds), Multi-Party Redress Mechanisms in Europe: Squeaking Mice?, Intersentia, Cambridge 2014, pp 209-24. 10 See for the current text of the FRCP www.uscourts.gov/sites/default/files/Rules%20of%20Civil%20Procedure. 11 It concerns the following cases, all decided by the Court of Appeal of Amsterdam: June 1, 2006, NJ 2006/461 and June 24, 2014, ECLI: NL: GHAMS: 2014: 2372 (DES); January 25, 2007, ‘JOR’ 2006/216 (Dexia); April 29, 2009, NJ 2009/448 (Vie d'Or); May 29, 2009, NJ 2009/506 (Shell); July 15, 2009, ‘JOR’ 2009/325 (Vedior); January 17, 2012, NJ 2012/355 (Converium); November 4, 2014, ‘JOR’ 2015/10 (DSB). See in more elaborate detail I. Tillema, Tien jaar WCAM: een overzicht (‘Ten years WCAM: an overview’), 2016 Maandblad voor Ondernemingsrecht 2016, nos. 3 & 4, p. 90-99.

21

Eddy Bauw did not reach a collective settlement and claimants were left without compensation. For politicians this has become an increasing problem. The number of organizations that represent in particular the interests of consumers and shareholders has grown considerably, as has their influence on public opinion. Also the number of mass disputes and the number of more specific ‘claim organizations’ (organizations established for a specific mass dispute) has increased.12 On the whole the attention for the phenomenon of mass disputes has grown while at the same time the fear of a compensation culture seems to have weakened. Of course, the preferred option is still that parties reach an amicable settlement, instead of using ‘the nuclear option’ of a class action, but more pressure on defendants seems to be needed in order to come to such a settlement. The possibility of a class action is primarily meant to exercise such pressure. Moreover, new legislation offers the possibility to influence the quality and attitude of claim organizations. The last decade has shown a tendency for representative organizations to take a more assertive, even aggressive, attitude towards defendants in mass dispute cases. In reaction to this development the Ministry of Justice initiated the establishment of a voluntary governance code for claim organizations, the so-called ‘Claim Code’.13 Research has however shown that this form of self-regulation has not had the desired effect on these organizations.14 The overall proliferation and the aggressive attitude of claim organizations make it more difficult to reach a settlement. This counteracts the successful application of the WCAM. Finally, the recommendations of the European Commission on collective redress, which were concluded the following year (2013), called for member states to ‘enable injured parties to obtain compensation in mass harm situations caused by violations of rights granted under Union law, while ensuring appropriate procedural safeguards to avoid abusive litigation.’ The combination of these circumstances led to a change in the parliamentary appreciation of the class action.15

12 This is consistent with an increase in the number of collective actions. Since 2005 this number is at a structurally higher level. See the recent survey by I. Tillema, ‘Commerciële motieven in privaatrechtelijke collectieve acties: olie op het vuur van de claimcultuur?’, Ars Aequi 2016/337. The Explanatory Notes to the Preliminary draft discussed below lists several reasons for this growth. 13 See https://www.consumentenbond.nl/binaries/content/assets/cbhippowebsite/bestanden-oud/pdf-algemeen-2013/compljuniclaimcodecomm2011.pdf. 14 E. Bauw & T. van der Linden, 'Schone slaapsters'. Pleidooi voor een actievere rol van toezichthouders bij collectief schadeverhaal. Nederlands Juristenblad (NJB) 2016 (32) and idem, ‘Claimorganisaties tussen wildgroei en regulering’, Tijdschrift voor Ondernemingspraktijk 2016, 564, no. 7, november 2016, p. 23-33. For the previous research into the effects of the Claim Code see E. Bauw and T. Bruinen, ‘Slow start of veeg teken? Gebrekkige naleving Claimcode vereist ingrijpen’, NJB 2013/140, p. 164-168. 15 Commission Recommendation of 11 June 2013 on common principles for injunctive and compensatory collective redress mechanisms in the Member States concerning violations of rights granted under Union Law (2013/396/EU).

22

3

3.3

The Paradox of the Dutch Class Action and the Fear of a ‘Compensation Culture’

Bill 34 608

On November 16, 2016 Bill 34 608, which proposes to introduce a class action, was sent to Parliament. The bill proposes to expand the collective action regime of Article 3:305a of the Dutch Civil Code with the possibility to claim monetary compensation of damages in a collective action.16 A previous draft bill of 2014, with a more reticent approach to promoting collective settlements17, was strongly criticized for being too lengthy and too complicated.18 Because the criticism was so widespread the draft did not pass through the consultation process which precedes the legislation process and was therefore not sent to Parliament. Here the two main features of the bill will be described: first, the class action proceedings and, second, the eligibility requirements for these proceedings.

3.3.1

Class action proceedings

Under the regime of the bill a claim organization will be able to file for class action proceedings at the first instance court of Amsterdam, which will have exclusive jurisdiction in Art. 3:305a BW cases (see Article 1018cb, subsection 3, Code of Civil Procedure; Wetboek van Burgerlijke Rechtvordering hereafter: Rv). The claim organization is under an obligation to register the initiation of the class action in a ‘public central register for collective claims’. There then follows a waiting period of three months – which can be extended by the court for another three months – in which the court inter alia decides on whether the applicant meets the eligibility requirements, has sufficiently demonstrated that the use of such a collective action is more efficient and effective than bringing individual actions and the collective action at first glance does not seem to be inadequate. If other ('competitive') claim organizations file for a class action for the same events within the three-month period, the court will appoint the most appropriate of the organizations as the exclusive representative (‘exclusieve belangenbehartiger’), which is very similar to the ‘lead plaintiff’ in US class actions (Article 1018e Rv). No appeal is allowed against this decision by the court. 16 Kamerstukken II, XIII 2011/12, 33000. 17 Wijziging van het burgerlijk wetboek en het wetboek van burgerlijke rechtsvordering teneinde de afwikkeling van massaschade in een collectieve actie mogelijk te maken. Wetsvoorstel Afwikkeling massaschade in een collectieve actie. The draft bill was published for consultation at: www.internetconsultatie.nl/motiedijksma, accessed 26 March 2017. 18 See for the criticism among many others T. Bosters, R. Hermans, J.-W. de Jong, A. Knigge, J. Kortmann, F. Leijten, J. Ouwehand, A. Raaijmakers, D. Lunsingh Scheurleer, J. de Bie Leuveling Tjeenk, B. van der Velden, R. Verburg, ‘Preliminary settlement mass damage in collective action’ NJB 2015/1138 and J.M.L. van Duin, R.S.I. Lawant, ‘Wetsvoorstel Afwikkeling massaschade in een collectieve actie: ontbrekende schakel of brug te ver?’, Tijdschrift voor Civiele Rechtspleging 2015, nr. 1, p. 7-15, p. 9-10.

23

Eddy Bauw The exclusive representative will act in the interest of the whole group of claimants and as the representative in the proceedings of the claim organizations that have not been appointed as an exclusive representative. The latter organizations will remain as litigants, but are not permitted to perform any procedural acts, which is the privilege of the exclusive representative. It allows them to monitor and take the initiative to adjust the course of the exclusive representative. At this moment in time the members of the group of claimants will be given a period of time in which they have the possibility to opt out of the class action (Article 1018f Rv). Thereafter the court will give parties a deadline for reaching a collective settlement that can be submitted to the court for approval, in which case the settlement can be declared binding for the whole group of plaintiffs (except for those who have opted out) in accordance with the WCAM rules (Art. 1018h Rv). When parties do not submit a settlement, the court may order parties to submit a proposal for the settlement of the damages within a certain period of time. Partly on the basis of this proposal, the court will decide on whether and how the claims will be awarded.19

3.3.2

The eligibility requirements

The present bill aims to strike a balance between the interests of claimants to effectuate their rights and the interests of liable parties to be protected against unfounded or even frivolous mass claims.20 The negative effects associated with class actions in other legal systems – such as the notorious ‘blackmail settlements’ – should be avoided, according to the explanatory memorandum.21 The bill therefore codifies the requirements of the aforementioned (voluntary) Claim Code and restricts the access to the collective action regime of Article 3:305a BW to organizations that meet these requirements. The eligibility requirements for interest groups – foundations or associations – to set up a collective claim will become stricter in terms of governance, funding and representativeness. A foundation or association – law firms, group members such as individuals or institutional investors or third party funders will not be able to act as representatives – is allowed to file a collective action provided that it represents the interests of other persons under its articles of association or constitution and those interests are sufficiently guaranteed. That is the case if the foundation or association is sufficiently representative, taking into account the support it has from aggrieved parties and the amount of claims that it represents. Other requirements include: a. a supervisory body; b. appropriate and effective mechanisms for the participation and representation in decision-making of individuals

19 For a more elaborate discription of the bill see E. Bauw & S. Voet, ‘Van stok achter de deur tot keurslijf? Een eerste verkenning van het wetsvoorstel tot invoering van een collectieve schadevergoedingsactie’ NJB 2017 (206). 20 Explanatory memorandum, p. 1. 21 Explanatory memorandum, p. 3.

24

3

The Paradox of the Dutch Class Action and the Fear of a ‘Compensation Culture’

whose interests are protected by the collective action; c. sufficient resources to bear the costs of bringing legal proceedings; d. a publicly accessible web page on which information (clearly defined in the new Article 3:305a BW) is available; e. sufficient experience and expertise regarding the establishment and conduct of the proceedings. In addition to these requirements the directors involved in the establishment of the foundation or association and their successors are not allowed to benefit from direct or indirect profits from the foundation or association. They are obliged to draw up a management report and a yearly financial statement and to publish these documents on the website. When the foundation or association does not meet these requirements, inadmissibility in a collective action follows. The judge can make an exception in cases where these requirements would be disproportionate. Although this is a discretionary competence for the judge, it is certain that – as the explanatory memorandum makes clear – it is not the intention of the legislator that (‘commercial’) claim organizations will benefit from this exception.22 It will be relevant for general interest groups like environmental organizations that, for example, use civil collective actions as a means to prevent environmental pollution.

3.4

The effect of the Bill on the Dutch ‘compensation culture’

As was described in the above, the number of mass disputes as well as the number of ‘claim organizations’ has grown in the last decade. Many of these organizations work on a commercial basis. They have a tendency to develop an aggressive legal as well as media strategy. They have an obvious interest in stimulating ‘claim awareness’ – and thereby the compensation culture – among the broader public. These types of claim organizations will have problems meeting the eligibility requirements under the bill, after all research has shown that most of them do not meet the requirements of the current Claim Code, which are largely the same. It is not very likely that it will be possible for these organizations to combine their business model with the requirements. They will have problems being transparent, having a supervisory body and having an active involvement of the individuals whose interests they represent. It is therefore expected that these organization will not be able to benefit from the introduction of the class action and will also be limited in their possibilities to start any collective action whatsoever. This holds true for substantive as well as summary proceedings.23 Of course, the possibility of a voluntary pooling of individual claims – as mentioned in section 2 – will still be open to these organizations

22 With ‘commercial’ I refer to organizations that do not have proper governance and which require a subscription and/or a conditional fee which is calculated as a percentage of the class action recovery. 23 The requirements of Article 3:305a BW also apply to the Dutch summary proceedings known as ‘kort geding’ (interim relief proceedings), see the Explanatory Memorandum, p. 34.

25

Eddy Bauw and they can still make use of publicity as a means to increase pressure on defendants to come to a collective settlement, but their legal position will be weakened compared to the present situation. Their legal ‘repertoire’ will be restricted to test cases and compensation through litigation on an individual basis. This will complicate their operations and one could expect their number to decrease, having a mitigating effect on the development of a compensation culture in the country. At the same time the legal position of claim organizations that do meet the requirements will be strengthened as they will have access to a class action. However, here another problem arises. These organizations – that work on a non-profit basis – will have difficulties in funding the class action, which is ‘a judicial procedure (that) is complicated and extensive and therefore lengthy and costly’.24 In the present situation they can work together and benefit from the efforts of the commercial organizations, but under the bill they will be ‘on their own’. For this reason doubts have been expressed concerning the question of whether the bill will lead to the situation that collective action will become scarce. The problem is illustrated by the recent decision of the Amsterdam Court of Appeal in the Fortis case.25 In the settlement (of € 1.2 billion) between the Vereniging voor Effectenbezitters (VEB, the Dutch Association of Security Holders) and a number of other organizations, and the successor of Fortis, Ageas, high amounts of compensation were awarded to these organizations. As a reason for this the VEB stated that the ‘war chest’ of the organization had to be filled to finance future collective actions. The Court of Appeal rejected this reasoning and refused to declare the settlement binding. The compensation for these organizations should be restricted to the reasonable costs and risks of the collective action. It is not likely that things will become better for them under the regime of the bill. Will there still be enough interest among representative organizations to start collective action, let alone class action proceedings? This will depend on the financial options for non-profit organizations and the possibilities to obtain external financing on attractive terms both for the organization and a possible third party funder. The question is how great this willingness will be under a loser-pays system in civil cases and in the absence of adequate external funding sources.26 The bill seems to leave room for third party funding as long as this is sufficiently transparent and the funder does not have too much influence on the decision making.27 It is however not clear if this will solve the financing problems of the organizations that will be able to use the class action instrument. 24 As the Council of State expressed it in its legislation advice. Kamerstukken II, 2016/17, 34 608, no. 4, p. 6. 25 Court of Appeal of Amsterdam 16 June 2017, ECLI:NL:GHAMS:2017:2257. 26 E. Bauw & S. Voet, ‘Van stok achter de deur tot keurslijf? Een eerste verkenning van het wetsvoorstel tot invoering van een collectieve schadevergoedingsactie’ NJB 2017 (206). 27 Kamerstukken II 2011/12, 33126, no.6 and Explanatory Memorandum, p. 11.

26

3

3.5

The Paradox of the Dutch Class Action and the Fear of a ‘Compensation Culture’

Conclusion

The introduction of a class action into Dutch law seems at first glance to be a historic turn with dramatic consequences for the compensation culture in the Netherlands. For this reason the bill has been heavily criticized by, among others, the Confederation of Netherlands Industry and Employers (known as VNO-NCW).28 When taking a closer look the bill can be expected to have the opposite effect. The strict requirements will prevent many representative organizations from starting a collective action, while others will have problems in financing the use of a class action. The question arises whether this will lead to a lack of enforcement. This will be to the detriment of the rights of claimants and will have a negative effect on the preventive effect of liability law. In an article I wrote at the beginning of this year with my Belgian colleague Stefaan Voet, we made the suggestion that supervising authorities like the ACM (The Netherlands Authority for Consumers and Markets) or AFM (The Dutch Authority for the Financial Markets ) should step in to fill this enforcement gap.29 We pointed out that these authorities already have the possibility under Article 3:305b of the Civil Code to undertake legal action against defendants, but have remained passive until now. We also gave examples of supervising authorities in other EU countries – which I will not repeat here – which take a more active attitude.30 This plea led to questions in Parliament, but the answers from the Minister of Security and Justice were not very satisfactory.31 He is not inclined to activate the supervising authorities, to wake up these ‘sleeping beauties’. This leads me to the conclusion that the new class action will not stimulate the further growth of a compensation culture but, paradoxically, will have a preventive effect. The number of commercial representative organizations is expected to decrease instead of increase. The same goes for the number of collective civil actions and claims. Indeed a historic turn, but in another direction than expected.

Epiloque A Liber Amicorum is the perfect opportunity to try to influence the choices in the last – no next – phase of a distinguished carreer. Collective action or collective redress have,

28 See the letter to the Minister of Security and Justice and the members of the Committee on Security and Justice of the Lower House (the Dutch equivalent of the ‘House of Commons’): https://www.vno-ncw.nl/ brieven-en-commentaren/wetsvoorstel-om-de-afwikkeling-van-massaschade-een-collectieve-actie-mogelijk. 29 E. Bauw & S. Voet, ‘Van stok achter de deur tot keurslijf? Een eerste verkenning van het wetsvoorstel tot invoering van een collectieve schadevergoedingsactie’ NJB 2017 (206). 30 See our article in footnote 19. 31 Kamerstukken II 2016/17, Aanhangsel 536.

27

Eddy Bauw as far as I can see, never been important themes in the work of Adriaan. But it’s not too late. I am sure his contribution to the discussion would be highly appreciated. Adriaan, do you accept the challenge?

28

4

What’s in a Name? Names and Conceptual Frameworks for the Design of, and Approaches to, Law Programme Courses on Undertakings

Ernst van Bemmelen

4.1

Introduction

Law departments at universities in continental (‘civil law’) Europe, the (‘common law’) UK and the USA and their equivalent in other continents offer courses to students on the law pertaining to ‘undertakings’. This name is the equivalent of corporations, companies, enterprises or businesses and is used in EU law to avoid the exclusion of any version of this social and economic phenomenon in societies. These courses have many different names and deal with a variety of topics, ranging from the characteristics of each type of undertaking (from sole proprietorship to a stock market listed multinational corporation), to corporate social responsibility. Because of globalization1 these courses increasingly try to highlight international aspects of undertakings. Also, given the trend to include multidisciplinary scholarship in higher education2, as well as problem-oriented learning3, law courses dealing with undertakings try to include – among other things – economic and societal perspectives. Given the (still) national character of most law programmes at the bachelor’s and American-style JD level4 these developments, internationalization and multidisciplinarization, challenge the designers of these courses. And they question the proper name to be attributed to them.

1

2

3

4

Braithwaite, J., Drahos, P., 2004. Global business regulation. Cambridge University Press, Cambridge, p. 8; M. Papa & D.B. Wilkins, 2011. ‘Globalization, lawyers and India: toward a theoretical synthesis of globalization studies and the sociology of the legal profession’, International Journal of the Legal Profession 18/3, p. 175–209, p. 176. A. D’Amato, A., 2006. The Interdisciplinary Turn in Legal Education, Northwestern Public Law Research Paper No. 06-32. Available at SSRN: https://ssrn.com/abstract=952483, p. 2; Klink & Taekema 2011. On the Border Multidisciplinarity, in: Law and Method, p. 298. A. Font & G. Cebrián Font, A., Cebrián, G., 2013. The Impact of PBL Training on Legal Professions. Presented at the 4th International Research Symposium on Problem-Based Learning (IRSPBL) 2013, pp. 100109, p. 101. With exceptions in among others the European Law School of Maastricht University and the International and European Law Program of The Hague University of Applied Sciences.

29

Ernst van Bemmelen Given the limited time which is available (all other courses in law programmes are equally challenged and the total amount of years remain the same5), the designers of courses on the law pertaining to undertakings struggle with the question of how to deal with the increasing body of local positive law, but still reserving enough time for these developments. To make things worse, these courses are expected to contribute to the overall aim of law programmes, being the preparation of students for a career in the legal industry as (assistants to) licensed attorneys-at-law (the ‘bar’), prosecutors, judges, company lawyers, legislators and/or legal scholars. This aim is accompanied by the task of spending time on legal skills and academic thinking, which I will indicate with the German term ‘Bildung’. One of the signs of this struggle faced by the designers of these courses is the choice of a course name. The name is often symbolic of the underlying approach taken. Should it be ‘corporate law’, ‘corporation law’, ‘company law’, ‘the law of undertakings’, ‘business law’, ‘international enterprise law’, ‘commercial law’, ‘comparative corporate law’, ‘European corporate law’, ‘economic law’, ‘the law of the regulation of economic activities’, ‘the theory and practice of corporate law’, ‘foundations and anatomy of corporate law’ ‘business & society’, ‘workers & capital & undertakings’, ‘understanding corporate law’, ‘business law for jurists’, ‘corporate law and legal practice’, ‘business law for non-jurists’, and all their local language equivalent?6 How does one express all these developments and tensions mentioned above and yet with a clear course name stay in connection with the expectations of the legal industry, which needs to recognize it on the candidates’ grade transcript. How does one translate the consequences of a choice for a particular course name to the subsequent choice of literature7 and other learning material. And what about the expertise8 of the team responsible for teaching it?

5

6

7

8

T. Finkenauer, C. Baldus & T. Rüfner, 2008. Juristenausbildung in Europa zwischen Tradition und Reform, Tübingen: Mohr, p. 331; A.W. Heringa Legal Education: Reflections and Recommendations, Antwerp (BE): Intersentia, p. 71. These names are just a random collection (and partly a translation) of course names of law schools in Austria, Brazil, Denmark, Germany, France, Hungary, India, the Netherlands, the Philippines, Spain, Switzerland, South Africa, the UK, and the USA. Davies, P.L., Worthington, S., Gower, L.C.B., 2016. Gower and Davies’ principles of modern company law. Sweet & Maxwell, London (UK); Gevurtz, F.A., 2010. Corporation law. West, St. Paul (USA); Henn, G., 1994. Handbuch des Aktienrechts. Müller, Jur. Verl., Heidelberg (GER); Kübler, F., Assmann, H.-D., 2006. Gesellschaftsrecht: Die privatrechtlichen Ordnungsstrukturen und Regelungsprobleme von Verbänden und Unternehmen. Müller, Heidelberg (GER); Bennett, D.A., Morse, G., 2009. Palmer’s company law: annotated guide to the Companies Act 2006. Sweet & Maxwell, London (UK); Pennington, R.R., 2006. Company law. Oxfrod University Press, London (UK). Stolker, C., 2014. Rethinking the Law School: Education, Research, Outreach and Governance. Cambridge University Press, Cambridge (UK), p. 182 with further references.

30

4 What’s in a Name? Names and Conceptual Frameworks for the Design of, and Approaches to, Law Programme Courses on Undertakings A similar struggle occurs in the design and naming of master’s programmes, especially relevant in continental Europe9. Those designers may, however, make it a specialized LLM programme in only a selected area of the developments mentioned above, which is the reason why their struggle is not directly addressed in this chapter. The issue is therefore especially introductory courses in an LLB programme. In this contribution to the Liber Amicorum for Adriaan Dorresteijn I will offer a conceptual framework that might help designers of (undergraduate) courses on the law pertaining to undertakings to choose an appropriate course name, and with that design a meaningful 21st century law course. Based also on ideas presented in an earlier research note10, I will discuss multiple approaches to the topic and analyse them in the light of the developments in internationalization, multidisciplinarization and Bildung, as well as the broader discussion11 around comparative company law. Connected to each approach I suggest a fitting course name and suggest topics and literature with which to work. This analysis also points at the scholarly achievements pertaining to these issues in the corporate law discipline itself, to which Adriaan Dorresteijn has so greatly contributed. In part, it challenges the title given by Adriaan to his course book, European Corporate Law12, as a broader attempt to contribute to the scholarly discussion13 within the Netherlands and abroad on law school curriculum design. The educational law approach below links very well with Adriaan’s efforts14 as law school dean and board member of the Utrecht Law School in order to pave the way for continuous improvements in legal education, that will hopefully be inspired by this chapter.

9

10 11

12

13 14

LLB and JD graduates in the UK and USA, respectively, have direct access to a Bar Professional Training Course (BPTC) or a Legal Practice Course (LPC) in the UK or (with a voluntary bar review course) to the bar examination (USA). Van Bemmelen van Gent, E.E., 2013. Approaches to Corporate Law. Bynkershoek Law Review Working Papers 2013/3, available at doi:10.2139/ssrn.2212265. See for an overview of that debate Donald, D.C., 2008. Approaching comparative company law (Working paper series No. 77). Johann-Wolfgang-Goethe-Universität, Institute for Law and Finance, Frankfurt am Main (GER). Available at http://publikationen.ub.uni-frankfurt.de/volltexte/2008/5403/; or Donald, D.C., 2008. Approaching Comparative Company Law. Fordham Journal of Corporate & Financial Law 14, 83– 178. Available at doi:http://ir.lawnet.fordham.edu/jcfl/vol14/iss1/3 Dorresteijn, A.F.M., Monteiro, T., Teichmann, C. & Werlauff, E., 2009. European Corporate Law, Second Edition, European Company Law Series, Volume 5. Austin/Boston/Chicago/New York/the Netherlands: Kluwer Law International. See Stolker C., 2014, p. 100. Ippel, P.C. & Dorresteijn, A.F.M., 2002. Zin in recht. De toekomst van het juridisch onderwijs, in W.M.J. Bekkers et all. (Eds.), Rechten in Utrecht. De academische studie in verleden, toekomst en heden, p. 131142. Deventer (NL): Kluwer.

31

Ernst van Bemmelen

4.2

Conceptual approaches for course names

In this section the various conceptual approaches are presented that are potentially helpful in choosing an appropriate name for an undergraduate introductory course on the law pertaining to undertakings (businesses enterprises, companies or corporations etc.). Potential conceptual approaches include the approach emphasising the positive law in the given jurisdiction, the approach that highlights the practical aspects of establishing and running a business, the approach that includes the interaction between an undertaking with others (with additional names such as ‘trade law’, ‘commercial litigation’, ‘investment law’ etc.), the approach that points at the scholarly work surrounding the phenomenon of a business, and the approach that stresses the generic aspects of this field of law in the context of training for a specific profession.

4.2.1

Positive law approach

In practically all jurisdictions the law pertaining to undertakings is codified in statutes.15 Cases heard by the judiciary in these jurisdictions further elaborate on these laws and form (ex post and also ex ante), formally or informally, additional rules of law pertaining to undertakings.16 Together they are considered to form the body of applicable or positive law in a given jurisdiction. A classic approach to courses is to follow this positive law. Typically, this means that the order of the statute dictates the order of the course content, where needed complemented with the relevant case law. Most statutes first deal with the criteria for the establishment of a corporation, followed by rules on registration in public registries, capital, shareholders’ meetings, and management. Depending on the scope of these statutes also liability and the liquidation of the corporation is dealt with in the same vein, or else as part of the specific laws or case law pertaining to liability and liquidation. So, the order of the topics in this classic approach is correspondingly the criteria for establishment, registration, capital, shareholders’ interaction, management, liability and liquidation. Moreover, most jurisdictions have multiple forms of undertakings, including sole proprietorships, commercial associations of professionals in a non-corporate form like LLPs in the UK

15 For instance Book 2 Civil Code (the Netherlands), Aktiengesetz (Stock Corporation Act) (Germany), Book 2 of the Code de commerce (Commercial Code 1807 as amended) (France), Company Act 2006 (UK), Delaware General Corporation Act (Title 8 Delaware Code) (Delaware, USA), Model Business Corporation Act (implemented in many states of the USA). 16 See for the dogmatic implications of my simplistic statement the vast literature on comparative law, see subsection 1.2 below.

32

4 What’s in a Name? Names and Conceptual Frameworks for the Design of, and Approaches to, Law Programme Courses on Undertakings and ‘maatschap’ in the Netherlands17, not stock market-listed corporations18, and hybrid forms such as the German ‘Kommanditgeselschaft’19. Depending on the size of the course at hand, these additional forms are also included, though often in a condensed form. Finally, given the societal importance and popularity of the topics, groups of companies and the financing of undertakings are included in these courses. The former is sometimes (partly) codified20 and for that reason is already included. The latter covers not only the way private entrepreneurs invest in undertakings but also the nowadays expanded topic of the regulation of financial institutions in the light of the ‘financial crisis’21 since 2009. Courses that follow this approach have predictable course names. In their name they follow the name of the respective codification, like ‘company law’ in the UK (following the Company Act 2006), ‘the law of legal persons’ (in Dutch ‘rechtspersonenrecht’) in the Netherlands (following the title of Book Two of the Dutch Civil Code).22 And the various equivalents in most other countries.23 This name tradition could be interpreted as expressing an ambition of law schools to offer (substantial) knowledge of positive law, fulfilling the requirements surrounding professionals like attorneys-at-law, civil notaries, judges etc. These requirements are regarded as being prescribed by law, like the law on attorneys-at-law in the various jurisdictions.24 Upon close scrutiny, the actual legislative prescriptions certainly do not literally require the knowledge as described above. For instance, in the Netherlands the respective paragraph requires a legal education in which ‘private law’ has been studied.25 The law on undertakings is part of private law. That is the only thing that is certain. It is not a justification for the design of most courses on undertakings. This results in two more questions. On the one hand, it is interesting to review the private law aspects of the law on undertakings. This review could analyse the basic private law concepts as they are transformed into the positive law on undertakings. Examples are the 17 Further examples are the cooperative commercial association in the various jurisdictions. 18 Non-public limited liability corporations such as the Dutch BV, the German GmbH and the French SARL. 19 This form is also suitable for large multinational undertakings like the Bertelsmann holding company. Further examples are the ‘commanditaire vennootschap’ in the Netherlands. 20 See for instance article 24a, 24b, 24c Book 2 Dutch Civil Code. 21 Wymeersch, E., Hopt, K.J., Ferrarini, G., 2012. Financial Regulation and Supervision: a Post-Crisis Analysis. Oxford University Press, Oxford (UK). 22 Examples are ‘Company Law’ after the name of the Company Act in the UK and ‘Rechtspersonenrecht’ after the title of Book 2 Civil Code in the Netherlands. See also Donald, D.C., 2008, note 149. 23 For instance ‘Unternehmensrecht’ as umbrella term of University of Heidelberg for a variety of elective courses like Kapitalgesellschaftsrecht, Deutsches und Europäisches Kapitalmarktrecht, Europäisches Gesellschafts- und Unternehmensrecht, Deutsches und Europäisches Umwandlungsrecht, Rechnungslegung, Abschlussprüfung und Publizität. 24 See section 1.4 below. 25 See Article 2 Advocatenwet (oud).

33

Ernst van Bemmelen law pertaining to property, agency, contract and tort, which return as the right of an undertaking to own property, the mechanism whereby natural persons represent the undertaking, the fact that many forms of undertakings are regarded as a contract between entrepreneurs, and the rule that an undertaking has to pay damages if an act by a natural person can be attributed to it. The answer to that question could influence the design of the courses on undertakings. Moreover, it might contribute to the other aims of courses of law in law schools as indicated in the introduction to this chapter. On the other hand, it potentially provides the freedom to develop a completely new approach to these courses, the fact that no local law seems to prescribe courses on undertakings to take the shape of a step by step commentary on the applicable codified rules. In the context of this chapter the following sections aim to contribute to such a redesign.

4.2.2

Business law approach

Before more fundamental approaches to courses on undertakings are presented, this section describes the tradition of designing courses on undertakings as hands-on instructions on how to deal with undertakings. These courses aim not at the understanding of legal rules as part of a specific body of codified law, in combination with the application of these rules in fictitious cases, as is a characteristic of the positive law approach discussed above. But rather the discussion and memorization of the actual steps to be taken by entrepreneurs is central to this approach. As a name, the ‘business law approach’ might function well as an umbrella term for this approach. From the perspective of law schools this approach can be regarded as less legal. Typical audiences of these courses include, therefore, students from other departments than law such as the departments of economics, governance studies and (undergraduate) (university) colleges. These students are not expected to use the knowledge of this course to solve future legal cases. The added value of this approach lies in the fact that students might end up as entrepreneurs themselves, or as advisors to entrepreneurs other than lawyers. Alternatively, students following such a course might acquire a role in government or in connection with other stakeholders of undertakings, like employees or shareholders. Both in courses taking this approach and in these mentioned professional roles, each time the actual phenomena with which an entrepreneur is confronted are relevant. Relevant phenomena include (1) the establishment of the undertaking, (2) the financing of the required capital, (2) the employment of management and other staff, (3) the setting up of the business organization, (4) the design and production of products and services, (5) the sales and distribution of products and services, (6) the interaction with public bodies 34

4 What’s in a Name? Names and Conceptual Frameworks for the Design of, and Approaches to, Law Programme Courses on Undertakings vis-à-vis licences and taxes, (7) potential liability discussions with suppliers, customers or others, and (8) transformations of the undertaking in the light of business mergers or bankruptcies. Textbooks26 that support this business law approach deal with these phenomena by describing the applicable law in a descriptive and consolidated way. For instance, pertaining to establishment, all the aspects of starting an undertaking are discussed in one go, where a positive law approach has to deal separately with the pertinent rules on how a civil notary drafts deeds, the mandatory content of the articles of incorporation, the options in these articles of incorporation pertaining to dispersed subjects as limitations to management, restricted voting rights or the start of the accounting year. Moreover, many of the phenomena listed above are regulated outside the laws on undertakings proper. For instance, in most jurisdictions bankruptcy is regulated in specific bankruptcy or insolvency laws; the design of products is regulated in the respective national and international laws on copyright, patents and trademarks; sales and the distribution of products and services in contract law and (international) trade law (including transport law); liability is dealt with in tort law and insurance law; business licences and taxes are part of the vast body of rules regulating the vertical state-undertaking relationship, operating under various names including administrative law and tax law. Courses on undertakings taking the business law approach therefore adopt a much broader scope compared to the positive law approach discussed in the previous section. Given the enormous amount of related topics and the abundance of legal regulation in all these fields, the description per phenomenon is not only descriptive and consolidated, but also often quite brief. These are the reasons why in a classic law curriculum this business approach is less popular. Contracts and torts are discussed in separate courses on private law. Intellectual property, insurance, transport and insolvency are all regarded as important topics for elective or non-undergraduate level courses. On the other hand, students tend to appreciate the grand overview they obtain in courses adopting the business law approach. If done properly, it provides an insight into the world of business and its varieties, which is valuable for future entrepreneurs, future advisors to entrepreneurs or future government officials tasked with regulating and overseeing undertakings. It is this value that might add to the development of future legal professionals in a classic law curriculum. This is the reason why it is argued that certain aspects of the business law approach should be integrated in classic (positive) law courses on undertakings.

26 Like Collins, D., 2009. Business law. Oxford University Press, Oxford (UK); Riches, S., 2007. Business Law. Pearson Education, London (UK).

35

Ernst van Bemmelen In addition, one can also identify approaches to courses on undertakings that are variations of this business law approach as presented in this section. One is comparing the situation pertaining to the phenomena mentioned in this section in various countries. This approach could be called the ‘comparative law approach’. When specific statutory and case law rules of a limited list of countries are discussed, such a comparative law approach is a variation of the positive law approach discussed in the previous sections.27 When a multitude of countries are discussed the claim of regarding this as a variation of the current business law approach is defendable. The problem with this approach is often the even greater amount of material that has to be processed in the course, next to the fundamental problems of comparative law in general connected to the reasons why to compare and what to compare.28 Furthermore, in a similar vein, taxation is an equally interesting perspective to compare business law environments from country to country.29 This so-called ‘tax law approach’ deals with the various forms of undertakings and identifies the tax consequences of each form. Given the limited scope of this chapter, any further discussion of both the comparative and tax approach to courses on undertakings needs to wait for future scholarly contributions. In closing, given the scope of this chapter, a next approach should be mentioned, taking the business law approach one step further, being the approach dealing with the interaction between the undertaking and others. Specialized areas of law emerged around that interaction like ‘trade law’, ‘commercial litigation’, or ‘investment law’. Also here, it can be argued that those topics belong in courses on the law pertaining to undertakings. Many aspects of trade, commercial litigation or investment law are the reasons for the ‘legislative design’ of undertakings and the respective laws in each jurisdiction. Moreover, these areas provide the relevant examples for discussing undertakings. The same can be said about many other specialized areas of law like the law pertaining to the medical sector (‘medical law’), the financial sector (‘finance law’), the educational sector, the creative sector (‘intellectual property’), or the innovation sector (‘industrial property law’) etc. Obviously, the breadth of these areas of law exclude them from exhaustive discussion in the types of courses discussed in this chapter. However, it might be worthwhile to connect the various courses in law schools by selecting one or two of the mentioned areas of law as examples of how the law pertaining to undertakings functions in relevant economic areas.

27 See also David C. Donald, D.C., 2008, p. 84. 28 See Husa, J., 2015. A New Introduction to Comparative Law. Hart Pub Ltd., p. 16. 29 See Thuronyi, V., Brooks, K., Kolozs, B., 2016. Comparative tax law; Offermanns, R., 2002. The entrepreneurship concept in a European comparative tax law perspective. Kluwer Law International, The Hague.

36

4 What’s in a Name? Names and Conceptual Frameworks for the Design of, and Approaches to, Law Programme Courses on Undertakings 4.1.3

Scientific approaches

This is not the place to comment on the current discussion on the scientific character30 of the legal discipline. However, the law dealing with undertakings is subject to different scholarly debates31 that deserve attention based on their innovative and contributory nature.32 This section discusses the growing trend (1) to develop a functional approach to corporate law, (2) to engage in economic analyses of corporate law, (3) to approach corporate law as part of regulatory science and (4) to include societal perspectives of corporate law under the flag of ‘social corporate responsibility’. Functional Approach – ‘five elements’ The functional approach has its roots in sciences such as biology, sociology, anthropology and linguistics. As a scientific method (structural) functionalism looks beyond the actual appearance or name of a phenomenon, and tries to identify its function in the light of larger topics.33 So the functional study of the genitals of whales looks at their reproductive role in the light of the survival of that species. In anthropology, a similar focus can be given to storytelling as cohesive tools for communities. In literature, fairy tales can be analysed as containing plot elements that all mirror 31 basic functions.34 Moreover, in all these disciplines a functional approach allows for a comparison of certain phenomena with phenomena with different outlook and names, when the underlying function is the same. So the genitals of whales (mammals) can be compared to the reproductive organs of sharks (fish), myths of indigenous peoples can be compared to scientific thinking35, and fairy tales to religious monotheist books. In law, especially the potential of a comparison has triggered the use of a functional approach, especially in the discipline of ‘com-

30 See Gestel, R. van, Micklitz, H.-W., Rubin, E.L., 2017. Rethinking legal scholarship: a transatlantic dialogue; Smits, J., 2014. Law and interdisciplinarity: on the inevitable normativity of legal studies. Critical Analysis of Law. An International & Interdisciplinary Law Review 1, 75–86; Smits, J., 2012. The mind and method of the legal academic. Edward Elgar Publishing, Cheltenham (UK). 31 For instance, Hansmann, H., Kraakman, R., 2004. The end of history for corporate law. The Georgetown Law Journal 89, 439–468; Gepken-Jager, E., Solinge, G. van, Timmerman, L., 2005. VOC 1602-2002: 400 years of company law. Kluwer Legal Publishers, Deventer (NL). 32 See among others pertaining to this scientific status EU Commission, 2010. Europe 2020. A strategy for smart, sustainable and inclusive growth (Communication No. COM(2010) 2020 final). Brussel; Royal Netherlands Academy of Arts and Sciences (KNAW), Netherlands Organisation for Scientific Research (NWO), Association of Universities in the Netherlands (VSNU), Rathenau Institute’s Science System Assessment department, Netherlands Association of Universities of Applied Sciences (HBO-raad), 2010. Evaluating the societal relevance of academic research: A guide. Amsterdam. 33 Levin, J., 2016. Functionalism, in: Zalta, E.N. (Ed.), The Stanford Encyclopedia of Philosophy. Metaphysics Research Lab, Stanford University. 34 See Propp, V.I., Pírková-Jakobsonová, S., Scott, L., 2015. Morphology of the folktale. 35 See Lévi-Strauss, C., 2010. The savage mind (Translation of La pensée sauvage, 1962). Univ. of Chicago Press, Chicago (USA), p. 17, as cited by Donald, D.C., 2008, note 60.

37

Ernst van Bemmelen parative law’.36 This discipline has its stand-alone tradition, with its focus on discovering local requirements for international commercial practice, its focus on good solutions for (governmental) rule makers, legislators and judges, or its focus on the intellectual conceptualization and mapping of the same by legal scholars. For corporate law the functional approach and comparative work resulted in the identification of five core characteristics of public limited liability corporations worldwide.37 The relevance of these five concepts cannot be overestimated, both for the obvious international and globalized character of international business, and its resulting need for comparative corporate law work, and, as this chapter argues, for a local understanding of these corporations and other undertakings in each jurisdiction. In the following each function is briefly described in the author’s logical (functional) order, using the word ‘corporation’, in the sense of a commercial (stock market-listed) business entity, to avoid confusion with the broader term of undertaking as used in the remainder of this chapter. The first element is legal personality. As the leading American court decision states, a corporation is an artificial being, invisible, intangible, and existing only in contemplation of law38. This function allows the corporation to be immortal compared to the mortal stakeholders thereof, to poses property, to enter into binding contracts with other corporations or natural persons, and can be the object of claims by others based on contract or tort and their equivalent.39 Most statutes on corporations around the world express this function in one or more rules.40 The second element is the fact that a corporation needs an owner, normally a shareholder or shareholders. This element is the expression of the function of the allocation of control and earnings.41 The provider of the corporation’s capital has the ultimate decision-making power within this corporate function, normally articulated as the right to appoint and dismiss management, to determine accounting outcomes and approve major transactions or transformations of the corporation. The distribution of the (net) earnings, the divi-

36 Zweigert, K., Kötz, H., 2011. Introduction to comparative law. Clarendon Press, Oxford (UKJ); Reimann, M., Zimmermann, R., 2012. The Oxford handbook of comparative law. Oxford University Press, Oxford (UK); Smits, J.M., 2012. Elgar encyclopedia of comparative law, second edition. Edward Elgar, Cheltenham (UK); Husa, J., 2015. A New Introduction to Comparative Law. Hart Publishing, Oxford (UK). 37 Kraakman, R.H., Armour, J., Davies, P.L., 2017. The Anatomy of Corporate Law: A Comparative and Functional Approach, 3rd ed. Oxford University Press, Oxford (UK), p. 10. 38 US Supreme Court 1819 17 U.S. 4 Wheat. 518 Trustees of Darthmouth College vs. Woodward, 39 See Kraakman, R.H., Armour, J., Davies, P.L., 2017, p. 5.; Easterbrook, F.H., Fischel, D.R., University of Chicago, Law School, Program in Law and Economics, 1984. Limited liability and the corporation. Program in Law and Economics, University of Chicago Law School, Chicago. 40 In the Netherlands Art. 2:5 Dutch Civil Code, in the USA Art. 3.02 Model Act, and Art. 10 (1) Delaware General Corporation Law, in the UK Art. 39 (1) Company Act 2006 and Art. 1 (3) SE Regulation (Council Regulation (EC) No. 2157/2001 of 8 October 2001 on the Statute for a European Company (SE)). 41 See Kraakman, R.H., Armour, J., Davies, P.L., 2017, p. 13.

38

4 What’s in a Name? Names and Conceptual Frameworks for the Design of, and Approaches to, Law Programme Courses on Undertakings dend, is the other side of this function. Typically, the right to receive the (net) earnings is proportional to the amount of capital invested in the corporation. Within the context of the international and globalized capitalist market economy this function is often called ‘investor ownership’.42 The rights of such an investor owner are spelled out in each national regulation of corporate law, be it in the central statute and case law, or specialized rules dealing with property law, financial instruments and stock markets, dispute settlement, accounting, codetermination, and bankruptcy. The third element is delegated management. It is not the investor owner but a specialized management that is running the corporation.43 The corporations that form the template for this functional analysis are large, based in many countries, complex and with multiple, sometimes millions, of investor owners. So only a properly designed governance structure can cope with the corporation’s goals and influences from the outside world. National jurisdictions developed two main forms of such governance, which were subsequently adopted by non-state legislators such as the EU44. The so-called ‘one-tier’ board consists of a large number of individuals, of which a selection has executive tasks and the others advisory or supervisory tasks. The ‘two-tier’ board consists of an (executive) board that is responsible for the day to day management of the corporation, as well as a supervisory board that typically appoints the board, approves major decisions and provides advice. As with the other elements, national statutory and case law rules determine each aspect of this third function in detail. The fourth element is limited liability. This function has developed over the course of time45 to foster the functioning of any corporation, or any equivalent limited liability undertaking, as well as the markets on which they operate, by reducing the risk of investing in a corporation or concluding a contract on behalf of the corporation by the management. This risk is reduced by a mechanism in which any third party with a claim against the corporation, based on contractual or non-contractual liability, in principle cannot target the investor owner or manager.46 Or, in other words, the assets of both the investor owner and manager are shielded from any action by such a creditor. This reduces the risks on the side of the investor owner to the initial investment. Or an individual to act as manager (board). This initial investment becomes an asset of the corporation. And when a valid claim is lodged against a corporation, its assets are at stake, given the function or 42 See Cahn, A., Donald, D.C., 2010. Comparative company law text and cases on the laws governing corporations in Germany, the UK and the USA. Cambridge University Press, Cambridge (UK), p. 9. 43 See Kraakman, R.H., Armour, J., Davies, P.L., 2017, p. 11. 44 See Art. 38 SE Regulation (EU Council, 2001. Council Regulation (EC) No. 2157/2001 of 8 October 2001 on the Statute for a European company (SE), OJ L 294, 10.11.2001, p. 1–21.). 45 For instance critically Gelderblom, O., Jong, de, A., Jonker, J.P., 2013. The Formative Years of the Modern Corporation: The Dutch East India Company VOC, 1602-1623. Journal of Economic History 73. 46 See Kraakman, R.H., Armour, J., Davies, P.L., 2017, p. 8.

39

Ernst van Bemmelen element of legal personality. So this ‘asset partitioning’ reserves the assets of investor owners and managers to their respective private creditors and the assets of the corporation to corporate creditors.47 Each jurisdiction has a rich regulatory landscape around this element, with many exceptions to this rule.48 In law schools, practice and academia it provides a wealth of topics to study. The fifth element is the transferability of shares. At the core of this element is the mechanism that the investor owner can transfer its ownership of its shares to a new (investor) owner.49 The function of this transfer is twofold. On the one hand, it is the expression of the immortal status of a corporation as a legal person. When one investor owner literally dies his or her heir continues to represent this investor owner function. On the other hand, it fosters the willingness of investor owners to invest in the corporation in the first place, knowing (or hoping) that at a certain moment this investment can be sold to the next investor. Both functions should be seen as facilitating market economies, resulting in an efficient allocation of capital and the production of the products and services that these economies seem to need. Moreover, this element also confirms the feature of corporations that all contracts with others are ‘bundled’ in the corporation and continue to be bound to this corporation and not to its investor owners (or even managers). This means that irrespective of the identity of the investor owner those contracts should be honoured. Obviously, also concerning this element national jurisdictions have created an abundance of legal rules.50 Especially concerning so-called ‘open’ or ‘public’ corporations, where this transferability of shares is almost without obstacles or limitations, specific rules, often of a federal51 or supranational52 nature, aim at protecting individuals as investors through disclosure obligations and prohibitions of market manipulation53.

47 See Kraakman, R.H., Armour, J., Davies, P.L., 2017, p. 9. 48 For instance, Articles 2:138 and 248 Dutch Civil Code (external liability exceptions), 2:9 Dutch Civil Code (internal liability exceptions) and their equivalent in other jurisdictions. 49 See Kraakman, R.H., Armour, J., Davies, P.L., 2017, p. 10. 50 For example, Article 2:5 Dutch Civil Code, Article 2:125 Dutch Civil Code etc. and their equivalent in other jurisdictions. 51 USA Securities Act 1933 as amended (15 U.S.C. § 77a). 52 EU, 2004. (MiFiD I as amended) Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, OJ L 145, 30.4.2004, p. 1–44. 53 See Van Bemmelen van Gent, E.E., 2016. Harmonising Criminal Laws and EU’s Significant Bankers: First Use of Article 83(2) TFEU, Rights of the Accused and Learning Organisations, in: Zwaan, J., Lak, M. (J.)., Makinwa, A.O., Willems, P. (Eds.), Governance and Security Issues of the European Union. Challenges Ahead. Asser Press (Springer), Den Haag (Hamburg), pp. 227–247, p. 228.

40

4 What’s in a Name? Names and Conceptual Frameworks for the Design of, and Approaches to, Law Programme Courses on Undertakings Law & Economics Next to these five elements, as an expression of the function of law to establish a structure and housekeeping rules for a corporate undertaking54, a functional approach to corporate law could identify another main function. Corporate law in this respect contributes to the ex ante or ex post settlement of conflicts between the stakeholders of a corporation with different interests.55 Such conflicts are labelled by economists as ‘agency problems’ and they relate to conflicts between (1) the investor owners (as principals) and managers (as agents) in respect of running the corporation, between (2) investor owners with a minority share (as principals) and investor owners with a controlling majority (as agents) in respect of decisions affecting the share price, and between (3) the parties in respect of which the corporation has obligations as an employer, a guarantor of product quality (as principals) and the corporation as such (or its managers/investor owners) (as agents) with respect to decisions pertaining to the corporate assets as a recourse of eventual claims against the corporation. Corporate law, as any law according to economists, can reduce agency costs. The various instruments that corporate law has at its disposal include rules on the disclosure of information by the agents to the principals.56 Or the creation and facilitation of procedures57 from the agent against the principals to enforce the rights of a principal vis-à-vis a dishonest or negligent agent.58 This approach is a fine example of a broader scientific tradition called ‘law & economics’. This chapter lacks the scope to provide details on this tradition59, but continental European readers are warned that it is not law with an economic aspect that is meant. Rather, following the Chicago Law School example60, an economic analysis is conducted, in our case of law pertaining to undertakings. And an economic analysis reviews a legal arrangement, be it a statutory rule or case law, from the perspective of an economist. This perspective looks at the increase in aggregate social welfare as a goal of any arrangement in law.61 Thus, with respect to the agency problem, the economic analysis looks at the question of whether the arrangement indeed realizes this increase, by the fact that both parties benefit. Does the law protecting a creditor of a corporation lead to a willingness to reduce

54 55 56 57 58 59

60

61

See Kraakman, R.H., Armour, J., Davies, P.L., 2017, p. 29. See Kraakman, R.H., Armour, J., Davies, P.L., 2017, p. 29. For instance, Article 2:107 (2) Dutch Civil Code and its equivalent in other jurisdictions. Example: Article 2:345 Dutch Civil Code, the right to institute an inquiry [‘commercial review procedure’] (in Dutch: enqueterecht) in the Netherlands. See Kraakman, R.H., Armour, J., Davies, P.L., 2017, p. 30. See Posner, R.A., 2006. The Economics of justice, 8th Reprint of 1983 edition. ed. Harvard University Press., Cambridge (Mass. USA); Farnsworth, W., 2007. The Legal analyst: a toolkit for thinking about the law. University of Chicago Press, Chicago (USA), p. 87. For instance, Gelter, M., Grechenig, K.R., 2014. History of Law and Economics (Working Paper No. 2014/5). Max Planck Institute for Research on Collective Goods, Bonn (GER). Available at https:// papers.ssrn.com/abstract=2421224. See Kraakman, R.H., Armour, J., Davies, P.L., 2017, p. 31.

41

Ernst van Bemmelen the interest rate of the loan? Does the protection provided by law to minority shareholders lead to a willingness to invest in corporations? Do the rules pertaining to a solid governance of the corporation or blocking the insider trading of stock/shares lead to an increase in managers’ salaries? Scholars taking a law & economics approach can review existing rules and can propose future rules and arrangements that bring this goal of an increase in aggregate social welfare somewhat closer. Alternatively, scholarly work in this respect can also identify elements in law that are counterproductive against this background. These are the reasons why such a law & economics approach should be considered in courses on the law pertaining to undertakings. Regulatory Science – the ‘five Cs’ A next level in this discussion is to consider with which tools these desired outcomes can be realised. This meta-perspective is the trade of regulatory science, a young discipline with links to governance studies and which has its roots in the study of how states control markets.62 One of the topics in this field is the question of with what tools a state can intervene in a market, or an economy at large, and what results are generated by such an intervention. Such tools are considered to be classic statutory rules or rules from case law, but also the enhancement of competition and state-led communication, as further discussed below, with each option starting with a ‘C’ in the English language.63 Now that multinational undertakings can easily choose between jurisdictions, and states even compete to attract those businesses, it matters which choices a state makes in this respect. This is the reason why courses on the law pertaining to undertakings might include aspects of this field that has strong links to courses with labels like public and constitutional law. The first C stands for ‘command’. This classic tool of a state to intervene is the statutory rule. Characteristic of this tool is the fact that each rule contains a norm addressed to, in our case, undertakings or stakeholders around undertakings, in combination with a sanction. Or, in other words, law as an imperative norm backed with punishment. The scientific question surrounding this tool is whether it is effective in achieving its goal. Does the 62 For instance, Parker, C., 2013. Twenty years of responsive regulation: An appreciation and appraisal. Regulation & Governance 7, 2–13; Levi-Faur 2005 D. Levi-Faur ‘The Global Diffusion of Regulatory Capitalism’, Annals of the American Academy of Political and Social Science 2005, 12, p. 12–32, p. 13. 63 Morgan, B., Yeung, K., 2007. An Introduction to Law and Regulation. Text and Materials. Cambridge University Pres, Cambridge (UK), p. 79; Ogus, A., 2002. Comparing Regulatory Systems: Institutions, Processes and Legal Forms in Industrialised Countries (Working Paper No. 35). University of Manchester, Manchester (UK). Available at http://www.scribd.com/doc/52950961/Comparing-Regulatory-Systems-AnthonyOgus.

42

4 What’s in a Name? Names and Conceptual Frameworks for the Design of, and Approaches to, Law Programme Courses on Undertakings rule of not trading in stock with insider information (or the punishment for such behaviour) actually stop all insider trading? Probably not.64 Do other tools stop this? The second C stands for ‘competition’. With this tool states can manipulate the way companies make choices. In respect of undertakings tax law is the most dominant example. With respect to the law pertaining to undertakings an entrepreneur’s choice of a certain form of undertaking is directly linked to the corresponding tax regime. Also, a change in liability law concerning agents like majority shareholders, managers and the corporation as such (see above) can have a direct influence on the choices made. Many other examples, however, are not related to the corporate form or liability but concern the products and services that are stimulated with subsidies or restrained by charges and trading mechanisms of emission rights, for example. Other than with ‘command’, these tools aim to influence the behaviour of the actors through the operation of the competitive forces of the market.65 And the interaction between investor owners, managers and outsiders can be seen as a market as well in this respect.66 The third C stands for ‘consensus’.67 With this tool, obviously with the treat of using other tools, a state can persuade actors reach a consensus on the desired behaviour. A popular example of this tool is self-regulation.68 This phenomenon comes in many different forms and shapes with more or less involvement by the state. Concerning the law pertaining to undertakings governance codes69 are a strong example, with their self-imposed rules on the age at which supervisory board members should retire, the level of remuneration for managers and the disclosure of the efforts made to reach a 30% share of female board members, for example. A special feature of these governance codes nowadays is the reference which is made to them in specific statutory rules for stock market

64 See Avgouleas, E., 2005. A critical evaluation of the new EC financial market regulation: peaks, troughs, and the road ahead. The Transnational Lawyer 18, 179–230, p. 182; Ashworth, P., 2000. Is the criminal law a lost cause? Law Quarterly Review 116, 225–256, p. 226. 65 Breyer, S.G., 1984. Regulation and Its Reform. Harvard University Press, Cambridge (Mass. USA). 66 Coase, R.H., 1937. The Nature of the Firm. Economica 4, 386–405. Available at doi:10.1111/j.14680335.1937.tb00002.x 67 Morgan, B., Yeung, K., 2007, p. 92. 68 Morgan, B., Yeung, K., 2007, p. 143; Ogus, A., 1995. Rethinking Self-Regulation. Oxford J Legal Studies Oxford Journal of Legal Studies 15, 97–108. 69 For instance, Hopt, K.J., Leyens, P.C., 2004. Board Models in Europe – Recent Developments of Internal Corporate Governance Structures in Germany, the United Kingdom, France, and Italy (Working Paper No. 2004/18). Max Planck Institute for Comparative and International Private Law; European Corporate Governance Institute (ECGI), Bonn (GER). Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=487944; Cuomo, F., Mallin, C., Zattoni, A., 2016. Corporate Governance Codes: A Review and Research Agenda. Corporate Governance: An International Review 24, 222–241. Available at doi:10.1111/ corg.12148.

43

Ernst van Bemmelen listed public corporations, resulting in the norm of ‘comply or explain’.70 These codes will also be discussed in the next section on corporate social responsibility. The fourth C stands for ‘communication’ and the fifth C stands for ‘code’. Communication, as a tool for states to regulate behaviour, looks at the possibilities of states to inform actors about risks and aspects of products, services and market behaviour. Concerning products, the perfect example is the warning text on cigarette packets. Code as a tool is a synonym for architecture or other technological design, which leads to the result that behaviour other than the design is impossible. A telling example connected to traffic law is physical speed humps in residential areas which effectively reduce the speed of cars. Both tools have potential significance for the law pertaining to undertakings, for instance state-orchestrated information fostering an awareness of (gender and ethnicity) diversity in organizations71 or punitive sanctions forbidding an individual from accepting a position as an investor owner or manager of a corporation.72

Corporate Social Responsibility The last scholarly approach to the law pertaining to undertakings relates to the fundamental rights or human rights of certain stakeholders. Taken from the angle of undertakings themselves, a commonly used name to address this topic is ‘corporate social responsibility’ or ‘CSR’.73 Like the previous two approaches, CSR relates to the interaction between undertakings as market actors (horizontal character), as well as the interaction between the state and undertakings (vertical character). On the horizontal level the undertaking respects human rights like non-discrimination vis-à-vis employees and customers. On the vertical level it is the state that pursues societal goals via undertakings like the protection of the environment, the employment of people with disabilities, the integration of ethnic groups, gender balances or a fair distribution of profits.

70 In conformity with Article 2:391 (5) Dutch Civil Code and the EU Member States’ equivalent based on Article 20 EU Parliament & Council, 2013. Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC Text with EEA relevance, OJ L 182, 29.6.2013, p. 19–76. 71 See Carter, D.A., D’Souza, F., Simkins, B.J., Simpson, W.G., 2010. The Gender and Ethnic Diversity of US Boards and Board Committees and Firm Financial Performance. Corporate Governance 18, pp. 396–414. 72 See Keijzer, F., Lennarts, L., 2014. Het civielrechtelijk bestuursverbod: geen medicijn maar een placebo, in: Busch, D. (Ed.), Wet continuïteit ondernemingen (delen I en II) en het bestuursverbod. Preadviezen Nederlandse Vereeniging voor Handelsrecht 2014. Uitgeverij Paris, Zutphen (NL). 73 See among others Carroll, A.B., 2016. Carroll’s pyramid of CSR: taking another look. International Journal of Corporate Social Responsibility 1; Spence, L.J., Crane, A., Matten, D., Routledge, 2014. Corporate social responsibility: readings and cases in a global context. Routledge, London; New York; Roo, K.H.M. de, 2015. The role of the EU Directive on non-financial disclosure in human rights reporting. European Company Law 12, 278–285.

44

4 What’s in a Name? Names and Conceptual Frameworks for the Design of, and Approaches to, Law Programme Courses on Undertakings These goals fit well in the pyramid model of the responsibilities of an undertaking74, in which the economic goal of realizing profit is the foundation and the first goal of an undertaking, compliance with mandatory legal rules being the next layer, the response to ethical norms that go beyond those mandatory rules forms the next level, and the top level is the philanthropic role of undertakings trying to fulfil the desire of society that undertakings act as good corporate citizens. CSR is related to the last two layers of the pyramid, or with the societal and environmental concerns that undertakings integrate in their business operations on a voluntary basis as the EU75 defines CSR. It is an approach to undertakings in which the undertaking is made responsible for certain outcomes related to the environment and disadvantaged individuals, including the right of access to remedies for victims of actions by undertakings having a negative impact on human rights.76 In a technical sense, each time aspects of CSR are codified in non-soft law, the respective norm loses its ‘voluntary’ nature and forms part of the positive law discussed in the first section of this chapter. Then, a special scholarly treatment with a CSR approach seems to be superfluous. However, at this period in time, only a few of the CSR norms have been transformed into hard law, and an integrative approach of soft and hard law norms for undertakings seems to be helpful in order to better understand the law pertaining to undertakings. On that basis it continues to be interesting to discuss CSR due diligence77, the disclosure arrangements concerning CSR with its mechanism of ‘comply or explain’78, the role of CSR in liability law79, and the way contract law responds to CSR80, as well as how CSR can be enforced in existing or future litigation platforms81. The use of all the approaches and perspectives mentioned in this sub-section could enhance courses on the law pertaining to undertakings. The scholarly work can form examples of how down to earth concepts discussed in the positive law and business law approaches work out in practice, it can confirm why these concepts are constantly scrutinized and transformed into law, and it can sensitize students concerning the topics with 74 See Carroll, A.B., 2016, p. 2. 75 EU 2011. A renewed EU strategy 2011-14 for Corporate Social Responsibility, COM (2011) 681 final, p. 3. 76 See UN 2011. United Nations Guiding Principles on Business and Human Rights (Ruggie Framework), and OECD Guidelines for Multinational Enterprises, or Code Frijns in the Netherlands for instance. 77 Browne, J., Nuttall, R., 2013. Beyond corporate social responsibility: Integrated external engagement. Available at McKinsey & Company http://www.mckinsey.com/business-functions/strategy-and-corporatefinance/our-insights/beyond-corporate-social-responsibility-integrated-external-engagement (accessed 7.29.17). 78 See note 72; Sections 1504 of the US Dodd-Frank Act (USA); California Transparency in Supply Chains Act (Cal. USA); Modern Slavery Act (UK). 79 See Vytopil, L., 2015. Contractual control in the supply chain: on corporate social responsibility, codes of conduct, contracts and (avoiding) liability. PhD Thesis. Utrecht University, Utrecht (NL). 80 Idem. 81 See cases as Shell/Nigeria, Doe/Walmart Stores Inc., Tony Chocolony Chocolate etc.

45

Ernst van Bemmelen which they will most likely be confronted in their future careers. In this respect it can be seen as part of the ‘Bildung’ that law students are supposed to undergo. An additional reason to include scholarly approaches as discussed in this chapter lies in the educational value in light of the educational approach discussed in the next section.

4.1.4

Educational approach

The educational approach to courses on the law pertaining to undertakings does not look at the legal aspects of undertakings but at the course as a generic tool to allow students to learn. As mentioned in the introduction, no statutory rule on the legal professions seems to force law schools to include a course pertaining to undertakings in their curriculum. The educational approach can assist in determining what reasons are convincing so as to nevertheless have a course with the possible contents mentioned above. The reasons for doing so could lie in the beauty of undertakings as social and economic phenomena, or in the supposed relevance for the future careers of students.82 A cynical reasoning in this respect would be one in which the availability of lecturers justifies the existence of the course. However, insights from the sciences surrounding education potentially point to more credible reasons, and these sciences include development psychology, pedagogy, and education law, the latter of which will be discussed below. From the perspective of education law83 courses are part of the larger concept of a degree programme, in our case, due to the Bologna process84, the LLB or its equivalent in Europe85 and the JD in the USA86, and their respective offspring in other countries87. All degree programmes have the aims that are summarized in Europe in the so-called Dublin

82 In conformity with university websites and, in the Netherlands, Yacht, 2016. Vraag naar overheidsjuristen groeit WWW Document. Yacht. URL https://www.yacht.nl/over-yacht/kenniscentrum/pers/2016/11/10-112016-vraag-naar-overheidsjuristen-groeit (accessed 7.29.17). 83 Louw, R.G., 2011. Het Nederlands hoger onderwijsrecht: een thematisch commentaar op de Wet op het hoger onderwijs en wetenschappelijk onderzoek. Leiden University, Leiden. 84 Joint Declaration of the European Ministers of Education of 19 June 1999, not published in official state publications, available at http://www.ehea.info/pid34363/ministerial-declarations-and-communiques.html, see also Sin, C., Veiga, A., 2016. European policy implementation and higher education: analyzing the Bologna process. Palgrave Macmillan, New York (USA); Lonbay, J., 2010. Education of Lawyers in the EU Part II. Bar Examiner 79, 25–35. Available at SSRN: https://ssrn.com/abstract=1715669 85 National statutes on higher education based on the Bologna Process degree structure (see note 86); see among others Lonbay, J., 2007. Lawyers in Europe embrace common training outcomes. European Journal of Legal Education 4, 117–119. Available at doi:10.1080/16841360802551660 86 American Bar Association, 2015. 2016-2017 Standards and Rules of Procedure for Approval of Law Schools. Available at https://www.americanbar.org/groups/legal_education/resources/standards.html. 87 For instance, Mwenda, K.K., 2007. Comparing American and British Legal Education Systems: Lessons for Commonwealth African Law Schools. Cambria Press, Youngstown (NY, USA).

46

4 What’s in a Name? Names and Conceptual Frameworks for the Design of, and Approaches to, Law Programme Courses on Undertakings Descriptors.88 According to these Descriptors (and their equivalent elsewhere), a graduate of any bachelor’s programme should be competent to enter the respective profession based on (1) the corresponding knowledge, (2) the skills to apply this knowledge, (3) proficiency in communication, (4) the ability to make judgmental decisions and (5) the capacity to continue his or her learning. This broad objective of also the law school degrees of this chapter logically justifies almost any course, and at least a course on the law pertaining to undertakings, given its connection to many legal practices. Moreover, the recognition of a degree programme is often based on participation in quality assurance mechanisms resulting in accreditation. These mechanisms come with their additional frameworks. One example is the international treaty between the Netherlands and Belgium89 resulting in the NVAO framework90, which concretises the Dutch91 and Belgium qualification framework. Based on this, a degree programme should identify, among other things, the intended learning outcomes, which should be in alignment with the level of the programme and the expectations of the professional field, the discipline and international requirements (‘Standard 1’), establish a curriculum with which a student can actually achieve these outcomes (‘Standard 3’), as well as enabling students to master research and professional skills (‘Standard 2’).92 Pertaining to the example of the Netherlands, to date neither the legal professions nor the ‘discipline’ or an international body93 have articulated any requirements pertaining to the bachelor level, not even for the LLB with the so-called ‘professional orientation’94 as offered by universities of applied

88 Joint Quality Initiative, 2004. Dublin Descriptors, included in Bologna Follow-up Group, 2005. From Berlin to Bergen. General Report of the Bologna Follow-up Group to the Conference of European Ministers Responsible for Higher Education Bergen, 19-20 May 2005 [Dublin Descriptors]. Secretariat of Bologna Process [Bergen], Oslo (NOR). Available at http://www.ehea.info/cid102059/wg-frameworks-qualification2003-2005.html. Adopted by Bologna Process Ministers, 2005. The European Higher Education Area. Achieving the Goals. Communiqué of the Conference of European Ministers Responsible for Higher Education, Bergen, 19-20 May 2005 [including Dublin Descriptors]; see Leegwater, M., 2015. Joint Quality Initiative – the origin of the Dublin Descriptors – short history. European Consortium for Accreditation in higher education (ECA), The Hague (NL). Available at http://ecahe.eu/joitn-quality-initiative-a-short-history/. 89 Dutch-Flamish Higher Education Quality Assurance Treaty 2003 [Verdrag tussen het Koninkrijk der Nederlanden en de Vlaamse Gemeenschap van België inzake de accreditatie van opleidingen binnen het Nederlandse en Vlaamse hoger onderwijs, Trb 2003, 167], as amended. 90 NVAO 2016. Assessment framework for the higher education accreditation system of the Netherlands, (The Hague: NVAO, 2016), p. 3. 91 NVAO 2008. The Higher Education Qualifications Framework in the Netherlands, a presentation for compatibility with the framework for Qualifications of the European Higher Education Area Self-certification document (The Hague (NL): NVAO, 2008), p. 6 [Dutch Qualification Framework]; This framework is based on the European Framework, see Bologna Working Group, 2005. A Framework for Qualifications of the European Higher Education Area. Bologna Working Group Report on Qualifications Frameworks (Copenhagen (DK): Danish Ministry of Science, Technology and Innovation), p. 29. 92 NVAO 2016. Assessment framework for the higher education accreditation system of the Netherlands, p. 18. 93 With maybe the exception of Article 9 of the IBA General Principles for the Legal Profession, stating that each lawyer should ‘act in a competent way’. 94 In Dutch ‘HBO-Rechten’.

47

Ernst van Bemmelen sciences which result in job starters as legal assistants in law firms and the judiciary95. As is the case with other European countries, the LLB seems to be geared towards the subsequent LLM or professional degrees in the UK96 and Germany97. Lacking any guidance in terms of the qualification and accreditation frameworks in the Netherlands, the only concrete indication comes from Standard 2: research and professional skills. So logically, and reasoning like a jurist myself, the only required content of a course on the law pertaining to undertakings seems to be research and professional skills. Research skills should be understood in the European sense as pointing to scholarly activity, excluding a dominant Anglo-American interpretation98 as the skill in finding the applicable law in a case. The relevance of the scholarly approach described above seems obvious. Given the qualification framework, one or more of these (or other) approaches may not go amiss. The content of these skills is subject to debate99, but it seems to include the ability to articulate research questions, to subsequently collect and interpret primary and secondary sources, to academically think and process data in the highest cognitive manner in the light of research questions, and to report the findings in accurate language100. How these skills could be integrated in a course on the law pertaining to undertakings are nicely conceptualized in the Haley matrix101. According to this matrix, students can be actively and passively confronted with research (skills) and can deal with the outcome of the research or its process. This matrix provides freedom for curriculum design and has as the lowest level the presentation of research outcomes to students in required literature, and at the highest level students conducting research themselves. In our course on undertakings this ranges from at least one piece of scholarly work in the mandatory literature list to having students write a paper. Translating this sub-section into a potential name for a course on the law pertaining to undertakings, ‘Understanding Corporate Law’ might be an option.

95 See Welten, J., 2011. Het beroep van de hbo-jurist: een case study. Nederlandsch Juristenblad (NJB), pp. 2374–2375. 96 See note 10; see Stolker 2014, p. 16. 97 Second State Examination (in German: Zweite Staatsexam), see Stolker 2014, p. 19. 98 See Knowles, J., Thomas, P.A., 2016. Effective legal research. Sweet & Maxwell, London (UK), p. 23. Lomio, J.P., Spang-Hanssen, H., Wilson, H., Wilson, G.D., 2011. Legal Research Methods in a Modern World: a Coursebook. Djøf Forlag, Copenhagen, p. 211. 99 See Smits, J., 2017. What is Legal Doctrine?: On the Aims and Methods of Legal-Dogmatic Research, in: van Gestel, R., Micklitz, H., Rubin, E.L. (Eds.), Rethinking Legal Scholarship: A Transatlantic Dialogue. Cambridge University Pres, New York (USA). 100 See Curry-Sumner, I., 2010. Onderzoeksvaardigheden: instructie voor juristen. Ars Aequi Libri, Nijmegen (NL). 101 See Healey, M., 2006. Linking research and teaching: exploring disciplinary spaces and the role of inquirybased learning, in: Barnett, R. (Ed.), Reshaping the University: New Relationships between Research, Scholarship and Teaching. Society for Research into Higher Education & Open University Press, Maidenhead (UK), p. 30-42..

48

4 What’s in a Name? Names and Conceptual Frameworks for the Design of, and Approaches to, Law Programme Courses on Undertakings Professional skills have no further definition in the realm of qualification and accreditation frameworks. Also the literature on legal education lacks any consensus where it comes to bachelor level education, maybe with the exception of case solving102. However103, based on an analysis of the legal profession, claims can be made in this respect that also the bachelor curricula should deal with the professional skills of the legal professions. Case solving is probably the most important and first professional skill that can or should be linked to many courses in law schools, including courses on the law pertaining to undertakings. Literature on this is available in abundance in especially American law schools, where the acronym ‘IRAC’ is often used to indicate the different steps in this mental process.104 The ‘I’ stands for issue and includes the legally relevant facts and the legally relevant questions. The ‘R’ stands for rule or any other norm or principle that the law recognizes as a basis for forming a legal opinion or decision. The ‘A’ stands for application, which means any mental or inductive or deductive process that tests or contrasts the elements of the ‘rule’ against the facts of the case. The ‘C’ stands for conclusion and represents the answer to the legally relevant question, often a ‘yes’ or ‘no’ to the main flavours in the law, being (private law-like) liability, (criminal law-like) findings of guilt or (administrative law-like) being allowed to follow a certain course of action. With respect to our course on the law pertaining to undertakings any topic as described in the positive law approach serves to train these professional skills. A justification for this particular topic, however, cannot be based on the objective to master the skill of case solving. For the purpose of answering the question of where case solving is used, the legal profession can be (limitatively) divided into four practices, being (i) the private practice for legal services to individuals, (ii) corporate practice for legal services to undertakings, (iii) governmental practice for state functions like judges, prosecutors, legislative or executive jurists, and (iv) as a complementary category, general interest practice, including jurists working in academia, for non-profit organizations or for international organizations. The distinction between these four legal practices lies in the interests that are represented. Connected to these interests a second professional skill can be identified, being the skill to acknowledge and work with these interests. In connection with our course, the relevant interests are mentioned above, including the interest of the investor owner, manager, employee, customer, supervising state etc. Our course could therefore be an appropriate 102 See Rakoff, T.D., Minow, M., 2007. A Case for Another Case Method 2007 Symposium on the Future of Legal Education. Vand. L. Rev. 60, 597–608; Stolker 2014, p. 162. 103 This section follows the conceptualization of the author in his forthcoming (2018/2019) PhD Thesis at Maastricht University. 104 See among others Strong, S., Desnoyer, B., 2016. How to write law exams: IRAC perfected. West, St. Paul (USA).

49

Ernst van Bemmelen avenue to exercise dealing with interests. A conclusive argument in favour of the course in the first place is it not. Alternatively, the fact that corporate practice is one of the four possible legal practices leads to the reasoning that around 25% of relevant legal activity deals with undertakings. This might form a very strong argument in favour of choosing this topic in a law school curriculum. Subsequently, in each practice legal products are produced, understood as an umbrella term covering all the activities, words and documents undertaken and produced by professional jurists. A closer look at these legal products potentially reveals further professional skills. As legal products the following can be identified: (i) advice including a letter of advice, (ii) representation including a summoning letter, pleading, legal action, (iii) regulation including (‘private law’) contracts and (‘public law’/’governmental practice’) statutory rules (‘laws’), executive orders or judgments, as well as (iv) other legal work including (‘general interest practice’) scholarly writing or memoranda (‘briefs’) in all practices often as a preparation for the other products. Connected to these legal products subsequent professional skills can be identified, being the skill or competence to actually produce (among others) an advice, pleading or contract/judgment. Our course could be instrumental in helping students to exercise these skills. This approach could be seen as a functional interpretation of the concepts in learning called problem-based105 or competence-geared106 learning. At the same time, this orientation in the actual work of the profession could be seen as part of ‘Bildung’ as discussed above. Translating this subsection into a potential name for a course on the law pertaining to undertakings, ‘Corporate Law & Legal Practice’ might be an option.

4.2

Recommendations

In concluding, it cannot come as a surprise that at this stage of the chapter a recommendation is developed to combine the various approaches described above in courses on the law pertaining to undertakings in the bachelor phase of legal education. The importance of positive law is stressed, resulting in a solid knowledge and understanding of the regulatory framework surrounding undertakings, which need to be present in the foundational legal skill of case solving. The introductory power of a business law approach is 105 See Loyens, S.M.M., Kirschner, P.A., Paas, F., 2012. Problem-based learning, in: Harris, K.R., Graham, S., Urdan, T., Bus, A.G., Major, S., Swanson, H.L. (Eds.), APA Educational Psychology Handbook, Vol. 3: Application to Learning and Teaching. American Psychological Association, Washington, DC, US, pp. 403–425; Wijnen, M., Loyens, S.M.M., Smeets, G., Kroeze, M., Molen, H. van der, 2016. Comparing problem-based learning students to students in a lecture-based curriculum: learning strategies and the relation with self-study time. European Journal of Psychology of Education, pp. 1–17. 106 See Anderson, L.W., Bloom, B.S., Krathwohl, D.R., 2009. A taxonomy for learning, teaching, and assessing. A Revision of Bloom’s Taxonomy of Educational Objectives, Abridged Edition. Longman, New York (USA).

50

4 What’s in a Name? Names and Conceptual Frameworks for the Design of, and Approaches to, Law Programme Courses on Undertakings described, with its down to earth explanations of how undertakings work, especially for non-law students. Various scholarly approaches to courses on the law pertaining to undertakings are introduced. However, no conclusive argument has been developed to favour one of the described approaches. It is moreover asserted that no such argument is possible, not even based on the approaches that were not discussed in this chapter like the international trade and finance approach, the critical legal and feminist studies approach, or the approaches dealing with development psychology and pedagogy. So trying to take the best of each approach seems to be the only sensible thing left. A combination of the approaches means yet another form of compromise. The starting point of such an additional compromise might be the available time and credit points connected to the course. These parameters tend to determine the availability and willingness of students to engage and learn.107 Based on empirical research to be presented in future publications an average of 250 clock hours learning time (around 8 ECTS or 14 ‘hours’ USA-style) per degree programme can be earmarked for the course (or courses) on the law pertaining to undertakings. Based on a subsequent design choice, a 55-30-15 division could be used, meaning 55% of the time (138 clock hours) taking the positive law approach, 30% of the time (75 clock hours) taking the scholarly approach, and 15% of the time (37 clock hours) having students produce writing assignments in the light of the legal practice approach. Obviously, other divisions can be defended. The aim of this chapter is to invite decision makers to consider at least these various approaches. More concrete, the bulk (55%) of the time could be used to introduce students to the issues faced by undertakings with help of the business law approach and making use of the sub-division of the functional approach to undertakings in legal person, investor ownership, delegated management, limited liability and transferability of shares. Based on this map of issues the focus could be to ‘hit’ as many positive law laws of the local jurisdiction. Each legal norm, be it of statutory or judicatory nature, could then be used to exercise case solving using the IRAC method to systematically learn to deal with the respective legal rules in their interaction with the various facts of the fictitious cases. On the basis of this foundation, and each time connected to the issues of that week, in the 30% of time reserved for scholarly approaches, each week one scholarly document could be analysed. In an alternating way, the functional approach, law & economics, regulatory science and CSR, but also the comparative approach, the tax law approach or the specific

107 See Pintrich, P.R., 2003. A motivational science perspective on the role of student motivation in learning and teaching contexts. Journal of Educational Psychology 95, 667–686.

51

Ernst van Bemmelen industry approach could take turns. Not only the view expressed in that article or book should be regarded as object of learning, but also the methodology, data and language used in it. In terms of the Haley matrix, this represents the passive exposure and both the outcome and process aspect of scholarly work. The remaining 15% of the time reserved should then be used to have students produce independent or group writing assignments. In terms of lecturer time investment efficiency, a teaching method can be used in which (partly) students review their work among themselves. Aims of the assignments can include the repetition of case solving skills in connection with the legal practice approach: writing letters of advice, contracts, judgments etc. Also, the active engagement with scholarly thinking could be an aim: students write a critical analysis of certain statutory rules with help of the toolkit of law & economics. Translating such recommendation to a fitting course name, and therewith answering the research questions of this chapter, I propose ‘Undertaking Law in Context’. No argument is found in this chapter to strongly support such choice. It is therewith a matter of taste. The aspect of ‘undertaking law’ tries to highlight the combination of positive law and business approach. The aspect of ‘context’ tries to cover the scholarly approaches and the legal practice approach. At least, standing on a Shakespearian balcony, this chapter has tried to review the potential essence of courses on the law pertaining to undertakings, and has argued that the name does not matter that much, similar to Julia who only regards the name Montague her enemy, not their member Romeo. In doing so, and, hopefully in all other courses, the undergraduate degree in law can prepare students for actual junior positions in the legal profession or lay a solid foundation for the subsequent LLM or other Bar exam preparatory courses. With the course on the law pertaining to undertakings being an integral part of that degree. The potential of such a degree is to produce a type of graduate who combines a thorough knowledge of positive law with hands-on research and professional skills that prepares him or her for subsequent steps in practice and/or further education, in combination with an explicit exposure to judgmental issues relating to internationalization, multidisciplinarization or Bildung-related topics. In my further research work I will call this integrative version of a graduate a ‘Temple Shaped Jurist’. Yet another continuation of the wonderful work of Adriaan Dorresteijn in the field of law school development.

52

5

Judicial Protection for Credit Institutions under the Single Supervisory Mechanism

Ton Duijkersloot & Rob Widdershoven

5.1

Introduction

The central theme of this farewell book for Adriaan Dorresteijn is the law that is of importance for undertakings in Europe. In addition to private law rules, this relevant law increasingly consists of public law rules as well. A large amount of these public law rules are concerned with the supervision of undertakings acting in regulated markets. In this contribution we will focus on an area of EU law that is of the utmost importance for a group of undertakings in such a market, namely credit institutions: the Single Supervisory Mechanism (SSM).1 Under this system, the European Central Bank (ECB) is exclusively competent to carry out the prudential supervision of credit institutions.2 But the system also foresees the involvement of national competent authorities (NCAs) of the Member States in the supervisory process. This contribution addresses the consequences of these developments with respect to judicial protection for credit institutions. In addition, it will also illustrate the growing importance of fundamental rights in company law.3

1

2

3

Based on Council Regulation (EU) No. 1024/2013 of 15 October 2013, conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (SSM Regulation/SSMR), OJ L 287, 29.10.2013, p. 63, and elaborated in more detail in ECB Regulation (EU) No. 468/2014 of 16 April 2014, establishing the framework for cooperation with the Single Supervisory Mechanism between the ECB and national competent authorities and with national designated authorities (SSM Framework Regulation/SSMFR) (ECB/2014/17), OJ L 141, 14.15.2014, p. 1. With regard to the new banking supervisory system in general, see: E. Ferran & V. Babis, 'The European Single Supervisory Mechanism', University of Cambridge, Faculty of Law, Research Paper No. 10/2013; E. Wymeersch, ‘The European Banking Union, a first Analysis’, Ghent University Financial Law Institute Working Paper Series WP 20120); G. Ferrarini & L. Chiarella, ‘Common Banking Supervision in the Eurozone: Strengths and Weaknesses’, ECGI – Law Working Paper No. 223/2013; E. Wymeersch, 'The single supervisory mechanism or 'SSM', Part one of the banking union', National Bank of Belgium, Working Paper No. 255, 2014. Within the framework of Art. 6 SSMR, the ECB shall be exclusively competent to carry out, for prudential supervisory purposes, the tasks mentioned in Art. 4(1) SSMR in relation to all credit institutions established in the participating Member States. Furthermore, Arts. 4(2) and 5(2) lay down specific ECB tasks within the SSM. This growing importance is not limited to regulatory company law, but applies to company law in general. See for a critical overview, S. Greer, J.H. Gerards & R. Slowe, Human Rights in the Council of Europe and the European Union, Cambridge: Cambridge University Press, forthcoming 2017, chapter 5.

53

Ton Duijkersloot & Rob Widdershoven The structure of the contribution is as follows.4 First, we will highlight the main features of the SSM (section 5.2). The main issue here is that this system can be characterised as a system of shared administration, i.e., shared between the EU and the national level. Then we will make some general remarks concerning judicial protection in such a shared system (section 5.3). In section 5.4 we will focus more specifically on some consequences for the judicial protection of credit institutions. The key question will be whether effective judicial protection has been guaranteed. Section 5.5 contains the most important conclusions.

5.2

Setting the scene: the SSM framework

The overarching principle in the SSM is that the ECB has the leading role in EU banking supervision. It is responsible for the effective and consistent functioning of the SSM.5 To that end, the ECB is exclusively competent concerning a number of prudential supervisory tasks enshrined in Article 4(1) SSMR, which range from authorizing banks to operate to ensuring compliance with requirements regarding, e.g., their own funds and liquidity. It should be noted that supervision in this field of law has a broad meaning: as far as enforcement is concerned it deals not only with supervision stricto sensu (monitoring) but also with investigating suspicious cases and imposing measures and sanctions.6 But, in addition, it also comprises tasks that are beyond enforcement and can be described as administration and rulemaking: e.g. issuing and withdrawing licences, and even setting rules and regulations. One has to say that the SSMR itself uses mixed terminology that does not clearly match with the separate enforcement stages of supervision in a broad sense as mentioned above, i.e., supervision sensu stricto (monitoring), investigating and sanctioning. Chapter III (‘Powers of the ECB’) deals with ‘supervisory and investigatory powers’ (Art. 9). The investigatory powers in section 1 (Arts. 10-13) then cover both the stage of supervision sensu stricto (monitoring) and the stage of investigations, i.e. investigating cases with a suspicion that the law has been violated. To confound things even further, section 2 4

5 6

The contribution builds on (and brings together) earlier work of (one of) the authors in cooperation with others, in particular, Laura Wissink, Ton Duijkersloot, Rob Widdershoven, ‘Shifts in Competences between Member States and the EU in the New Supervisory System for Credit Institutions and their Consequences for Judicial Protection’ (2014) 10 Utrecht Law Review, p. 92-115; Rob Widdershoven & Paul Craig, 'Pertinent issues of judicial accountability in EU shared enforcement’ in: M. Scholten & M. Luchtman (eds.), Law Enforcement by EU Authorities. Political and judicial accountability in shared enforcement, Cheltenham: Edward Elgar, p. 330-352; Ton Duijkersloot, Argyro Karagianni, Robert Kraaijeveld, ‘Political and judicial accountability in the EU shared system of banking supervision and enforcement’ in: M. Scholten & M. Luchtman (eds.) p. 28-52. Art. 6(1) SSMR. See further Duijkersloot et al. 2017.

54

5

Judicial Protection for Credit Institutions under the Single Supervisory Mechanism

(‘specific supervisory powers’) contains powers which have nothing to do with enforcement as such (for instance, the authorization of credit institutions in Art. 14), but also deals with ‘supervisory powers’ (Art. 16) which, in essence, are powers to take certain measures towards a credit institution at an early stage to address relevant (financial) problems – for instance, requiring institutions to hold their own extra funds – as well as powers to impose administrative (pecuniary) penalties on institutions (Art. 18). For reasons of clarity we will use the stages of enforcement mentioned earlier – supervision sensu stricto, investigating and sanctioning – as a starting point in this contribution and when we use the term supervision it almost always refers to supervision sensu stricto. Concerning the division of tasks between the ECB and the NCAs, the SSMR distinguishes between ‘significant’ (SIs) and ‘less significant’ (LSIs) credit institutions.7 This classification depends on various criteria, such as the size and importance of the institution for the economy. While the ECB is directly and exclusively responsible for the prudential supervision of SIs,8 the 19 NCAs provide assistance and follow the instructions of the ECB.9 The supervision of LSIs remains with the NCAs.10 According to the annual report of 2015, this results in the ECB directly supervising approximately 1,117 credit institutions in the euro area, covering nearly 82% of total banking assets (€26,507.20 billion). For the Netherlands on the basis of those criteria, seven credit institutions have been declared to be significant.11 However, the ECB does have indirect supervision of LSIs. It is responsible for the effective functioning of the entire SSM. In this respect it can give NCAs general instructions and guidelines regarding the monitoring of LSIs.12 NCAs transmit to the ECB draft supervisory decisions on which the ECB may express its views.13 Importantly, the ECB may decide at any time to exercise directly the supervision of a LSI if it considers that this is necessary to ensure the consistent application of high supervisory standards.14 The fact that the ECB’s instructions have not been followed by the NCA could be a relevant factor for taking over supervision.15 In this contribution we will mainly, but not exclusively, focus on the SIs. The ECB applies relevant Union law. However, where Union law is composed of directives, the ECB applies the national legislation transposing those directives. Where Union 7 8 9 10 11

12 13 14 15

Art. 6(4) SSMR and Art. 39 ff SSMFR. Art. 39(4) SSMFR and Art. 89 SSMFR. Art. 6(3) SSMR and Art. 90 SSMFR. Art. 6(3.4) SSMR. In accordance with Art. 49(2) SSMFR, the list gives the names of the supervised entities as referred to in Art. 2 SSMFR, point (20)5 in conjunction with Art. 2, point (7)6, that are referred to as ‘less significant institutions’ in accordance with Art. 6(4) SSMR, as well as the name of the relevant NCA. Art. 6(5) SSMR. Art. 6(7)(C)(iii) SSMR. Art. 6(5)(b) SSMR and Art. 67 ff SSMFR. Art. 67(2)(D) SSMFR.

55

Ton Duijkersloot & Rob Widdershoven law consists of regulations that grant Member States options and discretion, the ECB must also apply national legislation exercising those options and discretion.16 Even though the SSMR makes it clear that the ECB is responsible for supervising SIs and NCAs are responsible for supervising LSIs, enforcement tasks are shared to a large extent; NCAs are indirectly involved in the supervision of SIs, too, since they must follow the ECB’s instructions relating to SIs. For the supervision of SIs, so-called joint supervisory teams (JST) have been established. A JST is assigned to one SI. JSTs are composed of staff members from the ECB and NCAs and are coordinated by a designated ECB staff member (the JST coordinator) and one or more NCA sub-coordinators.17 A JST is the main tool within which the NCA shall assist the ECB in the supervision of SIs and is a far-reaching example of a mixed administration. The ECB is in charge of the establishment and composition of JSTs, but the appointment of staff members from the NCAs to JSTs shall be made by the respective NCAs.18 JST members shall follow the JST coordinator’s instructions as regards their tasks in the JST.19 The tasks of a JST include, amongst other things, performing the supervisory review and evaluation process (SREP), participating in the preparation of a supervisory examination programme and implementing such a programme and any ECB supervisory decisions with respect to SIs.20 The ECB supervisory powers consist of requiring information (Article 10 SSMR), conducting general investigations (Article 11(1) SSMR) and carrying out on-site inspections. In the course of a general investigation the ECB avails itself of the right to (a) require the submission of documents, (b) examine the books and records and take copies or extracts from such books and records, (c) obtain written and oral explanations from the credit institution or their representatives or staff, and (d) interview any other person who consents to be interviewed. In practice the powers of requiring information and carrying out a general investigation are conducted by the JSTs. In order to conduct an on-site inspection, on site-inspection teams (OSIs) may be established. The ECB is in charge of the establishment and composition of the on-site inspection team with the involvement of NCAs and it designates the head of the on-site inspection team from among ECB and NCA staff members.21 In the case of the supervision of SIs, the head of the team is responsible for coordination between the relevant JST and the on-site inspection team.22 16 Art. 4 (3) SSMR. 17 Art. 3(1) SSMFR. Each NCA that appoints more than one staff member to the JST shall designate one of them as the sub-coordinator (the NCA sub-coordinator), who shall assist the JST coordinator as regards the organisation and coordination of the tasks in the JST (Art. 6(2) SSMFR). 18 Art. 4(1) SSMFR. 19 Art. 6(1) SSMFR. 20 Art. 3(2) SSMFR. 21 Art. 144(1) and 144(2) SSMFR. 22 Art. 146(2) SSMFR.

56

5

Judicial Protection for Credit Institutions under the Single Supervisory Mechanism

As mentioned earlier, at the supervisory stage the ECB is empowered to impose the measures foreseen in Article 16(2) SSMR on a credit institution. These measures include, e.g., the measure to require credit institutions to hold their own funds in excess of the capital requirements and the imposition of more frequent reporting requirements. They are aimed at ensuring a sound prudential situation of the credit institution involved and are not of a criminal nature. The investigatory stage is triggered when either the JST or the OSIT suspects a breach of directly applicable Union law or of an ECB regulation or decision.23 The JST or OSIT must then refer the matter to the IU. The IU is an internal independent unit established by the ECB, which consists of investigating officers designated by the ECB.24 It conducts investigations on the basis of a decision,25 and avails itself of the same investigatory powers as the JSTs. It may conduct an OSI as well. On completion of the investigation and before the preparation of a draft decision, the IU communicates a report with its findings to the supervised entity.26 At the end it is the ECB that may impose a pecuniary administrative penalty, i.e. an administrative fine and/or a periodic penalty payment, on a credit institution.27 These sanctions seem to qualify as sanctions of a criminal nature or as a ‘criminal charge’ within the meaning of Article 6 ECHR.28 Therefore, the imposition should comply with extra criminal law guarantees.29 Finally, it should be noted that pursuant to Article 18(5) SSMR the ECB may require NCAs to open proceedings with a view to taking action in order to ensure that appropriate national penalties are imposed. Which penalties may be imposed is determined by national law. They may include administrative penalties of a criminal nature and criminal law penalties.

23 24 25 26 27 28

SSMFR, Art. 124 Art. 123 SSMFR. Art. 125(2) SSMFR. Art. 126(1) SSMFR. Arts. 18(1) and 18(7) SSMR in conjunction with Regulation (EC) No. 2532/98. See Duijkersloot et al. 2017. Cf. Case C-489/10, Bonda, ECLI:EU:C:2012:319, with reference to ECtHR 8 June 1976, Engel, no. 5100/71, in which the ECtHR set the criteria for the qualification of a sanction as a ‘criminal charge’ (or, in EU terminology, a sanction of a criminal nature). On the ground of these criteria, in any event administrative fines qualify as criminal sanctions. 29 Below, in section 3.3, we will especially discuss one of them, namely the right not to incriminate oneself. Other criminal law guarantees, applicable to the imposition of a (administrative) sanction of a criminal nature are codified in Articles 48-50 CFR. They include the legality principle and the prohibition of retroactive effect, the presumption of innocence and the principle of ne bis in idem.

57

Ton Duijkersloot & Rob Widdershoven

5.3

5.3.1

Judicial protection in the system of shared administration in the EU: general outline

Formal and substantive requirements

When we deal with judicial protection in the EU’s shared system the case law of the Court of Justice of the European Union (CJEU) has revealed that two judicial protection requirements are of importance. First, there is the formal requirement for EU citizens or companies to have access to the courts. This requirement relates to the question as to whether acts and decisions of EU or national authorities may be challenged before a court and, if so, which courts – the Union or national courts – are competent. Secondly, judicial protection implies a substantive element, namely the verification by the courts as to whether the competent EU or national authorities have complied with the applicable rules and principles. Both (formal and substantive) requirements are connected to the rule of law (or the principle of the Rechtsstaat), the fundamental principle which governs the EU legal order as a whole.30

5.3.2

Access to a court

Regarding the formal requirement, it is important that the CJEU has developed the leading principle of effective judicial protection in its case law.31 This principle has been derived from the constitutional traditions of the Member States as well as from Articles 6 and 13 ECHR and is now codified in Article 47 of the EU Charter of Fundamental Rights (CFR). According to this principle, individuals must be able to enforce rights conferred upon them by Union law before an independent court. In order to comply with this principle, it is necessary that individuals first have effective access to a court. At the Union level, several remedies exist. For the purposes of this contribution, the most important remedy for individuals is the action for reviewing the lawfulness of acts taken by a Union institution (Article 263(4) TFEU), with the competent court being the CJEU in Luxembourg. In the first instance, appeals by individuals are decided by the General 30 Cf. Case C-50/00 P, Union de Pequenos Agricultures (UPA), ECLI:EU:C:2002:462; Case C-263/02 P, Commission v Jégo-Quéré, ECLI:EU:C:2004:210. Cf. K. Lenaerts, I. Maselis, K. Gutman, J.T. Nowak (ed.), EU Procedural Law, Oxford: Oxford University Press 2014, no. 1.03; R. Ortlep & R.J.G.M. Widdershoven, ‘Judicial Protection’, in: J.H. Jans, S. Prechal, R.J.G.M Widdershoven (eds.), Europeanisation of Public Law, Groningen: Europa Law Publishing 2015, p. 336. 31 See in particular Case C-222/84, Johnston v Chief Constable of the Royal Ulster Constabulary, ECLI:EU:C:1986:206; Union de Pequenos Agricultures (UPA), supra; Commission v Jégo-Quéré, supra; Case C-432/05, Unibet, ECLI:EU:C:2007:163; Case C-583/11 P, Inuit Tapiriit Kanatami and Others v Parliament and Council, ECLI:EU:C:2013:625.

58

5

Judicial Protection for Credit Institutions under the Single Supervisory Mechanism

Court (GC), formerly the Court of First Instance (CFI). A judgment by the GC can be contested, on points of law only, before the Court of Justice. At the national level, legal protection against the application of EU law is provided for by national courts. Article 19 TFEU states that Member States must provide for sufficient remedies to ensure effective protection in the fields covered by Union law. Determining which national court is competent and what procedural rules and principles apply is, under the principle of procedural autonomy, a matter for national procedural law, at least as long as the Union legislator has not regulated a procedural matter in secondary Union legislation.32 The national courts can be considered as juge du droit commun. They have the task of ensuring an effective application of EU law in the Member State. To guarantee a uniform application of EU law, national courts have the opportunity or (at last instance) the obligation to refer preliminary questions concerning the validity and interpretation of EU law to the CJEU (Article 267 TFEU). This judicial cooperation mechanism forms the interface between the Union and the national legal order. According to the CJEU the remedies at Union and national level together (should) provide for a complete system of legal remedies in the Union legal order.33

5.3.3

Substantive requirements

With regard to substantive judicial protection, in other words the judicial verification as to whether competent authorities have complied with the applicable rules and principles, we can stress the following. There is a vast amount of rules and principles that are of importance for supervisory authorities operating under the SSM. First and foremost, the rules and regulations of the SSM itself, in particular those contained in the SSMR and the SSMFR, are of importance. The same holds true for national banking law rules, in particular those concerning prudential supervision. But from the perspective of substantial judicial protection we also have to point at the guarantees provided for by fundamental rights that are part of the EU legal order. In the EU context the main fundamental rights catalogue is the CFR. The CFR rights are not only binding for supervisory activities (including the imposition of sanctions) within the SSM of the ECB itself, but also for NCAs when cooperating with the ECB, as this co-

32 In recent years the Union legislator has been increasingly regulating matters of judicial protection in the MS. Important examples are the Aarhus Directive 2003/35, which regulates the access of environmental NGOs to the national courts, and the Recast Directive 2013/32, which prescribes a full and ex nunc examination of both facts and points of law in first instance asylum cases. The SSM framework still does not contain such rules. 33 Case C-583/11 P, Inuit Tapiriit Kanatami and Others v Parliament and Council, supra.

59

Ton Duijkersloot & Rob Widdershoven operation takes place ‘within the scope of Union law’.34 This includes national supervisory and investigatory activities in the course of an ECB investigation and the possible national imposition of sanctions on the basis thereof. The relation between the CFR as it is interpreted by the CJEU, and the other important European fundamental rights catalogue, the ECHR, interpreted by the ECtHR, is regulated in Article 52(3) CFR. According to this provision and the attendant explanation, the scope and content of CFR rights, in so far as they correspond to rights guaranteed by the ECHR, is the same as those laid down by the ECHR, as interpreted by the ECtHR.35 Therefore the level of protection of fundamental rights afforded by the CFR and interpreted by the CJEU may never be lower than the level guaranteed by the ECHR and the ECtHR.36 In practice, the CJEU will assess the supervisory activities of the ECB and NCAs in the light of the CFR, but will at the same time interpret the CFR provision in the light of the corresponding ECHR provision and the case law of the ECtHR thereon. The guarantees that are the most essential ones for the lawfulness of supervisory and investigatory activities in the SSM framework are connected with the principle of respect for the rights of defence.37 This principle is a general principle of Union law and is (partly) codified, but only with regard to the EU administration, in Article 41 CFR. Indirectly this codification also applies to the NCAs, as the CJEU considers Article 41 CFR to be a reflection of the general principle of Union law, and this principle is binding for the Member States’ administration acting within the scope of Union law as well.38 On the grounds of both the EU principle and Article 41, second paragraph, CFR, every person has the right to be heard before any individual measure which would adversely affect him or her is taken (sub. a), and is moreover entitled to have access to his or her file (sub. b). Both rights have to be complied with by the ECB and NCAs when acting within the framework of the SSM. In addition, the EU principle of respect for the rights of defence includes several defence rights which are not codified in Article 41 CFR. Most important for the supervision and investigation activities in the framework of the SSM are the right of legal professional privilege (LPP) and the right not to incriminate himself.

34 Cf. Case C-617/10 Akerberg Fransson, ECLI:EU:C:2013:105, Case C-418/11, Textdata Software, ECLI:EU:C:2013:588. 35 Article 52(3) CFR, according to the Explanations, p. 33. 36 S. Prechal, ‘The Court of Justice and Effective Judicial Protection: what has the Charter Changed’, in: C. Paulissen et al (eds.), Fundamental Rights in International and European Law, Public and Private Law Perspectives, T.M.C. Asser Press 2016. 37 Cf. X. Groussot, General Principles of Community Law, Groningen: Europa Laaw Publishing 2006, pp. 228234; O. Jansen & P. Langbroek (eds.), Defence Rights during Administrative Investigations, Antwerp/Oxford: Intersentia 2007; J.E. van den Brink et al., ‘General Principles’, in: Jans et al. (eds.) 2015, pp. 237-251; A.J.C. de Moor-van Vugt, ‘The Ghost of the ‘Criminal Charge’: the EU Rights of the Defence in Dutch Administrative Law’, 2012 Review of European Administrative Law, no. 2, pp. 5-16. 38 Case C-604/12, H.N., ECLI:U:C:2014:302; Case C-166/13, Mukarubegu, ECLI:EU:C:2014:2336.

60

5

Judicial Protection for Credit Institutions under the Single Supervisory Mechanism

The principle of LPP was recognized by the CJEU in the AM&S case and further developed in the case of AKZO Nobel & Akcros.39 It guarantees the confidentiality of written information between the lawyer and his/her client, including the correspondence between them, and applies, as a right of defence, in every procedure which may lead to a measure adversely affecting the interests of the client. This includes measures which are not of a criminal nature as well. Recital (48) of the SSM Regulation contains a reference to the right: ‘LPP is a fundamental principle of Union law, protecting the confidentiality of communication between natural or legal persons and their advisors, in accordance with the conditions laid down in the case-law of the CJEU’. The right not to incriminate oneself has been recognized by the CJEU in the case of Orkem as a part of the principle of respect for the rights of defence.40 Nowadays it is guaranteed by Article 48(2) CFR. In the context of competition law it implies that the Commission cannot compel an undertaking to provide it with answers that might involve an admission on its part of the existence of an infringement, which it is incumbent upon the Commission to prove, not even during preliminary inquiry procedures. There is, however, no objection to requests for factual information, or for the disclosure of documents already in existence.41 The right has been elaborated in more detail in the case law of the ECtHR, based on Article 6 ECHR. In the ECtHR case law, the right only applies from the moment an individual is charged with an offence which may lead to the imposition of a sanction of a criminal nature (or of a criminal charge).42 So, in principle, the right does not apply to the supervisory stage, as at this stage the credit institution is not yet suspected of a breach of the Union rules. However, in principle evidence obtained under compulsion at the supervisory stage cannot be used for imposing a sanction of a criminal nature in the following stage.43 Furthermore, the right does not apply, even if a person is charged, to information or materials which exist independent from the will of the charged individual, such as breath, blood and urine samples, bodily tissues, but also – and more important for the supervisory and investigatory tasks of the ECB and the NCAs – documents obtained pursuant to a warrant, such as books and records (including computer data).44 In this respect, the ECtHR approach is similar to that of the CJEU. However, also the latter information is protected by the right not to incriminate oneself in the event that the information possibly exists (independent from the individual’s will), but

39 Case 155/79, AM&S, ECLI:EU:C:1981:29, respectively Case T-125/03 and T-253/03, Akzo Nobel & Akcros, ECLI:EU:T:2007:287, as confirmed in Case C-550/07 P, Akzo Nobel & Akcros, ECLI:EU:C:2010:512. See Van den Brink et al 2015, p. 243-244. 40 Case 374/87, Orkem, ECLI:EU:C:1989:387. 41 Cf. Case T-112/98, Mannesmannröhren-Werke, ECLI:EU:T:2001:61. 42 ECtHR 17 December 1996, Saunders v. United Kingdom, no. 19187/91. 43 ECtHR 17 December 1996, Saunders v. United Kingdom, supra; ECtHR 5 April 2012, Chambaz v. Switzerland, no. 11633/04. 44 ECtHR 17 December 1996, Saunders v. United Kingdom, supra.

61

Ton Duijkersloot & Rob Widdershoven the authorities have to apply excessive force to obtain it.45 This limits the possibility of fishing expeditions. Finally, there are rights pertaining to respect for the home, which are particularly important when the ECB, assisted by an NCA, intends to search the premises of a credit institution in an on-site inspection. This right has been recognized by the CJEU as a general principle of Union law and is now codified in Article 7 CFR and the corresponding Article 8 ECHR.46 On the ground thereof, the enforcement of on-site inspections is considered to be a restriction of the right of respect for the home, which is only possible if it is provided for by law, respects the essence of the right and, subject to the principle of proportionality, is necessary and genuinely meets the objectives of general interest recognized by the Union (Article 52(1) CFR). In the SSM framework on-site inspections are foreseen by law,47 and have as such a legitimate enforcement aim. Possible limitations are, however, set by the necessity principle as part of the proportionality principle, which requires a judicial assessment of both the necessity of the investigation as such, and of the excessiveness and arbitrariness of the specific inspection means employed.48 In the next section we will discuss how the formal and substantive requirements of effective judicial protection are met in the authorisation process, in the supervision and investigation stage, in an OSI, and when imposing measures or sanctions.

5.4

5.4.1

Effective judicial protection for credit institutions under the SMM?

The authorisation process

As far as the authorisation procedures are concerned, in the end there are not many lacunae in the judicial protection. Before elaborating on this, we shall map out this authorisation process and highlight the role of the ECB and the NCAs. The authorisation of credit institutions under the SSM is a one or two-stage structured procedure, depending on whether the authorisation is rejected or granted. The first stage

45 ECtHR 3 May 2001, J.B. v. Switzerland, no. 31827/96. 46 See inter alia Case C-94/00, Roquette Frères, ECLI:EU:C:2002:603. Cf. Wissink et al 2014; Widdershoven & Craig 2017. 47 Art. 144(1) and 144(2) SSMFR, see above. 48 For this twofold test, see: ECtHR 16 April 2002, Colas Est, no. 37971/97, and Case C-94/00, Roquette Frères, supra. See for the different aspects that should be taken into account in the excessiveness test, in addition to these cases, also: ECtHR 6 January 2004, Cronin, no. 15848/03; ECtHR 8 January 2002, Keslassy, no. 51578/99; ECtHR 28 April 2005, Buck, no. 41604/98.

62

5

Judicial Protection for Credit Institutions under the Single Supervisory Mechanism

consists of submitting the application for an authorisation to take up the business of a credit institution by the applicant to the NCA of the Member State where the credit institution is to be established.49 This NCA shall assess whether the applicant complies with all conditions of authorisation set out in relevant national law. If the applicant does not comply with the national requirements, in this first stage the NCA shall reject the application. In this situation there is no role for the ECB. The ECB will only be provided with a copy of the decision by the NCA.50 If the credit institution wants to contest the NCA’s rejection, it may do so before the competent national court. If the applicant does comply with the national requirements, the procedure will step up to the second stage. The NCA prepares a draft authorisation decision proposing that the ECB grants the applicant authorisation to take up the business of a credit institution. The NCA shall ensure that the draft authorisation decision is notified to the ECB and to the applicant at least 20 working days before the end of the maximum assessment period provided for by the relevant national law. The NCA may propose attaching recommendations, conditions and/or restrictions to a draft authorisation decision in accordance with national and Union law. In such cases, the NCA shall be responsible for assessing compliance with the conditions and/or restrictions.51 The ECB shall assess the application on the basis of the conditions for authorisation laid down in relevant Union law. If, in its view, these conditions are not met, the ECB shall give the applicant the opportunity to comment in writing on the facts and objections relevant to the assessment, in accordance with the right to be heard provided for in Article 31 SSMFR. The ECB shall decide on a draft authorisation decision that it receives from the NCA within 10 working days. If a meeting is considered necessary and in any other cases that are duly justified, the ECB may extend the maximum period for deciding on an application.52 The extension shall be notified to the applicant. The final ECB decision can be twofold: the ECB supports the draft authorisation decision and thereby agrees to the authorisation or objects to the draft authorisation decision. The ECB shall base its decision on its assessment of the application, the draft authorisation decision and any comments provided by the applicant.53 If the ECB does not make a decision within the prescribed period, the draft authorisation decision prepared by the NCA shall be deemed to be adopted.54 The ECB shall adopt a decision granting author49 The NCA shall notify the ECB of the receipt of an application within 15 working days and also inform the ECB of the national time limit within which a decision on the application has to be taken (Art. 73(1) and 73(2) SSMFR). 50 Art. 75 SSMFR. 51 Art. 76 SSMFR. 52 Arts. 77(2) and 78(1) SSMFR. 53 Art. 78(2) SSMFR. 54 Art. 14(3) SSMR and Art. 78(3) SSMFR.

63

Ton Duijkersloot & Rob Widdershoven isation if the applicant complies with all the conditions for the authorisation in accordance with relevant Union law and the national law of the Member State in which the applicant is established.55 This decision shall be notified by the NCA to the applicant.56 This one or two-stage decision-making structure, involving a mix of advisory and decisive roles for both national and EU authorities (NCAs and ECB), is exemplary for the mixed banking supervisory process in the SSM. As mentioned earlier, problems with effective judicial protection in this process are limited. In most cases, in line with earlier case law, the Union courts will provide such protection, especially where the applicant is concerned. Irregularities concerning the NCA draft decision will have been resolved at the EU level by the ECB or – if not – will be part of the proceedings before the Union courts against the ECB decision. But, because of the strict standing requirements of Article 263(4) TFEU, third parties (individuals and general or collective interest organizations) will probably have no access before the CJEU.57 Since access before the national courts also seems impossible due to the fact that the ECB decisions in question are not implemented at the national level, a gap with regard to judicial protection for these groups seems likely. As such, the system of legal remedies provided by the Union and national courts together is not as complete as it should be. As far as the negative ECB authorisation decision based upon a positive NCA draft is concerned, there is the possibility that this decision might be challenged before the Union courts by the NCA’s Member State. Because of its privileged status (Article 263(2) TFEU), this Member State will undoubtedly have standing, although in practice solutions for such a situation will probably be dealt with ‘internally’. The same holds true for the situation in which a Member State does not agree with the ECB decision to withdraw the authorisation.

5.4.2

Supervision and investigations

As regards the formal side of effective judicial protection, a distinction should be made between general investigations and information requests. The former may be conducted at the supervisory stage (by the JST) and at the investigation stage (by the IU). A general investigation should be carried out on the basis of an ECB decision.58 This decision is

55 56 57 58

Art. 78(4) SSMFR. Art. 14(4) SSMR and Art. 88(3) SSMFR. See already Wissink et al. 2014. Art. 142 SSMFR.

64

5

Judicial Protection for Credit Institutions under the Single Supervisory Mechanism

subject to review by the Union courts, on the basis of Article 263(4) TFEU. The establishment of locus standi on the part of the supervised entity seems unproblematic. Concerning information requests, in competition law the Commission can address a ‘simple’ request for information to the undertaking.59 Such a request does not oblige the addressee to reply and does not alter its legal position. Therefore the request cannot be challenged before Union courts. The Commission also has the power to request information by decision on the basis of Article 18(3) Regulation No. 1/2003. A decision requiring information may only be taken after a prior simple request has proved unsuccessful.60 Such a decision must indicate the right to have the decision reviewed by the Union courts. In banking law the SSMR does not make a distinction between simple information requests and information requests by decision. Article 10 SSMR empowers the ECB to require credit institutions to provide all information necessary in order to carry out its tasks in the SSMR. Furthermore, these institutions must supply the information requested.61 In practice, it is conceivable that the ECB will also adopt a formal decision when a simple request for information has been unsuccessful. As soon as the ECB requests information by decision, arguably under the threat of a fine or a periodic penalty payment, the decision would change the addressee’s legal position and is contestable before the Union courts. As regards the substantive requirements of effective judicial protection, it should be recalled that the principle of LPP not only applies in the investigation stage, but also in the supervisory stage, as the ECB supervision might lead to the imposition of measures adversely affecting the credit institution (see section 5.3). In so far as the right is at stake in a general investigation in both stages, it may be invoked by the credit institution in the judicial procedure against the decision to carry out a general investigation. Where an information request is concerned with privileged information, substantive protection of the right is less obvious, because as yet it is not clear whether the ECB will follow our suggestion to adopt a formal decision if the simple request is not successful. If it does, the LPP issue may be raised by the credit institution in the judicial procedure before the Union courts against the formal decision. If not, possible violations of the LPP principle might be prevented by following the line set out by the CFI in the competition case of AKZO Nobel.62 In short and translated to the SSM supervision, this line implies that the ECB receives the allegedly privileged document, but places it in a sealed envelope. At the same time it takes a decision rejecting the confidentiality claim in respect of the document, thus making it possible for the credit institution to contest the latter decision before 59 60 61 62

Art. 18 Regulation 1/2003, OJ 2003, L 1/1. Case 374/87, Orkem v Commission, supra, para. 26. Art. 10(2) SSMR. Joined Case T-125/03 and T-253/03, Akzo Nobel, supra. Cf. Van den Brink et al. 2015, p. 244.

65

Ton Duijkersloot & Rob Widdershoven the GC. This procedure enables the risk of a breach of the LPP principle to be avoided, while at the same time enabling the ECB to retain certain control over the documents involved and avoiding the risk that these documents will disappear or be manipulated. As stated in section 5.3, the right not to incriminate oneself only applies in the investigation stage, as before that stage, in the supervisory stage, the credit institution is not (yet) suspected of a breach of Union rules. Nevertheless, the ‘shadow’ of the right may play a role in the supervisory stage as well, because evidence obtained in this stage under compulsion can in principle not be used for imposing a sanction of a criminal nature by the ECB or at the national level. In the investigation stage the right applies to those powers which may be concerned with will-dependent information. After all, information which exists independently from the will of the accused individual, such as books, records and computer data, is in principle not protected under this right. Therefore, in practice, the right seems to be particularly important where the ECB exercises the general investigation power to obtain written or oral explanations from the banking institutions or from their representatives or staff (Article 11(1), sub. (c) SSMR).63 In this respect these actors have the right to remain silent if answering a question would involve an admission of the existence of a violation of the relevant rules. In order to prevent an infringement of this right, the ECB should inform the actor concerned before obtaining written or oral explanations.

5.4.3

On-site inspections (OSIs)

Every OSI, be it at the supervisory stage or the investigatory stage, must be conducted on the basis of an ECB decision.64 If the OSI follows a general investigation and has the same purpose and scope, then the ECB decision for the general investigation must also form the basis for the OSI.65 Therefore, ECB decisions ordering an investigation or an OSI are subject to review by the Union courts.66 In view of the judicial accountability discourse, Article 12 SSMR must be read in conjunction with Article 13(1) SSMR. The latter article lays down the circumstances under which the ECB has to apply for an authorisation by national judicial authorities before carrying out an OSI. On the basis of those two provisions, we can distinguish between the following possibilities. If national law provides that, for carrying out an OSI, judicial authorisation must be applied for, the ECB must seek such authorisation (Article 13(1) SSMR). If a supervised entity opposes the inspection, the ECB must request the assistance of the relevant NCA. The NCA must afford the 63 64 65 66

Wissink et al. 2014, p. 109-110. Art. 143(2) SSMFR. Art. 143(3) SSMFR. This applies to both announced and unannounced OSIs.

66

5

Judicial Protection for Credit Institutions under the Single Supervisory Mechanism

inspection team all necessary assistance in accordance with national law (Article 12(5) SSMR). This implies that if, according to national law, the NCA itself requires prior judicial authorisation to perform the task that the ECB envisages performing in its decision, the ECB needs to apply for judicial authorisation too (Article 13(1) SSMR). Whenever the ECB applies for such judicial authorisation, the national judicial authority may only check that (a) the ECB decision is authentic; (b) the coercive measures envisaged are neither excessive nor arbitrary in view of the subject matter of the inspection.67 So, while the national judicial authority can perform an arbitrariness check, it may not assess the legality or necessity of the ECB decision. This is a competence exclusively reserved for the Union courts.68 This arrangement constitutes a dualistic approach to the judicial review of mixed administrative acts.69 This approach was developed by the CJEU in the Borelli case and it implies that national courts review the national part of the procedure, while Union courts are concerned with the Union part.70 However, this approach may prove to be problematic. Complete reliance on national law overlooks the fact that certain jurisdictions, such as the Netherlands, do not provide for prior judicial authorization of on-site inspections. This might lead to the situation that if the ECB – following an OSI – imposes a sanction on a Dutch credit institution, the ECB will escape the check on the arbitrariness of its inspection action. After all, it seems unlikely that the Union courts are willing and able to conduct this test. On the basis of the principle of mutual trust, which underlies the system of legal cooperation in the EU, they may presume that the procedures in the Netherlands have been conducted in a lawful way.71 This would undermine the notion of effective judicial control. These concerns, however, do not seem to be shared by the CJEU. In the case of Deutsche Bahn it decided that the ex post judicial control by the Union courts of Commission investigations in the area of competition is consistent with Articles 7 CFR/8 ECHR and Article 47 CFR, thereby taking into account the fact that national law might not require prior judicial authorization for the investigation.72 The judgment seems to be in line with the Pekarny judgment of the ECtHR.73 Apparently the CJEU is of the opinion that the

67 68 69 70 71

Art. 13(2) SSMR. Art. 13(2) SSMR. See S. Prechal et al., ‘Introduction’, in Jans et al. (eds.) 2015, p. 32. Case C-97/91, Borelli v Commission, ECLI:EU:C:1992:491. Wissink et al. 2014, p. 110-113; A. van Hoek & M. Luchtman, ‘The European Convention of Human Rights and Transnational Cooperation in Criminal Matters’, in: A. van Hoek et al. (eds.), Multilevel Governance in Enforcement and Adjudication, 2006, p. 27-28. 72 Case C-583/13 P, Deutsche Bahn, ECLI:EU:C:2015:404. That the latter is taken into account is clear from point 24 of the judgment. Cf. Widdershoven & Craig 2017. 73 ECtHR 2 October 2014, Delta Pekárny, no. 97/11.

67

Ton Duijkersloot & Rob Widdershoven Union courts are able to conduct a test on the excessiveness and arbitrariness of the inspection means employed as well. Although we generally have high expectations concerning the CJEU’s possibilities, we would nevertheless favour a system in which prior judicial authorization is not dependent on possibly divergent national laws, but is mandatory under the relevant EU rules.74 First, because national courts are, in our opinion, better placed than the Union courts to conduct a serious test on the arbitrariness and excessiveness of on-site inspections within their territory. Secondly, because it would ensure a uniform standard in respect of the judicial scrutiny of the same ECB inspections. Thirdly, because an obligatory system of prior judicial authorization by a national court would guarantee that the inspection is lawful as far as excessiveness and arbitrariness are concerned, and would prevent the situation that the Union courts have to annul a measure or sanction because it is based on a negative ex post assessment of the excessiveness of the coercive powers employed. The latter would seriously hamper effective enforcement. Finally, different from what has been stated in the literature,75 prescribing a mandatory prior judicial authorization in the SSMR would in our opinion not interfere with the principle of national procedural autonomy. As already stated in section 5.3, this principle only applies as long as the Union legislator has not regulated the issue in secondary Union law. Whether and how far the EU legislator is competent to regulate a matter is determined by the principles of conferral, proportionality and subsidiarity under Article 5 TEU. Prescribing a mandatory prior judicial authorisation seems to be in line with these principles, as it would guarantee a uniform standard in respect of the judicial scrutiny of ECB inspections, which is consistent with Articles 7 CFR/8 ECHR and Article 47 CFR.

5.4.4

Imposition of measures and sanctions

In the SSM framework, generally the ECB will impose measures and sanctions (pecuniary administrative penalties) on an individual credit institution. As these decisions are addressed to the institution, it can contest them before the Union courts (Article 263(4) TFEU). In the proceedings the credit institution may raise possible violations of the defence rights, discussed in section 5.3, in the supervisory (LPP) or the investigatory stage (LPP, right not to incriminate oneself). The same holds true for possible defects of an OSI, as far as the OSI has not yet been tested as to its lawfulness and necessity (by the Union courts) or its arbitrariness and excessiveness (by a national court in a prior author74 See Widdershoven & Craig 2017. 75 M. van Rijsbergen and M. Scholten, ‘The Limits of Agencification in the European Union’, 15 German Law Journal, p. 1223.

68

5

Judicial Protection for Credit Institutions under the Single Supervisory Mechanism

ization procedure, see section 5.4.3). In principle, violations of the defence rights or the right of respect for the home will lead to the exclusion of the evidence obtained. Thus far, the review of measures and sanctions seems to be well arranged. We now turn to discussing a more ambiguous case that could occur in practice. As stated in section 2, the ECB may require NCAs to open proceedings with a view to taking action in order to ensure that appropriate national penalties are imposed. In such a case, the ECB request will not be subject to an appeal before the Union courts.76 The request only aims at opening a proceeding. The decision to impose an appropriate penalty is either up to the NCA – in that case it may be contested before the national courts – or to the national court (in the case of a criminal law sanction). This can be derived from the Tillack case.77 In Tillack, OLAF had sent the results of an investigation conducted by it, from which the suspicion arose that Tillack had breached his duty of professional secrecy and had been bribed, to the NCAs, which had to decide what action should be taken. Tillack initiated proceedings against the OLAF information before the CFI. The CFI stated that the national judicial authorities had to examine that information carefully and to draw the appropriate consequences from it in order to comply with Union law. This duty of careful examination does not, however, require an interpretation of that provision to the effect that the forwarded information in dispute has binding effect, in the sense that the national authorities are obliged to take specific measures. Applying Tillack to the SSM, we may – by analogy – conclude that NCAs are free to decide what action to take. Obviously, on the ground of the principle of sincere cooperation (Article 4 (3) TEU), they are obliged to take the request of the ECB seriously. But in the end, they have – as the only authority – the power to adopt decisions that affect the legal position of the supervised entities. If they take such a decision it is subject to a review by the national courts. If they bring the matter to a criminal court, this court will decide on a possible sanction.

5.5

Conclusion

In the foregoing we have reflected on the formal and substantive judicial protection in a highly regulated area of company law, the supervision of credit institutions under the framework of SSM. Although the framework is rather complex as a result of the shared and sometimes mixed supervision and investigation activities of the ECB and the NCAs, the level of (shared) judicial protection is in general not that bad at all.

76 Cf. Duijkersloot et al. 2017. 77 Case T-193/04, Tillack v Commission, ECLI:EU:T:2006:292.

69

Ton Duijkersloot & Rob Widdershoven As regards the formal requirement of effective judicial protection (access to a court), it has been noted that not only the imposition of measures and sanctions by the ECB (section 5.4.4), but also the decision to conduct a general investigation (section 5.4.2), the decision to carry out on-site inspections (section 4.3, as regards necessity) and possibly the decision to require information (section 4.2) are contestable before the Union courts. In so far as sanctions are imposed at the national level, they may be contested before a national court (section 5.4.4). In respect of authorisations (section 5.4.1), judicial protection will be provided for by either the national courts (in case of a negative assessment by the NCAs) or by the Union courts. Regarding the substantive requirements of effective judicial protection, the SSM framework is rather silent about important defence rights, such as the right to legal professional privilege (LPP) and the right not to incriminate oneself. It is an important task of the ECB, in cooperation with the NCAs, to prevent violations of these rights from occurring in practice. In the foregoing we have indicated how they may act in this regard (section 5.4.2). In respect of on-site inspections we have maintained our position that the possible excessiveness and arbitrariness of the means employed should be tested by the national courts in a mandatory prescribed prior authorisation procedure (section 5.4.3).78 We doubt whether Adriaan Dorresteijn is pleased with the public law invasion of company law, described in this contribution. The positive side might be that this invasion goes hand in hand with the growing importance of fundamental rights. The down side is that the invasion itself ‘infects’ company law with highly technical rules and too many abbreviations, and that, as a result, the protection of fundamental rights is rather technical as well. For a conceptual academic such as Adriaan, this does not seem to be an attractive development. Then again, the devil is as always in the detail, in particular when it comes to the law in action. Therefore we hope that Adriaan will forgive us for writing such a dazzlingly technical piece in his farewell book, and that he possibly even enjoys reading it!

78 Cf. Wissink et al. 2014 and Widdershoven & Craig 2017.

70

6

Kelly v. Fraser Compared to the Allocation of Risk in Agency Law in the Netherlands1

Anka Ernes

6.1

Introduction

Apparent authority is an interesting subject. In the common law it is at a crossroads, according to Colm Kelly.2 He states that ostensible authority has been pushed to its limits and therefore he sees a need to recalibrate the conception of ostensible authority.3 The cause of this statement was the ruling of Kelly v. Fraser4 which will be discussed in this article. In the Dutch case law concerning apparent authority, much emphasis has been put on the allocation of risk. In this article I will point out various rulings by the Hoge Raad (Supreme Court NL) to show how the argumentation developed overtime. I will compare the two legal systems and I will discuss Kelly v. Fraser using the Dutch concept of allocation of risk.

6.2

Competing concepts in the common law on apparent authority

In Freeman and Lockyer (A Firm) v. Buckhurst Park Properties (Mangal) Ltd & Anor Diplock L.J. stated that four requirements are necesssary to establish apparent authority: – a representation made to the third party, – by somebody with actual authority to make it, – that was relied upon by the third party to his detriment; – where it was within the capacity of the company to make such a representation.5

1 2 3 4 5

This article has previously been published in European Journal of Commercial Contract Law (EJCCL) Volume 9, Number 3 2017. Colm Kelly, ‘Reconciling the Irreconcilable: Ostensible Authority after Kelly v. Fraser’, 3 King’s Inn Student L. Rev. 1 2013 at p 1. Ibid at p 2. [2012] UKPC 25; [2013] 1 AC 450. [1964] 2 QB 480 at 506. On Freeman and Lockyer see e.g. G.H.L. Fridman, ‘The Self-authorizing Agent’, 13 Manitoba Law Journal 1 [1983].

71

Anka Ernes When these four requirements are fulfilled, the conclusion is that the principal is bound. Following this judgment, other cases have been decided on the matter of apparent authority. A question that has arisen in some cases is whether an agent can have apparent authority to communicate the approval of the principal if that agent had no apparent authority to enter into that specific transaction. In Armagas Ltd v. Mundogas SA (‘The Ocean Frost’)6 the House of Lords held that if an agent has no actual or apparent authority to contract, he also cannot falsely represent that he has gained the principal’s approval since that would be the same as saying he has apparent authority to contract. Lord Keith declared that he was not willing to accept ‘the general proposition that ostensible authority of an agent to communicate agreement by his principal to a particular transaction is conceptually different from ostensible authority to enter into that particular transaction’.7 To accept that a third party may rely on a representation of approval by an unauthorized agent would offend the fundamental principle that an agent cannot hold himself out as having authority.8 In First Energy (UK) v. Hungarian International Bank Ltd (‘First Energy’)9 the appellant negotiated a credit agreement with the regional manager of a bank. This manager had authority to negotiate the terms, but had informed the appellant that he had no authority to approve the final deal. The head office held that authority. Nonetheless the regional bank manager confirmed that the head office had approved the transactions. The English Court of Appeal held that the appellant was entitled to rely on that representation. While the regional bank manager had no authority to grant credit facilities, he did have apparent authority to communicate the decision of the head office since: ‘the head office had put him in a position where one could expect him to have such authority’.10 In the First Energy case the regional bank manager was a senior manager and the highestranking personnel at the branch. Protection of the third party on the basis of the position of the agent was not new. I would like to point out the dictum of Atkin L.J. in Kreditbank Kassel GmbH v. Schenkers Ltd:11

6 7 8 9 10 11

[1986] 1 AC 717. [1986] 1 AC 717 at p 779. E.g. Peter Watts, ‘Deeds and the Principles of Authority in Agency Law’, [2002] Oxford U. Commw.L.J. 93. [1993] 2 Lloyd’s Rep 194. [1993] 2 Lloyd’s Rep 194 at p 204. [1927] 1 KB 826 at p 844.

72

6

Kelly v. Fraser Compared to the Allocation of Risk in Agency Law in the Netherlands ‘If you are dealing with a director in a matter in which normally a director would have power to act for the company you are not obliged to inquire whether or not the formalities required by the articles have been complied with before he exercises that power. Those are matters of internal management which an outsider is not obliged to investigate.’

In First Energy Steyn L.J.’s judgment holds the passage:12 ‘A theme that runs through our law of contract is that the reasonable expectations of honest men must be protected. It is not a rule or a principle of law. It is the objective which has been and still is the principal moulding force of our law of contract. It affords no licence to a Judge to depart from binding precedent. On the other hand, if the prima facie solution to a problem runs counter to the reasonable expectations of honest men, this criterion sometimes requires a rigorous re-examination of the problem to ascertain whether the law does indeed compel demonstrable unfairness. These general considerations are of some relevance to a question of ostensible authority which is the principal matter to be considered on this appeal. If we were to accept the implications which the appellants have placed on observation, The House of Lords in Armagas Ltd v Mundogas SA our decision would in my view frustrate the reasonable expectations of the parties. Moreover, our decision would have to be based on an unreal premise as to the way in which commercial men transact business of the particular kind involved in this case. I shall attempt to show that the application of orthodox principles does not compel such a result.’ Peter Watts, while explaining First Energy, states that there is a line of authority for the proposition that if a principal knows that an agent is overstating his authority and takes no action to prevent this, the principal can be estopped from relying on the agent’s lack of authority.13 This argument, however, turns on the knowledge of the principal. If the principal did not know that the agent was overstating his authority, the third party would not automatically be protected. While this may sound harsh, it really is not. In very many cases the holding out by the principal can basically already be found in a business card given by the principal to the agent, or attendance at a meeting by the third party at the principal’s premises. In these cases, the third party is protected if he relied on this (implicit) holding out by the principal.

12 [1993] 2 Lloyd’s Rep 194 at p 196. 13 Peter Watts QC, ‘Some Wear and Tear on Armagas v. Mundogas – The Tension Between Having and Wanting in the Law of Agency’, (2015) Lloyd’s Maritime and Commercial Law Quaterly 36 at p 43.

73

Anka Ernes

6.3

Kelly v. Fraser14 in line with First Energy

What was the case in Kelly v. Fraser? Michael Fraser became President and Chief Executive of the Island Life Insurance Company in 2000. He had previously been employed by Life of Jamaica Ltd. and had contributed to its pension scheme. He now wanted to transfer the accrued value of his entitlement under the Life of Jamaica scheme to the Island Life Plan and discussed this with Clive Masters, the Vice-President of Island Life Insurance Company, responsible for the Employee Benefits Division. The discretion to accept funds from other schemes was vested in the trustees personally. Clive Masters was not authorised to approve the transfer. However, the trustees could delegate the daily administration of the Island Life Plan to the employee benefits division and this they did. The pension administrator of Life of Jamaica sent a cheque representing Mr Fraser’s accrued contributions to the trustees of the Island of Jamaica Plan. The money was credited and invested with the other funds of the Plan without the trustees’ approval or knowledge. Michael Fraser received a letter from Clive Masters confirming the transfer. Also, he received periodical statements from the Employee Benefits Division of Island Life recording the accumulated value of his units in the fund. In 2003 Island Life merged with Life of Jamaica and the Plan was terminated. Of course, Michael Fraser was entitled to recover his contributions. The problem was the surplus. It was decided that, since Michael Fraser’s transfer from Life of Jamaica had not been approved by the trustees, Mr. Fraser’s share of the surplus should be calculated without regard to any benefit attributable to it. He was only entitled to JMD 866,688.43. Had the whole of his entitlement been taken into account, he would have received JMD 6,809,571.00. The question arises as to whether the trustees were bound. Lord Sumption states: ‘The Board approaches the question whether the trustees were bound by these statements on the footing that neither Mr masters nor any one else in the Employee Benefits Division had authority of any kind to approve the transfer into the Plan. Nor did they purport to have done so. Equally, none of them had any actual authority to tell Mr Fraser that everything was in order if it was not. The question, therefore, is whether they had ostensible authority to tell Mr Fraser that whatever steps needed to be taken to carry out his transaction regularly had been duly performed, if they had no authority to perform those steps themselves.’15

14 [2012] UKPC 25; [2013] 1 AC 450. 15 [2012] UKPC 25 at [11].

74

6

Kelly v. Fraser Compared to the Allocation of Risk in Agency Law in the Netherlands

Lord Sumption furthermore states that the judgments in First Energy and Armagas v. Mundogas are consistent. .

‘Lord Keith’s speech remains the classic statement of the relevant legal principles. An agent cannot be said to have authority solely on the basis that he has held himself out as having it. It is, however, prefectly possible for the proper authorities of a company (or, for that matter, any other principal) to organise its affairs in such a way that subordinates who would have no authority to approve a transaction are nevertheless held out by those authorities as the persons who are to communicate to outsiders the fact that it has been approved by those who are authorised to approve it or that some particular agent has been duly authorised to approve it. These are representations which, if made by some one held out by the company to make representations of that kind, may give rise to an estoppel.’16 In this case the trustees are the ultimate source of authority. But pension fund trustees hardly ever communicate personally with contributors. Their decisions are communicated and applied by professional managers. On the basis of these facts, Lord Sumption concludes that: ‘Mr Masters was the senior officer of the relevant department of the company. He never professed to have authorised the acceptance of the transfer funds himself, but the plan could hardly have been operated if he did not have the authority to write letters informing contributors that they had been duly accepted and in respect of what contributions. Moreover, with or without the trustees’ approval, the transfer funds were in fact accepted, and accruals to the transfer funds notified in successive benefit statements. Subject to the question of reliance, the trustees cannot now disclaim all of this and treat the transfer funds for some purposes as if they had been received and for other purposes as if they had not.’17 In other words, the trustees are bound because they put Clive Masters in the position of Vice-President of the Employee Benefits Division. Michael Fraser could (and actually did) rely on the apparent authority to communicate decisions by the trustees, created by this position. The source of the agent’s apparent authority is not founded in his own representation but in the principal’s conduct, the principal’s adoption of an operational

16 [2012] UKPC 25 at [15]. 17 [2012] UKPC 25 at [16].

75

Anka Ernes structure that involves delegating to intermediaries the authority to communicate its decisions to third parties.18 Secondly, the trustees are bound on the basis of apparent ratification, since the funds were in fact accepted and Mr Fraser even received periodic statements from the Employee Benefits Division of Island Life recording the accumulated value of his units in the fund. Colm Kelly justly points out that ‘essentially the law is trying to achieve a fair allocation of risk between the principal and the third party’ and that furthermore ‘Apparent authority was conceived as a means of achieving fairness and for that reason we should focus on the position of the third party’.19 In Dutch case law concerning apparent authority much emphasis has been put on the allocation of risk in ING Bank NV v. Bera Holding NV20. Therefore I would like to point out the gradual development of this concept of allocation of risk in the following paragraphs.

6.4

Apparent authority in Dutch Law

In 1926 the Supreme Court of the Netherlands (Hoge Raad der Nederlanden, hereafter referred to as Supreme Court NL)21 had to address the problem of apparent authority in the case Vas Dias v. Salters, where an architect had promised repairs. The principal stated he had never given the architect the authority to make this promise. The Supreme Court NL found that the principal is bound when he has disclosed his will to that effect, either directly (verbally) or indirectly (by his behaviour). Furthermore the demands of social intercourse must allow that on the basis of these words or conduct of the principal, the third party could indeed trust that the agent had been authorised. In 1968 the Supreme Court NL went one step further. In the case of Molukse Kerk v. Clijnk22 the Supreme Court NL found that apparent authority not only has to be based on words or conduct of the principal, but also non-conduct of the principal can create apparent authority of the agent. The case was as follows. Molukse Kerk commissioned architect Porsius to perform construction work on a church building. The maximum amount of the work was set at NLG 58,100.-. The architect in turn commissioned contractor Clijnk. Clijnk started work. Only when Clijnk was almost finished, did he find out 18 Pey Woan Lee, ‘The Apparent Authority of the Unauthorised Agent’, 26 SAcLJ 258 2014 at p 263. 19 Colm Kelly, ‘Reconciling the Irreconcilable: Ostensible Authority after Kelly v. Fraser’, 3 King’s Inn Student L. Rev. 1 2013 at p 9. 20 HR 19 February 2010, NJ 2010, 115, ECLI:NL:HR:2010:BK7671. 21 HR 6 May 1926, NJ 1926, 721. 22 HR 1 March 1968, NJ 1968, 246.

76

6

Kelly v. Fraser Compared to the Allocation of Risk in Agency Law in the Netherlands

about the cost limitation. His bill at that moment reached NLG 98,000.-. Molukse Kerk, the principal, stated she had done nothing at all. The Supreme Court NL found that Molukse Kerk had neglected to inform Clijnk about the limitation of the costs. Also Molukse Kerk should have realised how expensive and fundamental the construction job was; she should have interfered. Therefore since 1968 non-conduct of the principal can be the basis of apparent authority of the agent. In 1992 a major agency case was ruled upon. Felix v. Aruba23 was an Aruban case. In 1984 Felix acted on his plan to start an air cargo handling business at the Aruban airport. To do this, he needed a building. He contacted the aeroclub. The aeroclub and Felix requested from the airport commander for Felix to exploit the building of the aeroclub. Permission was apparently tacitly granted. Felix employed staff, renovated the building and started to handle air cargo. In November 1986 the Minister of Transport and Communication decided that handling of air cargo would only be allowed by Air Aruba. Felix closed his company in December 1986 and requested damages. The airport commander had not been authorised to bind Aruba. The Supreme Court NL ruled that the government can be legally bound by an unauthorised agent. Important facts in deciding whether the principal is bound are: 1. not only a manifestation by somebody with authority to make it, but also: 2. the position of the acting staff member in the governmental organisation, 3. his conduct, 4. the circumstance that the organisation and/or the authorities of its organs are not transparant for outsiders, 5. possible negligence of the government to alert the third party concerning the fact that the agent has no authority to bind the principal. In the above mentioned list only the first point refers directly to the original requirement necessary to establish ostensible authority (a representation made by somebody with authority to make it). The other points refer to the agent (2 and 3), the organisation of the principal (4) and non conduct by the principal (5). Another landmark case on agency took place in 2010. ING Bank v. Bera Holding24 came about as follows. Berner was the director of Bera Holding. He lived in Surinam and was the only person authorised to bind Bera. At the request of Ramkalup (joint founder of Bera) ING Bank made an offer to start a banking relationship. Berner came to the bank, together with Ramkalup, to sign the signature card on behalf of Bera Holding. Berner asked the bank to send the bank statements to the Dutch address of some companies that

23 HR 27 November 1992, NJ 1993, 287. 24 HR 19 February 2010, ECLI:NL:HR:2010:BK7671, NJ 2010, 115.

77

Anka Ernes belonged to Ramkalup. At the request of Ramkalup, ING Bank transferred EUR 210.000,from the account of Bera Holding to those of Bera BV and Bera Commercials BV. Bera Holding stated that ING Bank transferred the funds to Bera BV and Bera Commercials BV without authorisation by Bera Holding or its agent. ING Bank did not hold that Ramkalup was an authorised agent of Bera Holding. ING Bank held that, on the basis of Bera Holding’s conduct, it could (and did) believe that Ramkalup was authorised to represent Bera Holding. ING Bank supported this statement with the following arguments: – the bank account was opened on Ramkalup’s intervention, – contacts between ING Bank and Bera Holding were mainly via Ramkalup, – the bank statements were sent to the address of Ramkalup’s companies on the request of Berner, – Bera Holding did not complain (in time) about the transfer of funds, ordered by Ramkalup, – even after Berner complained about the transfer of funds, another EUR 50,000.- has been transferred, again via Ramkalup. The Courts in first instance and on appeal ruled that ING Bank, as a professional bank, should have done more research on Ramkalup’s authority before it transferred the funds. It is a fact that ING Bank did not do this research. The Supreme Court NL decided that the starting point must be that a principal is estopped to hold that an agent has no authority to represent him, – if the third party has trusted the agent’s authority on the basis of circumstances which allocate risk to the principal, and – if these circumstances, according to social intercourse, could lead to the belief that the agent had apparent authority. In 2012 a landmark ruling on agency was given by the Supreme Court NL. Fujitsu v. Excel25 repeated the ING v. Bera ruling. The risk factor was stressed and the Supreme Court NL stated explicitly that a representation by the principal is not required. In 2017 again two important court rulings were given by the Supreme Court NL on the subject of apparent authority. In the Aventura Real Estate-case the Supreme Court NL ruled that the ‘allocation of risk principle’ does not stretch so far as to include cases in which the representation is based solely on the words or behaviour of the agent.26 In

25 HR 3 February 2012, ECLI:NL:HR:2012:BU4909, NJ 2012, 390. 26 HR 3 February 2017, ECLI:NL:HR:2017:143.

78

6

Kelly v. Fraser Compared to the Allocation of Risk in Agency Law in the Netherlands

addition to the words of behaviour of the agent there must be circumstances that allocate risk to the principal. These are the facts of the second court ruling of 3 February 2017.27 The principal supplied the agent with all the required documents for the sale of a real estate portfolio. On top of that the principal had agreed to the fact that the agent would look for potential buyers in his own network. Lastly, it can be of importance that the third party knew that the agent was acting as attorney of the principal. These additional circumstances have to be taken into account to conclude whether the principal is bound on the basis of apparent authority.

6.5

The background of Agency Law in the Netherlands, links with Common Law?

Apparent authority has been codified in Article 3:61 sub 2 Dutch Civil Code. It is a rule of third party protection, a specific agency rule on the protection of trust.28 It reads as follows: ‘If a juridical act has been performed in the name of another person, then it is not possible towards the opposite party, who assumed and in the given circumstances reasonably could have assumed on the basis of a statement or the behaviour of that other person that an adeqaute authority for representation was granted, to appeal to the incorrectness of this assumption.’ Whereas this article only mentions ‘a statement or behaviour’ of the principal, I have argued in the previous paragraph that the case law holds a broader view. Article 3:61 sub 2 Civil Code only holds the first of the factors mentioned in Felix v Aruba: ‘a manifestation by somebody with authority to make it’. I would like to have a closer look at the other factors of this court ruling, since the Supreme Court NL in case law like ING Bank v Bera Holding and Fujitsu v Excel has used Felix v Aruba as a stepping stone to create a wide basis for apparent authority; wider than Article 3:61 sub 2 Civil Code provides.29

27 HR 3 February 2017, ECLI:NL:HR:2017:142. 28 General protection of trust can be found in Articles 3:35 and 3:36 Civil Code. 29 A.L.H. Ernes, Het leerstuk onbevoegde vertegenwoordiging sinds het arrest Felix/Aruba in: E hofi di Ley, Feestbundel ter gelegenheid van 25 jaar Faculteit der Rechtsgeleerdheid van de Universiteit van Aruba, red. Witjens, Van Bogaert, Bollen, Den Haag: Boom Juridische Uitgevers 2014, p. 341-355.

79

Anka Ernes The position of the acting staff member in the governmental organisation, This factor, I think, is what in Common Law is known as ‘usual authority’. In the case law of the Netherlands there are, for example, Supreme Court NL rulings concerning the position of an attorney30, a director31, a bailiff32, a carpenter33, and a general manager.34 His conduct, The factor ‘conduct of the agent’ seems to refer to the forbidden notion that an agent cannot hold himself out as having the necessary authority to represent the principal. However, this is not correct. One should hold in mind that an agent cannot be said to have authority solely35 on the basis that he has held hinself out as having it36. Nonetheless the agent’s conduct can be one of the factors on which the third party bases his trust. The circumstance that the organisation and/or the authorities of its organs are not transparant for outsiders, In Mahony v. Est Holyford Mining Co37 Lord Hatherly phrased the indoor management rule thus: ‘When there are persons conducting the affairs of the company in a manner which appears to be perfectly consonant with the articles of association, those so dealing with them externaly are not to be affected by irregularities which may take place in the internal management of the company.’ This indoor management rule seems to me to be a relative of the idea in the Netherlands that the fact that the organisation and/or the authorities of its organs are not transparant for outsiders, can be a factor to bind the principal.

30 HR 18 June 1926, NJ 1926, p 1021 (Altena v. Van der Horst) and HR 16 June 1967, NJ 1967, 340 (Cornelissen v Wagemakers NV). 31 HR 19 March 1942, NJ 1942, 445 (De Gruyter). 32 HR 24 April 1992, NJ 1993, 190 (Kuyt v. MEAS). 33 HR 9 October 1998, NJ 1999, 581 (Hartman BV v. Bakker). 34 HR 23 October 1998, NJ 1999, 582 (Nacap v. Kurstjens). 35 Lord Sumption in Kelly v Fraser [2012] UKPC 25; [2013] 1 AC 450 at [15]. 36 Hoge Raad 3 February 2017, ECLI:NL:HR:2017:142 and Hoge Raad 3 February 2017, ECLI:NL: HR:2017:143. 37 [1875] LR 7 HL 869.

80

6

Kelly v. Fraser Compared to the Allocation of Risk in Agency Law in the Netherlands

Possible negligence of the government to alert the third party concerning the fact that the agent has no authority to bind the principal. First, although the case is about the government of Aruba, a body governed by public law, it is accepted in the Netherlands that the case Felix v. Aruba also applies to bodies governed ny private law.38 Secondly, in my view, the negligence can be found in non-conduct by the principal and also in (apparent) ratification. In Kelly v. Fraser Michael Fraser received periodic statements from the Employee Benefits Division of Island Life recording the accumulated value of his units in the fund. This can be seen as apparent ratification. In addition to Felix v. Aruba, ING Bank v. Bera holds the notion of ‘risk’. Two factors are considered: A. The third party has trusted the agent’s authority on the basis of circumstances which allocate risk to the principal First and foremost, it has to be mentioned that the third party bears the onus of proving that the agent had actual or apparent authority. How he can prove this, however, implies more factors than just words or conduct of the principal. A broad range of facts and circumstances are at his disposal. Examples in the case law of the Netherlands include: – The third party and the agent had worked for two years on the implementation of a project, the principal had already paid substantial sums to the third party for this job. Also, the third party in this case had done previous business with the principal, concerning these previous contacts the third party also dealt with the agent and the contracts were later honoured by the principal.39 – The agent was the manager of the WIA Service Desk. The services in this case were within the scope of the tasks of the service desk. The third party had already performed various pre-contractual duties and was paid by the principal for these.40 – The station manager held a job interview with the third party. The station manager was part of the management of the principal and the station manager handed the third party the labour contract. On the basis of these circumstances the third party could trust that the station manager was authorized to hire him.41 – The third party could rely on the apparent authority of the agent because the rental contract mentioned that the agent represented the principal, the rental contract was 38 A.L.H. Ernes, Onbevoegde vertegenwoordiging, PhD Thesis Open University The Netherlands, Deventer: Kluwer 2000 at p 107; Asser-Van der Grinten-Kortmann 2-I (De Vertegenwoordiging), Deventer: Kluwer 2004 at [42]. 39 Hof Amsterdam 6 April 2010, ECLI:NL:GHAMS:2010:BM1231. 40 Rechtbank Rotterdam 18 March 2010, ECLI:NL:RBROT:BL9375. 41 Rechtbank Zeeland-West-Brabant 25 Februaru 2016, ECLI:NL:RBZWB:2016:1200.

81

Anka Ernes (on request of the agent) put in the name of the principal, the agent represented the principal often and the principal paid the rent.42 B. The above mentioned facts and circumstances, according to social intercourse, could lead the third party to believe that the agent had apparent authority. In my opinion, the notion ‘according to social intercourse’, is related to the notion ‘reasonableness of the third party’. A third party cannot assert a contract against a principal when this third party was reasonably led to inquire as to the lack of authority in an agent or as to other important circumstances of the case. If the circumstances are thus that they should ring alarm bells, the third party cannot ignore them and merrily continue to trust the agent. On the other hand, if a situation is ‘usual’ according to social intercourse, there is no reason for a third party to make further inquiries concerning the authority of the agent. The third party is then exempted from this research obligation.

6.6

Conclusion

Apparent authority is a concept known in common law as well as in the law of the Netherlands. The approach of the subject is definitely not the same, but some aspects are similar in both legal systems. In both legal systems an agent cannot be said to have authority solely on the basis that he held himself out as having it. In both legal systems this cannot be the sole reason to bind the principal! The question as to whether an agent who has no apparent authority to bind the principal, can nonetheless communicate decisions by the principal, is a question which has not yet been addressed explicitly by the Supreme Court NL. The Dutch legal system therefore might learn from the common law system on this subject. On the other hand, if the problem would rise in Dutch case law, the problem would very likely be solved using the concept of allocation of risk as described above. This might be a concept helpfull to common law case law.

42 Hof Den Haag 5 July 2016, ECLI:NL:GHDHA:2016:1788.

82

7

Changing the Causation Requirement and Its Impact on Companies Faced with Tort Claims1

Ivo Giesen & Rianka Rijnhout

7.1

Introduction

7.1.1

The problem

The possible success of a (mass) tort claim against a company often depends on the causation requirement in Article 6:162 or Article 6:74 Dutch Civil Code (hence: CC) being fulfilled or not. Traditionally, this was a good legal instrument for defendants to have claims dismissed and thereby keeping the floodgates of liability shut. However, in our current globalizing world (multinational) companies are confronted with causation requirements that differ from country to country and, at least within the Netherlands, even within countries, depending on the factual situation. In the Netherlands the traditional requirement of condicio sine qua non (CSQN) to establish liability has been relaxed to a large degree, as will be shown below, with case law making exceptions to the rule on a case by case basis.2 As we will also show, a justification or ‘leitmotiv’ that firmly underpins these exceptions is lacking. Since there is as yet no ‘one-size-fits-all EU causation’ either, a company that has its business in more (European) countries is faced with different types of causation requirements per country and sometimes even within a country. This means that the causation requirement has lost a great deal of its attractiveness for defendants over the years. 1

2

This article draws in part on earlier work(s) by the authors. Most notably, some of the parts hereafter on (proof of) causation in sections 7.2, 7.3 and 7.4 are based on R. Rijnhout & I Giesen, The Netherlands, in M. Infantino et al. (eds.): Causation. Common Core Project, to be published in the autumn of 2017; I. Giesen & E. Engelhard, Medical liability in the Netherlands, in: Koch (ed.), Medical Liability in Europe, Berlin 2011, and I. Giesen, R. Kool & F. Kristen, The Dutch Crush on Compensating Victims, in: M. Dyson (ed.), Comparing Tort and Crime, CUP: Cambridge 2015, pp. 355-358. The same holds true, no doubt, for other European countries, but in this contribution there is no room to engage in a comparative analysis. For a comparative overview see e.g. S. Steel, Proof of causation in tort law, Cambridge: Cambridge University Press 2015. See e.g. for English law, S. Steele, Justifying Exceptions to Proof of Causation in Tort Law (2015) 78(5) MLR 729-758. For American law see i.e. K.N. Hylton, Tort Law A Modern Perspective, Cambridge: Cambridge University Press 2016, chapters 11 and 12. See for a comparative overview of proportional liability, I. Gilead et al. (eds.), Proportional liability: analytical and comparative perspectives, Vienna: De Gruyter 2013.

83

Ivo Giesen & Rianka Rijnhout 7.1.2

Main question and structure

The main aim of this contribution in honour of Adriaan Dorresteijn is to show the lack of a general and broad justification, a ‘leitmotiv’ if you will, for (most of the individual) changes in the causation requirement that facilitate the establishment of liability under Dutch tort law in this modern day and age. This lack of an overarching justification for a relaxation of the causation requirement has led, we think, to a rather scattered landscape of in fact different causation demands per type of claim, differing from topic to topic, from subfield to subfield. As it turns out, there is no longer a generally applicable causation requirement in tort law in the Netherlands; per type of case different rules and exceptions have been accepted. The consequence is that legal uncertainty for businesses, especially those operating in different countries, has grown considerably, to the detriment of those businesses. Hereafter, we will show that the Dutch concept of causality differs on a case by case basis, both from a substantive and from a more procedural (evidence) angle (sections 7.2 and 7.3). In section 7.4 we will give two examples of questions of CSQN being reframed as questions of damage. We will round off this contribution with some conclusions (section 7.5).

7.2

Causality under Dutch law: A Dutch overall concept of causation is hard to find

7.2.1

General rule

The general rule of causation in the Netherlands consists of two stages. First, to establish liability a condicio sine qua non between the alleged wrongful behaviour and damage should be proven (factual causality). In principle the plaintiff has the burden of proof, and needs to convince the defendant or judge that a CSQN exists to ‘a reasonable degree of certainty’ (see section 7.3 below). Second, although the criterion of CSQN is the entry test for liability, in the second stage it should be determined whether there is a sufficient causal connection between the damage and the circumstance(s) that caused the damage, and that as a consequence the damage could reasonably be attributed to the tortfeasor (Article 6:98 CC; legal or normative causality).3 Thus, the second stage aims at limiting liability even more. It is the tortfeasor who should argue that there is an insufficient causal connection between the damage and the circumstances that caused the damage.4

3 4

C.J.M. Klaassen, Schadevergoeding: algemeen, II (Mon. BW B35), Deventer: Kluwer, 2007, no. 32. HR 2 October 1998, Nederlandse Jurisprudentie (NJ) 1998/831. A.S. Hartkamp and C.H. Sieburgh, Mr. C. Assers Handleiding tot de beoefening van het Nederlands burgerlijk recht. 6. Verbintenissenrecht, II, De verbintenis in het algemeen, Deventer: Kluwer 2013, no. 82.

84

7 Changing the Causation Requirement and Its Impact on Companies Faced with Tort Claims Article 6:98 CC embodies the question of legal causality. Several factors are used to answer this question5: the foreseeability of the damage; the remoteness of the damage; the blameworthiness of the damaging event; whether the harm was inflicted in the course of a business undertaking or by a private party; the nature of the norm infringed; and the nature of the damage caused (personal injury vs. purely financial loss).6 Although legal causality aims at limiting liability, it is also used in several cases to justify exceptions to the bare minimum of CSQN. Some of these are dealt with hereafter.

7.2.2

Subsequent wrongdoing: hypothetical causation

The first generally accepted exception to the CSQN requirement is accepted in the case of subsequent events, i.e. when a subsequent event would have led to the same damage as that caused by the defendant, had the defendant’s act not occurred. Two hypothetical situations exist. First, two persons wrongfully cause damage to the plaintiff simultaneously. It is generally accepted that in this situation both tortfeasors are responsible and one of them cannot argue that a CQSN does not exist because the other party caused the damage.7 The second hypothetical situation is when the damaging events do not occur at the same time, but subsequently in time. However, both events could have resulted in the same result, namely the damage suffered by the plaintiff. It could be argued that, because of the second damaging event, a CSQN connection between the behaviour of the first tortfeasor and the damage ceases to exist. However, this line of reasoning is not accepted under Dutch law. This situation is considered to be an instance of hypothetical causation for which an exception to the strict interpretation of CSQN is accepted. As a rule, the first tortfeasor (chronologically the person who first caused the damage) is liable for all the damage that occurred. The rationale of this rule is that the plaintiff should not bear the risk of the non-liquidity of the second tortfeasor, or of the fact that no one is liable for the second event that (again) caused the damage.8 Sieburgh argues that the requirement of legal causality demonstrates the reason for its existence especially in these types of cases, by allowing a causal connection to be accepted whilst, strictly speaking, a CSQN does not exist.9 This reasoning also shows that, due to reasons of reasonableness, the first stage of

5

6 7 8 9

This part is based on I. Giesen and A.L.M. Keirse, ‘The Netherlands’, in H. Koziol and B.C. Steininger (eds.), European Tort Law 2010, Berlin-Boston: de Gruyter 2011, p. 445-6. See also the so-called ‘Brunner rules’, C.J.H. Brunner, ‘Causaliteit en toerekening van schade’, Verkeersrecht (VR) 1981, p. 210, 213; Asser/Hartkamp en Sieburgh, Verbintenissenrecht 6-II (2013), no. 57-73. See Giesen and Keirse, ‘The Netherlands’, p. 445-446. Asser/Hartkamp & Sieburgh, Verbintenissenrecht 6-II (2013), no. 87. HR 7 December 2001, NJ 2002/576, comm. J.B.M. Vranken (Gemeente Leeuwarden/Loss), no. 3.4. Asser/Hartkamp & Sieburgh, Verbintenissenrecht 6-II (2013), no. 87.

85

Ivo Giesen & Rianka Rijnhout establishing causality, CSQN, is not the bare minimum but a criterion which in some cases is decisive and in others is not. An exception to the rule of hypothetical causality is made when the plaintiff’s damage is of a continuous nature and the second event falls within the plaintiff’s sphere of risk.10 The rationale of this rule, according to the Supreme Court in the case of Vermaas/Staat, is that: ‘the obligation to compensate damage as a consequence of an accident does not go as far as the situation in which the tortfeasor should preserve the plaintiff from damage that would have fallen within his sphere of risk had the accident not occurred.’11 An example of a situation which falls within the plaintiff’s sphere of risk is when he commits a criminal offence, or the plaintiff’s shop remains open whilst licences were suspended.12 This reasoning of course explains why the first tortfeasor (in time) should be responsible: however, it has been questioned why the second tortfeasor should not be obliged to pay damages. The main argument against this is that he did not cause the damage, because the damage was already there. However, as Van Boom argues, the essence of hypothetical causality is to pretend that the other cause does not exist.13 Hence, why is it allowed to pretend that the second cause never occurred and not to think away the first cause? Holding the second tortfeasor responsible could lead to unjustifiable outcomes due to, to him, unforeseeable damage, but liability law is equipped with other instruments to resolve that problem.14 Additionally, the justification for accepting hypothetical causality with regard to the first tortfeasor, as outlined above, could partly be followed in accepting full liability in the second event: why should the plaintiff bear the risk of the non-liquidity of the first tortfeasor? An argument against this reasoning is, however, that the first damaging event could be an event for which liability does not exist, and although the 10 HR 2 February 1990, NJ 1991/292, comm. C.J.H. Brunner (Vermaas/Staat); HR 7 December 2001, NJ 2002/576, comm. J.B.M. Vranken (Gemeente Leeuwarden/Loss), no. 3.4. Repeated by the Supreme Court: HR 23 December 2011, NJ 2012/377, comm. P. van Schilgaarde (V. & P./De Nederlandse Bank N.V. & Stichting AFM). See also A.J. Akkermans, ‘Oorzakelijk verband’, in Onrechtmatige daad BW-Krant Jaarboek 1996, Deventer: Gouda Quint, 1996, p. 49; Asser/Hartkamp & Sieburgh, Verbintenissenrecht 6-II (2013), no. 90; Klaassen, Schadevergoeding, p. 36-39. 11 HR 2 February 1990, NJ 1991/292, comm. C.J.H. Brunner (Vermaat/Staat), no. 3.3. 12 HR 23 December 2011, NJ 2012/377, comm. P. van Schilgaarde (V. & P./De Nederlandse Bank N.V. & Stichting AFM); comm. J.B.M. Vranken under HR 7 December 2001, NJ 2002/576 (Gemeente Leeuwarden/Loss), no. 6. 13 W.H. van Boom, ‘Meervoudige oorzaken, hoofdelijke aansprakelijkheid en toerekening naar redelijkheid’, in: Causaliteit, The Hague: Vermande 2003, p. 7. 14 Van Boom, ‘Meervoudige oorzaken, hoofdelijke aansprakelijkheid en toerekening naar redelijkheid’, p. 7-8.

86

7 Changing the Causation Requirement and Its Impact on Companies Faced with Tort Claims other way around this is an argument for accepting the liability of the first tortfeasor, precisely this possibility weakens the argument that the person who is responsible for the second event should be fully responsible. Why should a person who wrongfully sets fire to an already destroyed house (due to an earthquake, and thus not a man-made event) be responsible for repairing the house? We could argue that the principle of reasonableness could again resolve this unjustifiable outcome, but that would not add to our search for one leitmotiv to justify exceptions to the CSQN requirement. Indeed, it would underpin the idea that causality seems to be accepted or denied on a case by case basis.

7.2.3

Joint wrongdoing results in damage: joint and several liability

A second situation that is illustrative of exceptions to the rule of CSQN is when so-called samenlopende oorzaken, joint causes, occur: factor A and B together caused the damage, and both tortfeasors acted wrongfully or wrongfully neglected their duty of care. However, the occurrence of one factor is, in itself, not sufficient for a CSQN to exist between the damage and the factor. In other words, both factors were essential in causing the damage. In this case, it is generally accepted that both the persons responsible for factor A and B respectively are jointly and severally responsible, when they have together caused the same damage (Article 6:102 CC).15 An exception will, however, be made when the fault of the second tortfeasor is so much worse, when compared to the fault of the first tortfeasor, that this second fault cannot reasonably be attributed to the first tortfeasor. This is due to the fact that the second fault was an unforeseen consequence of the behaviour that led to the first fault and the second fault does not fall within the sphere of risk of the first tortfeasor.16 Again, the facts of the case give rise to an exception to the CSQN criterion, which in essence is justified by the idea that the plaintiff should not be responsible for damage that is wrongfully inflicted, but is in essence caused by two tortfeasors.

7.2.4

Wrongdoing contributes to damage: partial liability

Another type of joint wrongdoing, however, results in partial liability. That is the case when the defendant could not have caused all the damage but merely contributed to the damage.17 In other words, all tortfeasors together partially created the damage. The pre15 HR 24 December 1999, NJ 2000/351, comm. C.J.H. Brunner (Van Nugteren/Meskes). See also Akkermans, ‘Oorzakelijk verband’, 47; Asser/Hartkamp & Sieburgh, Verbintenissenrecht 6-II (2013), no. 86; Klaassen, Schadevergoeding, p. 35; Van Boom, ‘Meervoudige oorzaken, hoofdelijke aansprakelijkheid en toerekening naar redelijkheid’, p 92-93. 16 HR 25 September 1992, NJ 1992/751 (Alpuro/Dijkhuizen), no. 3.3. See Asser/Hartkamp & Sieburgh, Verbintenissenrecht 6-II (2013), no. 86; Klaassen, Schadevergoeding, p. 35. 17 See A.J. Akkermans, Proportionele aansprakelijkheid bij onzeker causaal verband (diss. Tilburg), Deventer: W.E.J. Tjeenk Willink 1997, p. 74-76.

87

Ivo Giesen & Rianka Rijnhout vailing view in this matter is that the defendant should be held liable for the part of the damage for which he is responsible (partial liability).18 An example of a Supreme Court decision in this regard is the Kalimijnen case. MDPA, a French company, had wrongfully drained off salt into the Rhine. The plaintiff, a Dutch farmer, who used underground water to irrigate his crops, suffered damage because of the high quantity of salt in the Rhine. That high quantity of salt was caused by both the behaviour of MDPA and by the large quantity of saltwater fish in local waters. The plaintiff claimed compensation for the cost of limiting and preventing his damage. The Supreme Court ruled that considering the fact that the plaintiff had to incur expenses in limiting or preventing his damage because of both the behaviour of MDPA and the large quantity of saltwater fish in local waters, and the linear connection between the amount of salt and the quality of the crops respectively, MDPA should partially compensate the plaintiff for the damage. According to the Supreme Court, damages should be a reflection of the extent to which MDPA contributed to the total quantity of salt by wrongfully draining off (‘its’) salt.19

7.2.5

Wrongdoing perhaps caused damage: proportional liability

Another exception to the requirement of CSQN is made for situations in which more than one cause could explain the damage which occurred, but only for one possible cause does the legal responsibility of the defendant exist. This rather recently20 accepted exception is the idea of proportional liability, which implies that damages are awarded in accordance with the degree (the chance or possibility) to which the defendant has in fact caused the damage. Hence, the theory of proportional liability is a mechanism to cope with uncertain causation,21 and aims at fairly distributing the problems of evidence that stem from such uncertainty. However, it is uncertain to what extent this theory may be applied, which will be illustrated by the three Supreme Court decisions which we will deal with here.

18 Akkermans, Proportionele aansprakelijkheid, p. 76-77; Asser/Hartkamp & Sieburg, Verbintenissenrecht 6-II (2013), no. 95-96. See e.g. on the European Union’s principle of the polluter pays, P.E. Lindhout & B. van den Broek, ‘The polluter pays principle: Guidelines for costs recovery and burden sharing in the case law of the European Union‘, Utrecht Law Review 2014, vol. 10-2, p. 46-59. 19 HR 23 September 1988, NJ 1989/743, comm. J.C. Schultsz and J.H. Nieuwenhuis (Kalimijnen), no. 3.5.1. 20 HR 31 March 2006, ECLI:NL:PHR:2006:AU6092, NJ 2011/250, comm. T.F.E. Tjong Tjin Tai (Nefalit/Karamus). 21 The theory could be seen as an exception to the rule that there must be a CSQN between someone’s wrongful act and the damage suffered by the plaintiff.

88

7 Changing the Causation Requirement and Its Impact on Companies Faced with Tort Claims The theory of proportional liability was accepted in the case of Nefalit/Karamus.22 The judgement is a clear illustration of how the Dutch Supreme Court – mostly based on a general notion of fairness, given the contractual relationship between an employer and an employee – has dealt with evidentiary problems that arise due to causation and uncertainty. A former employee who had worked with asbestos claimed damages because of the fact that he suffered from lung cancer. One difficulty existed: the CSQN between the damage as a result of cancer and the wrongful act of the employer (Article 7:658 CC) could not be established. The cause of the lung cancer could have been the inhaling of asbestos dust, but could also have been the fact that the plaintiff was a heavy smoker; but the cancer could also have been due to genetic factors. In other words, there was uncertainty about the existence and extent of causation. The Supreme Court decided in general that if there is a very small chance that the damage to the plaintiff’s health has been caused by the wrongful act of the defendant, his claim should be denied. However, when that chance is very high, the claim should be allowed. As regards the ‘grey area’ – neither a very small nor a very high possibility – the Supreme Court decided that, considering the rationale of the norm which was breached (to prevent damage to the health of employees and the nature of the wrongful act), it would be contrary to reasonableness and fairness to either leave the risk on the side of the employee, or on the side of the employer. The Supreme Court decided that ‘also in view of the starting points that underlie Articles 6:99 and 6:101 CC, it has to be accepted that, when an employee suffers damage that, considering the possibilities in percentage terms, could have been suffered both because of the wrongful act of his employer and his duty to protect the health of his employees, and because of circumstances that could be attributed to the employee himself, without the possibility of ascertaining how far the damage is a consequence of one of these circumstances, the judge could allow the claim by the employee; however, damages should then be decreased in proportion to (and with a reasoned estimation) the extent to which the circumstances that increased the damage should be attributed to the plaintiff.’23 In other words, under certain circumstances a judge can decide to hold the defendant partly liable, that is, for the part for which he (on the basis of a probability calculation) in fact could be responsible but not with regard to the circumstances that fall within the plaintiff’s sphere of risk. Thus, the defendant could be held proportionally liable for the damage to the plaintiff in the course of the establishment of liability; the proportionality rule does not extend to the assessment of damages (see Article 6:98 CC). 22 HR 31 March 2006, ECLI:NL:PHR:2006:AU6092, NJ 2011/250, comm. T.F.E. Tjong Tjin Tai (Nefalit/Karamus), no. 3.13. 23 HR 31 March 2006, ECLI:NL:PHR:2006:AU6092, NJ 2011/250, comm. T.F.E. Tjong Tjin Tai (Nefalit/Karamus), no. 3.13.

89

Ivo Giesen & Rianka Rijnhout After the ruling in Nefalit/Karamus it was questioned to what extent the theory of proportional liability could be used to resolve problems of CSQN. The second decision of the Supreme Court, Fortis/Bourgonje, shed some light on this matter.24 The first question that arose was to which kind of risks (in this case financial risks) the theory could be applied. The Supreme Court decided that this theory could not be generally accepted throughout liability law in its entirety. Also, the judge should exercise restraint with regard to applying the rule of proportional liability, and if he does apply this rule he should justify his decision according to the rationale of the norm which is breached, the nature of the wrongful act, and the nature of the damage suffered. However, the theory of proportional liability should not be limited, according to the Supreme Court, to cases similar to the aforementioned case of Nefalit/Karamus. In general, the Supreme Court decided that: ‘[A judge can choose to hold the defendant proportionally liable] especially when the liability [the wrong] of the tortfeasor is definite, the possibility of a CSQN between the wrong and the damage is not very small, and the rationale of the norm breached, and the nature of the wrongful act, justify the application of proportional liability.’25 In the case of Fortis/Bourgonje itself the Supreme Court declined to apply proportional liability, because it concerned the duty of an asset manager to warn his client, and the rationale of this duty – this legal norm – is (merely) to prevent financial loss. Furthermore, the Supreme Court ruled that the possibility that the client in this specific instance would in fact have listened to a warning given by the bank and that he would have sold his shares – after a lock-in period – in due time, would not have been very great.26 The reasoning in Fortis/Bourgonje has been criticized in Dutch academic literature, because, considering the importance of the question of whether an exemption to the rule of CSQN can be made, it is not very clear under which circumstances the theory of proportional liability can and should be applied and – all the more important – on what justification (except ‘fairness’ in general) it could then be based.27 In the case of NationaleNederlanden/S.&L the Dutch Supreme Court cleared up some of the fog surrounding the

24 HR 24 December 2010, ECLI:NL:HR:2010:BO1799, NJ 2011/251, comm. T.F.E. Tjong Tjin Tai (Fortis/Bourgonje). 25 HR 24 December 2010, ECLI:NL:HR:2010:BO1799, NJ 2011/251, comm. T.F.E. Tjong Tjin Tai (Fortis/Bourgonje), no. 3.8. 26 HR 24 December 2010, ECLI:NL:HR:2010:BO1799, NJ 2011/251, comm. T.F.E. Tjong Tjin Tai (Fortis/Bourgonje), no. 3.10. 27 See I. Giesen, ‘(Dis)Proportionele duidelijkheid’, NTBR 2011, no. 19, p. 149-150; S.D. Lindenbergh & S.B. Pape, ‘Proportionele aansprakelijkheid bij onzeker causaal verband: deel 2’, AA 2011, p. 720-725.

90

7 Changing the Causation Requirement and Its Impact on Companies Faced with Tort Claims question regarding the interpretation of the factor of the nature of the norm that has been breached. In that particular case a so-called traffic norm, a rule aimed to prevent people from being injured, was breached. The Supreme Court decided in this case that the theory of proportional liability could be applied.28

7.2.6

Intermediate conclusion: establishing causality on a case by case basis

Since the exceptions to CSQN which we have dealt with can be justified in each individual setting and on a case by case basis, as they are mostly underpinned by the notion of reasonableness, we cannot but face the conclusion that the CSQN requirement as such is not, or perhaps not at all (?), decisive for establishing causality. Although some exceptions are certainly accepted, e.g. cases of joint causes or hypothetical causation, other solutions are of course still being questioned, or are bestowed with a judicial warning that reluctance in its use is required (e.g. proportional liability). This cannot be explained by the degree to which CSQN does exist or not, because that is a question of either yes or no. We can only guess at the reasons for this difference in reception, but perhaps it is just a matter of time: hypothetical causation has been well established for many years while proportional liability is of a more recent date.

7.3

7.3.1

The former Dutch concept for proof of causation is now ‘missing in action’

General rules on the standard and burden of proof as regards causation

Factual uncertainty about what actually caused what damage is bound to lead not only to fierce debates about causation as such (see section 7.2 above), but also to difficult evidential questions as regards causation, especially when it comes to (finding) the required CSQN connection between the established wrongdoing and the damage that ensued. In particular, questions relating to the burden and standard of proof as well as the possible use of presumptions will arise here. In general, a plaintiff will bear the burden of having to prove, to the required standard of proof, that there was indeed a causal connection between the unlawful act and the damage complained of (Article 150 Code of Civil Procedure CCP). The standard of proof in Dutch civil cases refers to the extent or degree of certainty or probability that the evidence adduced by the litigants must generate in the mind of the judge when deciding an issue of 28 HR 14 December 2012, ECLI:NL:HR:2012:BX8349, NJ 2013/236, comm. S.D. Lindenbergh (Nationale Nederlanden/S.&L.).

91

Ivo Giesen & Rianka Rijnhout fact.29 If the required degree is reached, the court can say that it is convinced of the ‘truth’ of a certain factual proposition and decide the case accordingly. Included in the foregoing description is the notion that in principle, but with exceptions, the courts in the Netherlands are free to attach their own weight to different pieces of evidence. Whether they believe an eyewitness or not, to give one example, is at their discretion. Related to that notion is the starting point that the standard of proof is decided according to the weight that the judge in question decides to give to the evidence. It is thus in principle a subjective judgment, but one which is subject to at least some ‘objective review’ by the judge’s obligation to give reasons for his decision.30 As to the degree or extent of the evidence required to pass the standard of proof hurdle in a civil claim, this is put at ‘a reasonable degree of certainty’. It is also noteworthy that this standard of proof can vary according to the type of case that is being dealt with. In line with that, the Dutch courts lower the standard in so-called kort geding procedures. These are very expeditious preliminary proceedings, issued at short notice before a single judge, based mainly on oral arguments, in cases where a speedy decision is needed due to the nature of what is at stake. There, the standard is lowered to aannemelijkheid: ‘is it more likely than not?’.31 Thus, the standard of proof can in fact be varied. For possible reasons why demanding more evidence might be unjustified, one can refer to the general justifications for a court to accept a reversal of the burden of proof. For example, one party has in fact caused the evidentiary problems of the opposing party, or there is a substantive justification such as the need for the law to protect employees against employers to a certain extent.32 The standard of proof is also of great influence on the burden of proof; this standard will affect the extent to which the concept of the burden of proof determines the final outcome of a case. If a court is convinced of the existence of a certain fact, the required evidence apparently has been brought forward, allowing the judge to decide the matter accordingly. The risks associated with the burden of proof are then no longer at stake: it would be impossible to have a so-called non liquet situation, the situation in which the fact that needed to be proven has not been proven according to the standard of proof which is applicable.33 From this it follows that if the required standard of proof were to be lowered, the degree of evidence necessary to reach the standard would also be lower, making it less likely that the burden of proof will be decisive in that case at hand.34

29 30 31 32 33 34

See I. Giesen, Bewijs en aansprakelijkheid (diss. Tilburg), The Hague: BJu 2001, p. 50. For details, see Giesen, Bewijs en aansprakelijkheid, p. 53-55. See Giesen, Bewijs en aansprakelijkheid, p. 56. For an elaboration, see Giesen, Bewijs en aansprakelijkheid, p. 475 and 477. See for instance G. Baumgärtel, Beweislastpraxis im Privatrecht, Berlin: Heymanns 1996, no. 377. Giesen, Bewijs en aansprakelijkheid, p. 476; C. Bumberger, Zum Kausalitätsbeweis im Haftpflichtrecht, Linz: Trauner Verlag 2003, p. 42.

92

7 Changing the Causation Requirement and Its Impact on Companies Faced with Tort Claims When considering these rules on the standard of proof, one must however be aware that there might be other mechanisms to compensate for a difficult procedural position of one of the parties. For instance, it might be that the burden of proof can be shifted between the parties (a so-called reversal of the burden of proof stricto sensu). Other private law mechanisms that could be used in just about any case where evidentiary problems arise include presumptions of fact, including res ipsa loquitur (see section 7.3.5) and, as already alluded to, a lowering of the standard of proof.35 These mechanisms are also of use when dealing with evidentiary issues that arise due to uncertainties about causation, as will be illustrated below.

7.3.2

The DES rule on alternative causation

In Dutch law some noticeable exceptions have been created by the Supreme Court. A first landmark case that attracted some fame also outside of the Netherlands is the Dutch case of the DES daughters.36 Here, causal uncertainty led to difficulties for the plaintiffs. Several manufacturers had brought a similar pharmaceutical product onto the market, the DES drug; these drugs all had similar, cancerous side-effects, not so much for the pregnant women taking the pills but for their soon to be born daughters. The plaintiffs in the DES case were thus the daughters of the women who had bought and used the pharmaceutical product. However, these ‘DES daughters’ could not prove which manufacturer supplied their respective mothers with the products, and therefore they could not prove a CSQN between the damage and the wrongful act of the – or rather one of the – manufacturer(s). In this case, the Dutch Supreme Court decided that the DES daughters could claim damages in full from one manufacturer that could have caused all the damage to the plaintiffs.37 The Supreme Court was called upon to decide the case under the former Civil Code, and no rule to solve this CSQN problem was laid down in that code. The Supreme Court however decided that the new (and current) Art. 6:99 CC was already substantive law at the time the facts of the case took place.38 According to this standard, if two or more wrongful acts may have caused the damage, but it is unclear which of the alternative causes did, in fact, cause the damage, then each responsible actor is liable in full unless 35 See I. Giesen, ‘The burden of proof and other procedural devices in tort law’, in H. Koziol and B.S. Steiniger (eds.), European Tort Law 2008, Springer: Vienna 2009. 36 HR 9 October 1992, ECLI:NL:HR:1992:ZC0706, NJ 1994/286 comm. C.J.H. Brunner (DES). On that case, see e.g. W. van Gerven, Tort law, Oxford: Hart Publishers 2000, p. 447-452; W.H. van Boom, I. Giesen, in: B. Winiger, H. Koziol, B.Z. Koch, R. Zimmernan, Digest of European Tort Law, Vol 1.: Essential Cases on Natural Causation, Vienna/New York: Springer 2007. 37 The Supreme Court did not accept the theory of market share liability, HR 9 October 1992, NJ 1994/535 note C.J.H. Brunner (DES), no. 3.8. 38 HR 9 October 1992, ECLI:NL:HR:1992:ZC0706, NJ 1994/286 comm. C.J.H. Brunner (DES), no. 3.4.

93

Ivo Giesen & Rianka Rijnhout he can prove that his act did not cause the damage.39 The rationale of this shift in the burden of proof seems to be the idea that it is unfair that the plaintiff should bear the risk of the impossibility of proving which of several defendants’ wrongful behaviour caused the damage.40 The Supreme Court even decided that a defendant (who has in fact acted wrongfully) was liable in full when the possibility existed that the plaintiff suffered damage because of taking DES which had been produced by another manufacturer which had not acted wrongfully.41

7.3.3

The so-called ‘reversal rule’

A second possible exception to the regular division of the burden of proof is to accept a reversal of that burden of proof as regards that CSQN element. Ever since the famous 1996 judgment in the professional liability case of Dicky Trading II,42 the Supreme Court has decided cases on the division of the burden of proof in a manner which is contrary to the general burden of proof rule as laid down in Article 150 CCP. This burden of proof then does not rest on the claimant, but on the defendant. This rule is particularly relevant where traffic rules or safety regulations or other protective measures have not been followed, for instance in cases of traffic accidents or work-related accidents.43 Think also of cases of omissions to inform or to warn someone else against the potential dangers of a certain act.44 In such situations, the question arises whether the person who should have been given the information or should have been warned would have acted differently if (s)he had received the information or warning. If (s)he would not have acted differently, the omission to warn that person did not cause the damage. This is of course a difficult

39 The Dutch Supreme Court also applied the DES rule in an environmental tort case (HR 17 January 1997, ECLI:NL:HR:1997:ZC2247 NJ 1997/230) and in a tort case concerning property damage (HR 31 January 2003, ECLI:NL:PHR:2003:AF1301NJ 2003/346). 40 C.J. van Zeben, J.W. Du Pon & M.M. Olthof, Parlementaire Geschiedenis van het Nieuwe Burgerlijk Wetboek. Boek 6. Algemeen gedeelte van het verbintenissenrecht, Deventer: Wolters Kluwer 1981), p. 346. The Supreme Court also decided that this also applies when the plaintiff is unable to name all the possible tortfeasors: HR 9 October 1992, NJ 1994/535, comm. C.J.H. Brunner (DES), no. 3.7.4. 41 HR 9 October 1992, ECLI:NL:HR:1992:ZC0706, NJ 1994/286 comm. C.J.H. Brunner (DES), no. 3.7.6. An exception should be made when there is a good chance that the damage to the plaintiff has been caused by taking Des of another manufacturer which did not act wrongfully. The burden of proof rests with the defendant, however. 42 HR 26 January 1996, ECLI:NL:HR:1996:ZC1976, NJ 1996/607 (Dicky Trading II). 43 See I. Giesen, ‘De aantrekkingskracht van Loreley. Over opkomst en ondergang (?) van de ‘omkeringsregel’’, in T. Hartlief and S.D. Lindenbergh, Tien pennenstreken over personenschade, The Hague: Sdu 2009, p 6986. 44 There is a vast amount of literature on this, see e.g. I. Giesen, Bewijslastverdeling bij beroepsaansprakelijkheid, Deventer: Wolters Kluwer 1999, p. 66; A.J. Akkermans, De omkeringsregel bij het bewijs van causaal verband, The Hague: BJu 2002; D.T. Boks, Notariële aansprakelijkheid: enige aspecten van de civielrechtelijke aansprakelijkheid van de notaris, Deventer: Wolters Kluwer 2002, p. 211.

94

7 Changing the Causation Requirement and Its Impact on Companies Faced with Tort Claims (factual) question to answer because it enquires about someone’s hypothetical state of mind in the past, which is something that cannot be proven. The precise extent and ambit of this ‘omkeringsregel’ (the ‘reversal rule’) as it has been dubbed, is still not exactly settled, and neither is its underlying justification since the Supreme Court never alluded to this, except for invoking the fairness of its consequences.45 The rule has nevertheless gained a great deal of importance and has triggered a lot of litigation. During the last couple of years the Supreme Court has limited the instances in which this burden of proof rule might be applicable. Nowadays, before the rule can be applied, it needs to be proven by the claimant that a certain specific risk of damage was created or enlarged by the wrongful behaviour of the defendant and that this specific risk has in fact materialized.46 In 2012 the Supreme Court again decided on the range of applicability of this ‘reversal rule’, by holding that: ‘in order to apply this rule it is required that the defendant’s behaviour infringed a norm that aims at preventing a specific danger with regard to causing damage, and that the person who refers to this norm, makes it plausible, also in the case of argument, that in his specific case the danger that the norm aims to prevent has nevertheless been realized.’47 Beware also, when using this rule, that a ‘shift’ of the burden of proof under Dutch law in this sense does not mean a shifting of the ‘legal’ burden, but rather that of the ‘evidential’ burden. That is, the burden of proof actually does not change, it only denotes that, for the time being, that burden has been discharged. It is then for the opposite side, similar to the situation where a presumption of fact is accepted, to come forward with evidence to rebut that provisional judgment.48 This rule as regards the possible ‘shifting’ of the (evidentiary) burden of proof has had a tempestuous past.49 It seems, however, as if nowadays the rule is limited to the situation

45 On that aspect, see HR 29 November 2002, ECLI:NL:PHR:2002:AE7345, NJ 2004/304 (TFS/NS) and HR 29 November 2002, ECLI:NL:PHR:2002:AE7351, NJ 2004/305 (Kastelijn/Achterkarspelen). 46 HR 29 November 2002, ECLI:NL:PHR:2002:AE7345, NJ 2004/304 (TFS/NS) and HR 29 November 2002, ECLI:NL:PHR:2002:AE7351, NJ 2004/305 (Kastelijn/Achterkarspelen) and on these important cases e.g. T. Hartlief, ‘Causaliteitsonzekerheid. Opkomst en ondergang van de ‘omkeringsregel’?’, AA 2003, p. 298–306; G.R. Rutgers, ‘De omkeringsregel’ en de redelijkheid en billijkheid’, AA 2003, p. 307–313. 47 HR 23 November 2012, ECLI:NL:HR:2012:BX7264, NJ 2012/669 (Erven van A./B. & C.), no. 3.7. 48 I. Giesen, ‘The burden of proof and other procedural devices in tort law’, p. 56. See also HR 23 November 2012, ECLI:NL:HR:2012:BX7264, NJ 2012/669 (Erven van A./B. & C.). 49 I. Giesen, ‘De aantrekkingskracht van Loreley. Over opkomst en ondergang (?) van de ‘omkeringsregel’’, p. 69-86. See also A.J.P. Schild, ‘Het ‘conditio sine qua non’-verband bij de schending van een zorgvuldigheidsverplichting: enige wegen naar Rome’, Rechtsgeleerd Magazijn THEMIS 2009-6, p. 257.

95

Ivo Giesen & Rianka Rijnhout in which a safety or traffic norm has been infringed.50 This does not mean, though, that a judge cannot use other procedural devices to lessen the burden of proof that falls on the claimant, such as a presumption. Also, the theory of proportional liability (see below) can be used to solve the difficulty as regards proving a CSQN that arises due to uncertainties about causation.

7.3.4

Presumptions in financial cases

For another mechanism we need to point to the decision in the World online case. The Supreme Court decided in that case that in principle the burden of proof falls on the investor whose investment has gone bad due to misleading statements by the CEO of the stock issuing company. However, providing such evidence will be problematic (due to causation uncertainty), as the Supreme Court stated, and this would lead to a situation where the protection that the EU prospectus guidelines aim at would become illusionary.51 Giving due weight to ‘effective legal enforcement’ is thus the key notion here. In light of this starting point of effective protection that should be attached to these European rules by means of national law, the Supreme Court decided to introduce a presumption of a CSQN between the misrepresentation and the damage. In other words, as Pijls and Van Boom rightly pointed out, the Supreme Court did not decide to shift the burden of proof in the strict sense of the phrase (‘het bewijsrisico’), but simply presumed that a CSQN is present and placed the onus of having to adduce counterevidence (the ‘evidentiary burden’) on the shoulders of the defendant.52 However, when the defendant succeeds in raising doubts regarding the presence of a CSQN between the breach of duty and the damage (i.e. the judge starts to doubt this presumption, prima facie), then the plaintiff should again prove that a CSQN is indeed present. This line of reasoning could be applied when the investor claims damages under Article 6:193c CC (in conjunction with Article 6:162 CC), but probably also when the claim is made under EU Regulation No. 462/2013 (liability of credit rating agencies), because the EU introduced this regulation to protect parties against unfair ratings and this protection would also become illusionary when the CQSN is not presumed. ‘Fairness’ as a justification for new rulings on causation seems to have thus received a somewhat narrower

50 I. Giesen, ‘De aantrekkingskracht van Loreley. Over opkomst en ondergang (?) van de ‘omkeringsregel’’, p. 80; A.J. Akkermans and C.H. van Dijk, ‘Proportionele aansprakelijkheid, omkeringsregel, bewijslastverlichting en eigen schuld: een inventarisatie van de stand van zaken’, AV&S 2012, no. 17, p. 157-77. 51 HR 27 November 2009, ECL:NL:HR:2009:BH2162, RvdW 2009/1403, no. 4.11.1. 52 A.C.W. Pijls and W.H. van Boom, ‘Handhaving van prospectusaansprakelijkheid niet illusoir: vermoeden van causaal verband bij prospectusaansprakelijkheid’, WPNR 2010, p. 195-196.

96

7 Changing the Causation Requirement and Its Impact on Companies Faced with Tort Claims interpretation through the notion of effective legal enforcement, i.e. making sure that the legal norm will be lived up to by providing a legal sanction when it is not.

7.3.5

Presumptions of fact; res ipsa loquitur

So far, we have not yet mentioned nor dealt with the use of ‘regular’ presumptions of fact, i.e. the kind of presumptions that any given court has at its disposal in any given case, and we have not done so for that very reason. In any case, if a court finds enough weight in a certain fact to presume the presence of another fact, i.e. the fact that actually needs to be proven, a presumption to that effect may be used, leading to a shift of the evidentiary burden of proof, as explained earlier. Since this is in no way special to the causation requirement in tort cases but a general evidentiary notion,53 we will not delve any further into this matter now, except for mentioning that this presumption might sometimes also be labelled as the maxim of res ipsa loquitur, the ‘case speaks for itself’.54 7.3.6

Intermediate conclusion: the worrying effect of a missing justification

In this third section, we have dealt with the general rules as well as the most noticeable exceptions to the burden and the standard of proof when it comes to causation issues under Dutch law.55 What we take away from this overview is, firstly, that there are in fact several exceptions to the main rules. Apparently, the need is felt quite often in Dutch case law to provide the (admittedly usually deserving) plaintiffs with some form of help to get some form of legal redress in the civil court. Of course, as a downside, these help lines put the defendant companies quite often at a (sometimes even big) disadvantage, if viewed from the perspective of the general rules of evidence law as they are still in place. Secondly, although there are – we think – good justifications for this course of action, the cases that actually take a stand and that provide solace to plaintiffs most often do so without really providing for an explanation and/or justification. We have seen many references to ‘fairness’ instead of concrete arguments being used. This is, thirdly, albeit understandable to a large extent (in fact: how should one further justify what is fair from the outset?), troublesome because it is (and has proven to be) actually possible to provide such a more thorough justification, as shown by some of the examples we have also seen. 53 Giesen, Bewijs en aansprakelijkheid, p. 64-69, with references. See also I. Giesen, ‘The burden of proof and other procedural devices in tort law’, no. 18-24. 54 See e.g. Giesen, Bewijs en aansprakelijkheid, p. 69-73, with further references; I. Giesen, ‘The burden of proof and other procedural devices in tort law’, no. 22-23. 55 The law of civil procedure even provides for more possibilities to increase the plaintiff’s success rate, for instance through the so-called ‘duty to provide information’, see I. Giesen, ‘The burden of proof and other procedural devices in tort law’, no. 25-35.

97

Ivo Giesen & Rianka Rijnhout The explanation that the possibility of actually enforcing duties of care (effective legal enforcement) warrants a form of relief for plaintiffs is a fine example thereof. Lastly, we must conclude that the ‘justification deficit’ described here has left the ‘proof of causation’ part of Dutch tort law surrounded with many uncertainties. This may have rather negative consequences, as we will explore further in section 7.5. But first, there is a third way of handling difficult causation issues that warrants attention.

7.4

7.4.1

Creating a new head of damage to remove the CSQN problem

Loss of a chance

Another approach to CSQN, and to deal with the problems posed by that requirement, was approved by the Dutch Supreme Court’s decision of 24 October 1997,56 by allowing a new head of damage to be compensated: a loss of a chance. The 1997 case dealt with the professional liability of a lawyer. A former employee, Baijings, of the Sara Lee/DE company claimed damages for not having been able to cash in on a set of stock options after the termination of his employment contract. Because of an error made by his lawyer, his appeal against the rejection of the claim at first instance was never filed. Baijings then claimed damages from his (by then former) lawyer. The main issue in that second case was whether an appeal in the previous proceedings could and would have been successful if the appeal had been filed on time. The Court of Appeal decided that given the rules of Dutch labour law the claim by Baijings against Sara Lee/DE would not have succeeded. The claim against the lawyer was therefore also dismissed. The Supreme Court first dealt extensively with the labour law aspects of the original case and overruled the decision of the Appellate Court in this respect. The Court continued as follows: the question in this case is whether, and to what extent, the client of the attorney has suffered damage as a consequence of his failure to file an appeal against the verdict at first instance. To find the answer to this question the court needs to determine, either, how the Court of Appeal would have decided the original case, or alternatively, to estimate the amount of recoverable damage on the basis of the good and poor chances that the party would have had on appeal. In cases dealing with damage resulting from the fact that the appeal, contrary to what was intended, has not been filed or has been filed too late, the relevant CSQN question is whether the original proceedings would have led to success on appeal. If that is not the case, the plaintiff has suffered no damage through the negligent act. The plaintiff’s claim 56 HR 24 October 1997, NJ 1998/257 (Baijings/mr H).

98

7 Changing the Causation Requirement and Its Impact on Companies Faced with Tort Claims should then be dismissed. Determining what would have been the outcome of an appeal if it had been filed properly is of course difficult, if only because one of the parties that would have been present at that appeal, the original defendant, is no longer present. Furthermore, a ruling on what someone else ‘would have done if’ is always difficult from an evidential point of view. The Dutch Supreme Court allows the lower courts to use either one of the two methods mentioned above in determining this issue: courts can decide what would have been decided in the original case and determine the damages based on that outcome (leading to an ‘all or nothing’ result), or they can determine by an estimate the chances of success on appeal and, by doing so create a new (or separate) head of damage (the lost chance), base the amount of damages on that estimate. A further justification for this until then unavailable tort law mechanism was sadly not provided. Courts are not obliged to use this method, but they may do so as an alternative to the more classic approach of deciding what (another) court would have decided in the original case (the trial within a trial method).57 In general, the loss of a chance approach is then seen as a subsidiary option.58 By now, this is established and widely followed case law.59 The dogmatic features of this theory and its place within the overall system of Dutch liability law are, as yet, not entirely clear. The original wording by the Supreme Court suggests that this loss of a chance doctrine can be based on Article 6:97 CC, in conjunction with Article 6:105 CC. The former article basically states that if the amount of damage cannot be determined precisely, it will be estimated. This estimate could then of course be the percentage of chance that the claim would have had on appeal. The second article states that the determination of future loss can be postponed or undertaken immediately, after weighing the good and the poor chances.60 Since this approach has been approved by the Supreme Court, more and more lower courts have used the loss of a chance approach to decide cases (of professional liability),61

57 See also the preliminary advice of the Advocate General before the decision of the Dutch Supreme Court, under no. 3.3 ff, who also deals with the pros and cons of both methods. 58 See A.J. Akkermans, ‘Theorie en praktijk van proportionele aansprakelijkheid’, in: A.J. Akkermans, M. Faure & T. Hartlief (eds.), Proportionele aansprakelijkheid, The Hague: Boom Juridische Uitgevers 2000, p. 108; Chr.H. van Dijk, ‘Onzeker causaal verband in de rechtspraak’, in: A.J. Akkermans, M. Faure & T. Hartlief (eds.), Proportionele aansprakelijkheid, The Hague: Boom Juridische Uitgevers 2000, p. 39. 59 See HR 19 January 2007, ECLI:NL:HR:2007, AZ6541, NJ 2007/63 (Kranendonk Holding BV en De Vries/A). 60 See T. Hartlief, ‘Proportionele aansprakelijkheid: een introductie’, in: A.J. Akkermans, M. Faure & T. Hartlief (eds.), Proportionele aansprakelijkheid, The Hague: Boom Juridische Uitgevers 2000, p. 1-25, p. 15. 61 See for example Hof Arnhem 14 December 1999, ECLI:NL:GHARN:1999:AC3940, NJ 2000/742 and Rb. The Hague 12 July 2000, TVP 2000/4, p. 94, comm. I. Giesen.

99

Ivo Giesen & Rianka Rijnhout and also medical negligence cases.62 The Supreme Court has ruled that the theory of the loss of a chance is not restricted to mistakes by lawyers and doctors, and has applied it, e.g., in the case of the liability of an investment consultant and the liability of an employer under Article 7:658 CC.63 One can thus safely say that the loss of a chance approach has been widely accepted in the Netherlands. This does not mean, however, that the loss of a chance theory has become predominant or has become the only approach that might be taken. For instance, the reversal of the burden of proof is also still used. Several approaches are thus at hand to decide a case.64 Sometimes these two approaches are even combined, or at least it is suggested that a combination of the two might work.65 A key question now, comparable to the theory of proportional liability, is under which circumstances the theory of the loss of a chance can be used to solve CQSN problems, and when resort can and should be had to another mechanism, if at all. The relevance of this question is reflected in the outcome of the case of Fortis/Bourgonje (the second case on proportional liability which we dealt with above). In essence, the Supreme Court decided that proportional liability – as a solution to CSQN difficulties – could only be applied in exceptional cases. In the case of B. and Deloitte Belastingadviseurs/H. and H. & H. Beheer it was however decided that this reluctance is not needed when applying the theory of the loss of a chance.66 The Supreme Court also explicitly stated that proportional liability and the loss of a chance are two different theories, with a different reach as regards the types of cases they can deal with.67 This distinction which is made between the theory of proportional liability and the loss of a chance respectively has been heavily criticised in legal discourse, the main argument being that both theories in essence aim to solve the same problem, namely the impossibility of proving a CSQN in a situation in which it is uncertain what the outcome would have been if the tortfeasor would not have acted unlawfully.68 62 See e.g. Hof Arnhem 14 December1999, ECLI:NL:GHARN:1999:AC3940, NJ 2000/742; Rb. The Hague 12 July 2000, TVP 2000/4, comm. I. Giesen; Hof The Hague 10 October 2002, ECLI:NL:GHSGR:2002:AF5796, NJ 2003/99; Rb. Amsterdam 28 May 2003, ECLI:NL:RBAMS:2003:AH8760, NJ 2004/45, as well as HR 23 december, NJ 2017/133 (Erasmus MC). 63 HR 21 December 2012, ECLI:NL:HR:2012:BX7491, NJ 2013/ 237 (B. & Deloitte/H. and H.&H.); HR 7 June 2013, ECLI:NL:HR:2013:BZ1721, NJ 2014/99, comm. T. Hartlief (Lansink/Ritsma). 64 On the cumulative use of several techniques in this respect, see Giesen 1999. 65 Akkermans, Proportionele aansprakelijkheid bij onzeker causaal verband, p. 393; Giesen, Bewijs en aansprakelijkheid, p. 72, 122 en 474. 66 See however comm. S.D. Lindenbergh, HR 21 December 2012, ECLI:NL:HR:2012:BX7491, NJ 2013/237 (B. and Deloitte Belastingadviseurs/H. and H. & H. Beheer), no. 7-10. 67 HR 21 December 2012, ECLI:NL:HR:2012:BX7491, NJ 2013/237, comm. S.D. Lindenbergh (B. and Deloitte Belastingadviseurs/H. and H. & H. Beheer); JA 2013/41, comm Chr.H. van Dijk and A.J. Akkermans. See also the conclusion of Advocate General Hartlief (see ECLI:NL:PHR:2016:871), before HR 23 December 2016, NJ 2017/133 (Erasmus MC), who also mentions proponents of the Court’s line of reasoning. 68 See e.g. C.H. van Dijk, ‘Causale perikelen: het is moeilijk en zal moeilijk blijven’, Tijdschrift voor vergoeding personenschade 2013, p. 61, p. 81-82. See also Akkermans, Proportionele aansprakelijkheid bij onzeker cau-

100

7 Changing the Causation Requirement and Its Impact on Companies Faced with Tort Claims 7.4.2

Damage to integrity

A current and much debated topic, and yet another example of turning a CSQN problem into a question of damage, is the idea of ‘damage to integrity’ as used in medical malpractice cases. When a patient, from a legal perspective, is inaccurately informed about a medical treatment and subsequently suffers damage, the question arises whether the patient would have withheld his consent if he would have been correctly informed, and therefore would not have suffered damage. In essence, this is again a question of CSQN: would the patient’s decision have been any different if he had been correctly informed? This question is difficult, if not impossible, to answer. Therefore this CSQN question has been reframed by plaintiffs’ representatives as a question of damage: the right to informed consent is infringed, which is as such a personality right, and therefore damages for non-pecuniary loss should be awarded for that infringement as such, no matter what the patient would have decided.69 Up to now there is no definite outcome on the acceptability of this line of reasoning under Dutch law. It has been accepted in lower courts’ decisions but has not yet been decided by the Supreme Court.70 And both a ‘yes’ and a ‘no’ answer give rise to follow-up questions. For example, if ‘yes’: what are additional personality rights that justify nonpecuniary damages being awarded (the slippery slope argument)? If ‘no’: how could it be justified that a personality right aimed at protecting patients against undesired medical treatment, as laid down in the Dutch Civil Code in Articles 7:448 and 7:450 CC, cannot be enforced in a civil court? Whatever the answer may be, what this discussion makes clear from the outset is that by taking a different starting point, e.g. a legal right, the question of CSQN can be reframed as a question of damage.

saal verband, p. 248-250; J.P. van den Klein, ‘Kansschade bij medische aansprakelijkheid’, Bb 2017, p. 104. See however e.g. C.J.M. Klaassen, ‘Kansschade en proportionele aansprakelijk: volgens de Hoge Raad geen zijden van dezelfde medaille’, AV&S 2013/14; R.L.M. Cox, ‘Proportionele aansprakelijkheid versus kansverlies – Tussen dogmatiek en praktijk’, NTBR 2016, p. 271-279. 69 Hof Arnhem 25 April 2006, ECLI:NL:GHARN:2006:BM5194. See e.g. on this matter L.G.J. Hendrix & A.J. Akkermans, ‘Causaliteitsonzekerheid bij informed consent. Beschouwingen naar aanleiding van Chester v. Afshar’, Tijdschrift voor Gezondheidsrecht 2007, p. 498-515; comm. L.G.J. Hendrix HR 23 April 2010, JA 2010, 97; Asser Procesrecht/Giesen 1 2015, nos. 144-147; A.M. Overheul, ‘Vergoeding van integriteitsschade mede bezien vanuit een mensenrechtelijk perspectief’, TVP 2016, p. 1-9; R.P.Wijne, Medische aansprakelijkheid, Nijmegen: Ars Aequi Libri 2013, p. 85-86 and p. 121-122. See however Rb. Midden-Nederland 18 September 2013, ECLI:NL:RBMNE:2013:3761 which frames the question as regards damage to integrity as a question of proof of causation. 70 See the literature mentioned in the previous footnote for further references.

101

Ivo Giesen & Rianka Rijnhout

7.5

7.5.1

What emerges from all of this? Some food for thought

Four categories of legal techniques

In the previous sections we have seen that under Dutch tort law several techniques have been developed and used in the last few decades to ‘escape’ the sometimes devastating effects of the ‘regular’ CSQN requirement for plaintiffs. This seems to be especially salient where it has already been established that the defendant in question has acted negligently in some way. After an analysis of the examples dealt with below, we think we can group these techniques into four basic categories. These four main techniques to escape the usual (reading of the) CSQN requirement – and their legal consequences when it comes to compensation – are: 1. Liability in full by way of reinterpreting (in fact: ‘downplaying’) the (ambit of the) regular CSQN requirement, that is: relaxing the standards by which one is to rule on the requirement being fulfilled or not (sections 7.2.2 and 7.2.3.); 2. Liability in full by way of accepting an exception under the law of evidence, such as a (rebuttable) presumption (section 7.3.2) or an actual reversal of the burden of proof in the strict sense of the term (‘bewijsrisico-omkering’) (section 7.3.2); 3. Partial (or better: proportional) liability by way of accepting the concept of proportional liability as such (section 7.2.5) and/or the theory of the loss of a chance (section 7.4.1.); 4. Partial liability, and thus compensation, by reinterpreting the causation element by in fact changing the concept of damage as such (the theory of the loss of a chance, damage to integrity, see section 7.4.1. and 7.4.2.).71

7.5.2

Too little by way of justification (?)

Our analysis has also taught us that the justification for the use of one of the four escape routes found is not always a prominent feature of the case at hand, notable exceptions (such as the DES case and Gemeente Leeuwarden/Loss) excluded. Much comes down to just handing down the new rule in question (example: loss of a chance; the ‘reversal rule’) and/or actually limiting its usage, to notions of fairness (example: the ‘reversal rule’) and to very strict interpretations of the route chosen in the preliminary stages (example: proportional liability in Nefalit/Karamus) while it is foreseeable that these routes will 71 Whether the theory of the loss of a chance fits into either category 3 or 4 does not matter as far as the main legal consequences (partial compensation) are concerned; its classification depends on the view one holds as regards the doctrinal issue of the interchangeability (or not) of the loss of a chance as a theory with the concept of proportional liability, an ongoing discussion with strong proponents on either side (see section 7.4.1) and one that we cannot go into in this contribution.

102

7 Changing the Causation Requirement and Its Impact on Companies Faced with Tort Claims soon be tested in a different setting anyhow (as happened, for example, in Fortis/Bourgonje). And differences in the treatment (use with or without reluctance) of seemingly comparable instruments have not been explained either (see the Deloitte case). We may be – in fact we are – judging the Dutch civil courts rather harshly here, and measuring them up against a very high standard indeed, but since the justifications for alternative action are readily available, as can be seen, for example, from the use thereof in the World Online case, we think that the courts could and should have done (somewhat) more in this regard than they have generally done so far. Why? Because really explaining the justification for an accepted exception, formulating its rationale, also clarifies and limits the ambit and scope of the exception. Any new fact pattern that does not then fit that ratioale is excluded, whereas anything that does fit is included. This will thus profoundly ease the use of the causation exceptions for future courts, for practitioners preparing novel cases and for society at large.

7.5.3

Leaving uncertainty to reign…

The current ‘justification deficit’, as we overdramatically would like to call it, has left the (proof of) causation element within Dutch tort law surrounded with (still too) many uncertainties. This has important negative consequences, for instance for defendant companies facing tort actions. As a company lawyer faced with a tort claim against one’s company, it is nowadays almost impossible to advise the CEO or the Board on the chances of success when going to court or on the terms and amounts of an agreeable settlement. For example, the general burden of proof rule (section 7.4.1) would usually provide some (maybe even a great deal of) comfort from a defence lawyer’s perspective, given the difficulties that the causation requirement normally poses, but this perspective is nowadays heavily blurred by all the possible exceptions that might be invoked (and their still relatively unknown interaction). The same is happening in other instances where causation is of the essence for a claim. And this is even more the case since totally new alternatives might also come to light in the case at hand; we have seen it happening. The ensuing uncertainty is only added to since each of these mechanisms/alternatives/exceptions has its own set of conditions for applicability and most often still a relatively unknown or underdeveloped area of application. That state of underdevelopment is furthermore not yet addressed by a strong (set of) justification(s) for certain rules, which is a pity since such a justification could act as an alternative way to provide some certainty as to where the law stands and/or is actually going.

103

Ivo Giesen & Rianka Rijnhout Of course this leaves a lot to be desired. What companies in fact need is legal certainty. If a company knows that liability will be incurred in situations A, B and C, the budget needed to deal with those claims can be set aside for that purpose. But if no one knows what to expect from claims A, B and C, nobody knows how to prioritize budgets anymore. The result is to either leave valuable resources unused or to end up with a financial gap at the end of the fiscal year. Furthermore, this unpredictability might also lead to higher legal costs (more advice will be needed from more expensive external experts, cases going to trial where this was not self-evident, and so on) and thus a smaller return on investments.

7.5.4

The easy solution…

Of course, the easy solution to all of this flows directly from the problem analysis itself. And that is of course that courts from now on, and if possible retroactively for the exceptions already developed, use the reasoning in their case law to explicitly phrase the rationale of and the justification(s) for the alternative route chosen, and that they do so in an open manner and in plain language.72 The examples of how to do this are already out there,73 and the most important substantive justification is as such already known (i.e. negligence is already proven and not fixing the causation requirement would make the actual enforcement of the duty of care next to impossible74). Now, if the case at hand warrants an individual equitable solution that is not to be generalized – which might have been the reason for the lack of a justification in the first place – that is stated as well by the court, honestly. And if no exceptions are in order, the reasoning will also reflect this, at least to some extent, because that will then allow others to better judge on new fact patterns in the future and thus serves society at large as well.

7.5.5

For Adriaan

‘Serving society at large’… that is also what Adriaan Dorresteijn has been doing for all of his professional life. By serving as a professor, by serving as Dean of the LEG faculty at Utrecht University, by acting as chairman of the board of Utrecht Law College, and by redesigning and thinking about legal education all of his career. His legacy will be carried

72 Hartlief also suggests that the Supreme Court should underpin its decisions with regard to the development of Dutch tort law in general, T. Hartlief, ‘Wat doet de Hoge Raad anno 2015 in het aansprakelijkheidsrecht?’, AA 2015, p. 923-926. 73 See e.g. the case of Fortis/Bourgonje, HR 24 December 2010, ECLI:NL:HR:2010:BO1799, NJ 2011/251, comm. T.F.E. Tjong Tjin Tai. 74 Cf. Giesen, ‘De aantrekkingskracht van Loreley. Over opkomst en ondergang (?) van de ‘omkeringsregel’’, p. 81-83, with further references.

104

7 Changing the Causation Requirement and Its Impact on Companies Faced with Tort Claims forward by the many law lecturers he has inspired on a daily basis in striving to pioneer in teaching and reforming legal education. But without hesitation, he has most of all served society by actually teaching and training (probably) thousands and thousands of law students to become good (and in many cases: excellent) lawyers and legal professionals who now serve our society to the best of their abilities. Thanks for doing this for society, and for Utrecht University.

105

8

Towards a European Commercial Code?

Ewoud Hondius

8.1

Introduction

When the current European Union came into existence some sixty years ago, harmonisation of law was not a primary objective. Private law in particular hardly played a role1. But matters have changed. Since the late 1960s, Europeanisation of private law has come to occupy an ever increasing position on the EU agenda. At first, civil law was the focus of this attention2. Then commercial law3 and procedural law4 became the object of Europeanisation. This paper will focus on harmonisation of commercial – or business – law, the main research area of my esteemed colleague Adriaan Dorresteijn. For a Dutch reader the question may raise some doubts. Has not commercial law recently been ‘swallowed’ by civil law5 (Nr. 3)? Then in Nr. 4, some other general issues will be dealt with: If on a European level commercial law has not been taken over by civil law, should Brussels then focus on Commercial Law, or Business Law as it is sometimes called (a)? The very question whether or not Europeanisation of this area of the law is feasible may be raised (b), as is the case with technical issues such as the choice between hard law and soft law (c), between hard and fast rules or case-law (d) and the basis in the European Treaty (e). But before we engage in this exercise, let us first consider a French proposal precisely in our domain in outline (section 8.2). In the end we will return to the French proposal (section 8.5) and cap off with some conclusions, including whether or not Dutch researchers should participate in the discussion (section 8.6).

1 2 3

4 5

A.S. Hartkamp, C. Sieburgh, W. Devroe (eds), European law and private law, Oxford: Hart, 2017, p. 1. A.S. Hartkamp et al. (eds), Towards a European civil code, fourth ed., Nijmegen: Ars Aequi Libri, 2011, 1125 p. See A.F.M. Dorresteijn et al, European Company Law, Deventer: Wolters Kluwer, second ed., 2009, 344 p., and for an earlier overview Charlotte Villiers, European company law – towards democracy?, Aldershot: Ashgate, 1998, p. 31-51. M. Freudenthal, Schets van het Europees civiel procesrecht/Europees burgerlijk procesrecht voor de Nederlandse rechtspraktijk, Deventer: Wolters Kluwer, 2013, 364 p. Unification of private law and commercial law was already advocated by W.L.P.A. Molengraaff in his 1883 report (‘preadvies’) to the Nederlandsche Juristen-Vereeniging.

107

Ewoud Hondius Two preliminary observations should be made (section 8.1). First, on 1 March 2017, the European Commission published a White paper on the future of Europe (COM(2017) 2025). The white paper presents and develops five scenario’s for Europa by 2025. One of these scenario’s foresees the following: ‘Why and how? In a scenario where there is consensus that neither the EU27 as it is, nor European countries on their own, are well-equipped enough to face the challenges of the day, Member States decide to share more power, resources and decision-making across the board. As a result, cooperation between all Member States goes further than ever before in all domains. Similarly, the euro area is strengthened with the clear understanding that whatever is beneficial for countries sharing the common currency is also beneficial for all. Decisions are agreed faster at European level and are rapidly enforced. By 2025, this means: On the international scene, Europe speaks and acts as one in trade and is represented by one seat in most international fora. The European Parliament has the final say on international trade agreements. Defence and security are prioritised. In full complementarity with NATO, a European Defence Union is created. Cooperation in security matters is routine. The EU27 continues to lead the global fight against climate change and strengthens its role as the world’s largest humanitarian and development aid donor. The EU’s broad-ranging foreign policy leads it to reinforce its joint approach on migration. Closer partnerships and increased investment in Europe’s neighbourhood and beyond help to create economic opportunities, manage regular migration and tackle irregular channels. Within the EU27, there is a strong focus and ambition to complete the single market in the field of energy, digital and services. Thanks to joint investment in innovation and research, several European ‘Silicon Valleys’ emerge to host clusters of venture capitalists, startups, large companies and research centers. Fully integrated capital markets help mobilise finance for SMEs and major infrastructure projects across the EU. Within the euro area, but also for those Member States wishing to join, there is much greater coordination on fiscal, social and taxation matters, as well as European supervision of financial services. Additional EU financial support is made available to boost economic development and respond to shocks at regional, sectoral and national level’. In the months ahead, the European Commission purports to publish a discussion paper on this theme. Does this mean that the French proposal to be discussed below does not stand a chance? Not necessarily. It may well be that the fact that the French are currently

108

8

Towards a European Commercial Code?

rethinking European business law provides them with a head start, enabling French academics to take the lead in law reform, just as the opposite fact that their Civil Code had remained unaltered for two centuries was a severe setback, two decades ago, for any French move to enact harmonized rules on a European level. A second preliminary remark is of a methodological nature. European Commercial Law encompasses a large domain, on which much has been written. It would have been easy to assemble large numbers of references, but the aim of this paper is not to provide the reader with a plethora of footnotes but rather with some directions for thought. It therefore will barely be footnoted.

8.2

A French proposal

By the end of 2016, the French Association Henri Capitant, with the aid of the Fondation pour le droit continental, came up with a trilingual proposal for a European business code. Below in Nr. 5 I will look into the details more closely. In this paragraph, I will put the two associations in context. Of the two, the Association Henri Capitant is the elder one. It was founded in 1935 to ‘propager la culture juridique française’, which was later turned into a less chauvinistic ‘Amis de la culture juridique française’. Capitant has long been associated with a blend of innovative congress themes and ‘academic tourism’: the annual conferences often focus on wholly new themes and preferably take place in exotic French-speaking resorts. But in recent years, the academic part of Capitant is on the rise and its ambitions have become more political6. There have been two direct causes for this change in attitude. The first was the idea which arose at the occasion of the bicentenary of the Code Napoléon in 20047. Why o why, was the question, does the French code no longer exercise the influence it once had the world over. The answer was easy to find: because unlike other great examples of codification, such as the German Bürgerliches Gesetzbuch, which was thoroughly modernized in 20018, the general part of the Code civil had never been the subject of law reform. What is more: the sections of the Code civil on contract have never been adapted to new developments over these two centuries. The remedy was considered to be

6

7 8

See the Revue de droit Henri Capitant. A recent initiative is the publication of French language introductions to the legal systems of various jurisdictions; the one on the Netherlands co-ordinated by Diana DankersHagenaars has just been published by LGDJ: Diana Dankers-Hagenaars (ed), Droit des Pays-Bas, Bibliothèque de l’Association Henri Capitant, LGDJ, 2017, 100 p. The 2004 bicentenary has been celebrated with a plethora of books, conferences and law review articles – see especially Le Code civil 1804-2004/Livre du Bicentenaire, Paris: Dalloz, 2004, 718 p. See W. Ernst & R. Zimmermann (eds), Zivilrechtswissenschaft und Schuldrechtsreform, Tübingen: Mohr, 2001; and R. Schulze & H. Schulte-Nölke (eds), Die Schuldrechtsreform vor dem Hintergrund des Gemeinschaftsrechts, Tübingen: Mohr, 2001.

109

Ewoud Hondius a modernization of the general part of the contract law, which is precisely what happened in 2016. Whether the new provisions will contribute to France’s regaining its original civil law grandeur remains to be seen: the Belgians – who until last year shared their Code civil with France – for one are not convinced9. The second organization involved in spreading the gospel – of French civil law – is the Fondation pour le droit continental. Again, this organization finds its origin in wounded French pride. At the basis of this was a famous – in France rather infamous – research project of the World Bank which concluded that French law was inefficient, or at least far less efficient than common law systems. The research project itself looks innocent: by looking into the number of years, the costs, the bureaucracy needed to start a company, a legal system’s efficiency can be measured. Setting up a company apparently will take years on end in a number of African studies, whereas in Denmark it is a question of days or even hours. When the outcome for France was that it lagged behind common law systems, a storm of indignation broke out. The study’s methodology was challenged and the outcome denied10. This then led to the foundation of the Fondation du droit continental, which aims at providing support to civil law projects as against the common law. An example is the support provided to a project which after the example of the Principles of European Contract Law aims at drafting principles of Latin American contract law11. The project to develop a European Business or Commercial law is inspired by the same political motives.

8.3

Civil and commercial law

Back in 1977, I had the pleasure of participating in a Comparative law conference in Zaragoza. Which were the legal systems compared at the conference? They were Spanish civil law and Spanish commercial law. To such extent the two had grown in separate directions, that a conference was considered the only option to bring the two on speaking terms. Not far away, Italy was on a wholly different track, with a full fusion of Civil and Commercial law in the 1942 Codice civile. Italy has not remained the single messenger for

9

See Sophie Stijns and Sanne Jansen (eds), The French contract law reform: a source of inspiration?, Cambridge: Intersentia, 2016, 231 p., especially the papers by Frederik Peeraer on nullities (p. 49-71), Sanne Jansen on price reduction (p. 131-156), Brecht Verkempinck on damages (p. 157-199) and Matthias Storme on compensation (p. 201-207). 10 See ; Rafael La Porta, Florencio López-De-Silanes et al., Law and finance, (1998) 106 Journal of Political Economy 1113-1155; Ejan Mackaay, La valeur des rapports Doing business aujourd’hui, Revue de l’ERSUMA 2010, no. 6, is more nuanced’: ‘Leur méthodologie est sujette à amelioration, mais la large diffusion des données sur lesquelles ils tablent est de nature à conduire à ces améliorations’. 11 Rodrigo Momberg, Stefan Vogenauer (eds), The future of contract law in Latin America, Oxford: Hart, 2017, 320 p.

110

8

Towards a European Commercial Code?

the new approach. The Netherlands have likewise abolished their Commercial code and taken this matter up in the Burgerlijk wetboek. Integration of commercial law in a civil code or keeping it separate in a code of its own may be one of the most pressing questions, it is not the only one. Should commercial law be national or European? Should it consist of hard law or of soft law? Let us now briefly turn to these other general issues.

8.4

(a)

Other general issues

Commercial law or business law

A first question is of a terminological nature: should we call the project European business law, as the French proponents have done, or should we stick to European commercial law? Personally I have a slight preference for the latter, but now that substantive differences between the two, if any, are hardly noticeable, I will leave out further discussion of this question.

(b)

European or national law

A more relevant question is whether harmonization should focus on transborder transactions only or or domestic transactions as well. It is the kind of discussion which has been engaged in over and over again, among others with regard to such instruments as the Convention on the International Sale of Goods (CISG) and the proposal for a Common European Sales (CESL). It is often argued that the EU has no competence to deal with purely domestic transactions. This may indeed be the case, but there is little doubt that from a harmonization perspective it does not make sense to leave out a major part of the law, i.e. the domestic law of the member states.

(c)

Hard law or soft law

Yet another issue to be solved is whether or not soft law may perhaps present a solution to the codification issue. Especially when a political consensus is difficult to arrive at, a softer instrument such as Principles of European Contract Law may well be preferable. This also has the advantage that amendment in the light of new technological developments is far easier than in case of legislation or treaties. A good example of this danger is the Vienna Sales Convention, which has not been brought up to date – internet for

111

Ewoud Hondius instance – for a number of decades. Although the CISG Advisory Council endeavours to fill in the gaps12, because of its voluntary nature this is not wholly satisfactory.

(d)

Hard and fast rules or case-law

Why should we always only consider legislation.13 An issue which is little debated is whether or not case law does perhaps provide a better way of providing a basis for business transactions than legislation.

(e)

Basis in European Treaty

Constitutionalists will ask for a discussion of Art. 114 of the Treaty on the functioning of the European Union (TFEU). The emphasis should indeed be on constitutionalists: for business law adherents this question is of little importance. Even if a European measure as to harmonization of business law is within the competence of the EU, the comity principle14 will require the EU to refrain from drafting rules if a substantial part of the EU cannot live with such rules15.

(f)

Feasibility

The most difficult question raised by harmonization is its feasibility. Will common and civil law ever come together? May the French and German traditions of legislation and Rechtswissenschaft as main sources of the law arrive at a common denominator? Is the impact of good faith and equity ever to be harmonized? Considering the various harmonized instruments which have already been arrived at, it may be observed that harmonization by no means seems impossible. But in view of the diverging legal traditions, it will by no means be a simple question. This is not only a question of substantive law, but also of the aims of harmonization: is it the best16 law that should be looked for, or is a compromise between the various jurisdictions enough?

12 See Ingeborg Schwenzer (ed), The CISG Advisory Council opinions, The Hague: Eleven, 2017, 742 p. 13 Jan Smits, Plurality of sources in European private law, or: how to live with legal diversity, in: Roger Brownsword et al. (eds), The foundations of European private law, Oxford: Hart, 2011, p. 323-336. 14 According to Duhaimes’s Law dictionary, comity is a principle of international law, that one state, to the greatest extent possible, recognize the legislative, executive or judicial acts of another. 15 On the competence of the EU see Stephen Weatherill, Competence and European private law, in: Christian Twigg-Flesner (ed), European Union private law, Cambridge: University Press, 2010, p. 58-69. 16 See Masha Antokolskaya, The ‘Better law’ approach and harmonisation of family law, in: Katharina BoeleWoelki (ed), Perspectives for the unification and harmonisation of family law in Europe, Antwerpen: Intersentia, 2003, p. 157.

112

8

8.5

Towards a European Commercial Code?

The Capitant project

In 2016, Capitant presented a draft research project as to a European Business Code. Meanwhile, the project has been discussed at a number of meetings in Paris17, Berlin18 and Bonn19. It has also been published with a preface by Giscard d’Estaing, who at ninety plus years (born 2 February 1926) is still going strong, and dealt with separately in various law review articles20. What is the object of the research project? There are proposals as to market law (droit du marché), prepared by Martine Béhar-Touchais (Paris I) and Cyril Grimaldi (Paris 13). This is about distribution contracts (should they become uniform?), competition law (should national competition law be abrogated completely?), unfair trade practices and – surprisingly – private international law. Then there is a chapter on electronic commerce, collected by Nathalie Martial-Braz (Paris-Descartes): should access to digital goods and services be improved? When dealing with business law, one of the first chapters which one considers will be company law. Philippe Dupichot (Paris I) was in charge of the overview. Should Europe provide a regulation for groups of companies? Sureties law is a more contested area. Civil lawyers will often consider this civil law, whereas in France business law apparently is considered a better formula. Should a Eurohypothèque21 be made possible, a ‘sûreté conservatoire européenne’? Two directives provide a European base: 2002-47 of 6 June 2002 on financial sureties and 2014/17 of 4 February 2014 on mortgage consumer credit. Regulations 575/2013 of 26 June 2013 and 1346-2000 of 29 May 2000 and directive 2011/7 of 16 February 2011 also bear on this. This part has been taken care of by Michel Grimaldi (Paris I) and Charles Gijsbers (Rouen).

17 Pour un Code européen des affaires, Paris: LGDJ, 2016. 18 Forum franco-allemand, Berlin, 23 November 2016, with sections on ‚le juge et l’équilibre du contrat‘, ‚le juge et les clauses abusives‘, ‚le juge et la révision du contrat‘, l’insolvabilité de l’entreprise‘, ‚les procédures de prévention’ en ‚le traitement de l’actionnaire‘. 19 Konferenz ‘Braucht Europa ein Wirtschaftsgesetzbuch ?‘, 27 April 2015, with sections on ‚From Brexit to a European Business Code‘, ‚Das Projekt eines Europäischen Wirtschaftsgesetzbuchs und seine Bedeutung für die Zukunft des kontinentalen Rechts‘, ‚Der Bedarf für ein Europäisches Wirtschaftsgesetzbuch im Bereich des Gesellschafts-, Kapitalmarkt- und Insolvenzrechts’ en ‚Form, Struktur und Stil des Europäischen Wirtschaftsgesetzbuchs‘. 20 Laure Bélanger, Un code européen des affaires, le droit au coeur de la consolidation de l’Europe, La semaine juridique – édition générale No 16, 17 April 2017; Matthias Lehmann, Braucht Europa ein Handelsgesetzbuch? ZHR januari 2017. 21 See J.H.M. van Erp and B. Akkermans (eds), Ius commune casebooks for the Common law of Europe, Texts and materials on property law, Oxford: Hart, 2010.

113

Ewoud Hondius Then there are chapters on execution and seizure (Nicolas Cayrol, Tours) and on enterprises in difficulty (Philippe Petel, Montpellier). The chapter on banking law has been written by Anne-Claire Rouaud (Reims). There are chapters on insurance law (Mireille Bacache, Paris 1), capital markets (Pauline Pailler, Reims), intellectual property (Nicolas Binctin, Poitiers), social security (Sophie Robin-Olivier, Paris I) and tax law (Franck Le Mentec, attorney). The French report does not provide a complete overview of business of commercial law. Contract law – including the Vienna Sales Convention – is absent, as is transport law. The report on the other hand does include the law of seizure and execution, which in several jurisdictions will not be included in commercial law, but rather in that of civil procedure. Apparently, the subdivision of private law may render some transnational puzzles. What will be the outcome of this project? Will it succeed in harmonizing European commercial law? Not necessarily. There are as yet too many discrepancies in the text and the political will to overcome these is absent22. However, as is demonstrated by the various ‘Principles’ projects, the present text may indeed show the way forward when arbitrators are looking for a proper solution and when academics are reporting on projects on harmonization of commercial law.

8.6

What about the Dutch?

Finally, nebenbei the question may be raised whether or not the Dutch should participate in the discussion of a European commercial – or business – law. The answer seems obvious. Of course, lawyers such as Adriaan Dorresteijn and his colleagues should do so. In the first place, Dutch commercial law is one of the building blocks of European commercial law. It is necessary that on a European level knowledge of Dutch law is available, so it can gain its natural position among other legal systems. If Dutch lawyers are not involved, it is not inconceivable that such information is forwarded by academics and law firms from other jurisdictions who have picked up the Dutch language – especially Germany has a large number of lawyers trained in the Dutch language. But even when Germans linguistically know their way around, they will often have problems in grasping the true meaning of e.g. cases handed down by the Hoge Raad. For one, Germans are not used to the lack of precedents in Dutch law and therefore will sometimes conclude that there being no precedents, general notions such as good faith must be applied.

22 Although President Macron has recently, in an important speech of 26 September 2017, supported the idea.

114

8

Towards a European Commercial Code?

It can also be useful to prepare the European discussion in the Netherlands. This will enable Dutch participants in international discourse to defend their position. Preparing the discourse in the Netherlands, e.g. within the Vereeniging ‘Handelsrecht’ (Association for Commercial Law) may provide a forum for discussion in the Dutch language of the Capitant proposals. The necessary work has already been prepared with publication of the paper ‘Eenvormig bedrijfsrecht: realiteit of utopie?’ (Uniform business law: reality or utopia), by a Group of scholars from the Erasmus University Rotterdam23. That the Netherlands do not possess a Code of Business Law does not necessarily mean that this absence is one forever24.

23 F. De Ly, K.F. Haak, W.H. van Boom (eds), Eenvormig bedrijfsrecht: realiteit of utopie?, The Hague: Boom, 2006, 380 p. See also the chapter by André Berends and Charlotte Pavillon on Les entreprises in Diana Dankers-Hagenaars (ed), Droit des Pays-Bas, Bibliothèque de l’Association Henri Capitant, LGDJ, 2017, p. 89-94. 24 M.J.G.C. Raaijmakers, Naar een Wetboek ondernemingsrecht?, The Hague: Boom, 2009, 76 p.

115

9

Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment

Anthonie W. Jongbloed

9.1

Introduction

In a time in which full use was initially made of fax machines and is now being made of emails and WhatsApp messages and in which commercial trips are thought of in order to spend some time in the atmosphere, saying that the world seems to have become ‘smaller’ is labouring an obvious point. Anyone who compares procedural law in 2017 with that of half a century or one or two centuries ago discovers that legislation sometimes lags behind (legal) practice. To give an example: In Section 115 of the Dutch Code of Civil Procedure (CCP), the legislature gives defendants who do not reside or stay in the Netherlands an ample summoning period, namely up to three months. In practice, however, the shortening of the period is (almost) always requested under Section 117 CCP. Such ample summoning time is easy to explain. Think of someone in central Australia who was summoned before a Dutch court 50 or 60 years ago. The summons would first have to be sent via official channels in order to be certain that it actually reached the person concerned, which is not the case with a simple airmail letter. The person concerned would then want to obtain advice from a Dutch lawyer,1 so a request to that effect would be sent to the Netherlands. The answer given would follow afterwards and the lawyer would be engaged. If we take problems with mail delivery in Australia into consideration (at the time possibly once a week), and the time needed to write letters, it is then clear that the standard period of, for example, one month would have been too short.2 Viewed from a Dutch perspective, a great deal has changed. The Netherlands is a small country dealing with many foreign countries. Membership of the European Union and the Council of Europe has made many changes to procedural law, and the law of the

1 2

A delaying factor could also have been that one would first have to inquire as to which lawyer should/could be engaged. Australia ratified the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters on 15 March 2010 (the Hague Service Convention 1965) after which it entered into effect on 1 November 2010. Australia is not mentioned among the participating States of the Convention on Civil Procedure (Civil Procedure Convention 1954).

117

Anthonie W. Jongbloed countries surrounding us is no longer really ‘foreign’ to us anymore. After the (then still) European Economic Community (EEC) had finally realised that the free movement of persons, services and capital should be followed by the free movement of judgments, the Brussels 1 Convention was concluded: the Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters from 1968.3 On the one hand, this removed the inner borders (so that a German defendant could not be summoned in the Netherlands pursuant to Section 126 subsection 3 of the old CCP, but had to be summoned before a court in his temporary or permanent place of residence in Germany) and, on the other hand, judgments and authentic instruments from the Member States were recognised in principle (so that after a convicting judgment in a Member State, renewed proceedings were no longer required to arrive at enforcement in another Member State). This is now the Brussels 1Regulation (recast), applicable to all 28 Member States.4 On the other hand, the Convention for the Protection of Human Rights and Fundamental Freedoms from 1950 (ECHR), and particularly Art. 6 relating to the right to a fair trial within a reasonable time by an independent and impartial tribunal, has harmonised a great deal of procedural legislation.5

9.2

The need for internationalisation in the Netherlands and particularly Europeanisation within the European Union

It was already stated above that the Netherlands is a small country dealing with many foreign countries. The Netherlands is also a trading country: a major part of Dutch income comes from trade, imports and exports. In such a case, it is desirable that few obstacles exist. Fixed exchange rates are a prerequisite, legal certainty as well. As far as the latter is concerned, it should be clear how any proceedings will run, what costs can be involved therein, the extent to which the judiciary is independent, etc. The point is that the law in another State should be predictable and preferably resemble the law in one’s own country as closely as possible. For example, in Poland (prior to joining the European Union) from 1 February 2000 the Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Lugano Convention

3 4

5

Cf. R.Ch. Verschuur, Vrij verkeer van vonnissen, diss. Utrecht, Kluwer Deventer 1995. Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, OJEU 2012 L351/1. See also M.I. Hazelhorst, Free Movement of Civil Judgments in the European Union and the Right to a Fair Trial, diss. Rotterdam, T.M.C. Asser Press The Hague 2017. Cf. Section 20 subsection 1 CCP: The judge must guard against an unreasonable delay in the proceedings and, if necessary, take measures at the request of a party or ex officio. The provision was included as a result of e.g. ECHR June 1987, NJ (Dutch Law Reports) 1990, 231, Capuano/Italia (more about this below).

118

9

Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment

1988) applied, because trade with Germany had to be possible accompanied by as few obstacles as possible.6 First of all, of course, the sphere of application of the Regulation had to be determined: to what countries and to what types of matters will the Regulation apply. For instance, the recast Brussels I Regulation relates to civil and commercial matters, regardless of the nature of the tribunal. But various types of matters are immediately kept outside the sphere of application: tax matters, customs matters and administrative law matters. But also a) the status and authority of natural persons, matrimonial property law or property law in relation to forms of relationships to which consequences are attached under the applicable law which are similar to those of marriage; b) bankruptcy, compositions and other similar proceedings; c) social security; d) arbitration; e) maintenance obligations arising from family relationships, consanguinity, marriage or affinity and f) wills and inheritances, including maintenance obligations that arise as a result of death, are all excluded. In that context, it is customary nowadays to include definition provisions to make clear what is meant by a certain term. What, for example, should we understand a ‘decision’, a ‘court settlement’ or an ‘authentic instrument’ to mean? The terminology can vary from country to country and misunderstandings quickly arise. It will be discussed next which court has absolute and territorial jurisdiction and whether a residency criterion or a nationality criterion applies. Regarding the latter: do only those with EU passports come under the regulation or everyone who stays in the EU? In this case, ‘those who have their place of residence on the territory of a Member State, regardless of their nationality’ was chosen. In addition, the starting point is that one is summoned before the courts of that Member State. Therefore, whether the person who starts the proceedings resides in a different Member State or has non-EU nationality does not play a role. This does not affect the fact that ‘custom work’ is sometimes necessary in connection with the specific circumstances of the case. Illogical situations should be prevented from occurring. For example, Article 24, first lines and under 1 of Brussels 1 (recast) entails that irrespective of the parties’ place of residence, the following courts have exclusive jurisdiction for real rights to renting out and the renting and leasing and letting of immovable property: the courts of the Member State where the immovable property is located. But: for the renting out and renting and leasing and letting of immovable property for temporary private use for six consecutive months at most, however,

6

This convention is also sometimes called the Parallel (or EVEX) Convention, because it is a ‘stripped down’ version of what is now the Brussels 1 Regulation. The convention closely resembles it but no role is set aside in it for the Luxembourg Court of Appeal, which needs to provide for a uniform interpretation because, for example, Swiss judges cannot be bound by a foreign court of justice. A revised version has applied from 2010, OJEU 2007 L 339. Besides the EU countries, the convention applies to Norway, Iceland and Switzerland.

119

Anthonie W. Jongbloed the courts of the Member State where the respondent resides also have jurisdiction, provided that the renter or lessor is a natural person and the owner and the renter or lessor have their place of residence in the same Member State. The exception was created after Court of Justice EC 15 January 1985, NJ 1986/208 (Rösler/Rottwinkel). This concerned a dispute over the rental of a holiday home in North Italy near the Lago Maggiore for three weeks by one German to another German. Because the exception rule had not yet been added, litigation had to take place in Italy in Italian with the assistance of Italian lawyers; these were all cost-increasing factors that can stand in the way of starting proceedings.7 Proceedings can now be conducted in such a case in German in Germany with the assistance of German lawyers. Attention should also be paid to disputes that arise from contracts or unlawful acts. In addition, certain areas of law should also be considered such as insurance law, consumer law and employment contract law, while the possibility of a choice of forum by the parties should also be taken into account. This, too, involves ‘custom work’. But it also needs to be delineated when a judgment or authentic instrument qualifies for recognition and enforcement in another Member State. Recognition can also follow automatically – as if it were a domestic judgment – but one can also think of an exequatur procedure in which it is reviewed whether the principles of due process of law have been fulfilled8 and there is no conflict with public order. Which documents must be submitted in such a case? A copy of an authentic judgment and/or a certificate? In the original language of the proceedings or in a translation (into one of the modern languages?)? And is enforcement possible at all if another legal remedy can be used? And to what extent can the jurisdiction of the foreign court be reviewed, certainly if the impression exists that there has been an error. Can that be done ex officio or must it be based on a request by a party? These are all questions that need to be answered. Once these answers have been given, in this case in the recast Brussels 1 Regulation, a party to the proceedings can then assess how proceedings in a foreign country will run, which requirements are set, which costs are involved in this, etc. In that way procedural law becomes predictable to a great(er) extent and a party to the proceedings will know that he/she will not be confronted with a ‘black hole’ that constantly results in new surprises. As will become evident below, harmonisation in a European context is the most 7 8

In addition, conducting proceedings in Italy takes a very long time. Cf. ECHR 25 June 1987, NJ 1990/231 (Capuano/Italy). A refusal to recognise a judgment is logical if the document initiating the proceedings has not been served in such a timely manner and in such a way on the respondent as was necessary with a view to his defence (unless the respondent has not used any legal remedies against the judgment while he was able to do so) or if the judgment is not compatible with an earlier judgment given between the same parties in a dispute over the same matter and based on the same cause, provided the earlier judgment meets the conditions for recognition in the requested Member State.

120

9

Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment

logical. Naturally it would be best if regulations could be drafted that apply to (almost) all countries in the world. But that is not a realistic starting point. The legal cultures differ too much to make that possible at all times. That may well be possible in partial areas for a number of countries and it can certainly be an ambition. The fact that legal cultures can diverge too much is simply illustrated on the basis of some examples. Conducting proceedings is almost a loss of face for the Japanese; the aim is always to reach a solution in mutual consultation. The number of legal actions per head of the population is small.9 The situation in the United States is very different. There you will hear ‘I’ll sue you’ with a certain regularity and the number of lawyers per 1000 residents may well be the highest in the world. Economic interests also play a part. Industrialised countries have an interest in a properly operating intellectual property law to protect their inventions. It must also be possible to enforce the judgments that follow from a properly operating system of execution and attachment law. Emerging countries do not have that wish at all: they prefer to follow on from results obtained elsewhere. The distinction between ‘civil law’ and ‘common law’ countries is also known. Countries bordering on each other often have many points of agreement and that often provides a better basis. We need only think of the countries in which the civil legislation elaborates on the efforts of Napoleon. Other countries have in common with each other that they speak the same language, so legal terms are often construed unambiguously. And mutual trade also provides for points of reference. I mention the Central Rhine Navigation Board.10 Examples can of course be given of regulations which very many countries have adopted. In that context one can immediately think of the Hague Conference on Private International Law (HCCH).11 This is an intergovernmental organisation with the object of unifying the regulations of private international law. A total of 81 states and the European Union are members of the Hague Conference. In addition, there are many observers, such as the Union Internationale de Huissiers de Justice (UIHJ) referred to below.12 Within the framework of the Hague Conference, inter alia, the Procedural Law Convention 1954 was drafted: the Convention of 1 March 1954 on civil procedure, which replaces the Convention of 17 July 1905 on civil procedure. Also mentioned are: the Convention of 15 November 1965 on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters; the Convention of 1 February 1971 on the

9 Cf. A.W. Jongbloed, Japans (burgerlijk) recht, Advocatenblad 1987, pp. 400-407. 10 Cf. http://www.ccr-zkr.org/11010400-nl.html: This principle [of freedom of navigation] entails that existing or future obstacles to navigation are avoided or at least limited as much as possible. 11 https://www.hcch.net. 12 http://www.uihj.com.

121

Anthonie W. Jongbloed Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters; the Convention of 18 March 1970 on the Taking of Evidence Abroad in Civil or Commercial Matters; and the Convention of 2 October 1973 on the Recognition and Enforcement of Decisions Relating to Maintenance Obligations. This does not affect the fact that drafting sometimes runs with difficulty, the number of ratifications is disappointing or the differences are so great that they cannot be bridged.13 All things considered, it is not surprising that when harmonisation is thought of in the Netherlands, first of all Europeanisation within the European Union comes to mind. This may not always be a guarantee of success, because sometimes harmonisation in a specific case nevertheless goes too far in a certain country, and sometimes there are national procedures that work so well that there is no or hardly any need for a harmonised international procedure. Denmark is an example of the first type. Although it is a member of the European Union it has made a reservation to the regulations relating to justice. They are de facto declared inapplicable.14 Another example is the European Account Preservation Regulation (EAPO)15 which, unlike other judicial regulations, will not be applicable in the United Kingdom and Denmark. Examples of the second type are the European Order for Payment (EOP) Procedure and the European Small Claims Procedure (ESCP), mainly because the sphere of application was limited to no more than €2,000. The intention is to raise the competency level to €5,000.16 Whether this will have much effect must 13 From https://www.hcch.net/en/projects/legislative-projects/judgments I have taken: The ‘Judgments Project’ refers to the work undertaken by the Hague Conference since 1992 on two key aspects of private international law in cross-border litigation in civil and commercial matters: the international jurisdiction of courts and the recognition and enforcement of their judgments abroad. Initially, the Judgments Project focussed on developing a broad convention, which was subsequently scaled down to focus on international cases involving choice of court agreements. This led to the conclusion of the Hague Convention of 30 June 2005 on Choice of Court Agreements (‘Choice of Court Convention’). Work has been done for some time on the project Recognition and Enforcement of Foreign Civil Protection Orders. 14 An exception was made for the recast Brussels 1 Regulation. Denmark was already a party to the preceding convention and this regulation has a certain added value. To prevent a convention from being concluded or the old one from having to be supplemented, Denmark ultimately subjected itself to the effect of this regulation. 15 European Account Preservation Order. Cf. Regulation (EU) No. 655/2014 of 15 May 2014 establishing a European Account Preservation Order procedure to facilitate cross-border debt recovery in civil and commercial matters, OJEU 2014, L 189/59, as well as the Act of 14 November 2016, implementing Regulation (EU) No. 655/2014 of the European Parliament and of the Council of 15 May 2014 establishing a European Account Preservation Order procedure to facilitate cross-border debt recovery in civil and commercial matters (OJEU 2014, L 189) (Act Implementing the Regulation establishing a European Account Preservation Order procedure), Bulletin of Acts and Decrees (Stb.) 2016, 440. 16 Act of 22 March 2017, Bulletin of Acts and Decrees 2017, 125, amending the Act implementing the European Regulation setting up a European Small Claims Procedure (ESCP) and the Act implementing the Regulation creating a European Order for Payment procedure and implementing Regulation (EU) 2015/2421 of the European Parliament and of the Council of 16 December 2015 amending Regulation (EC) No. 861/2007 establishing a European Small Claims Procedure and implementing Regulation (EC) No. 1896/2006 creating a European order for payment procedure (OJEU 2015, L 341/1).

122

9

Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment

be awaited, as much more attention is paid in the Netherlands to the drastic Quality and Innovation (Kei) legislation17 and both regulations are ‘on the radar’ of (very) few lawyers. What we should not forget, however, is that in the context of the European Union, a scheme was drafted in relation to the seizure of evidence in IP cases. Directive 2004/48 of 29 April 2004, OJEU 2004, L195 on the enforcement of Intellectual Property Rights led to Title 15 being added to Book III of the Dutch Code of Civil Procedure. In Sections 1019 – 1019i CCP, a connection is sought to the existing provisions on prejudgment attachment and measures are laid down to prevent infringements of intellectual property rights.18

9.3

The importance of the Council of Europe and CEPEJ

Besides the European Union, another organisation plays a role that is not to be underestimated in the harmonisation of the law of civil procedure in Europe. This is the Council of Europe.19 Uniformisation is pursued there from a socio-cultural perspective, and not from an economic perspective. There are 47 countries which are members of the organisation and besides the 28 countries of the European Union, one can also think of Russia and Turkey. Undoubtedly the most familiar scheme is the Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR) from 1950 and in

17 Act of 13 July 2016, Bulletin of Acts and Decrees 2016, 288, amending the Dutch Code of Civil Procedure and the Dutch General Administrative Law Act in connection with the simplification and digitisation of procedural law. Cf. M.J.A.M. Ahsmann, KEI: steengoed of drijfzand, TVPP 2015, pp. 65-66; W.D.H. Asser, M.J. Blaisse, A. Hammerstein, A. Knigge, J. Mendlik & M. Ynzonides, Procesinnovatie: KEIgoede ideeën, Procesrechtelijke reeks NVvP 32, Boom Juridische Uitgevers The Hague 2015; E. Bauw, KEI, een gamechanger voor de civiele en bestuursrechtspraak?, RM Themis 2016, pp. 55-61; J.J. Dammingh & L.M. van de Berg, Enkele inhoudelijke aspecten van KEI: waar gaat en waar moet het naartoe?; report of the autumn meeting 2015 of the Dutch Procedural Law Association, TCR 2016, pp. 25-33; W. Heemskerk, K. Teuben & R. Wieringa, Kort begrip van KEI, Convoy Uitgevers Dordrecht 2016; S. Heeroma, De uniforme procesinleiding; het vereenvoudigde procederen in civiele zaken volgens KEI, Celsus Amersfoort 2015; C.J.M. Klaassen, De civiele procedure volgens ‘KEI’, RM Themis 2016, pp. 74-84; C.J.M. Klaassen, Advocaat ‘let op uw saeck’, enkele opmerkingen over de regierol van de civiele rechter en de rol van de advocaat onder ‘KEI’, NJB 2017, pp. 724-733; A.I.M. van Mierlo & P.J.J. Vonk, Vereenvoudiging en digitalisering van het procesrecht; procederen in nieuwe jas na KEI, WPNR 2015/7065, pp. 511-520; J.H. Rutten, KEI voor de gerechtsdeurwaarderspraktijk; De nieuwe procedure onder KEI in eerste aanleg, De Gerechtsdeurwaarder 2016/2, pp. 23-28; H.M.M. Steenberghe & J.D.A. den Tonkelaar (ed.), Commentaar & Context KEI; het gewijzigde Wetboek van Burgerlijke Rechtsvordering becommentarieerd vanuit de parlementaire geschiedenis van de KEI-wetgeving, Boom juridisch Den Haag 2017 and J.D.A. den Tonkelaar, De regisserende zaaksrechter: de regierol van de rechter volgens KEI, TCR 2015, pp. 105-113. 18 See e.g. T.J.J. Bodewes, Bewijsbeslag; grondslag en rechtsgevolgen van het conservatoir beslag tot afgifte van bescheiden, Celsus Tilburg 2009 and M. Rieger-Jansen, Twee jaar ervaring met het bewijsbeslag, AMI 2009, pp. 91-96. 19 http://www.coe.int.

123

Anthonie W. Jongbloed relation to procedural law especially because of Article 6(1) regarding the right to a fair trial: ‘In the determination of his civil rights and obligations (…) everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. Judgment shall be pronounced publicly (…)’. The article was ‘rediscovered’ round 1975 and afterwards the provision has influenced various decisions and judgments within the whole of procedural law.20 I would like to point to ECHR 9 October 1979, NJ 1980/376 (Airey/Ireland), ECHR 25 June 1987, NJ 1990/231 (Capuano/Italy), ECHR 24 May 1989, NJ 1990/627 (Hauschildt/Denmark), ECHR 27 October 1993, NJ 1994/534 (Dombo) and ECHR 27 March 1996, NJ 1996/577 (Goodwin).21 But a special commission within the Council of Europe also plays an important role in relation to harmonisation. This is the CEPEJ:22 the European Commission for the Efficiency of Justice. This commission was established on 18 September 2002 by Resolution Res (2002)12 of the Committee of Ministers of the Council of Europe. The creation of the CEPEJ demonstrates the will of the Council of Europe to promote the Rule of Law and Fundamental Rights in Europe, on the basis of the European Convention on Human Rights, and especially its Articles 5 (Right to liberty and security), 6 (Right to a fair trial), 13 (Right to an effective remedy) and 14 (Prohibition of discrimination). The establishment of CEPEJ, which is ensured by the Directorate General of Human Rights and Legal Affairs, shows the intention of the Council of Europe not only to elaborate on international legal instruments but also to promote a precise knowledge of the judicial systems in Europe and of the different existing tools which enable it to identify any difficulties and facilitate their solution.

20 See e.g. P. Smits, Artikel 6 EVRM en de civiele procedure, Serie Burgerlijk Proces & Praktijk 10, Kluwer Deventer 2008; M. Chébti, Misbruik van procesrecht door advocaten, rechterlijke terughoudendheid en het recht op toegang tot de rechter gewaarborgd in art. 6 EVRM, WPNR 2015/7087, pp. 1057-1061, en A. Hammerstein, De invloed van art. 6 EVRM op het burgerlijk procesrecht, in: G.J.M. Corstens et al. (ed.), Europeanisering van het Nederlands recht; opstellen aangeboden aan mr. W.E. Haak, Kluwer Deventer 2004, pp. 220-233. 21 In Airey/Ireland it is made clear that the right to have ‘access to the court’ should have a practical meaning and that financial obstacles should not prevent this. In Capuano/Italy it was decided that the State is liable if and in so far as the judge can be blamed if proceedings last unnecessarily long. The impartiality of the judge has an objective and a subjective component, as is evident from Hauschildt/Denmark. Dombo shows that the principle of equal treatment is violated if statements by parties to the proceedings are given different value, depending on who bears the burden of proof (in that case there is additional evidentiary value pursuant to Section 164 subsection 2CCP and otherwise non-binding evidentiary value pursuant to Section 152 subsection 2 CCP), while in Goodwin journalistic privilege is recognised. See regarding the Dombo judgment G.R. Rutgers De partij-getuigenverklaring en art. 6 EVRM, WPNR (2000) 6427, pp. 908-911. 22 Commission européenne pour l'efficacité de la justice; Cf. http://www.coe.int/cepej.

124

9

Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment

The CEPEJ will have, among other duties, the task of continuing the ongoing reflexion about the potential offered by new information technologies (IT) to improve the efficiency of justice. The functioning of the CEPEJ is governed by its Statute (cf. Appendix 2 to Resolution Res (2002)12). The aim of the CEPEJ is the improvement of the efficiency and functioning of justice in the member States, and the development of the implementation of the instruments adopted by the Council of Europe to this end. Its tasks are: – to analyse the results of the judicial systems – to identify the difficulties they meet – to define concrete ways to improve, on the one hand, the evaluation of their results, and, on the other, the functioning of these systems – to provide assistance to member States, at their request – to propose to the competent instances of the Council of Europe the fields where it would be desirable to elaborate a new legal instrument. In order to carry out these different tasks, the CEPEJ prepares benchmarks, collects and analyses data, defines instruments of measure and means of evaluation, adopts documents (reports, advice, guidelines, action plans, etc.), develops contacts with qualified personalities, non-governmental organisations, research institutions and information centres, organises hearings, and promotes networks of legal professionals. Reports are published on a regular basis in which the different countries are compared and from which the governments can learn. In the series European judicial systems, efficiency and quality of justice, 2016 CEPEJ study 23 Edition 2016 (2014 data)23 was published in 2016 and as a study 24 Thematic report: Use of information technology in European courts. In this way the possibility is offered to learn from best practices elsewhere and a finger is kept on the pulse: no country wants to be at the bottom of a list showing, for example, that the costs of proceedings there are the highest or the procedures last the longest.

23 In this numerous subjects are compared, such as Budgets of judicial systems (Annual budget of the whole justice system, Annual public budget of the judicial system, Budget allocated to courts, Annual public budget allocated to the public prosecution services, Court taxes or fees, Annual public budget allocated to legal aid and Trends and conclusions), Judicial staff and lawyers (Judges, Prosecutors, Other staff in courts and Lawyers), Court organisation and court users (Organisation of the court system, Quality of the court system and court users and Monitoring of the violations of ECHR Article 6) and Efficiency and quality of the activity of courts and public prosecutors (General overview of court workload, Civil and commercial justice (litigious cases), Administrative justice, Criminal justice, and Trends and conclusions).

125

Anthonie W. Jongbloed

9.4

An area suitable for uniformisation: execution and attachment law

Although much attention is paid to the European law of civil procedure, this mainly concerns the proceedings. 24 An important catalyst is the bar of Art. 6 ECHR against which proceedings are compared. Proceedings must take place before an independent tribunal and must be concluded within a reasonable time. The fundamental principles of the law of civil procedure must also be met, such as hearing both sides. Plans for harmonised European procedural law focus mainly on partial projects such as the uniformisation of time limits. But it will be clear that the enforcement of court decisions is of great significance. A person who obtains a judgment allowing his claim but does not have possibilities to have the judgment enforced will have won a Pyrrhic victory. The necessary steps have meanwhile been taken. Particularly the (recast) Brussels 1 Regulation is of great importance. Another example from 18 January 2017 is the Regulation on the European Account Preservation Order (EAPO),25 but this offers Dutch creditors few possibilities and the application of Dutch law will often be preferred.26 As a rule, however, attention is focused on questions such as which court has jurisdiction to take cognisance of proceedings, how do the proceedings run, what should be done in the absence of the summoned person and should it be possible to use legal remedies. Where relatively little attention is paid is to the possibility and manner of enforcement. This is expressed in education, 27 the activities of CEPEJ on this level and in the case law of the Luxembourg Court of Justice and the Strasbourg Court of Human Rights. It should be noted first of all that although the Council of Europe or CEPEJ has undertaken certain 24 It is worthwhile to mention Article 81 of the Treaty on the functioning of the European Union: The Union shall develop judicial cooperation in civil matters having cross-border implications, based on the principle of mutual recognition of judgments and of decisions in extrajudicial cases. Such cooperation may include the adoption of measures for the approximation of the laws and regulations of the Member States. In §2 it is said that measures shall be adopted, particularly when necessary for the proper functioning of the internal market. Eight specific measures are mentioned. Furthermore, Article 47 of the Charter of Fundamental Rights of the European Union also provides for a right to an effective remedy and to a fair trial. 25 European Account Preservation Order. Cf. Regulation (EU) No. 655/2014 of 15 May 2014 establishing a European Account Preservation Order procedure to facilitate cross-border recovery of debts in civil and commercial matters, OJEU 2014, L 189/59. 26 See my European seizure of bank accounts, but then different, Beslag en Executie in de Rechtspraktijk 2014, no. 5, pp. 20-31. At the time this text was concluded, not a single EAPO seizure had as yet been imposed in the Netherlands. 27 For instance, from 2017, the Utrecht bachelor’s students have only been taught a limited number of areas in the law of civil and administrative procedure, and this does not include the enforcement of court judgments. Those who graduate in private law still encounter this component in the Civil Litigation Practice course, but a person who graduates in administrative or criminal law is not taught execution and attachment law. The courses for private law students have often be halved as well, as until a few years ago an optional course existed that taught this area of law for eight weeks, whereas the course now lasts for only four weeks.

126

9

Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment

activities, this was done quite some time ago. For example, Recommendation Rec (2003)17 of the Committee of Ministers to Member States on enforcement28 was adopted in 2003 and the Guidelines for a better implementation of the existing Council of Europe’s recommendation on enforcement29 in December 2009. The last activity is the first and only Global Forum on Enforcement which was organised by CEPEJ and UIHJ on 10 December 2014.30 The main points from the Recommendation from 2003 are: III.1 In order for enforcement procedures to be as effective and efficient as possible, a. enforcement should be defined and underpinned by a clear legal framework, setting out the powers, rights and responsibilities of the parties and third parties; b. enforcement should be carried out in compliance with the relevant law and judicial decisions. Any legislation should be sufficiently detailed to provide legal certainty and transparency to the process, as well as to provide for this process to be as foreseeable and efficient as possible; c. the parties should have a duty to co-operate appropriately in the enforcement process; in addition, and particularly in family law matters, the relevant authorities should facilitate this co-operation; d. defendants should provide up-to-date information on their income, assets and on other relevant matters; e. states should set up a mechanism to prevent misuse of the enforcement process by either party which should not be considered as a re-adjudication of the case; f. there should be no postponement of the enforcement process unless there are reasons prescribed by law. Postponement may be subject to review by the court; g. during the enforcement process, a proper balance should be struck between claimants’ and defendants’ interests, bearing in mind, in particular, the provisions of both Articles 6 and 8 of the ECHR. Where appropriate, the interests of third parties should also be taken into account. When the enforcement process concerns family law matters, the interests of the members of the family should be taken into account; in addition, when the enforcement process concerns, in particular, the rights of children, the best interests of the

28 https://search.coe.int/cm/Pages/result_details.aspx?ObjectID=09000016805df135. 29 https://wcd.coe.int/ViewDoc.jsp?p=&Ref=CEPEJ(2009)11&Language=lanEnglish&Ver=original&BackColorInternet=eff2fa&BackColorIntranet=eff2fa&BackColorLogged=c1cbe6&direct=true. 30 http://www.coe.int/t/dghl/cooperation/cepej/meetings/2014/Forum_Enforcement/Dossier_special_Forum_ Enforcement_2014_en.asp.

127

Anthonie W. Jongbloed child should be a primary consideration, in accordance with international and national law; h. certain essential assets and income of the defendant should be protected, such as basic household goods, basic social allowances, monies for essential medical needs and necessary working tools. III.2 Enforcement procedures should: a. be clearly defined and easy for enforcement agents to administer; b. prescribe an exhaustive definition and listing of enforceable titles and how they become effective; c. clearly define the rights and duties of defendants, claimants and third parties, including, in the two latter cases, their rankings and entitlements to monies recovered and distributed amongst claimants; d. provide for the most effective and appropriate means of serving documents (for example, personal service by enforcement agents, electronic means, post); e. provide for measures to deter or prevent procedural abuses; f. prescribe a right for parties to request the suspension of the enforcement in order to ensure the protection of their rights and interests; g. prescribe, where appropriate, a right of review of judicial and non-judicial decisions made during the enforcement process. III.3 Enforcement fees should be reasonable, prescribed by law and made known in advance to the parties. One of the first important judgments of the European Court of Human Rights is that of 23 March 1994, NJ 1994/506 (Silva Pontes). Silva Pontes became involved in a serious traffic accident on 12 November 1975: his car collided with a car from the firm of Dos Reis. He sustained serious injuries in the accident, as a result of which he remained partially incapable of work in spite of various operations. On 20 December 1977 Silva Pontes brought a civil action against, among others, Dos Reis and the latter’s firm for compensation of the loss sustained. Compensation was requested as well for the loss yet to be sustained as a result of the accident in an amount to be determined partly in the execution proceedings. The claim was allowed on 1 October 1982 as far as the loss sustained was concerned. On 13 October 1982 he brought an appeal concerning the level of the amount awarded. After this was dismissed on 30 May 1985, he contacted the High Court of Justice on 11 July 1985, which on 5 February 1987 awarded an amount to be determined in the execution proceedings for loss as a result of permanent invalidity and incapacity for work. On 28 October 1987 he started execution proceedings which were settled out of court on 19 December 1989. Meanwhile, 14 years had passed and the question was whether a reasonable period existed within the meaning of Art. 6 ECHR. Concisely stated, the ECHR ruled that the reasonable time in civil proceedings pursuant 128

9

Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment

to Art. 6 ECHR also includes the follow-up proceedings for the determination of damages and the execution proceedings. This means that in execution proceedings, a judge must indeed take account of the progress of the preceding stages of the proceedings, even if they took place before a different court. ECHR 19 March 1997, NJ 1998/434 (Hornsby/Greece) is also referred to constantly, in which five years after a judgment giving an order against the Greek State, no measures had yet been taken to implement that judgment: ‘40 The Court reiterates that, according to its established case-law, Article 6 § 1 secures to everyone the right to have any claim relating to his civil rights and obligations brought before a court or tribunal; in this way it embodies the ‘right to a court’, of which the right of access, that is the right to institute proceedings before courts in civil matters, constitutes one aspect (see the Philis v. Greece (no. 1) judgment of 27 August 1991, Series A no. 209, p. 20, § 59). However, that right would be illusory if a Contracting State’s domestic legal system allowed a final, binding judicial decision to remain inoperative to the detriment of one party. It would be inconceivable that Article 6 should describe in detail procedural guarantees afforded to litigants — proceedings that are fair, public and expeditious — without protecting the implementation of judicial decisions; to construe Article 6 as being concerned exclusively with access to a court and the conduct of proceedings would be likely to lead to situations incompatible with the principle of the rule of law which the Contracting States undertook to respect when they ratified the Convention (see, mutatis mutandis, the Golder v. the United Kingdom judgment of 7 May 1974, Series A no. 18, pp. 16–18 (NJ 1975, 462, annotated by EAA; ed.), § 34–36. Execution of a judgment given by any court must therefore be regarded as an integral part of the ‘trial’ for the purposes of Article 6; moreover, the Court has already accepted this principle in cases concerning the length of proceedings (see, most recently, the Di Pede v. Italy and Zappia v. Italy judgments of 26 September 1996, Reports of Judgments and Decisions— 1996, pp. …, §§ …).’ A very good illustration is also ECHR 28 July 1999, NJ 2000/470 (Immobiliare Saffi v. Italy). The Italian construction company I.B. was the owner of an apartment in Livorno.31 This apartment was rented to a certain L.B. On 20 April 1983, I.B. informed the tenant of its intention to terminate the rental after the rental term ended on 31 December 1983 and requested him to vacate the apartment on that date. In November 1983 a ‘notice to quit’ was sent to L.B. The latter, however, refused to leave. The same month, L.B. was ordered 31 This summary was taken from the heading in the Dutch Law Reports (NJ).

129

Anthonie W. Jongbloed to appear before the Livorno Magistrate . The latter ruled on 21 November 1983 that the ‘notice to quit’ was valid and ordered the tenant to vacate the apartment before 30 September 1994. This order became enforceable on 7 December 1983. On 30 May 1985 L.B. was ordered in writing to vacate the apartment. Almost five months later, on 26 September 1985, L.B. was notified that the ‘order for possession’ would be enforced on 19 November 1985 by a bailiff. The latter made six unsuccessful attempts to do so from this date until December 1987. By way of a merger of I.B. with Immobiliare Saffi, the latter became the owner of the apartment in question in 1988. Between 15 December 1988 and 9 January 1996, the bailiff made eleven attempts to secure possession of the apartment. These attempts were not successful because of the fact that the firm also, in accordance with the statutory rules relating to suspension and spreading of eviction, had no right to police assistance. On 21 February 1989, Act No. 61/89, in which provisions are including for the spreading of the execution of orders to transfer possession, took force. The prefect of Livorno determined on 16 May 1989 and 19 February 1990 that decisions on requests for police assistance shall be based on the criteria included in that Act, namely the order of priority indicated by the legislature, the date on which the request for assistance was submitted, any specific aspects of the individual case, as well as the condition that per month 30% of the total number of orders for the transfer of possession must be enforced. Immobiliare Saffi ultimately took possession of the apartment on 11 April 1996, after the tenant had died. The ECHR held: ‘66. The Court reiterates that the right to a court as guaranteed by Article 6 also protects the implementation of final, binding judicial decisions, which, in States that accept the rule of law, cannot remain inoperative to the detriment of one party (see, mutatis mutandis, Hornsby (…), § 40). Accordingly, the execution of a judicial decision cannot be unduly delayed. (…) 74. In conclusion, while it may be accepted that Contracting States may, in exceptional circumstances and, as in this instance, by availing themselves of their margin of appreciation to control the use of property, intervene in proceedings for the enforcement of a judicial decision, the consequence of such intervention should not be that execution is prevented, invalidated or unduly delayed or, still less, that the substance of the decision is undermined. In the present case (…) the impugned legislation rendered nugatory the Livorno magistrate’s ruling in his order of 21 November 1983. Further, from the moment the prefect became the authority responsible for determining when the order for possession would be enforced, and in the light of the fact that there could be no effective judicial review of his decisions, the applicant com130

9

Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment pany was deprived of its right under Article 6 § 1 of the Convention to have its dispute (contestation) with its tenant decided by a court. That situation is incompatible with the principle of the rule of law.’

An important judgment of the Luxembourg Court is that of 3 October 1985, NJ 1987/118 (Capelloni v Pelkmans). Pelkmans had obtained leave on 19 December 1980 from the Corte d'appello in Brescia (Italy) to enforce the judgment of the Breda District Court of 8 May 1979, ordering Capelloni to pay Pelkmans a sum of money. Capelloni lodged an objection pursuant to Art. 36 of the Brussels Convention, also at the Corte d'appello in Brescia. But before a decision had been taken on the objection, Pelkmans imposed prejudgment attachment, pursuant to Art. 39 of the Brussels Convention, on immovable property belonging to Capelloni. Pelkmans subsequently requested the Corte d'appello to validate this attachment in accordance with Sec. 680 of the Italian Code of Civil Procedure. After the Corte d'appello had declared Pelkmans’ application inadmissible, the Italian Corte Suprema di Cassazione, in a decision of 9 November 1983, applied to the Luxembourg Court for a preliminary decision on the interpretation of Art. 39 Brussels Convention: To what extent must the provisions in the different national legal systems be referred to for similar measures in order to adopt the rules governing the protective measures in Art. 39.32 The Luxembourg Court (Fourth Chamber) ruled: '(1) By virtue of Article 39 of the Convention, a party who has applied for and obtained authorization for enforcement may, within the period mentioned in that article, proceed directly with protective measures against the property of the party against whom enforcement is sought and under no obligation to obtain specific authorization. (2) A party who has obtained authorization for enforcement may proceed with the protective measures referred to in Article 39 until the expiry of the period prescribed in Article 36 for lodging an appeal and, if such an appeal is lodged, until a decision is given thereon. (3) A party who has proceeded with the protective measures referred to in Article 39 of the Convention is under no obligation to obtain, in respect of

32 Under Italian law, authorisation was required from the competent court for each prejudgment attachment, so the interested party could not immediately proceed to impose attachment; prejudgment attachment had to be imposed within a peremptory period that started on the day on which the interested party was able to impose attachment, and after the attachment was imposed, validation proceedings had to be instituted.

131

Anthonie W. Jongbloed those measures, any confirmatory judgment required by the national law of the court in question.'33 The second decision to be mentioned is CJEC 10 February 1994, NJ 1994/385 (Mund v. Hatrex). In that judgment it was decided that Article 7 of the EEC Treaty in conjunction with Article 220 of the EEC Treaty and the Brussels 1 Convention preclude the application of a national provision of the law of civil procedure which in the event of a judgment to be enforced on its own national territory allows prejudgment attachment only on the ground that without such a measure enforcement would probably be impossible or considerably more difficult, while it already allows such attachment in the event of a judgment to be enforced in another Member State, merely on the ground that the judgment will have to be enforced abroad. A Member State may make a difference between domestic situations and situations in other Member States, but there must be justification for doing so. But because the Brussels I Convention exists, there was no such justification and the provisions in the German Zivilprozessordnung (ZPO) were in conflict with the prohibition on discrimination according to nationality in the EC Treaty, so the provision had to remain inapplicable. Although these are important judgments, all things considered the harvest is limited and the question arises whether further steps can be taken. As far as I am concerned, this question must be answered in the affirmative, because practice shows that a judgment for allowance is no reason to cheer. Sometimes an allowing judgment must be presented for review by an executing judge who must assess whether the judgment in question should or should not be enforced. The starting point at times is that the oldest judgment must be enforced first. A noble pursuit that, however, leads to problems in practice: if there is a backlog, it sometimes takes a few years before a judgment can be enforced and in that case it still remains to be seen whether the debtor has departed to an unknown destination (because not all countries have sound population records). A third complication could be that there are too few officials charged with enforcement. Finally, a complication can also occur if the rates are set at too high a level (for example, on the transition to enforcement by bailiffs as officers under private law and no longer as officers under public law), because enforcement is then not possible in all cases. After all, if there is enforcement by private officers and not by public servants who are paid by the government, those who insist on enforcement will have to advance the costs for this and must then wait and see if those costs can be recovered from the debtor.

33 See the present Art. 39 (enforcement) and 46 ff. (refusal of enforcement) Brussels 1 recast.

132

9

9.5

Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment

What to do next

It is clear from the foregoing that there is a need for provisions on execution and attachment law in a European context. Our society is acquiring more and more of an international character. While people used to go on holiday to the Veluwe or the Ardennes, it is now the most usual thing in the world to travel to countries such as Spain, Italy and Greece. Some people think about buying a second home in those countries. But what can one do if the seller ultimately does not want to cooperate? What needs to happen if someone wants to buy a painting on location and pays the purchase price but the supplier does not want to surrender the painting? In such cases it is advisable that the same legal measures can be taken in the various EU countries,34 for example that attachment for the purpose of delivery can be imposed. It can be pointed out that attachments can be subdivided. We have prejudgment attachment as opposed to executory attachment. We have attachment against a debtor, a third party or a creditor itself. Attachment is possible on movables, property subject to registration, aircraft, ships, bearer rights or rights by order and of shares, of rights under a capital sum policy or life insurance. Attachment can be for the purpose of recovery or surrender or delivery. And, an important point: there are indirect means of execution such as an incremental penalty and commitment for failure to comply with a judicial order, because it is not always possible by far to compel the agreed performance. Think of a stage actress who can sign a lucrative contract elsewhere and is no longer motivated to perform for her present employer. Such an employer cannot bring her to the theatre, so to speak, with a whip in hand. But if someone is affected financially or if someone is temporarily deprived of his/her liberty by an unwanted stay in a House of Detention, it is often possible to achieve what was agreed. Another obstacle is that attachment law proves to be very diverse when recovery is sought. It is not surprising that goods intended for public service cannot be attached (cf. Sections 436 and 703 CCP). But there are provisions in the different legal systems expressing that certain goods may not be attached. For example, under Section 475e there is an income tax allowance in the event of periodic payments. On the one hand, a creditor must have the possibility to seek recovery from the assets and income of the debtor,35 but the legislature also realised that the debtor may/should not be

34 An obstacle is however that national purchasing law differs. In France, one already becomes the owner through the purchase, whereas in the Netherlands, transfer is still necessary. In order to revendicate ownership, it is much simpler if one has to take legal action on the basis of a personal right. This means that uniform purchasing law is a primary need. 35 Cf. Book 3, Sections 276 and 296 of the Dutch Civil Code. The same in France as well: Sec. 2284 Code Civil.

133

Anthonie W. Jongbloed plucked down to the bone. For instance, no attachment is possible on clothing, food and beverages for a month and tools that are necessary to acquire an income. For instance, an income tax allowance applies to wages and other income. In Dutch situations, the amount of income someone needs to leave free can be fixed on the basis of the standard of living applicable in the Netherlands: the incomes that roughly equal 90% of the statutory assistance criterion cannot be attached and the debtor can use them to pay rent or mortgage interest, food and beverages, heating of the home etc. But if a debtor living in a foreign country is involved, the standard of living there has to be considered and it would not be simple for a Dutch court to determine the right amount. Moreover, it is possible that the debtor hardly earns any income in the Netherlands, or has income that remains below the statutory assistance criterion, but has considerable income in the country of residence. It is however difficult to find out if there is such income and how much it is. An unfair situation could occur if the income in the Netherlands is less than the statutory assistance criterion, but the foreign income exceeds it. All this was a reason at the time for the legislature to grant persons living abroad a protected earnings level in principle if the court awards this on their application.36 In such a case the court can deliver ‘customised work’. If non-attachable movables are concerned, a Dutch creditor can be over-optimistic, but have a rude awakening. It appears in fact that in most countries in Europe, the group of items of property that cannot be attached is much larger than in the Netherlands. I already pointed this out in 200237 and further research in relation to the preliminary advice of the Royal Dutch Organization of Bailiffs (KBvG) published in 2012 confirmed that.38 The Dutch scheme in fact proves to be still the scheme from 1838. No attachment can be imposed on clothing, food and beverages for a month and tools that are needed to acquire an income. Two possibilities have been dropped, namely first of all that no attachment can be imposed on the equipment of persons in military service. In addition, the possibility has disappeared from the law that no attachment can be imposed on a cow, or two pigs, or two goats, or four sheep, at the discretion of the person against whom attachment is made, with the necessary hay and feed for that livestock for a month. No exceptions have been added, however. This is remarkable, because in other countries the legislature has sought to be in line with the increased social welfare, which has resulted in legislative amendments that extended attachment. In many countries a choice appears to

36 Cf. Kamerstukken (Parliamentary Papers) II 1982/83, 17 897, General scheme for garnishment of wages, social benefits and other periodic payments, No. 3, Explanatory Memorandum, pp. 11 and 20.’ 37 Cf. pp. 50-53 and pp. 59-65 of my oration. I already argued at the time in favour of extending the scheme and adjusting it to the countries surrounding us. 38 Cf. J. Rijsdijk & J. Nijenhuis (eds.), Herziening van het beslagverbod roerende zaken, een achterhaalde regeling bij de tijd gebracht, preliminary advice of the Royal Dutch Organization of Bailiffs (KBvG), SDU The Hague 2012.

134

9

Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment

have been made to leave a debtor in possession of what are viewed nowadays as essential necessities of life. Think of the movables needed for the subsistence and work of the attached person and his family, as well as the items of property that are indispensable for disabled persons or the care of the sick. In addition, sometimes attachment cannot be imposed on items of property that a testator or giver has declared not to be capable of attachment. The doctrine of abuse of rights also proves to play a role. The starting point of the right of recovery is (still) that a creditor can recover from all items of property of his debtor (Section276 Book 3 of the Dutch Civil Code (BW))39 and that the creditor may exercise this right in respect of all items of property at the same time. He is, after all, at liberty to impose attachment on all items of property capable of attachment (Section 435 subsection 1 CCP). But those main rules can be derogated from if a greater interest is served than that of the individual creditor in recovering his debt. In many countries the law contains a more extensive list and attachment is not possible, for example,40 on computers in use by children of school age, the household items that are needed to preserve, prepare and consume food, the table and chairs to consume meals together, a wardrobe and a store cupboard. But also household effects such as a sewing machine, bicycle, clock, vacuum cleaner, radio and television set, a refrigerator, a washing machine and a tumble dryer. Strictly personal items such as photographs, letters and awards also fall outside the reach of the attaching party. The same holds true de facto for pets such as cats and dogs.41 In Section 1412ter of the Belgian Judicial Code, a scheme is included relating to cultural property owned by a foreign power that is located in Belgium for exhibition purposes. It appears to me that this scheme of non-attachable property could be harmonised in a relatively simple way by formulating an open standard that gives bailiffs the freedom to act as they see fit within a limit to be set by the European Commission. The European Commission could be inspired by the ‘non-excessiveness criterion’ referred to in Section 295 subsection 4 under 4 of the Bankruptcy Act (Fw) that applies in our country in the context of the Debt Management (Natural Persons) Act (Wsnp), but could also choose an amount derived, for example, from the minimum income in a country. The situation can be assessed from case to case, taking account of the circumstances of the case. I expect that the bailiff handling the matter (and if necessary also the judge, who can always be asked for an opinion) will also be inspired by the list which exists at present, but that ‘firm’ standards formulated in the law will be prevented from resulting in cases of unfairness. 39 Also in France: Cf. Sec. 2284 Code Civil. 40 For Belgium see Section 1408 Judicial Code; Germany § 811 in conjunction with 930 ZPO; France: Sec. 14 of the Act of 9 July 1991, no. 650 and for the United Kingdom Sec. 89 County Court Act 1984 and Scheme 7 under 9 subsection 3 to the Courts Act 2003. 41 This, too, with a view to practical aspects such as care. If a pedigree cat or dog is concerned, attachment may indeed come up for discussion.

135

Anthonie W. Jongbloed In this way, a reasonable balance could be found between, on the one hand, the principle that the debtor warrants his debts with his entire assets and, on the other, the principle on which the debt management scheme is based that a debtor must be offered the opportunity to work on a solution for his debts so that he can again participate fully in social life. A similar solution could be found for the protected earnings level when it comes to periodic income.42 The starting point could be a certain percentage of the minimum income or the statutory assistance criterion, with attention being paid to several circumstances which are assessed as a flat-rate starting point. But a correction could be applied to this in order to do justice to the circumstances of the actual case. One has higher housing costs out of necessity than the other; one lives closer to his work and the other does not; one has growing children, the other does not. A bit tricky: one has a higher spending pattern than the other. By this I do not mean that, by definition, someone who spends a lot should be given a higher or lower protected earnings level. But some spend proportionately less on themselves and are able to pay off their debts more quickly. In fact, the solution referred to here is what judges already do in determining maintenance, namely doing justice within predetermined limits to the circumstances of the specific case. It would now be alleged against this that legal inequality would occur in that way because one person will be affected more and the other person less by the attachment. I, however, can reply to this: this may be the case in absolute amounts, but the point is to arrive at a fair outcome. The person who receives a higher protected earnings level will have more costs and the surplus may go to the landlord or be spent on diet food. I think that justice can be done precisely by delivering custom work via a protected earnings level. I understand from bailiffs that they weigh the debtor with respect to his/her ability to pay and that it is often better to set a realistic amount that the debtor has left after the deduction of a protected earnings level than that the debtor is ‘squeezed’ because the latter will lose the motivation to make efforts to pay off the debts as soon as possible. And two things should be borne in mind: 1. It is ultimately the judge who rules and 2. The problem does not need to be solved in 45 minutes; by exchanging ideas a properly operating system can be found. Another question can be raised as well. Does such a system constitute discrimination because the residents of the various Member States are assessed differently? It is evident from the aforementioned judgment of the Luxembourg Court of 10 February 1994, NJ 1994, 385 (Mund v. Hatrex) that residents of the European Union must be treated equally. The court held in paragraph14:

42 See also J. Rijsdijk, O.M. Jans and J. Feikema (ed.), Naar een nieuwe beslagvrije voet; Vereenvoudiging in een tweetrapsraket, preliminary advice by the Royal Dutch Organisation of Bailiffs (KBvG), SDU The Hague 2014.

136

9

Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment ‘The Court has consistently held that this provision43 prohibits any discrimination on grounds of nationality within the field of application of the Treaty. This article forbids not only overt forms of discrimination based on nationality, but also all covert forms of discrimination which, by the application of other criteria of differentiation, lead in fact to the same result.44 This, however, concerns a prohibition of discrimination based on nationality. If the persons located on the territory of a Member State are treated equally and no other specific obstacles are raised, there is no question of this. The fact that the law in one Member State is not exactly the same as that in another Member State does not need to form a problem. If I should live on a farm in Romania, for example, no attachment could be imposed on part of my livestock (nor on the feed). In reverse, if a Spaniard is located in the Netherlands, garnishment of his wage would be limited to – briefly stated – 90% of the Dutch statutory assistance criterion. Equal cases are then treated equally’.

There are even parts that are easy to harmonise, and even unify. In that case I think of both coercive measures and incremental penalty and commitment for a failure to comply with a judicial order. It is not possible to compel a court judgment in all cases. More than 80 years ago – on 1 April 193345 – the Dutch legislature included the incremental penalty scheme in the Code of Civil Procedure. The incremental penalty is an additional order to pay the creditor a sum of money, without any connection to the loss the creditor is sustaining or will sustain as a result of the late performance of the main obligation, in order to exert pressure on the debtor to comply with the main order pronounced against him. It is usually calculated per day of delay in implementing the order or per violation of the order. The aim was that in this way less use needed to be made of the imposition of commitment for a failure to comply with a judicial order and the hope was that hitting a debtor in his pocket would give him/her a substantial impetus to comply. Briefly stated, this comes down to obligations to give which can indeed be compelled, whereas obligations to do or omit (not to do) have to fall back on incremental penalties or commitment for a failure

43 Cf. the present Articles 2 and 3 of the EU Treaty as well as Article 21 of the Charter of Fundamental Rights of the EU. 44 See also CJ EC 29 October 1980, NJ 1981, 655 (Boussac v. GerstenMayer), legal ground 9: ‘Article 7 of the Treaty (now Article 12 of the EC Treaty, AWJ) prohibits any discrimination on grounds of nationality within the field of application of the Treaty. That article forbids not only overt discrimination by reason of nationality, but also all covert forms of discrimination which, by the application of other criteria of distinction, lead in fact to the same result.’ 45 Cf. the Act of 29 December 1932, Bulletin of Acts and Decrees (Stb.) 676.

137

Anthonie W. Jongbloed to comply with a judicial order. The incremental penalty has indeed been called the main procedural law innovation of the twentieth century.46 A Uniform Benelux Act on Incremental Penalty Payments has meanwhile applied for almost 30 years in the Netherlands, Belgium and Luxembourg.47 While Belgium abolished commitment for a failure to comply with a judicial order on the introduction of the incremental penalty payment 1980, this institution was retained in the Netherlands. Although the number of cases in which commitment is imposed annually is limited, the institution nevertheless has a useful function. As a last resort, someone can be deprived of his liberty by transfer to a detention facility. It can be said that the law shows its teeth in this way. The importance of commitment for a failure to comply with a judicial order is illustrated on the basis of a ruling by the President of the Court of The Hague of 31 May 2012, ECLI:NL:RBSGR:2012:BX7581. The husband had to pay his estranged wife maintenance after the divorce. After a change to the maintenance with retroactive effect, there were payment arrears of almost €115,000. The wealthy father of the husband had died and the husband rejected the inheritance from his father. His daughters of majority age therefore took the husband’s place as the heirs. On the day of rejection, the husband concluded a contract with his daughters in which agreements were made in relation to the husband’s rejection of the estate and its administration by his daughters of the share in the inheritance to which they were entitled. Briefly stated, the husband was nevertheless able to have considerable capital at his disposal by way of a joint account with one daughter and an interest-free loan from the other daughter. In this case, attachments for the purpose of recovery did not produce much. From September 2011 a sum of €10.35 a month was withheld from the husband’s state pension benefit and from December 2011 a sum of €1006.10 a month from his benefit under the Victims of Persecution (1940-1945) Benefits Act (WUV). From the amounts withheld costs, including those of the bailiff, were paid. On balance, since March 2012 the wife has received a sum of €950 gross per month. The attachment of the husband’s dwelling had no effect because the value of the dwelling was estimated at €190,000 and the husband had two mortgage loans, one of €98,400 from Rabobank and one of €131,000 from his daughter. The attachment imposed on the husband’s bank accounts did not have any effect either. The Court was of the

46 Quoted from: Geschriften van H. Drion, Deventer: Kluwer 1982, p. 126. This is the conclusion of the article ‘Rechterlijk bevel en verbod’ published in RMThemis 1962, pp. 203-240. The great importance of including the incremental penalty in the law also emerges from G.J. Scholten, ‘De invloed van wijzigingen in het procesrecht op het burgerlijk recht’, WPNR 1980-5517, pp. 317-321, which states on pp. 317-319 that the introduction of the incremental penalty was the cause of a shift in the term ‘obligation’. 47 Cf. A.W. Jongbloed, ‘De dwangsom in Nederland, België en Luxemburg’, in: D. Kokkini-Iatridou & F.W. Grosheide (ed.), Molengrafica. Eenvormig en vergelijkend privaatrecht 1991, Lelystad: Vermande 1991, pp. 349-366. See also: A.W. Jongbloed, ‘De dwangsom als een speciale sanctie in het Europese privaatrecht’, in: M. Storme (ed.), Procedural Laws in Europe; Towards Harmonisation, Antwerp/Apeldoorn: Maklu 2003, pp. 193-255.

138

9

Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment

opinion that the husband provided insufficient insight into the capital at his disposal, and which he could actually can have at his disposal, and the total amount of the estate of the husband’s father and the way in which it was divided was not sufficiently evident from the documents. It should be clear that this was not a case of an inability to pay, but of an unwillingness to pay. It will not be surprising that the wife’s claim for commitment for failure to comply with a judicial order was allowed, and for a period of six months at most. If the husband did not pay, he could think in all peace and quiet in a detention facility about what the future would entail for him. Because, for the sake of clarity: the application of commitment for a failure to comply with a judicial order does not cancel the obligation to pay the overdue partner maintenance. So much experience has been gained with the scheme of the incremental penalty and commitment for a failure to comply with a judicial order that it can simply be laid down in an EU Regulation. The Storme Commission published a report in 1994 entitled ‘Approximation of Judiciary Law in the European Union’,48 which contained the building blocks for a harmonised law of civil procedure. The incremental penalty was one of those building blocks.

9.6

A short-term solution

The Union Internationale des Huissiers de Justice (UIHJ) was already mentioned above.49 An important objective of the UIHJ is to establish uniform regulations: the UIHJ board members travel all across the world to place their knowledge and experience at the service of governments and international organisations. In doing so, attention is paid, first of all, on the one hand, to the uniformisation of the national laws of civil procedure and drafting treaties and conventions, but they emphasis as well that an independent ‘officer of the court’ is of great importance for the enforcement of judicial judgments/decisions. Since 2008 the UIHJ has had a ‘think tank’ at their disposal in the form of a conseil scientifique. Its members are high court judges and university professors from all parts of the world.50 Owing to their practical experience and knowledge of various legal systems, they constitute a good forum for drafting uniform regulations. The Tunisian Nad48 M. Storme (ed.), Raprochement du Droit Judiciaire de l’Union européenne – Approximation of Judiciary law in the European Union, Dordrecht 1994. 49 The UIHJ was established in 1952 by Belgium, France, Greece, Italy, Luxembourg, the Netherlands and Switzerland. Meanwhile, 86 countries have become members. http://www.uihj.com/en/ 50 Cf. http://www.uihj.com/en/installation-of-the-scientific-council-of-the-uihj-in-paris-on-june-20th-2008_ 1017701.html. The members come from Argentina, (Kemelmajer de Carlucci), Germany (Hess), France (Ferrand and Fricero), the Netherlands (the author hereof), Portugal (Meira Lourenco), Romania (Les), Russia (Yarkov) Thailand (Vattanahattai) and the US (Emerson).

139

Anthonie W. Jongbloed hir Ben Ammou is now Minister of Justice and Jacqueline Lohoues-Oble held that post for the Ivory Coast. The group meets on a regular basis under the direction of Fricero and has drafted a Global Code of Enforcement in consultation with UIHJ president Andrieux. The ‘Global Code of Enforcement’ project was given shape bit by bit. It was examined whether a draft rule was acceptable and reformulation often took place. A logical order also had to be set out. A choice was made for a subdivision into five parts. After the fundamental principles, attention was devoted to bailiffs and other persons charged with the enforcement of warrants of execution. The judicial authorities are mentioned in part 3, after which common provisions relating to enforcement measures and common provisions relating to preliminary measures follow. It is no surprise that the fundamental principles were put first and foremost, as they are the core of the material to be regulated. Persons in possession of a warrant of execution had to be assured, for example, that there was an effective possibility for enforcement. It is in line with this that a debtor warrants his debts with his entire assets and can be compelled to make a statement of his possessions. Likewise, the costs of enforcement also have to be charged to the debtor, but the creditor must pay them in advance because otherwise the party charged with enforcement would not be certain of payment for his services and therefore might not want to take any action. Consequently, it was added that in case of the insolvency of the debtor, the creditor will bear the costs. Should it be established that the right of execution has been abused, the court can order the creditor to pay the costs of enforcement and compensate the debtor for the damage and/or loss sustained. It is also important for the costs of execution to be laid down, predictable, transparent and reasonable. On the other hand, the state must see to it that all information known about the place of residence, registered office or head office of the debtor, as well as the structure of the possessions is provided to the parties charged with enforcement. An important point is to ensure that all creditors have equal access to the possibilities for enforcement, so that foreign or small creditors do not have to join at the back of the queue. It implies as well that states must give up their privileges. In virtually all countries it is made clear that enforcement can take place only at times determined by the legislature. Elaboration has been left to the national legislatures, because national circumstances play a part. We can think of national holidays and commemorative days, but also the time at which the sun rises and sets. It is essential to bring the service of the warrant of execution to the debtor’s attention prior to enforcement. Here, too, elaboration takes place in national law. This also opens the possibility to reach an amicable solution. 140

9

Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment

In practice a two-way split sometimes occurs between new technological resources and legislation that has not yet been adjusted to this. Consequently it is stated that use can be made of new technologies in the hope that this will urge states to keep their legislation up to date. The law of the jungle applied in earlier times, but now, too, bailiffs can be impeded in performing their duties. Therefore assistance should be guaranteed within a reasonable time of the professional persons charged with enforcing warrants of execution who request this. In line with that, in the context of effecting an executory measure, bailiffs must be able to enter the dwelling and grounds of the debtor, even without the latter’s permission or in the latter’s absence. When the debtor’s property is located at a third party, authorisation by the court is required for entry. Otherwise, the third party’s right to inviolability of the home would be violated. All measures with extraterritorial effect must be carried out by a bailiff of the state of the place of enforcement. This ensures a connection with the national legislation and decreases the chance of shortcomings. Parts 2 and 3 centre on the officers charged with enforcement (in short: bailiffs) and the judicial authorities. Not just a random somebody may be charged with enforcement, but this must be someone who is specifically appointed in the national legislation, which ensures that competency requirements have been met. This concerns a ministerial duty and professional secrecy, but it is also stated that there must be éducation permanente and that rules must be laid down on professional ethics. To monitor quality, disciplinary law is provided that complies with the rules of a fair trial before an independent body that decides in proceedings where both sides are heard. In addition, disciplinary penalties must be in proportion to the gravity of the offences committed, and anappeal must be possible against a disciplinary decision. Disciplinary law is also important in connection with the possibility to develop sideline activities. This will vary from country to country, but the starting point will be that bailiffs can be authorised to proceed with the amicable collection of debts. Differences undoubtedly occur in enforcement. It is important that only a judge can rule on disputes arising from enforcement. Judges are considered to be independent and impartial and that cannot be said of all government officials, because the government is sometimes a stakeholder. Judges should also have the possibility to suspend or cancel enforcement. The Code concludes in parts 4 and 5 with common provisions on enforcement and preliminary measures. It is stated, first of all, that all property can be attached unless it has 141

Anthonie W. Jongbloed been declared protected from attachment by national law. In the event of attachment of a bank account, an amount must be left at the debtor’s disposal that is sufficient to maintain him and his family, the level of which is determined by law. Because the schemes differ on this point, the drafters sufficed with formulating a general starting point that must be specified by the national legislature. Clarity should also be observed regarding immunity: this should be clearly formulated in national legislation, particularly with respect to the state and public bodies, as well as with respect to diplomatic staff. For all certainty, a rule was formulated regarding the proportionality of enforcement measures: they must be in proportion to the amount of the claim. In case of abuse the creditor can be required to pay compensation. The same category of self-evident rules covers the autonomy of the bailiff: he applies the enforcement measure independently in a manner that prejudices the creditor’s rights and the fundamental rights of the debtor as little as possible. States must, however, organise their enforcement systems in such a way that it is in line with the creditor’s interests and the economic and social situation of the debtor. Consequently, a variety of execution measures should exist so that the bailiff can choose them according to the circumstances of the case. Commitment for a failure to comply with a judicial order, a radical coercive measure, exists in many countries. It is stated that its enforcement against persons must comply with international conventions, charters and declarations, as well as that imprisonment for civil-law debts is prohibited. It is fundamentally wrong to enforce it against family members of the debtor, while an eye must especially be kept on the interests of children. Anyone in possession of a warrant of execution may proceed to enforce it. But for other cases a right to a provisional or protective measure must be included in the legislation, because otherwise it might not be possible to implement (alleged) rights. The Global Code strikes a balance between the rights of the creditor, on the one hand, and, on the other, protection of the fundamental rights of the debtor. It is also special that there is insistence on the use of new methods and technologies to modernise the execution procedure. Not so long ago, a bailiff received an engagement to impose garnishment at a bank by e-mail, after which the bailiff brought the essentials in printed form to the attention of the bank, where the information was subsequently processed again in a digital file. This entailed unnecessary costs. In the future, there must be a connection with digital reality. Should national legislatures observe the principles of the Global Code, harmonisation would be simple and possible in the short term, as the preliminary work has been done.

142

9

9.7

Yes We Can (in the Near Future); the Internationalisation of the Law of Execution and Attachment

A solution in the longer term

In the past, several Regulations and Directives were introduced in the law of the 28 EU Member States.51 But we have to think of the future. What should be done? There are four options: 1. Doing nothing at all; 2. Compilation and consolidation (maintaining the status quo, accompanied by setting out existing minimum standards in one instrument, possibly also of guidelines on application); 3. Comprehensive review, a ‘Roadmap’ and subsequent further legislation (where the Roadmap would contain the key principles, and further pieces of binding legislation would cover specific aspects or stages of civil procedure); 4. Creating a binding instrument containing minimum standards (adoption of a binding instrument containing common minimum standards (CMS), or a binding instrument containing common minimum standards (CMS) accompanied by a non-binding instrument concerning further, more detailed standards and some detailed rules as a suggested method of application of these standards in practice. Ultimately there should be an EU Code of Civil Procedure. At present, the EU has limited legislative competence to regulate civil procedure: it relates to matters with cross-border implications. The fundamental limiting feature of Article 81 Treaty on the functioning of the European Union is that the EU has the power to only regulate ‘matters with cross-border implications’. For the existing EU legislation on civil procedure adopted on the basis of Article 81 ‘cross-border implications’ entail a cross-border case: one with a cross-border element. But a more liberal interpretation is possible if we take into account the nature of the matters regulated (for example, common minimum standards in civil procedure). Improving judicial cooperation, enhancing mutual trust, the fairness of civil justice, and the protection of fundamental rights can be regarded as having cross-border implications. People say that civil procedure rules are difficult to harmonise. Civil procedure is ‘deeply enshrined in each nation’s political organisation, social and economic structure, its constitutional and social identity, as well as arrangements for wealth distribution’. 51 E.g. European Enforcement Order, European Order for Payment, European Small Claims Procedure, Regulation (EU) No. 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, Regulation (EC) No. 2201/2003 concerning jurisdiction and the recognition and enforcement of judgments in matrimonial matters and the matters of parental responsibility, Regulation (EC) No. 1393/2007 on the service in the Member States of judicial and extrajudicial documents in civil or commercial matters (service of documents).

143

Anthonie W. Jongbloed But I think a lot of people will welcome further harmonisation. And with the elimination of exequatur by the recast Brussels I Regulation, the issue of mutual trust comes to the fore and requires a common approach to the principle of a fair trial. This means that we need harmonisation of certain fundamental procedural principles and standards. I think the existing differences in national civil procedure rules should not be overly exaggerated. We have common ground in the Napoleonic Code of Civil Procedure, Article 6 of the European Convention on Human Rights: the right to a fair trial, the right to have access to justice, Article 47 of the Charter of Fundamental Rights of the European Union and the CEPEJ reports. We should probably do it the American way: procedural law in the United States of America varies from state to state. But American procedural law has already been largely harmonised by the introduction of the Federal Rules of Civil Procedure, which have also extensively influenced procedural law at the level of the separate States. I think this is what the Storme Commission had in mind. At that moment only a few politicians were interested in that idea, but nowadays a lot has been realised by regulations and directives. Times are changing and that could mean that procedural rules can be harmonised.

144

10

Substance over Form in Various Aspects of Cross-Border Company Groups

Bastiaan Kemp & Mieke Olaerts

10.1

Introduction

The topic for this contribution was an obvious choice. Adriaan Dorresteijn has published widely on various aspects of European corporate law as well as company groups. Therefore, for the contribution to his Liber Amicorum we decided to combine these two topics by discussing various aspects or potential problems which may appear in a cross-border group context and relating them to another subject that has attracted Dorresteijn’s particular interest: substance over form. In his inaugural lecture in Utrecht, entitled ‘Substance over form in company law?’, Dorresteijn addressed various aspects of Dutch corporate law and their application in the case of company groups leading him to the question of to what extent Dutch law recognizes a substance over form approach.1 Over the years there seems to have been increasingly less need for this question mark behind the title as Dutch company law seems to become more flexible allowing for the ‘substance’ to come more to the forefront. In 2012, for example, the Dutch legislation with regard to private limited liability companies was reformed allowing for a more flexible approach and more room for the incorporators to tailor their company and the rules applicable to their collaboration to fit their needs, effectively allowing for a clearer reflection of the substance of the collaboration in the chosen corporate form. We will use this substance over form approach as the common thread in discussing various developments in Dutch and European (group) law. Within the scope of this contribution we will use substance over form in a broader manner than Dorresteijn did in his inaugural lecture. Whereas Dorresteijn was mainly looking for ways to reconcile the corporate form with the substance of the enterprise, we use the concept in an extended manner by looking at various instances in which the courts and the literature try to reconcile economic and legal reality. We will focus more in particular on three topics: substance over form in relation to the regulation of company groups at the EU level (section 10.3), substance over form in relation to directors` liability in cross-border groups involving Dutch subsidiaries (section 10.4) and substance over 1

A.F.M. Dorresteijn, Substance over form in het ondernemingsrecht? (inaugural lecture Utrecht), Deventer: Kluwer 2004.

145

Bastiaan Kemp & Mieke Olaerts form in Dutch inquiry procedures and the consequences of such an approach in a crossborder group context (section 10.5). We will summarize our findings in a conclusion (section 10.6). However, before embarking upon the above-mentioned issues, we will start our journey with a few introductory remarks regarding the company and the enterprise connected to it (section 10.2).

10.2

Substance over form and the legal person

In his inaugural address Dorresteijn observed the need to recognize the enterprise as a legal concept. He pointed to the fact that only a few articles of Dutch company law referred to the enterprise as a legal concept at the time.2 In the meantime, however, the enterprise (onderneming) seems to have gained importance as an instrument in the legal context allowing for a further-reaching reflection on the substance of the enterprise when determining the role of the board members and members of the supervisory board. An important concept in Dutch company law is constituted by the so-called ‘company interest’. This company interest forms an important guideline for the members of the board of directors and the supervisory board. In fulfilling their tasks as board members or as supervisors they have to take into account the interest of the company and the enterprise connected to it.3 In practice, it is not always easy for directors and supervisors to define what the company interest entails. Various theories have been developed in academic literature over the years in order to assist in this regard.4 These theories range from equating the interest of the company to the interest of the shareholders,5 or creating shareholder value,6 to seeing the company interest as the result of a weighing of the interests of all stakeholders involved.7 Another theory uses a more holistic approach acknowledging that the com-

2 3 4

5 6 7

A.F.M. Dorresteijn, Substance over form in het ondernemingsrecht?(inaugural lecture Utrecht), Deventer: Kluwer 2004, p. 10. Art. 2:129/239-5 DCC and 2:140/250-2 DCC. See about these theories amongst others: B.F. Assink, De januskop van het ondernemingsrecht-Over facilitering en regulering van ondernemerschap (inaugural lecture Rotterdam), Deventer: Kluwer 2012, p. 38 e.v.; A.J.A.J. Eijsbouts and B. Kemp, ‘Over maatschappelijk verantwoord ondernemen, waardecreatie, ondernemingsrecht en vennootschappelijk belang’, TvOB 2012, afl. 5, p. 127; M.M. Mendel & W. Oostwouder, ‘Het vennootschappelijk belang na recente uitspraken van de Hoge Raad’, NJB 2013/1776, afl. 29, p. 1965-1972; B. Kemp, Aandeelhoudersverantwoordelijkheid: De positie en rol van de aandeelhouder en aandeelhoudersvergadering (diss. Maastricht), Deventer: Kluwer 2015, p. 109 – 121. F.J.W. Löwesteyn in: H.C.F. Schoordijk e.a., Honderd jaar rechtsleven. De Nederlandse Juristen-Vereniging 1870-1970, Zwolle: Tjeenk Willink 1970, p. 88. M.J. Van Ginneken & L. Timmerman, ‘De betekenis van het evenredigheidsbeginsel voor het ondernemingsrecht’, Ondernemingsrecht 2011/123. E.J.J. Van der Heijden/ W.L.C. Van der Grinten/P.J. Dortmond, Handboek voor de naamloze en besloten vennootschap, Deventer: Kluwer 2013, no. 323; L. Timmerman, ‘Grondslagen van geldend Ondernemingsrecht’, Ondernemingsrecht 2009/2; Asser/Maeijer, Van Solinge & Nieuwe Weme 2-II* 2009/394.

146

10

Substance over Form in Various Aspects of Cross-Border Company Groups

pany has an interest of its own which is separated from the interest of its stakeholders. This own interest would then, within this theory, consist of the growth and continuation of the company allowing it to achieve its goal.8 In the Cancun case, the Supreme Court provided (some) more clarity by ruling that: if there is an enterprise connected to the company, the so-called company interest will primarily be constituted by the enhancement of the lasting success of that enterprise.9 By doing so, the Supreme Court effectively links the enterprise to the legally recognized concept of the company interest, which in turn influences the legal boundaries of the rights and responsibilities of the board of directors and the supervisory board as their main duty is to safeguard and enhance this company interest.10

10.3

The group interest

Serving the company interest may become complicated once the company forms part of a group of companies, since the interest of the company and the interest of the group do not necessarily have to coincide. The board of directors of a subsidiary company may be confronted with a parent company and its central management wanting to give priority to the group interest over the interest of the individual companies within the group. This could become particularly problematic when the company forms part of a company group with a parent company from a legal system with a more shareholder-oriented background, such as the UK or US. As was mentioned in the previous paragraph, Dutch law assigns to the board of directors the duty to safeguard the company interest. This duty remains applicable in a group context. Even if a private limited liability company for example forms part of a group of companies and the parent company has the right on the basis of the articles of association of the subsidiary to give binding instructions to the board of directors of that subsidiary, the latter will have to ignore these instructions if they go against the interest of the subsidiary company.11 It has been accepted that the group interest can to a certain extent influence the company interest of a subsidiary.12 However, in practice the reach of this influence is not always clear.13

8

9 10

11 12 13

See for instance: J.M.M. Maeijer, Het belangenconflict in de naamloze vennootschap (inaugural lecture Nijmegen) Deventer: Kluwer 1964, p. 6; M.M. Mendel, Het vennootschappelijk belang (inaugural lecture Leiden), Deventer: Kluwer 1989, p. 10-11. HR 4 April 2014, NJ 2014/286 nt. Van Schilfgaarde, 4.2.1. See for comments with regard to this case: A.F. Verdam e.o. (ed.), Autonomie van het bestuur en haar grenzen voor en na de Cancun-uitspraak, Deventer: Kluwer 2015. See also Assink in his contribution to the IVO-conference held in November 2016 (contribution yet to be published). Article 2:239-4 Dutch Civil Code. HR 10 October 2010, NJ 2002/94 nt. Maeijer. Company groups are not always dealt with in a consistent manner in case law. See in this respect: S.M. Bartman, ‘Supreme Court at a Loss over Groups’, ECL 13, no. 4 (2016): 123-128.

147

Bastiaan Kemp & Mieke Olaerts This brings us to the next subject matter in which the substance over form approach seems to gain attention, or perhaps more precisely, where the need is felt to find a form that matches the substance: the discussion on the recognition of the group interest. In a European context, the group interest has recently received increased attention. The European Commission proposed, following a recommendation in this respect by the reflection group,14 to come to an EU-wide recognition of the group interest.15 Such a recognition could create more (legal) clarity for both directors of parent companies as well as directors at subsidiary level. Recognizing the group interest would provide room to put in place an arrangement in which the parent company has the power to enforce a coherent group policy while at the same time allowing directors of subsidiaries to give priority to the group interest without violating their responsibilities towards creditors, even if this would not be in the direct interest of the subsidiary or its creditors.16 A European recognition of the group interest would constitute a legal recognition of the fact that in practice subsidiaries are often already practically compelled to adhere to the instructions of the parent company and the fact that in company groups the interest of the various group members are tied together and will inherently influence each other. The statements made by the European Commission on the need for the recognition of the group interest formed the starting point for various expert groups to further elaborate on potential rules on company groups for the future.17

14 Report of the Reflection Group on the Future of EU Company Law of 5 April 2011, p. 62-65. 15 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. Action Plan: European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies, 12 Dec. 2012, COM(2012) 740 final. 16 See in this respect further M. Olaerts, ‘Eenheid en verscheidenheid in concernverhoudingen’, Ondernemingsrecht 2016/75; M. Olaerts, ‘The ‘European’ Group Interest and Stakeholder Protection’, ECL 13, no. 3 (2016): 89–91; M. Olaerts, ‘Concerndilemma`s: laveren tussen de economische werkelijkheid en de juridische benadering van het concern’, in: Ph.W. Schreurs (e.o. editors), De curator en het concern. Insolad Jaarboek 2017, Deventer: Kluwer, p. 1-25. 17 See in this respect C. Teichmann, ‘Towards a European Framework for Cross-Border Group Management’, ECL 13, no. 5 (2016): 150-157; P.H. Conac, ‘The Chapter on Groups of Companies of the European Model Company Act (EMCA)’, ECFR 2016, p. 301-321; European Company Law Experts, A proposal for reforming group law in the European Union, comparative observations on the way forward, October 2016; The Informal Company Law Expert Group, Report on the recognition of the interest of the group, October 2016; Forum Europeaum on Company Groups, ‘Proposal to facilitate the management of cross-border company groups in Europe’, ECFR 2015, p. 299-306. Given the scope of this contribution, we will not go into detail on the various proposals.

148

10

Substance over Form in Various Aspects of Cross-Border Company Groups

10.4

Cross-border company groups and directors’ liability from a Dutch perspective

From the group interest we move to directors liability18 to discover whether a substance over form approach can also be distilled in the case of directors’ liability in a cross-border group context. We find inspiration for this question in the discussion revolving around Article 2:11 Dutch Civil Code (hereinafter: DCC), which will be elaborated upon below.

10.4.1

Liability of indirect directors and Article 2:11 DCC

Article 2:11 DCC contains a rule aimed at preventing abuse by legal persons. This rule entails that if a director is held liable and this director is a legal person (which is permitted under Dutch law), the liability of that legal person as a director also rests jointly and severally upon the natural persons who are directors of the legal person when the liability arises. The rule aims to prevent natural persons from being able to hide behind a ‘shield of incorporation’ and prevent liability if improper management would lead to creditors being disadvantaged.19 Article 2:11 DCC is applicable to all specific liability grounds which can be found in Dutch company law. In this respect one can think of liability in the case of an improper performance of duties as envisaged in Article 2:9 DCC as well as the liability of directors in the case of insolvency under Article 2:138/248 DCC. These liability rules have in common that they confer, in principle, joint liability on all directors due to the directors’ collective responsibility for the management of the company. Individual directors can exonerate themselves, but the burden of proof is on the individual director.20

10.4.2

Applicability of Article 2:11 in case of tort based directors’ liability

For a long time there was a discussion in the Dutch literature regarding the question of whether Article 2:11 DCC is also applicable if the primary director, being a legal person, is not held liable on the basis of this collective responsibility as a director as envisaged by either Article 2:9 or 2:138/248 DCC, but on the basis of a(n) (individual) general tort as

18 For completeness sake we note that directors’ liability should be distinguished from the situation in which a director of the primary director/legal person is held liable on the basis of a ‘general’ tort for acts committed at subsidiary level that are not directly related to the indirect directorship of the primary director/legal person. In the latter case the higher threshold of a sufficiently serious personal blame is not required (see also: HR 23 November 2012, NJ 2013/302 nt. Van Schilfgaarde). 19 HR 17 February 2017, JOR 2017/121 nt. A.F.J.A. Leijten. 20 Article 2:9-2 DCC and article 138/248-3 DCC.

149

Bastiaan Kemp & Mieke Olaerts envisaged in Article 6:162 DCC.21 This discussion is not purely academic. Liability on the basis of Article 2:9 DCC and Article 2:138/248 DCC constitutes, in principle, the joint liability of all directors, unless individual directors are able to exonerate themselves by showing that they, personally, are not seriously to blame for either the misconduct of the company`s affairs or the improper performance of certain duties. The tort liability under Article 6:162 DCC, on the other hand, requires the plaintiff to show for each and every director to what extent that director has committed a tort. This threshold is not easily satisfied as the plaintiff would have to show that serious blame can be attributed to a specific director.22 If Article 2:11 DCC can thereby be applied in the case of a tort, the natural persons/directors of the primary director/legal person will be jointly liable unless they can individually exonerate themselves. If Article 2:11 DCC cannot be used, the plaintiff will have to show for each and every director to what extent that director has committed a tort. In other words, whether or not Article 2:11 DCC applies is relevant for the burden of proof in the case of directors’ liability based on a tort. At the beginning of this year the Dutch Supreme Court resolved the discussion and ruled that Article 2:11 DCC is indeed applicable when the primary director/legal person is held liable on the basis of a tort.23 A result of the ruling of the Dutch Supreme Court is that, if the board of directors of the legal person that acted as a primary director consists of several directors, it will be more difficult for these so-called secondary directors, i.e. the natural persons who are directors of the legal person who has been held liable as a primary director of the company on the basis of a tort, to avoid liability compared to the situation in which the directors/natural persons would have been primary directors.24 As

21 Answering this question positively are among others: Slagter/Assink, Compendium Ondernemingsrecht, Deventer: Kluwer 2013, p. 270; Huizink, Groene Serie Rechtspersonen, art. 2:11 BW, aant. 6.5; Asser/Maeijer, Van Solinge & Nieuwe Weme 2-II* 2009/476. Answering this question negatively are among others: J.B. Wezeman, Aansprakelijkheid van bestuurders (diss. Groningen), Deventer: Kluwer 1998, p. 372-373; M.L. Lennarts, Concernaansprakelijkheid (diss. Groningen), Deventer: Kluwer 1999, p. 263-265 and J. Roest in her annotation under Rb. Den Haag 16 September 2015, JOR 2016/3. 22 Asser/Maeijer/Van Solinge & Nieuwe Weme 2-II* 2009/469. 23 HR 17 February 2017, JOR 2017/121 nt. A.F.J.A. Leijten. 24 See on this issue A.F.J.A. Leijten in his note to HR 17 February 2017, JOR 2017/121, who does not see this as a problem. According to Leijten the difference between collective and individual liability is more of a dogmatic difference which has to be put into perspective since the joint liability of a collective of directors can be based on Art. 6:162 DCC. Leijten also refers to the fact that the internal liability of Article 2:9 DCC is not really a collective responsibility since it requires serious blame on behalf of every director. See further also Van Bekkum in his note under no. 4-5 to Hof Arnhem-Leeuwarden 25 November 2014, JOR 2015/3, nt. Van Bekkum; Van der Kraan in the note to Hof Arnhem-Leeuwarden 15 October 2013, JIN 2014/8, nt. Van der Kraan; Roest in her annotation under Rb. Den Haag 16 September 2015, JOR 2016/3, nt. J. Roest. M.L. Lennarts, ‘‘Piercing the corporate director’ – Over de (on)zin van art. 2:11 BW en art. 106a lid 2 Fw’, in: G. van Solinge e.a., Aansprakelijkheid van bestuurders en commissarissen, Deventer: Kluwer 2017, p. 167-168; M. Mussche & Y. Borrius in their note to HR 17 February 2017, Ondernemingsrecht 2017/79; S.M. Bartman and C.J.E.M. Hanegraaf, ‘Indirect bestuurder rechtspersoon dient eigen onschuld te bewijzen’, AA 2017, p. 523-527.

150

10

Substance over Form in Various Aspects of Cross-Border Company Groups

discussed above, the burden of proof will be on the secondary directors to show that they can be exonerated. Moreover, it begs the question how the governance of the company can be structured in such a way that this difficult burden of proof is avoided as much as possible.

10.4.3

Article 2:11 DCC and foreign holding companies

Another question that has been raised with regard to Article 2:11 DCC is whether this article is also applicable in case the directing legal person is incorporated in a foreign (i.e. non-Dutch) jurisdiction. This question is relevant, because if Article 2:11 DCC would not be applicable to foreign companies, directors could relatively easily escape the ‘grasp’ of this article by using a foreign holding or management company, as a result of which the company, bankruptcy trustee or creditors would be unable to use the benefits of Article 2:11 DCC. This is especially regrettable because the primary reason for introducing Article 2:11 DCC was to avoid abuse of legal entities as director of the company in order to make it more difficult to hold the directors/natural person liable.25 Despite the background of Article 2:11 DCC, the Supreme Court has affirmed that this article does not apply in cases where a foreign company is the director.26 The main reasoning used by the Supreme Court was that the applicable law regarding the question whether or not natural person behind the legal person/director can be held liable has to be, according to Dutch private international law, determined based on the law applicable on the foreign company/directors, meaning the law under which the foreign company is incorporated. Therefore, Article 2:11 DCC cannot be applied in case the legal person/ director is a foreign company. In these cases the Supreme Court uses a strict interpretation of the incorporation theory to determine the liability of the secondary directors. It could be argued that this does not point towards a substance over form approach when applying Article 2:11 DCC. After all, even if the foreign company/director has no activities of its own and has no other purpose than to shield the natural persons behind it from liability, the benefits of Article 2:11 DCC are withheld from the claimant on the simple ground that the legal person/director is a foreign company. These judgements have led to criticism in literature, precisely because the reasoning is formalistic, seems to be contrary to the intentions behind Article 2:11 DCC and leads to a

25 HR 14 March 2008, JOR 2008/152 nt. Borrius; HR 17 February 2017, JOR 2017/121 nt. A.F.J.A. Leijten. See more detailed: C.E.J.M. Hanegraaf, Art. 2:11 BW, doorgeefluik van bestuurdersaansprakelijkheid. Hoe diep kan een bestuurder vallen? (diss. Leiden), Deventer: Kluwer 2017, p. 62 – 63. 26 HR 18 March 2011, JOR 2011/144 nt. Van Solinge (D Group Europe/Schreurs q.q.); HR 21 June 2013, JOR 2013/238 nt. Verhagen (Van der Meer q.q./Pieper).

151

Bastiaan Kemp & Mieke Olaerts situation in which directors could ‘hide behind’ foreign companies.27 This will especially hold true in cases where the foreign company director does not have any activities of its own and all natural persons/directors behind that foreign legal person are situated in or have a close link to the Netherlands. Arguments have been provided in the literature to nevertheless defend the applicability of Article 2:11 DCC to foreign companies being the director of a Dutch company. Bulten argues for instance that Article 2:11 DCC places a direct liability on the secondary directors, irrespective of the nationality of the primary director.28 Additionally, Verhagen, Assink and Bulten point out the fact that the judgement of the Supreme Court frustrates the goal of Article 2:11 DCC.29 Secondary directors can easily avoid Article 2:11 DCC by using foreign holding/management companies, while the ratio of the Article 2:11 DCC is to avoid that directors/natural persons can hide behind legal entities to shield their liability. The arguments to apply Article 2:11 DCC therefore seem to be more supportive of the substance over form approach with the aim of preventing abuse of legal entities to shield liability. Despite these arguments, within the scope of this contribution, we assume in line with the Supreme Court’s ruling that Article 2:11 DCC is in principle not applicable to directors liability if the legal person/director is a foreign legal person.30 The question then arises whether there are other ways to establish a more substance over from approach. Below we provide an overview of the potential instruments which have been suggested in the literature to hold the directors of the foreign company/director liable under Dutch law.

10.4.4

Instruments to hold directors of foreign companies / primary directors liable

Although the Supreme Court ruled that Article 2:11 DCC is not applicable in case of foreign companies/director because of the incorporation theory and Article 10:119 (e) DCC, exceptions are potentially possible. It is argued that with the entry into force of Article 10:8-1 DCC in 2012, there is the possibility to, in exceptional circumstances,31 27 C.D.J. Bulten, ‘De (on)mogelijke perforatie van een buitenlandse rechtspersoon op grond van art. 2:11 BW’, Ondernemingsrecht 2014/9; Slagter/Assink, Compendium Ondernemingsrecht, Deventer: Kluwer 2013, p. 274 – 275; Verhagen in his note to HR 21 June 2013, JOR 2013/238 (Van der Meer q.q./Pieper); S.M. van den Braak in her note to HR 18 March 2011, RO 2011/38; M.L. Lennarts, ‘‘Piercing the corporate director’ – Over de (on)zin van art. 2:11 BW en art. 106a lid 2 Fw’, in: G. van Solinge e.a., Aansprakelijkheid van bestuurders en commissarissen, Deventer: Kluwer 2017, p. 179-187. 28 C.D.J. Bulten, ‘De (on)mogelijke perforatie van een buitenlandse rechtspersoon op grond van art. 2:11 BW’, Ondernemingsrecht 2014/9. 29 Verhagen in his note to HR 21 June 2013, JOR 2013/238 (Van der Meer q.q./Pieper); Slagter/Assink, Compendium Ondernemingsrecht, Deventer: Kluwer 2013, p. 274-275; C.D.J. Bulten, ‘De (on)mogelijke perforatie van een buitenlandse rechtspersoon op grond van art. 2:11 BW’, Ondernemingsrecht 2014/9. 30 See also Bulten, who states that she sees very little room to apply Article 2:11 DCC to ‘pierce’ the foreign company/director: C.D.J. Bulten, ‘De (on)mogelijke perforatie van een buitenlandse rechtspersoon op grond van art. 2:11 BW’, Ondernemingsrecht 2014/9. 31 P. Vlas, IPR en BW (Mon. BW no. A27), Deventer: Kluwer 2015, no. 33.

152

10

Substance over Form in Various Aspects of Cross-Border Company Groups

deviate from the law of the country in which the legal person was incorporated if there is clearly a much closer connection with another law.32 This article could provide a ground to apply Article 2:11 DCC if the foreign company/primary director has no other function than to frustrate the use of this legal provision.33 The plaintiff will however have to sufficiently substantiate that this is the case, which could in practice be difficult, especially since using a foreign company as primary directors in itself does not seem to constitute abuse.34 Moreover, Article 10:8-1 DCC should be used very restrictively and, as is clear from the wording of Article 10:8-1 DCC, the connection with the law of the country in which the legal person is incorporated needs to be very limited. This in combination with the judgements of the Supreme Court seems to indicate that Article 10:8-1 DCC could only be used in truly exception circumstances. Whether this is the case when the secondary directors intentionally uses a foreign company as the primary directors to shield himself from Article 2:11 DCC remains to be seen.35

10.4.5

Liability of the secondary directors based on a tort

If it is not possible to use Article 2:11 DCC to hold the secondary directors liable based on the liability of the primary director, for instance because the primary director is a foreign company and Article 10:8-1 cannot be applied, the company, bankruptcy trustee or creditor could still try to hold the secondary directors liable on other grounds. A way to do this is by launching a direct tort claim against the secondary directors. Holding the directors directly liable on the basis of a tort would mean that the creditors ‘go around’ or, in other words, avoid the primary director/legal person (and the (national) law under which 32 See Verhagen in his note to HR 21 June 2013, JOR 2013/238 (Van der Meer q.q./Pieper); C.D.J. Bulten, ‘De (on)mogelijke perforatie van een buitenlandse rechtspersoon op grond van art. 2:11 BW’, Ondernemingsrecht 2014/9 and M.L. Lennarts, ‘‘Piercing the corporate director’ – Over de (on)zin van art. 2:11 BW en art. 106a lid 2 Fw’, in: G. van Solinge e.a., Aansprakelijkheid van bestuurders en commissarissen, Deventer: Kluwer 2017, p. 185; C.E.J.M. Hanegraaf, Art. 2:11 BW, doorgeefluik van bestuurdersaansprakelijkheid. Hoe diep kan een bestuurder vallen? (diss. Leiden), Deventer: Kluwer 2017, p. 264-267. See more detailed on the general aspects of this exception: P. Vlas, IPR en BW (Mon. BW no. A27), Deventer: Kluwer 2015, no. 33. 33 C.D.J. Bulten, ‘De (on)mogelijke perforatie van een buitenlandse rechtspersoon op grond van art. 2:11 BW’, Ondernemingsrecht 2014/9; Verhagen in his note to HR 21 June 2013, JOR 2013/238 (Van der Meer q.q./ Pieper); M.L. Lennarts, ‘‘Piercing the corporate director’ – Over de (on)zin van art. 2:11 BW en art. 106a lid 2 Fw’, in: G. van Solinge e.a., Aansprakelijkheid van bestuurders en commissarissen, Deventer: Kluwer 2017, p. 184 – 185. See critical of this argumentation: P. Vlas, IPR en BW (Mon. BW no. A27), Deventer: Kluwer 2015, no. 33. Vlas argues that the incorporation regime is not based on whether there is a presumed close connection. Therefore, in his view Article 10:8-1 DCC cannot be used to apply Article 2:11 DCC to foreign companies. 34 See also: C.D.J. Bulten, ‘De (on)mogelijke perforatie van een buitenlandse rechtspersoon op grond van art. 2:11 BW’, Ondernemingsrecht 2014/9. 35 Bulten seems to be in favour of using the exception of Article 10:8-1 DCC in such circumstances see C.D.J. Bulten, ‘De (on)mogelijke perforatie van een buitenlandse rechtspersoon op grond van art. 2:11 BW’, Ondernemingsrecht 2014/9).

153

Bastiaan Kemp & Mieke Olaerts this legal person is incorporated) in order to hold the directors of the primary director/ legal person directly liable on the basis of a tort under – for instance – Dutch law.36 We believe two views could be taken towards the question whether it should be possible to hold the secondary director directly liable based on a tort. The first view is that it is indeed possible to hold secondary directors liable on the basis of a tort. In a solely national context the Supreme Court has ruled that this is indeed possible.37 The idea in that case is that the person who knows or ought to have known that the conduct would lead to damage and who was able to prevent it, has the duty to do so.38 No distinction is made whether the defendant is a primary or secondary director. Wezeman and Lennarts also use this reasoning, in a purely Dutch context, to substantiate their argument that there is no use for Article 2:11 DCC in the case of a claim based on tort, since this tort can be applied directly to the directors of the primary director/legal person.39 In other words, they argue that Article 2:11 DCC is obsolete under these circumstances.40 Applying these arguments to a cross-border situation, this would mean that the claimant would ‘go around’ the primary director and the law applicable to this foreign legal person. It would also mean that the director of a foreign legal person has a certain duty towards the Dutch subsidiary company and its creditors based on Dutch law. This view could be deemed a substance over form approach, since the consequences are that the secondary directors that are actually involved in the business of the Dutch company also have an obligation towards the company and its creditors, irrespective of whether there is a foreign company that is the formal primary director. As will be discussed in section 5 below, a similar reasoning is used in inquiry proceedings to determine whether indirect shareholders have the right to request an inquiry into the policy and

36 The law that will be applicable to the tort claim will depend on the rules of private international law. However, if the foreign legal entity is only used as a primary director to shield the secondary director from Article 2:11 DCC and the damage to the creditor occurred in the Netherlands it should generally be possible to apply Dutch law to the tort claim. This would be based on Article 4-1 Rome II (P. Vlas, Rechtspersonen, Antwerpen: Maklu 2009, no. 307, 309, 320 and 322; Asser/Kramer & Verhagen 10-III 2015/67). See further regarding whether Rome II should be used in the case of directors’ liability that is based on a tort: Asser/Kramer & Verhagen 10-III 2015/67-70. 37 HR 14 november 1997, JOR 1998/6 nt. Van den Ingh; HR 23 May 2014, JOR 2014/229 nt. Van Bekkum. 38 M.L. Lennarts, ‘‘Piercing the corporate director’ – Over de (on)zin van art. 2:11 BW en art. 106a lid 2 Fw’, in: G. van Solinge e.a., Aansprakelijkheid van bestuurders en commissarissen, Deventer: Kluwer 2017, p. 171 with reference to Van Bekkum in HR 23 May 2014, JOR 2014/229 nt. Van Bekkum (Kok/Maas). 39 J.B. Wezeman, Aansprakelijkheid van bestuurders (diss. Groningen), Deventer: Kluwer 1998, p. 372-373; M.L. Lennarts, Concernaansprakelijkheid (diss. Groningen), Deventer: Kluwer 1999, p. 263-265. See also: H.J.M.N. Honée, ‘Aansprakelijkheid in concernverhoudingen’, in: P. van Schilfgaarde e.a. (ed.), De nieuwe misbruikwetgeving, Deventer: Kluwer 1986, p. 89; M. Mussche & Y. Borrius in their note to HR 17 February 2017, Ondernemingsrecht 2017/79. 40 M.L. Lennarts, ‘‘Piercing the corporate director’ – Over de (on)zin van art. 2:11 BW en art. 106a lid 2 Fw’, in: G. van Solinge e.a., Aansprakelijkheid van bestuurders en commissarissen, Deventer: Kluwer 2017, p. 168.

154

10

Substance over Form in Various Aspects of Cross-Border Company Groups

affairs of a Dutch company. The downside of the approach mentioned above is that it can create legal uncertainty for directors of foreign companies as to the potential liabilities they could face. In our opinion an alternative (second) view is also possible. It can be argued that a claimant who wants to hold the secondary director liable, should first try to find recourse against the primary director. If no recourse can be taken, for instance because the primary director does not have any assets, further recourse might be taken against the secondary directors based on the laws that govern the secondary directors fiduciary duties.41 This means that instead of disregarding the legal person/director, one looks first at the actions of that director/legal person and if the claim cannot be satisfied in that way, one turns to the director of that legal person on the basis of the law which governs the relation between the legal person director and the natural person in his capacity of director of the primary director. The benefit of this view would be that the directors’ duties are only governed by the laws under which the company of which they are a director is incorporated, not the laws that govern the company of which they are indirect directors. Such an outcome would however be frustrating for claimants, since it means that they would have to include the laws under which the primary director is incorporated in their analysis of whether the secondary directors are liable. This could lead to substantial additional costs and make it more difficult to hold secondary directors liable.

10.5

10.5.1

The Dutch inquiry proceedings in a cross-border context

Inquiry proceedings

Another aspect of Dutch company law which has undergone important further developments in (cross-border) group law and the further recognition of a ‘substance over form’ since the inaugural lecture by Dorresteijn are inquiry proceedings.42 Dorresteijn already mentioned such a development in his inaugural lecture, where he focused specifically on the so-called group inquiry (concernenquete).43 This was later confirmed by the Supreme Court in Landis, where the court held that the shareholders of the parent company can

41 A similar reasoning is provided in: Handelingen II 2013/14, 744, answer 4 and answer 6. A side note is however that certain jurisdictions do not allow legal persons to be directors and will therefore not have any regulation regarding directors liability in such cases see also: M.L. Lennarts, ‘‘Piercing the corporate director’ – Over de (on)zin van art. 2:11 BW en art. 106a lid 2 Fw’, in: G. van Solinge e.a., Aansprakelijkheid van bestuurders en commissarissen, Deventer: Kluwer 2017, p. 182. 42 See more elaborate on this topic: B. Kemp, ‘Verontruste dochters en buitenlandse moeders: volle kracht vooruit of terughoudendheid voor de economisch gerechtigde in enqueteprocedures?’, TvOB 2017/4. 43 A.F.M. Dorresteijn, Substance over form in het ondernemingsrecht (inaugural lecture Utrecht), Deventer: Kluwer 2004, p. 11 e.v.

155

Bastiaan Kemp & Mieke Olaerts request an inquiry at the level of the subsidiary if the ‘economic reality’ gives rise to this.44 Since then, economic reality has also resulted in other developments with regard to inquiry proceedings. Inquiry proceedings are focused on ordering an investigation into the policy and affairs of a (Dutch45) legal entity during a certain period and take place before the Enterprise Chamber of the Amsterdam Court of Appeal. If the request is granted, an inquiry will be held by one or more investigators appointed by the Enterprise Chamber. These investigators will draw up an inquiry report on the policy and affairs of the legal entity during the period as determined by the Enterprise Chamber. If the applicant (or any interested party) finds sufficient grounds in the inquiry report, he may file a request with the Enterprise Chamber to establish mismanagement and, in addition, request that definitive measures as mentioned in Article 2:356 DCC be taken. These measures include the suspension or nullification of resolutions, the suspension or dismissal of directors, the appointment of temporary directors, the temporary transfer of shares to an administrator and the liquidation of the legal entity. Moreover, during the proceedings the applicant may request that certain immediate measures are taken for the duration of the proceedings, which include (but are not limited to) the measures as mentioned in Article 2:356 DCC.46 Not all interested parties have the power to request an inquiry into the policy and affairs of the company. The stakeholders who are endowed with this are included in Articles 2:345-2, 346 and 347 DCC and include, among others, shareholders holding a minimum number of shares, the company itself, the Advocate General of the Amsterdam Court of Appeal, the association of employees which has amongst its members those working for the enterprise and persons who are authorized to do so under an agreement entered into with the legal entity. The holder of a depositary receipt for shares (a depositary receipt holder) also has this power. Whether the depositary receipt holders have the right to attend the general meeting (vergaderrecht) or not is of no consequence when determining the power to request an inquiry.47 Despite the fact that the list in the afore-mentioned

44 HR 4 February 2005, NJ 2005/127 nt. Maeijer (Landis). 45 Foreign companies are not subject to (Dutch) inquiry proceedings: Hof Amsterdam (OK) 16 July 2004, JOR 2004/230 nt. Josephus Jitta (Citadel Beheer); HR 13 May 2005, NJ 2005/298 (Aannemingsmaatschappij Zeelandia Curaçao). 46 Article 2:349a DCC. 47 This is an interesting note, because it means that even if depository receipts were issued without the consent of the company itself the depository receipt holders still have the power to request an inquiry into the policy and affairs of the company. See further: F.J.P. van den Ingh, ‘Certificaathouder en enquêterecht’, TvOB 2004/5; F.P.J. van den Ingh, Certificering en certificaat van aandeel bij de besloten vennootschap (diss. Nijmegen), Deventer: Kluwer 1991, p. 255-256; C.A. Boukema, Het enquêterecht, Deventer: Kluwer 1981, p. 34-35.

156

10

Substance over Form in Various Aspects of Cross-Border Company Groups

articles should have been an exhaustive list of the parties with the power to request an inquiry,48 the Supreme Court has ruled on a number of occasions that certain other stakeholders also have the power to request inquiry proceedings if they can be considered equal to the shareholders or depository receipt holders.49

10.5.2

Admission to inquiry proceedings in a cross-border context

The first time the Supreme Court ruled on whether the claimant could be considered equal to shareholders or depository receipt holders was regarding a company called Scheipar.50 Scheipar was a Dutch private limited liability company that held 30% of the shares in a French company. All shares in Scheipar were held by a Dutch foundation and depository receipts for the shares were issued to Credit Lyonnais Luxembourg S.A. (CL). CL entered into a Contrat Fiduciaire51 with the two original shareholders/UBOs of Scheipar. Based on this contract all powers under the depository receipts would be used by CL on the instructions of the UBOs and all proceeds would go to the UBOs. The two UBOs became embroiled in an argument regarding the way in which Scheipar should exercise its voting rights in the French subsidiary. This led to one of the UBOs initiating inquiry proceedings, in order to have an investigation into the policy and affairs of Scheipar. The Supreme Court ruled that, despite the fact that the claimant could not be considered as one of the stakeholders as mentioned in Articles 2:345-2, 346 and 347 DCC, the claimant had the power to initiate inquiry proceedings, because (i) the shares were held by CL for the claimant’s account and risk and (ii) the claimant held the control powers with regard to the depository receipts, because CL had to follow instructions from the claimant as to the way in which these powers were exercised. As a result, the claimant had to be considered equal to a depository receipt holder. The Supreme Court further broadened the scope of the stakeholders with the power to initiate inquiry proceedings in Butôt.52 Here the depository receipts of shares in Butôt were part of an undivided estate. The joint holders of the undivided right to the estate initiated inquiry proceedings, because they required additional information from the company – which was refused when this was requested at earlier date. The Supreme 48 HR 1 February 2002, NJ 2002/225 nt. Maeijer (De Vries Robbé); HR 4 February 2005, NJ 2005/127 nt. Maeijer (Landis Group); HR 29 March 2013, NJ 2013/304 nt. Van Schilfgaarde (Chinese Workers); HR 11 April 2014, NJ 2014/296 nt. Van Schilfgaarde (Slotervaart). 49 HR 6 June 2003, JOR 2003/161 nt. Josephus Jitta; HR 10 September, JOR 2010/337 nt. Brink; HR 8 April 2011, JOR 2011/178 nt. Doorman; HR 29 March 2013, JOR 2013/166 nt. Doorman; HR 11 April 2014, JOR 2014/259 nt. Olden; Hof Amsterdam (OK) 19 July 2016, JOR 2016/272 nt. Spruitenburg. 50 HR 6 June 2003, NJ 2003/486 nt. Maeijer (Scheipar). 51 The judgements of the Enterprise Chamber and the Supreme Court do not mention what law was applicable to this contract, but it seems likely that this was Luxembourg law. 52 HR 10 September 2010, NJ 2010/665 nt. Van Schilfgaarde & Perrick (Butôt).

157

Bastiaan Kemp & Mieke Olaerts Court ruled that despite the fact that the claimants did not have any control powers, it was possible to consider the claimants equal to depository receipt holders. Therefore, the claimants were, according to the Supreme Court, economic depository receipt holders, who had the power to initiate inquiry proceedings. The second test as included in Scheipar – having control powers – was therefore no longer included as a condition.53 From a cross-border perspective following Scheipar and Butôt two rulings of the Supreme Court that were provided in a relatively short period of time are of interest, especially because they seem somewhat contradictory and have led to lengthy discussions in the literature. The first case concerned Transmission and Engineering Services Netherlands B.V. (TESN).54 TESN was a Dutch private limited liability company and functioned as a sub-holding. The shares in TESN were held by two companies on the (former) Netherlands Antilles. The shares in those two companies were held by BTCL, a company incorporated in Bermuda. The shares in BTCL were held in four trusts, also under the laws of Bermuda. The primary beneficiary to the trusts were Anthony and Marc. A conflict arose between Marc and Anthony, resulting in Marc initiating inquiry proceedings before the Enterprise Chamber against – among others – TESN. One of the arguments was that Marc should be admitted as a claimant based on earlier case law regarding Scheipar and Butôt. However, both the Enterprise Chamber and the Supreme Court ruled that the interest of Marc could not be considered equal to that of a shareholder or depository receipt holder. The reasons for this seemed to be twofold. Firstly, it was not Marc or BTCL that held the shares in TESN, but the shares were held by other companies that were situated in a different state. It is therefore, according to the Supreme Court, impossible to disregard these companies, even if these sub-holdings were only incorporated and placed between Marc and TESN for tax purposes. Secondly, Marc as a primary beneficiary to the shares of BTCL could not be considered to have an interest equal to that of a shareholder of TESN. The Supreme Court ruled that having an indirect economic interest in TESN was not the same as being a shareholder or depository receipt holder. Not long after the ruling by the Supreme Court in TESN, the Enterprise Chamber had to rule in another case with a cross-border element. This case involved Chinse Workers B.V., a company focusing on recruiting Chinese chefs in China for Chinese restaurants in the Netherlands.55 The sole shareholder of Chinese Workers was Chinnede, a com-

53 After the judgement in Scheipar this condition was already scrutinized in the literature, since depository receipt holders do not normally have control rights either. See: Asser/Maeijer, Van Solinge & Nieuwe Weme 2-II* 2009/738. 54 Hof Amsterdam (OK) 5 November 2009, JOR 2010/10 nt. Doorman (TESN); HR 8 April 2011, JOR 2011/178 nt. Doorman (TESN). 55 Hof Amsterdam (OK) 7 February 2012, JOR 2012/143 nt. Doorman (Chinese Workers); HR 29 March 2013, NJ 2013/304 nt. Van Schilfgaarde (Chinese Workers).

158

10

Substance over Form in Various Aspects of Cross-Border Company Groups

pany incorporated under Chinese law with its head office in Hong Kong. Chinnede had four shareholders and was also the sole director of Chinese Workers. A conflict arose between the shareholders of Chinnede, resulting in a deadlock in both the general meeting and the board of directors of Chinnede. As a result of the governance structure of Chinnede and Chinese Workers, this in turn resulted in a deadlock within Chinese Workers. In response to the deadlock and the underlying conflict, one of the shareholders of Chinnede initiated inquiry proceedings. The question before the Enterprise Chamber and – later – the Supreme Court was whether the claimant, a shareholder of the parent company incorporated under Chinese law, could for the purpose of initiating inquiry proceedings be considered equal to a shareholder or depository receipt holder of Chinese Workers. Based on the earlier judgement in TESN the Advocate General argued that this was not the case, because Chinnede was the shareholder in Chinese Workers and it was not possible to disregard this foreign company. However, despite the earlier ruling in TESN and the conclusion of the Advocate General, the Supreme Court ruled that the claimant should be allowed to request an inquiry into Chinese Workers. The Supreme Court based this on five circumstances as were previously determined by the Enterprise Chamber: 1. the sole function of Chinnede is to hold shares in Chinese Workers; Chinnede has no other business activities; 2. factually the shares in Chinese Workers are not administrated in Hong Kong (and there is no real reason to do so); 3. all business activities take place in or on the orders of Chinese Workers; 4. the recruitment of Chinese chefs in China takes place as ordered by Chinese Workers; and 5. the commissions that the employment agencies owed are directly paid to the shareholders of Chinnede. The fact that the claimant held shares in Chinnede, and not directly in Chinese Workers did not bring the Supreme Court to a different conclusion. The judgement of the Supreme Court in Chinese Workers led to some surprise in the legal community, because the ruling seemed to be contrary to the judgement in TESN, even though there were only two years between the two judgements.56 However, based on the judgement in Chinese Workers and also the more recent judgements of the Enterprise

56 H.J. de Kluiver, ‘Kroniek van het Ondernemingsrecht’, NJB 2013/789; J.M. Blanco Fernández, ‘De rechter en de economische werkelijkheid’, Ondernemingsrecht 2015/21; G. van Solinge, ‘Doorbraak van enquêtebevoegdheid in internationale concernverhoudingen’, in: F. Ibili, M.E. Koppenol-Laforce & M. Zilinsky, IPR in de spiegel van Paul Vlas, Deventer: Kluwer 2012, p. 208-209; S.M. Bartman, ‘Grenzeloos enquêterecht’, AA 2012, p. 382 et seq.

159

Bastiaan Kemp & Mieke Olaerts Chamber and Supreme Court in Slotervaart,57 Interfisc58 and FEIST59 the prevailing view in the literature and case law seems to be that under specific circumstances, it is indeed possible to be admitted to inquiry proceedings even if the claimant is only an indirect shareholder of the company. The most important aspect of the test whether such a claimant indeed has standing is related to the function of the holding company. If the only function is to hold shares in the (Dutch) subsidiary, which has to be determined taking into account all circumstances of the case, we believe based on the judgements in Chinese Workers, Slotervaart and FEIST,60 there seem to be grounds to argue that the claimant indeed has standing before the Enterprise Chamber in inquiry proceedings. The case law regarding the standing of an indirect shareholder in inquiry proceedings shows that the Dutch courts are sometimes willing to interpret the rules in a manner that reflects the economic reality of the group structure used. By doing so, the courts take a flexible approach to the principle of territoriality in private international law, especially considering that the Netherlands uses the incorporation theory61 and therefore in principle respects that companies incorporated under a different jurisdiction are controlled by the laws of that jurisdiction and not Dutch law.62 The argumentation to justify this approach as found in the literature is that the question whether a claimant has standing in inquiry proceedings is a matter for Dutch law, even if the claimant is only indirectly a shareholder of the company because of a foreign holding company.63 While this argument could indeed be defended, it does result in a situation in which conflicts that are actually between shareholders in a Chinese company are, at least in part, discussed in legal proceedings that focus on the subsidiary company in the Netherlands.

10.6

Conclusion: the way forward?

In this contribution we discussed several developments with regard to the idea of substance over form in connection with certain topics related to company groups. We described various instances in which this substance over form approach seems to emerge or evolve. First of all, we pointed to the increased recognition of the enterprise and its influence on the definition of legal concepts such as the company interest which forms 57 58 59 60

HR 11 April 2014, JOR 2014/259 nt. Olden. Hof Amsterdam (OK) 3 June 2013, JOR 2013/241 nt. De Groot (Interfisc). Hof Amsterdam (OK) 19 July 2016, JOR 2016/272 nt. Spruitenburg (FEIST). HR 29 March 2013, NJ 2013/304 nt. Van Schilfgaarde (Chinese Workers); HR 11 April 2014, NJ 2014/296 nt. Van Schilfgaarde (Slotervaart); Hof Amsterdam (OK) 19 July 2016, JOR 2016/272 nt. Spruitenburg (FEIST). 61 Article 10:118 DCC. 62 See more detailed on this topic: B. Kemp, Verontruste dochters en buitenlandse moeders: volle kracht vooruit of terughoudendheid voor de economisch gerechtigde in enqueteprocedures?, TvOB 2017/4. 63 K. Spruitenburg, ‘De economische gerechtigdheid in het enquêterecht, follow the money’, in: G.C. Makkink, M.P. Nieuwe Weme & A.J. van Wees, Ik ben niet overtuigd, Nijmegen: Ars Aequi Libri 2015, p. 467.

160

10

Substance over Form in Various Aspects of Cross-Border Company Groups

the primary guideline for directors in fulfilling their duties. Secondly, we eluded to the increased need which is being felt to recognize the group interest at the European level and thereby recognizing the economic reality that companies within groups are often mutually dependent on each other. With regard to directors’ liability we discussed the potential liability of indirect directors of Dutch subsidiaries which form part of an international group with a foreign parent company being the formal director of the Dutch subsidiary. We saw that making use of a foreign company as a statutory director of a Dutch subsidiary could decrease liability risks to a certain extent. The question is to what extent the courts will be prepared in the future to look through the economic reality and make use of a substance over form approach in these situations. Lastly, we discussed the substance over form approach in inquiry proceedings and found that courts may be more willing to use a substance over form approach when it comes to providing indirect shareholders with standing in inquiry proceedings. The conclusion is that the idea of substance over form has continued to gain importance since the inaugural lecture by Dorresteijn. Progress has however been slow and sometimes unpredictable, which could be due to the fact that it is case based. The question is what kind of common thread – if any – can be derived from the three examples of a substance over form approach as discussed above and whether the developments in that respect in one area of company law can be used in other areas as well. In our opinion these examples provide some indication that the tendency to include the economic reality (the substance) when interpreting and explaining the legal governance structure (the form) is stronger when using a strict interpretation would lead to formalistic and generally unfair results. However, whether a substance over form approach can be taken, largely depends on the subject matter at hand. If the subject matter is part of an area in corporate law in which legal certainty plays a strong role, such as in case of (potential) liability, there might be less room to use the substance over form approach compared to the situation in which shareholders are given access to court proceedings.

161

11

The Societas Europaea (SE) Revisited

Harold Koster

11.1

Introduction

The European Company Statute (SE Regulation)1 was adopted on 8 October 2001 after more than 30 years of negotiations in the Council of the European Union. The idea for a European Company was proposed as early as the 1950s.2 The idea once again emerged after the entry into force of the Treaty of Rome, within the scope of the Common Market.3 The first formal proposal by the Commission regarding the introduction of the European Company was made in 1970.4 Due to different opinions between the Member States, the final regulation was much less ambitious than the first draft, and in the end many details were left to the national laws of the Members States. The SE Regulation offers the option to create a legal body called a European Company. The European Company is also referred to as an SE after its Latin name Societas Europaea. In close connection with the SE Regulation, Council Directive 2001/86/EC (SE Directive) was also adopted supplementing the SE Regulation for a European Company with regard to the involvement of employees. Both the SE Regulation and the SE Directive entered into force on 8 October 2004. The main idea behind the introduction of the European Company was to provide for: ‘the creation, side by side with companies governed by a particular national law, of companies formed and carrying on business under the law created by a Community Regulation directly applicable in all Member States’5

1 2

3 4 5

Council Regulation (EC) No. 2157/2001 of 8 October 2001 on the Statute for a European company (SE). The first proposal for a European Company Statute came from Prof. Pieter Sanders, who spoke about the European Company during his inaugural lecture entitled ‘Toward a European Company?’ delivered in Rotterdam in 1959. See also Winter, J.W. (2012) Bescheiden maar noodzakelijk. in ‘Pieter Sanders. Een honderdjarige vernieuwer’. The Hague: BJU. Lenoir, N. (2008) The Societas Europaea (SE) in Europe A promising start and an option with good prospects. Utrecht Law Review, (4) 1. Proposal for a Council Regulation Embodying a Statute for the European Company, OJ C 124, 10.10.1970, p. 1. See Council Regulation (EC) No. 2157/2001 of 8 October 2001 on the Statute for a European company (SE), recital 6.

163

Harold Koster It was introduced in order to overcome the obstacles arising from the limited territorial application of national company law and from the differences between the national laws. Moreover, due to the SE Regulation, companies and groups in Europe have the opportunity to structure, reorganise and combine their European operations and to transfer their registered office throughout the European Union (EU) and the European Economic Area (EEA). Article 69 of the SE Regulation required the Commission to have a report prepared on the application of the SE Regulation including proposals for amendments, where appropriate, five years after the SE Regulation came into force. The report was published on 9 December 2009 and was entitled ‘Study on the operation and the impacts of the Statute for a European Company (SE)’6 and it included several recommendations for possible amendments to the SE Regulation.7 However, following the report, not much happened. For example, the Action Plan on EU Company Law and Governance, published on 12 December 2012, contained no proposals to amend the SE Regulation or SE Directive. Nevertheless, some attention was given to the European Company in the Action Plan. On page 14 of the Action Plan it was mentioned: ‘The Commission will, in 2013, launch an information campaign to increase awareness of the European Company (SE) Statute through a comprehensive website bringing together practical advice and relevant documents on the Statute (…).’ The website is now available and indeed offers useful information about the European Company such as the fact that it is mentioned that since its introduction in 2004, the European Company statute has been adopted by more than 1800 businesses.8 Adriaan Dorresteijn also wrote about the European Company.9 Furthermore, in the European Corporate Law handbook, co-authored by Adriaan Dorresteijn,10 we can read the following about the European Company: 6

The report can be found on the website Worker-Participation EU. See https://www.worker-participation.eu/ European-Company-SE/Review-2010-13/Study-on-the-operation-and-the-impacts-of-the-Statute-for-aEuropean-Company-2009, visited 5 May 2017. See about the report Schutte-Veenstra, J.N. and Verbrugh, M.A. De SE: pro’s en con’s. Ondernemingsrecht 2011-1. 7 A Staff Working Document (SEC(2010) 1391 final) accompanied the report. It provides a description of the inventory of European companies and the implementation of the Member State options contained in the SE Regulation, as well as a more detailed description of the practical problems encountered in the course of setting up or running a European Company. 8 See: http://ec.europa.eu/internal_market/company/societas-europaea/index_en.htm, visited 5 May 2017. 9 Dorresteijn, A.F.M. & Snijder V.N.J. (2011). Oil Disaster Spills over BP Europa SE. European Company Law, 8 (1). 10 Dorresteijn, A.F.M., Monteiro, T., Teichmann, C. & Werlauff, E. (2009). European Corporate Law, Second Edition, European Company Law Series. Austin/Boston/Chicago/New York/The Netherlands: Kluwer Law International.

164

11

The Societas Europaea (SE) Revisited

‘Although the SE is not the first type of company of non-national nature (…), its introduction is hailed as ‘a unique and historic step (…) in European Company Law’. It opens up new possibilities for the restructuring and internationalization of European businesses. It also offers flexibility, (…) . The SE is also a catalyst for further legal developments (…).’11 In this article in honour of Adriaan Dorresteijn, as the SE regulation has now been operational for almost 15 years, I will analyse the main strengths and weaknesses of the European Company and discuss whether there are arguments for amending the SE Regulation.

11.2

Background of the European Company and SE Regulation

In general, over the years, two main approaches have been used to create a framework for EU company law.12 The first approach is to harmonize the company laws of the Member States by adopting harmonized rules. This approach had some successes, but it is difficult to harmonize legal systems which widely differ, for example when they reflect different national attitudes to issues such as worker involvement in the management of the company. The other, second approach, is to create a totally new system of EU company law, that co-exists alongside the individual company laws of the Member States. The SE Regulation that came into effect after more than 30 years of discussion is (partly) an example of such an approach. The European Company is governed by the following sets of rules: (i) the EU Treaty; (ii) European Council Regulation No. 2157/2001 of 8 October 2001 on the Statute for a European Company (SE);13 (iii) European Council Directive No. 2001/86/EC of 8 October 2001 supplementing the Statute for a European Company with regard to the involvement of employees; (iv) the applicable national company law, for example with regard to further rules and procedures for formation, registration and corporate governance; and (v) the constitutional documents, such as the memorandum and articles of association of the European Company itself. Hence, in practice, the European Company legal framework can be marked as challenging and hybrid, as it is half European and half national. The end result was very different from the starting point, as initially it was aimed for the European Company legal framework to be (only) federal in nature. The idea was that the European Company should become a new and original type of company governed by autonomous EU rules, equal in all 11 Dorresteijn, A.F.M., Monteiro, T., Teichmann, C. & Werlauff, E. (2009). European Corporate Law, Second Edition, European Company Law Series. Austin/Boston/Chicago/New York/The Netherlands: Kluwer Law International, p. 104. 12 See also Koster, H. (2015) EU Legal Entities: New options?, European Company Law. (12) 1. 13 The SE Regulation is directly applicable and self-executory in the Member States.

165

Harold Koster respects in the entire EU. But the Members States, being afraid that the European Company would be free of national government influence, gave up this audacious plan.14 Further, there were challenging and difficult discussions about taxation and labour provisions. For example, the German government was afraid that German companies would use the SE statute as a tool to escape from employee participation (Mittbestimmung).15 After many years of discussions, these issues were finally resolved. Taxation was removed from the SE Regulation, whereas the labour provisions were based on a ‘before-after’ principle. This means that employee participation rights in a company becoming a European Company cannot be lessened compared to the rights which existed prior to the incorporation. Thus, the outcome is a legal framework that co-exists alongside the individual company laws of the Member States. However, due to the hybrid character of the applicable rules as described, the European Company is governed partly by EU rules, and partly by the applicable national company law. Article 9 of the SE Regulation sets out the hierarchy of the applicable rules, namely: ‘9(1). An SE shall be governed: a. by this Regulation, b. where expressly authorised by this Regulation, by the provisions of its statutes or c. in the case of matters not regulated by this Regulation or, where matters are partly regulated by it, of those aspects not covered by it, by: i. the provisions of laws adopted by Member States in implementation of Community measures relating specifically to SEs; ii. the provisions of Member States' laws which would apply to a public limited-liability company formed in accordance with the law of the Member State in which the SE has its registered office; iii. the provisions of its statutes, in the same way as for a public limitedliability company formed in accordance with the law of the Member State in which the SE has its registered office.’ The SE Regulation was proposed due to the fact that the completion of the internal market and the improvement it brings about in the economic and social situation throughout the Community16 mean not only that barriers to trade must be removed, but also that the structures of production should be adapted to the Community dimension. For that purpose it was felt essential that companies should be able to plan and carry 14 Lenoir, N. (2008) The Societas Europaea (SE) in Europe A promising start and an option with good prospects. Utrecht Law Review, (4) 1. 15 The German employee participation has three forms: parity employee participation in the sectors of mining, iron and steel, parity employee participation in stock corporations of over 2,000 employees, and the onethird employee participation in stock corporations having between 500 and 2,000 employees. 16 Now Union.

166

11

The Societas Europaea (SE) Revisited

out the reorganisation of their business on a Community scale. Moreover, these reorganisations require that existing companies from different Member States are given the possibility to combine their potential by merging together.17 As the legal framework within which business had to be carried on in the Community was still based largely on national laws, a situation existed which did not correspond to the desired economic framework and it formed a considerable obstacle to the creation of groups of companies from different Member States.18 Thus, it was concluded that there was a need for the creation, side by side with companies governed by a particular national law, of companies formed and carrying on business under the law created by a Community Regulation which is directly applicable in all Member States.19 Thus, the European Company offers: a simpler way to do business if it is active in more than one EU country; greater mobility in the integrated EU market; and a framework for how to involve staff – employed in more than one country – in the running of the business.20

11.3

Incorporation, structure and organisation of the European Company

Key features of a European Company are that it has legal personality, its capital shall be divided into shares and no shareholder shall be liable for more than the amount he has subscribed. Further, the European Company must have a minimum subscribed capital of €120,000, except where a Member State requires a larger capital for companies exercising certain types of activities. The capital of a European Company shall be expressed in euro. According to Article 10 of the SE Regulation, a European Company shall be treated in every Member State as if it were a public limited-liability company formed in accordance with the law of the Member State in which it has its registered office. The SE Regulation provides for five ways to form a European Company,21 they are: (i) by a merger of public limited-liability companies from different Member States, each formed under the law of a Member State, with registered offices and head offices within the

17 See Council Regulation (EC) No. 2157/2001 of 8 October 2001 on the Statute for a European company (SE), recital no. 1 and 2. 18 See Council Regulation (EC) No. 2157/2001 of 8 October 2001 on the Statute for a European company (SE), recital no. 4. 19 See Council Regulation (EC) No. 2157/2001 of 8 October 2001 on the Statute for a European company (SE), recital no. 6. 20 See: http://ec.europa.eu/internal_market/company/societas-europaea/index_en.htm, visited 5 May 2017. 21 Articles 2 and 3 SE Regulation.

167

Harold Koster Community;22 (ii) by the creation of a joint venture between companies23 from different Member States;24 (iii) by the creation of an SE subsidiary of at least two national companies or firms;25 (iv) by the conversion of a national public limited-liability company formed under the law of a Member State, which has its registered office and head office within the Community, into an SE, if for at least two years it has had a subsidiary company governed by the law of another Member State; however, the registered office may not be transferred from one Member State to another at the same time as the conversion takes place; and lastly (v) an existing European Company can form one or more European Companies as a subsidiary.26 In general, although the SE Regulation does not include a clause specifically stating this, based on the structure and applicable rules of the SE Regulation, it seems to implicitly require a European Company to be linked in some way to at least two different Member States. Moreover, in recital 13 of the SE Regulation reference is made to this characteristic: ‘The SE itself must take the form of a company with share capital, that being the form most suited, in terms of both financing and management, to the needs of a company carrying on business on a European scale.’ Further, it is mandatory that the registered office of the European Company as stated in the articles of association must also be the place where it has its central administration, meaning its centre of operations. The European Company may however transfer its registered office (and thus also its central administration) within the Community without dissolving the company in one Member State in order to form a new one in another Member State. With regard to the organisation of the European Company, the articles of association of the European Company need to include as governing bodies the general meeting of

22 See also Brandes, S.M. (2005) Cross Border Merger mittels der SE. Die Aktiengesellschaft. (50) 6. 23 Private limited-liability companies have also participated in the creation of European Companies (the creation of a holding SE and a subsidiary SE). Private limited-liability companies have also participated in setting up European Companies through a merger and conversion, but only after first having transformed into a public limited-liability company. These findings are extracted from the data contained in the report ‘Study on the operation and the impacts of the Statute for a European Company (SE)’. 24 Public and private limited-liability companies, formed under the law of a Member State, with registered offices and head offices within the Community may promote the formation of a holding SE provided that each of at least two of them: (a) is governed by the law of a different Member State, or (b) has had, for at least two years, a subsidiary company governed by the law of another Member State or a branch situated in another Member State. 25 Provided that each of at least two of them: a) is governed by the law of a different Member State, or (b) has had, for at least two years, a subsidiary company governed by the law of another Member State or a branch situated in another Member State. 26 Article 3 of the SE Regulation.

168

11

The Societas Europaea (SE) Revisited

shareholders and either a management board and a supervisory board (a two-tier system) or a one-tier board. In the case of a two-tier system the company is managed by the management board and the members of the management board have the power to represent the company in dealings with third parties and in legal proceedings. Members of the management board are appointed and dismissed by the supervisory board. However, a Member State may require or permit the statutes to provide that the member or members of the management organ shall be appointed and removed by the general meeting under the same conditions as for public limited-liability companies that have registered offices within its territory. Importantly, no person may be a member of both the management board and the supervisory board of the same company at the same time. The supervisory organ may, however, nominate one of its members to act as a member of the management organ in the event of a vacancy. During such a period the functions of the person concerned as a member of the supervisory organ shall be suspended. A Member State may impose a time limit on such a period. Further, the supervisory organ shall elect a chairman from among its members. If half of the members are appointed by employees, only a member appointed by the general meeting of shareholders may be elected chairman. Winding-up, liquidation, insolvency, and the suspension of payments are mostly governed by national law. The registration and also the completion of the liquidation of a European Company must be disclosed for information purposes in the Official Journal of the European Union. Further, every European Company must be registered in the Member State where it has its registered office. With regard to employee representation, special provisions were introduced in the SE Directive, aimed at ensuring that the establishment of a European Company does not entail the disappearance or reduction of practices of employee involvement existing within the companies participating in the establishment of a European Company.27 Moreover, the great diversity of rules and practices existing in the Member States as regards the manner in which employees’ representatives are involved in decision-making within companies made it necessary to create a European model of employee involvement applicable to the European Company.28 Thus, EU Directive 2001/86/EC, supplementing the SE Regulation relating to the involvement of employees, provides that, once the decision has been taken to set up a European Company, negotiations have to be opened with the employees’ representatives to establish a procedure for involving the employees in the

27 Council Directive 2001/86 (EC) supplementing the SE Regulation for a European Company with regard to the involvement of employees, recital no. 3. 28 Council Directive 2001/86/(EC) supplementing the SE Regulation for a European Company with regard to the involvement of employees, recital no. 5.

169

Harold Koster running of the company.29 A special negotiating body must then be created to represent all workers in all participating companies and in each EU Member State in which the company is established. The discussions with the special negotiating body may last for between six and 12 months. If a satisfactory arrangement is not reached, a set of standard principles set out in the Annex to the Directive becomes applicable. These standard rules contain obligatory information, consultation and, where appropriate, participation rights. The standard can also be applied voluntarily if both parties so desire. In general, several models of participation are possible such as: (i) a model in which the employees are part of the supervisory board or of the administrative board (the board employee participation model); (ii) a model in which the employees are represented by a separate body (the works council model); or (iii) any other model to be agreed between the parties.

11.4

11.4.1

Strengths and weaknesses of the European Company

Strengths of the European Company

The introduction of the European Company resulted in a hybrid regulatory situation for businesses, as they can now choose between supranational and national law. It offers the possibility of adopting a European identity which is seen as a positive characteristic of the European Company.30 Further, a company may transform itself directly into a European Company, if it held a subsidiary in another Member State for at least two years.31 Moreover, the SE Regulation allows companies to operate in different EU Member States by using one single legal company form that is recognized in all the Member States. In practice, many European Companies are of German origin and among them are some well-known businesses such as Alianz SE, BASF SE, Deutsche Börse SE, Porsche SE, Siemens SE and Zalando SE.32 This might be the result of, among other things, the fact that

29 It is uncertain whether negotiations are required if there are no employees. See also Roelofs, E.R. (2010) Shelf SEs and Employee Participation’ European Company Law. (7) 3. According to the German Oberlandesgericht Düsseldorf (ZIP 2009, 918) it is possible to form a European Company without complying with Article 12 (2) of the SE Regulation. See also Bungert, H. and Gotsche, H. (2013) Die Deutsche Rechtsprechung zur SE. Zeitschrift für Wirtschaftsrecht (34) 14. 30 See also Stolowy, N. (2012) Does the ‘Societas Europaea’ or ‘European Company’ make a significant contribution to construction of European company law?. Journal of Business Law (5). 31 An example is SEVIC Systems SE from Germany. It is assumed that the setting up of the European Company occurred much more quickly than its previous restructuring exercise. See the judgment of the ECJ of 13 December 2005, C-411/03 (SEVIC Systems AG). 32 Interestingly, incorporating a European Company became most popular in the Czech Republic. It is suggested that this is mainly driven by the desire to economize on board size and the positive European image of the European Company (brand management). Moreover, it is suggested that the large number of Czech shelf European Companies probably results either from service providers overestimating these advantages and, as a consequence, a demand for new European Companies or, conversely, from users underestimating

170

11

The Societas Europaea (SE) Revisited

the SE Regulation is inspired by German company law as well as the opportunity to create a more flexible co-determination structure,33 because in order to incorporate a European Company, an agreement is needed about co-determination. This can be negotiated with the employees. Such negotiation can be an attractive feature for companies in countries with mandatory board-level worker participation, as it gives companies an opportunity to negotiate for a more efficient system of co-determination. As Article 2 of the SE Regulation states: ‘the involvement of employees’ means any mechanism through which employees may exercise an influence on decisions to be taken within a Company.’ Indeed, incorporation as a European Company may lead to an increase in firm value, as it enables corporate governance structures to be adopted that might not be allowed under national corporate law,34 for example creating a one-tier board structure in countries that prescribe a two-tier structure for their national public companies.35 Consistent with this argument, it is documented that the European Company is predominantly used in countries where board-level worker participation is mandatory such as in Germany.36 The use of the European Company allows businesses in Germany to soften the rules on co-determination by limiting the number of members of the supervisory board, and adding trade union members from other Member States to the supervisory board.37 Another strong point is the fact that a change of seat within the EU is possible without being forced into dissolution.38 Such mobility and the fact that there is a legal framework for such a change of seat is an important advantage of the European Company. The respondents to the 2010 SE consultation generally placed the possibility to transfer the seat and the European image of the company at the top of the list. Other positive drivers were the flexibility in corporate governance, the potential for corporate simplification and

33 34 35 36 37

38

the beneficial effects of (re)incorporating as an European Company. See Eidenmüller. H. and Lasák, J. (2011) The Czech Societas Europaea Puzzle. https://www.ssrn.com/en/, visited 7 May 2017. Lenoir, N. (2008) The Societas Europaea (SE) in Europe. A promising start and an option with good prospects. Utrecht Law Review, (4) 1. A good example is a 2010 decision by a German Court, Landgericht Nürnburg-Fürth (ZIP 2010, 372, 373). Hornuf, L., Abdulkadir, M. and Schwienbacher, A. (2016) The Economic Impact of Forming a European Company. https://www.ssrn.com/en/, visited 7 May 2017. Eidenmüller, H., Engert, A., and Hornuf, L. (2009). Incorporating under European law: The Societas Europaea as a vehicle for legal arbitrage. European Business Law Review, 10 (01). See also Reichert, J. (2008) Experience with the SE in Germany. European Company Law, (5) 6; and Schuberth, E.M., and Von der Höh, R.M. (2014) Zehn Jahre ‘deutsche’SE – Eine Bestandaufnahme. Aktiengesellschaft. 12. Lamp. F. (2011) Value creation and value destruction in the Societas Europaea: Evidence from the new legal form. https://www.ssrn.com/en/, visited 7 May 2017.

171

Harold Koster regulatory advantages in comparison with the equivalent national types of companies. Other positive features mentioned were taxation and labour law.39

11.4.2

Weaknesses of the European Company

The regulation of the European Company also has some weaknesses.40 A first issue is that it can be questioned whether the minimum capital requirement of €120,000 might not greatly hinder the setting up of European Companies. It is suggested here that a lower threshold such as €50,000 may be more suitable. Secondly, only public limited-liability companies can currently convert into a European Company and the same is the case for participation in a merger to set up an European Company.41 It is suggested that private limited-liability company forms should also be given access to a European Company by way of conversion or a merger. Another issue is the fact that it is not clear which national rules apply to the formation of a European Company by a merger. More specifically, in connection with Article 18 of the SE Regulation, it is unclear whether the provisions of the applicable national laws with regard to mergers which are not based upon the 2017 Directive relating to certain aspects of company law are also applicable.42 A further characteristic that might nowadays be experienced as an obstacle is the crossborder requirement. It seems to be open to discussion, for example, whether the requirement for a period of at least two years during which the companies have had a subsidiary company or a branch in another Member State still makes sense. Moreover, in general, it can be challenged whether it is still necessary to require a European Company to be linked in some way to at least two different Member States.43 I suggest that it is now time to abandon this (implicit) requirement, and to allow European Companies that only have a connection with one Member State to be formed.44 In a maturing European

39 European Commission, Synthesis of the comments on the consultation document of the Internal Market and Services Directorate General on the results of the study on the operation and the impacts of the statute for a European Company, July 2010, p. 4. 40 See also the report ‘Study on the operation and the impacts of the Statute for a European Company’ and the Staff Working Document (SEC(2010) 1391 final) that accompanied the report. 41 See Article 2 of the SE Regulation. 42 Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law. This directive replaced, among others, Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies. 43 A requirement which, as mentioned by Dorresteijn, Monteiro, Teichmann,& Werlauff,, is easy to circumvent. See Dorresteijn, A.F.M., Monteiro, T., Teichmann, C. & Werlauff, E. (2009). European Corporate Law, Second Edition, European Company Law Series. Austin/Boston/Chicago/New York/The Netherlands: Kluwer Law International, p. 109. 44 This would also solve the seemingly strange difference between forming a holding or a subsidiary European Company and the conversion into a European Company. For the latter it is required that the company wishing to be converted into a European Company has had, for at least two years, a subsidiary company

172

11

The Societas Europaea (SE) Revisited

market, in my opinion it should be possible to incorporate a European Company, even if it only has a relationship with one Member State. Moreover, the requirement of Article 7 of the SE Regulation that the registered office and the head office of a European Company need to be located in the same Member State seems to be too strict.45 Indeed, it might be an obstacle in practice, because if the head office of a European Company will be moved, it follows, on a mandatory basis, that the registered office must also be moved. As per EU law the choice of the connecting factor for incorporation is up to the individual Member States,46 it seems that this requirement can also be abandoned. Furthermore, according to Article 37 of the SE Regulation, the conversion of an existing public limited-liability company into a European Company is possible, but the registered office may not be transferred from one Member State to another at the same time as the conversion takes place. Again, this seems unnecessarily strict and it is suggested to allow doing this simultaneously. Moreover, this should also be possible for the combination of a merger by acquisition and a transfer of seat.47 Currently, it is uncertain whether this is possible. Another problem is that it is not currently possible to form a European Company by way of a (cross-border) division. It can be argued that a division, similar to a merger, is an obvious tool for restructuring and thus there seems to be no valid reason to offer the merger option but not the division option.48 Hence, it is suggested that this option should additionally be made available. Also, it is currently not possible for a natural person to incorporate a European Company. Again, it is suggested that this option should be made possible.49

45

46

47

48

49

governed by the law of another Member State, whereas for forming a holding or a subsidiary European Company a branch situated in another Member State also qualifies. Moreover, it might conflict with the case law of the European Court of Justice. In a similar vein see Storm, P.M. (2006) The Societas Europaea: a new opportunity? In: The European Company Volume 1. Cambridge: Cambridge University Press. p. 11. See for example the Centros judgement, in which the court stated that: ‘the Treaty regards the differences in national legislation concerning the required connecting factor … as problems which are not resolved by the rules concerning the right of establishment’. See Case C-212/97, Centros, 1999. The current SE Regulation does not solve problems with regard to differences in national rules when transferring the seat of the European Company. Since the SE Regulation only provides for a basic framework, there are uncertainties in relation to the differences in national legislation. A preferred solution would be a Cross-Border Transfer Directive, clarifying the criteria for such a transfer in general. Based on the jurisprudence of the European Court of Justice it is possible to carry out a cross-border division when the companies involved are governed by the laws of different Member States. See especially the judgment of the ECJ of 13 December 2005, C-411/03 (SEVIC Systems AG). Remarkably, Article 2 of the European Cooperative Society (SCE) Regulation allows for incorporation by a number of natural persons. There seems to be no valid reason for such a difference.

173

Harold Koster A last remark I will make is that the Member States have implemented the SE rules in different ways.50 This is also caused by the fact that the Regulation and the Directive are not always very clear. For example, Article 11 of the SE Directive states: ‘Member States shall take appropriate measures in conformity with Community law with a view to preventing the misuse of an SE for the purpose of depriving employees of rights to employee involvement or withholding such rights.’ whereas recital 18 of the same directive explains: ‘It is a fundamental principle and stated aim of this Directive to secure employees' acquired rights as regards involvement in company decisions. Employee rights in force before the establishment of SEs should provide the basis for employee rights of involvement in the SE (the ‘before and after’ principle). Consequently, that approach should apply not only to the initial establishment of an SE but also to structural changes in an existing SE and to the companies affected by structural change processes.’ Following this, some Member States chose to implement ‘misuse’, whilst others selected ‘structural changes’.51 For example, the Lithuanian legislation states that there should be new negotiations if ‘shortly after the establishment of a European company, essential changes take place … which clearly show that the purpose of the establishment of the European Company was to deprive the employees of the right to be involved in decision making’. Essential changes means changes in the number of employees or the way the European Company is incorporated ‘which would have extended the rights of the employees to be involved in the management of the company’, if they had happened beforehand.52 In Denmark new negotiations are required if there are changes in the first two years which would have led to a different outcome to the negotiations had they applied at the start of the procedure.53 In Austria, among others, it has been legislated that a Eur-

50 See also Storm, P.M. (2008) The Societas Europaea: a new opportunity? In: The European Company Volume 2. Cambridge: Cambridge University Press. p. 13-14. 51 English language copies of national legislation can be downloaded from the EU website. See http://ec. europa.eu/social/main.jsp?catId=707&langId=en&intPageId=212, visited 20 May 2017. 52 See https://www.worker-participation.eu/European-Company-SE/Countries-Transposition/Lithuania/ COUNTRY-OVERVIEW, visited 20 May 2017; and Article 6(4) of the Law of the Republic of Lithuania on the involvement of employees in decision making in European Companies (Act no. X-20 of 12 May 2005). 53 See https://www.worker-participation.eu/European-Company-SE/Countries-Transposition/Denmark/ COUNTRY-OVERVIEW, visited 20 May 2017; and Article 44 of the Act on the involvement of employees in European Companies (Act No. 281 of 26 April 2004).

174

11

The Societas Europaea (SE) Revisited

opean Company may not be misused to deprive employees of participation rights or to withhold these rights from them. Misuse is particularly to be suspected if there are changes in the company structure which are likely to result in employees losing or not gaining these rights. Furthermore, any structural changes that occur in the first year of a European Company’s existence are to be taken as a misuse of procedures unless it can be proved that this was not the case.54 Hence, this shows that there is still work to be done.

11.5

Conclusion

It has been stated that the European Company is a unique and historic step in European Company Law.55 In practice, the European Company has proven to be a useful legal form. However, after almost 15 years of experience with the European Company, the analysis in this contribution shows that there seem to be some flaws and also some areas that can be improved. Hence, I have made some suggestions for amendment. Given Adriaan Dorresteijn’s interest in EU corporate law, I hope he will find this contribution interesting.

54 See https://www.worker-participation.eu/index.php/European-Company-SE/Countries-Transposition/Austria/COUNTRY-OVERVIEW, visited 20 May 2017; and Article 229 of the 2004 Federal Act amending the Labour Constitution Act, the Federal Act on Employee Representation in the Post Office and the Labour and Security Courts Act. 55 Dorresteijn, A.F.M., Monteiro, T., Teichmann, C. & Werlauff, E. (2009). European Corporate Law, Second Edition, European Company Law Series. Austin/Boston/Chicago/New York/The Netherlands: Kluwer Law International, p. 104.

175

12

Who Is in Control in Public Procurement?

Pieter Kuypers

12.1

Introduction

Control over legal entities and of course other companies is an important object of study by legal scholars, especially within groups of companies. Moreover Adriaan Dorresteijn, as an academic in the field of (European) company law, has published in this field in one of his recent books.1 Therefore I assume that it is likely that Adriaan is interested in this topic as an expert in company law. In particular, control within a group of companies or larger groups of legal entities remains interesting also within a European context. In EU cartel law it already became an important issue decades ago, because a company that exercises a decisive influence – which means control over strategy and important decisions – over an undertaking (which is often a group of companies) can be fined by cartel authorities for the behaviour of other companies within the same undertaking. The answer to the question of which legal entity ultimately exercises control does not seem to be relevant in EU public procurement law. Nevertheless, it is control over legal entities (often companies) where Adriaan Dorresteijn’s and my areas of interest (European competition and public procurement law) meet. Indeed, one might not have expected at the moment of the introduction of European public procurement law that control over legal entities would later become an important subject in public procurement.2 Public procurement is about public contracts and concessions and is related to supplies, works and services provided to the public sector and utilities. What has control over legal entities to do with public procurement? The question of control over legal entities became important after the Teckal judgment in 1999.3 Control is one of the conditions to be exempted from the obligation to tender under the so-called ‘quasi in-house’ exemption. This exemption has been finally codified (and almost unchanged) in the fifth generation public procurement directives in Article 1 2

3

Adriaan Dorresteijn, Steef Bartman, Van het concern, 9th edition, Deventer, Kluwer, 2016. The first public procurement directives were adopted in 1971 (Directive 71/305/EEC on public works contracts) and 1977 (Directive 77/62/EEC on public supply contracts). Later the Public Services Directive was adopted (Directive 92/50/EEC) and public procurement by the utilities sector became regulated as well (Directive 90/531/EEC). ECJ 18 November 1999, C-107/98 (Teckal).

177

Pieter Kuypers 12 Directive 2014/24/EU (public sector) and Article 28 Directive 2014/25/EU (the Utilities Directive).4 In this contribution to Adriaan Dorresteijn’s farewell liber amicorum I shall focus on the conditions for (similar) control over legal entities in the ‘quasi inhouse’ exemption. In other words: when does sufficient control exist in order to be able to rely on the ‘quasi in-house’ exemption? First I shall describe the ‘quasi in-house’ exemption. Then I shall analyse the case law of the ECJ on ‘control’ in the ‘quasi in-house’ exemption. The scope of the study on control will be limited to the Public Sector Directive (Directive 2014/24/EU), since ECJ case law is more related to the public sector rather than to utilities. The entry into force and the transposition of Article 12 into national legislation did not affect the case law of the ECJ on control. This condition is laid down in Article 12 par. 1 sub. (a) and is a reproduction of the condition that the court imposed in its case law.

12.2

The quasi in-house exemption

The 'quasi in-house' exemption is an exemption that applies in situations in which a contracting authority (Article 2 par. 1 sub. (1)) awards a contract to a person that is materially not distinct from it. It is a 'quasi' in-house relationship in which a contract is needed between the entities due to the reason that the contracting party is formally distinct from the contracting authority, but it is still dependent on the contracting authority, which is similar to the relationship between the contracting authority and its own departments. The ECJ established in the Teckal judgment, first of all, that there is no such general exemption from the public procurement rules for contracts between contracting authorities.5 In its decision the ECJ followed the opinion of Advocate General Cosmas6 that there can only be a public contract in the event that there is an actual agreement between 'two separate persons'.7 In order to be a separate person, within the meaning of the Directive, the contracting party needs to be legally distinct from the contracting authority. The ECJ proceeded with two criteria for determining that the contracting party is actually not a legally distinct person. The contracting authority can make an exception under ECJ 18 November 1999, C-107/98 (Teckal), par. 508:

4 5 6 7 8

Articles 29 and 30 Utilities Directive extend the quasi in-house exemption also to public contracts awarded to affiliated entities, but this exception remains outside the scope of this contribution. ECJ 18 November 1999, C-107/98 (Teckal), par. 44. Opinion of Advocate General Cosmas, C-107/98 (Teckal), par. 53. ECJ 18 November 1999, C-107/98 (Teckal), par. 49. ECJ 18 November 1999, C-107/98 (Teckal), par. 50.

178

12

Who Is in Control in Public Procurement?

'only in the case where the local authority exercises over the person concerned a control which is similar to that which it exercises over its own departments and, at the same time, that person carries out the essential part of its activities with the controlling local authority or authorities'. The ECJ created in one sentence of the Teckal judgment an exception that did not exist in the public procurement directives. It was surprisingly not incorporated in the fourth generation of public procurement directives in 2004, although its importance could not have been underestimated.9 The ECJ established two vague criteria for the application of the ‘quasi in-house’ exemption: (i) the 'similar control' criterion and (ii) the 'activities' criterion. The ECJ did not explain the meaning of these criteria in the Teckal judgment. Nevertheless, there were judgments handed down after the Teckal judgment in which the ECJ did define and clarify these criteria. Advocate General Cosmas voiced his fear that this judgment would open the floodgates to public authorities which intend to escape from the obligation to tender. It would enable new forms of evasion and undermine the aim of the public procurement rules.10 Since this judgment, there have indeed been many cases in which contracting authorities have tried to make use of this exemption. However, the ECJ determined that the exemption should be interpreted strictly and not disrupt the objectives of the public procurement rules.11 Nevertheless, Advocate General Cosmas accurately predicted what would happen: the exemption has since been frequently used by public authorities, and so the ECJ has widened the exception in later judgments. In 2014 the EU legislator added to this development by further extending the ‘quasi inhouse’ exception in Article 12 Directive 2014/24/EU by enlarging the situations in which contracting authorities can rely on the exemption and lightening the conditions for ‘quasi in-house’ public contracts. In 2014 the Concession Directive also incorporated the ‘quasi in-house’ exemption in Article 17. The ‘quasi in-house’ exemption was therefore given extra weight in 2014.

9 Directives 2004/18/EC (public sector) and 2004/17/EC (utilities). 10 Opinion of Advocate General Cosmas, C-107/98 (Teckal), par. 65. 11 ECJ 11 January 2005, C-26/03 (Stadt Halle), par. 46. The Court emphasized in later judgments that any exception in public – public relationships to the application of the obligation to tender must be interpreted strictly (judgments of 11 January 2005, C-6/03 (Stadt Halle and RPL Lochau), par. 46, and of 8 May 2014, C-15/13 (Datenlotsen Informationssysteme), par. 23).

179

Pieter Kuypers

12.3

12.3.1

'Similar control’

Developments in ECJ case law

The first condition for a ‘quasi in-house' exemption provides that the contracting authority exercises control over the contracting party (the economic operator12) which is similar to that which it exercises over its own departments. This criterion is aimed at the functional dependence of the contracting party. Advocate General Mengozzi described the idea of this criterion as the controlled party being similar to a department of the contracting authority in the sense that the controlled entity does not have its own will. It is solely led by the will of the controlling entity (the contracting authority).13 This idea seems to have been confirmed by the ECJ in its judgment in the Stadt Halle case.14 In a request for a preliminary ruling the ECJ answered that a strict interpretation of the exemption should be adopted.15 The Court reiterated, first of all, that the 'quasi in-house' exemption is based on the presumption that European public procurement rules do not seek to restrict the freedom of public authorities to perform their public tasks by means of using their own resources. The Court held in that respect that any participation by a private undertaking in the capital of the contracting party, even if it is very minor, excludes the possibility of the contracting authority exercising the necessary control over the contracting party.16 The Court based this conclusion on the reasoning that in the relationship between a contracting authority and its own departments, all decisions are solely governed by the pursuit of public interest objectives. Private capital investments, however, are based on considerations of private interest, even if the private stake in the contracting party is limited. Any undertaking with private capital or private investment, even if this is in the minority, is not exclusively governed by public interest. Furthermore, the award of a contract without a tendering procedure to an undertaking in which there is private capital participation would put the private investor in an advantageous position compared to its competitors on the market, which would be contrary to the aims of public procurement rules.17 The ECJ therefore established that the similar control criterion could never be fulfilled if there was any private capital participation in the contracting party. The interpretation of the similar control criterion is consequently important to prevent public authorities from distorting competition.

12 13 14 15 16 17

An ‘economic operator’ is defined in Article 2 par. 1 sub. 10 Directive 2014/24/EU. Opinion of Advocate General Mengozzi dated 23 January 2014, C-13/15 (Datenlotsen), par. 41. ECJ 11 January 2005, C-26/03 (Stadt Halle). ECJ 11 January 2005, C-26/03 (Stadt Halle), par. 46. ECJ 11 January 2005, C-26/03 (Stadt Halle), par. 49. ECJ 11 January 2005, C-26/03 (Stadt Halle), par. 50.

180

12

Who Is in Control in Public Procurement?

The ECJ further defined the control criterion in its judgment in the Parking Brixen case18 which was, according to the ECJ, a service concession and therefore at that time explicitly excluded from the scope of the procurement directive which was in force when the concession was awarded.19 The ECJ stated that a direct award without any prior advertising or being open to competition was in violation of the obligations of the municipality which followed from the EU Treaty20 (primary EU law) and the obligation of transparency as established in its earlier Telaustria judgment.21 Although it is not relevant for the obligation of transparency if a contract between the contracting authority and a legally distinct entity in fact exists, the ECJ decided in the light of the freedom of public entities to perform their tasks with their own resources, that the obligation of transparency is not applicable to 'quasi in-house' situations. The ECJ argued that all legislative provisions and relevant circumstances need to be taken into account in the assessment of the control criterion.22 In a detailed analysis of the facts of the case in the judgment, especially emphasising the conversion of the special undertaking to a company limited by shares, the broadening of the company’s objectives, the obligatory opening of the company to other (private) capital, the expansion of the geographical area of the company’s activities and, especially, the considerable powers of the administrative board, which in principle excludes any management control by the municipality, the ECJ came to the conclusion that Stadtwerke Brixen enjoyed such a high degree of independence that it was not possible for the municipality to exercise the necessary control over the company.23 The Court emphasised that the control that the municipality could exercise was essentially limited to the measures which the national company law assigned to the majority of the shareholders.24 Here the relevance of a sound knowledge of company law to assess the similar control criterion can be noted. When assessing the similar control criterion, the influence of the contracting authority should extend beyond the normal exercise of powers by the shareholders. In other words, it is not sufficient that the contracting entity is a daughter company within the definition of Article 2.24a CC. In its judgment the ECJ established as a new element in the ‘similar control criterion’ that a contracting authority must have the 'power of decisive influence over both strategic objectives and significant decisions' of the contracting party in order to fulfil the control criterion. With this judgment, the ECJ generally made clear that Stadtwerke Brixen had become market-oriented, which rendered the municipality’s control insufficient. From the point of view of competition this is an important element that could be given more emphasis: as 18 19 20 21 22 23 24

ECJ 13 October 2005, C-458/03 (Parking Brixen). ECJ 13 October 2005, C-458/03 (Parking Brixen), par. 40. Nowadays the Treaty on the Functioning of the European Union (TfEU). ECJ 13 October 2005, C-458/03 (Parking Brixen), par. 46-52. ECJ 13 October 2005, C-458/03 (Parking Brixen), par. 65. ECJ 13 October 2005, C-458/03 (Parking Brixen), par. 67 and 70. ECJ 13 October 2005, C-458/03 (Parking Brixen), par. 69.

181

Pieter Kuypers soon as the contracting entity becomes market-oriented, the ‘similar control’ criterion is no longer applicable. This is the flip side of the coin that this exception is meant to carry out a public service and is not to enter into competition with private companies. In line with the functional approach, the ECJ did not initially provide any quantitative conditions for the interpretation of the control criterion, even if the contracting entity was a company limited by shares. However, it can be said that the ECJ has found the percentage of the capital that the contracting entity holds in the contracting party to be an indicator of the existence of control. Since voting rights and shares can be separated, this seems to be a careful and correct approach (e.g. voting agreements among shareholders might lead to differences in voting rights and the ownership of shares).25 In its judgment in the Coname case, the ECJ was asked in a preliminary ruling whether the direct award of a service concession to a company with predominantly public capital was in violation of primary EU law.26 The capital of the contracting entity was held by the contracting authorities. However, the contracting authority that intended to award the concession held only 0.97% of the capital. The Court decided that this percentage was so small that it precluded the municipality from having control over it that was sufficient to qualify for the 'quasi in-house' exemption.27 At the same time the ECJ ruled that the possibility that the contracting entity is open to private capital is enough to conclude that there is no similar control.28 The ECJ went further than in Parking Brixen: the possibility that private shareholders can participate is already enough to conclude that the similar control criterion is not fulfilled. This ruling seems to have received insufficient attention: the national court should not only examine the participation of private capital, but also the potential accession of private shareholders. In principle, the court should examine the articles of association and assess whether they prevent private shareholders from entering the capital of the company.29 One year later an Italian court again asked the ECJ for more clarity concerning the similar control criterion. A contracting authority had started a tendering procedure for a contract concerning the supply and maintenance of (public) heating installations. However, before awarding the contract to one of the tenderers, the contracting authority suspended the call for tenders and directly awarded the contract to a joint stock company in which a holding (AGESP) held 100% of the capital. The vast majority (99.98%) of the shares in the capital of the holding were held by the contracting authority. The remainder of the

25 26 27 28 29

Adriaan Dorresteijn and Steef Bartman, Van het concern, 9th edition, Kluwer, Deventer, 2016, p. 41 e.v. ECJ 21 July 2005, C-231/03 (Coname). ECJ 21 July 2005, C-231/03 (Coname), par. 24. ECJ 21 July 2005, C-231/03 (Coname), par. 26. E.g. the articles of association should require the contracting authority to be a shareholder of the company.

182

12

Who Is in Control in Public Procurement?

holding’s capital was held by nearby municipalities. The national court asked the Court whether the fact that the municipality held 99.98% of the shares in the holding was enough to assume that the similar control criterion had been fulfilled.30 The ECJ answered that if the contracting authority held all the shares of the contracting entity, this would indicate control similar to that which it exercised over its own departments. From a company law perspective, this was not a surprising judgment. However, the ECJ also held that the ownership of all of the shares is only an indication and is not decisive.31 Secondly, in this case the (similar) control was only indirect. There was a holding between the contracting entity and the contracting authority (the holding company AGESP was a shareholder in the contracting entity). I shall come back to the concept of indirect control within the framework of the ‘quasi in-house’ exemption.32 Again national company law must be carefully understood. In its next judgment in the Asemfo case, the ECJ provided an insightful example of the fulfilment of the similar control criterion.33 In Spain, Tragsa was a state company which provided agricultural services (in the form of advice) to public authorities. Spanish law excluded tasks that public authorities conferred on Tragsa from the obligation to procure through a call for tenders. A private company questioned the dominant position that Tragsa had on the Spanish forestry (advisory) market and claimed that assignments to Tragsa needed to be tendered. The national court therefore referred questions concerning public procurement to the ECJ.34 The ECJ took into account several provisions of Spanish law according to which Tragsa was required by law to carry out all assignments given to it by the Spanish state administration and the participating municipalities for a tariff that was not at the discretion of the state company. The ECJ held that in the event that Tragsa did not actually have any choice in the acceptance of tasks from the competent authorities nor in the establishing of the tariffs for its services, there could be no contractual relationship with a legally distinct person.35 The similar control criterion does not mean that the usual contractual relationship entails an obligation to contract. The contracting entity may enjoy the freedom to accept assignments. The next judgment was handed down soon afterwards in the case of ASI.36 It was a straightforward example of a ‘quasi in-house’ exemption. The municipality of Mantova had entrusted its ICT services to a separate company called ASI which it owned together with neighbouring municipalities. The ECJ confirmed that ownership is itself not suffi30 31 32 33 34 35 36

ECJ 11 May 2006, C-340/04 (Carbotermo), par. 30. ECJ 11 May 2006, C-340/04 (Carbotermo), par. 37. Section 3.2.1. ECJ 19 April 2007, C-295/05 (Asemfo). ECJ 19 April 2007, C-295/05 (Asemfo), par. 24. ECJ 19 April 2007, C-295/05 (Asemfo), par. 24. ECJ 17 July 2008, case C-371/05 (ASI).

183

Pieter Kuypers cient, but that the contracting authority should exercise a decisive influence over the controlled entity: there must be an influence on both the strategic objectives as well as the important decisions.37 In this respect the Court confirmed the Parking Brixen and Carbotermo judgments.38 The Court gave particular attention to the right of the municipality of Mantova to appoint members of the board, a right to verify the administration of ASI by a special representative and control over the operating costs.39 Secondly, the ECJ ruled that the possibility that private parties could enter the capital of the company after the awarding of the contract does not affect the similar control criterion, unless there are special circumstances (which did not exist in this case).40 The ECJ provided more indications for the interpretation of the control criterion in its judgment in the case of Coditel.41 After an unsuccessful tender for the sale of its television network, the municipality of Ukkel (Belgium) decided to become a member of Brutélé, an inter-municipal cooperative company which was not open to private participants. The municipality directly entrusted Brutélé (the contracting entity) with the management of its cable television network.42 The national court was reluctant to establish whether the municipality of Uccle exercised the necessary control over Brutélé. According to Brutélé’s articles of association, its governing council enjoyed the widest powers. In its judgment in Stadtwerke Brixen the ECJ had found this situation to be an indicator of a high degree of independence towards the contracting authority and therefore there was a lack of similar control.43 However, in this case the governing council consisted entirely of representatives of the contracting municipalities and was appointed by the general assembly, which in turn consisted only of representatives of the municipalities as well. The ECJ ruled that Brutélé’s decision-making bodies consisted solely of these public authorities which proved that they were 'able to exert decisive influence over both Brutélé’s strategic objectives and significant decisions'.44 Since Brutélé took the form of an inter-municipal cooperative company governed by the law on inter-municipal cooperatives and had as its objective the pursuit of municipal interests, the fact that its governing council, consisting of the municipalities' representatives, enjoyed the widest powers did not seem to indicate a degree of independence that would preclude the municipalities from exercising control over it. This case is a reminder that indications are not decisive, but that all legislation and relevant circumstances need to be taken into account when determining the possible fulfilment of the similar control criterion. The ECJ declared that the control exercised 37 38 39 40 41 42 43 44

ECJ 17 July 2008, case C-371/05 (ASI), par. 24. ECJ 13 October 2005, C-458/03 (Parking Brixen), par. 65; ECJ 11 May 2006 (Carbotermo), par. 36. ECJ 17 July 2008, case C-371/05 (ASI), par. 25. ECJ 17 July 2008, case C-371/05 (ASI), par. 29- 30. ECJ 13 November 2008, C-324/07 (Coditel). ECJ 13 November 2008, C-324/07 (Coditel), par. 13. ECJ 13 October 2005, C-458/03 (Parking Brixen), par. 67. ECJ 13 November 2008, C-324/07 (Coditel), par. 34.

184

12

Who Is in Control in Public Procurement?

by the contracting authority must be similar to the control which it exercises over its own departments; however, it does not need to be identical in all respects. Nevertheless, the control exercised must be effective.45 The final judgment concerning similar control is Datenlotsen/HIS.46 Somewhat surprisingly the court provided a new condition for the interpretation of the control criterion.47 The Technical University of Hamburg had directly awarded a supply contract regarding IT systems to HIS, a limited company governed by private law. There was clearly no relationship of control between the University of Hamburg and HIS, but the national court enquired whether this situation might still be seen as a 'quasi in-house' situation, because the city of Hamburg could be considered to have sufficient control over both HIS and the University of Hamburg. Therefore the situation might be excluded from the obligation to tender. Without actually confirming the existence of the 'horizontal quasi in-house' exemption, the ECJ ruled that the city of Hamburg did not exercise 'similar control' over the University of Hamburg. The rationale behind this answer to the request for a preliminary ruling was that the city of Hamburg was able to exercise control solely over matters of procurement, whereas the University of Hamburg enjoyed a broad discretion in other fields, such as (its main duties of) education and research.48 It can therefore be presumed that the ECJ interprets ‘similar control’ so that it must extend to all of the controlled (contracting) entity’s activities. However, having regard to the specific circumstances and in particular the relationship between the city of Hamburg and the university instead of the relationship between the university and its actual contracting partner (HIS), it remains unclear whether this condition is meant to be part of the interpretation of the general control criterion. It could also be seen as a more specific condition which is peculiar to the 'horizontal in-house' situation.

12.3.2

Private capital participation

One of the cornerstones of the ‘similar control’ criterion is the obligation to exclude private capital. In its judgment in Stadt Halle the ECJ introduced the rule that any participation of private capital in the contracting party precludes the contracting authority from having the necessary control over that entity.49 The rationale behind this approach

45 ECJ 13 November 2008, C-324/07 (Coditel), par. 46. 46 ECJ 8 May 2014, C-15/13 (Datenlotsen). In December 2016, in case C-553/15 (Undis), par. 37, the ECJ delivered a judgment that is related to the second criterion and held that any turnover to parties (public or private) that are not controlled, does not count for the majority criterion. The ECJ did not rule on the similar control criterion itself. Therefore this judgment remains outside the scope of this article. 47 ECJ 8 May 2014, C-15/13 (Datenlotsen). 48 ECJ 8 May 2014, C-15/13 (Datenlotsen), par. 31 and 32. 49 ECJ 11 January 2005, C-26/03 (Stadt Halle), par. 49.

185

Pieter Kuypers is that private entities have their own (commercial) interests, which differ from the interests of public entities. According to the ECJ, the participation of private capital precludes the decisions of the contracting party from being guided solely by considerations in the public interest. Although situations might be imaginable in which the participation of private capital would not actually disturb the purely public considerations of an entity, the ECJ decided not to examine private participation on a case-by-case basis. From the judgment it can be concluded that the distortion of competition is the main reason for not accepting any private capital50: ‘…, the award of a public contract to a semi-public company without calling for tenders would interfere with the objective of free and undistorted competition and the principle of equal treatment of the persons concerned, referred to in Directive 92/50, in particular in that such a procedure would offer a private undertaking with a capital presence in that undertaking an advantage over its competitors.’ There is zero tolerance for private capital and the ECJ has accepted this very strict quantitative approach in subsequent case law.51 The clarity of this condition leads to a high degree of legal certainty. Excluding any kind of private capital participation, regardless of how small the percentage may be, provides a clear and unequivocal standard. Nevertheless, there is uncertainty about situations in which a contract is awarded to an entity that has been privatized (shortly) after the award of the public contract, and which is potentially open to private capital or which has subsequently been opened to the possibility of private capital participation. The ECJ was first confronted with privatisation in the case of Stadt Mödling.52 This city had created a private company as a legally separate body to carry out the city’s waste management obligations. A contract conferring waste management on this company for an unlimited period of time and for a fixed remuneration was concluded only 15 days before the city of Mödling decided to sell 49% of the shares in the company to a private company. Since the conclusion of the waste management contract had occurred when the company was still fully owned by the city of Mödling, the latter held that the award of the waste management contract was a 'quasi in-house' situation. The ECJ declared that, in principle, for reasons of legal certainty, the relevant date for the application of the public procurement rules should be the date on which the public contract was 50 ECJ 11 January 2005, C-26/03 (Stadt Halle), par. 51. 51 See for example: ECJ 10 November 2005, C-29/04 (Stadt Mödling); ECJ 6 April 2006, C-410/04 (ANAV); ECJ 10 September 2009, C-573/07 (Sea) and ECJ 15 October 2009, case C-196/08 (Acoset), par 53 and 19 June 2014, case C-574/12 (Setubal). 52 ECJ 10 November 2005, C-29/04 (Stadt Mödling).

186

12

Who Is in Control in Public Procurement?

awarded. However, the particular circumstances of a case could require that the events which took place subsequent to awarding the contract should also be taken into account.53 In particular the Court took into consideration that the company was opened to private capital shortly after the award of the waste management contract and the start of the operations after the opening to private capital.54 The ECJ ruled that this situation was an artificial construction designed to award a public contract to a semi-public company while evading the obligations under EU public procurement law. The Court established that when assessing the lawfulness of the award of a public contract, all stages and their purpose must be taken into account instead of basing the analysis only on their strict chronological order. The objective of the public procurement rules would be jeopardised if it were permissible to evade the obligation to tender by means of such an artificial construction.55 It is interesting that the ECJ again held that without this rule competition would be distorted56: ‘The award of a public contract to a semi-public company without calling for tenders would interfere with the objective of free and undistorted competition and the principle of equal treatment of the persons concerned, referred to in Directive 92/50, in that such a procedure would offer a private undertaking with a capital presence in that undertaking an advantage over its competitors.’ In its judgment in the case of Parking Brixen, the ECJ examined the control that the municipality of Brixen possibly exercised over Stadtwerke Brixen AG. One of the deciding factors on which the Court based its negative decision was the fact that the municipality had transformed Stadtwerke Brixen from a municipal body into a company limited by shares. The Court took into account the national legislation under which this kind of company is obliged to open up its capital to private investors in the short term. Among other reasons, this made the Court decide that the similar control condition had not been met.57 The ECJ followed this line of reasoning in its judgment in the ANAV case where the municipality of Bari (Italy) awarded a service contract for public transport to AMTAB Servizio without a call for tender.58 This company was wholly owned and controlled by the municipality. However, the municipality had allegedly planned to open up the company to private capital before the contract would be awarded. The municipality of Bari had also allegedly started a call for tenders for a (majority) private partner a few months

53 54 55 56 57 58

ECJ 10 November 2005, C-29/04 (Stadt Mödling), par. 38. ECJ 10 November 2005, C-29/04 (Stadt Mödling), par. 39. ECJ 10 November 2005, C-29/04 (Stadt Mödling), par. 41 and 42. ECJ 10 November 2005, C-29/04 (Stadt Mödling), par. 48. ECJ 13 October 2005, C-458/03 (Parking Brixen), par. 67. ECJ 6 April 2006, C-410/04 (ANAV).

187

Pieter Kuypers after the contract with AMTAB had entered into force. The ECJ declared, in more general wording, that if the capital of AMTAB were to be opened for private shareholders during the contract, the effect would be the same as if the contract had been awarded to a semipublic company without any call for competition. This would go against the aims pursued by EU law.59 Although the ECJ presented a general rule that was not only related to the facts of the case at hand, it also created uncertainty. To what extent should the contracting authority forecast the future? At least an intention to privatise at the time of the awarding of the contract should be taken into account. A fortiori a decision prior to a ‘quasi in-house’ award must be considered to give private parties access to the capital of the company. But one step further: which intentions must be taken into account when the contracting authority awards a 'quasi in-house' contract? Internal plans? I would favour a strict approach: all processes (also internal decisions regardless of the level of decisionmaking) aiming at giving private parties access to the capital of the company before the awarding of the contract must be taken into account. Another unanswered question is whether there must actually be private capital participation shortly after the awarding of the contract. Is the sole possibility of future private capital sufficient to exclude similar control? Both questions must be answered in the same way: the moment of actual participation does not matter; the question is rather an economic one. Does the contracting authority allow economic stakes or interests in the contracting entity? An economic stake jeopardises a level playing field and endangers fair competition. The next step in the development of the case law came in the Sea case.60 The municipality of Ponte Nossa (Italy) decided to become a minority shareholder in Setco, a company limited by shares, which was owned by a number of municipalities. Directly after becoming a shareholder, the municipality awarded a service contract concerning waste disposal to Setco without any call for tenders. The national judge was uncertain whether the situation at hand really qualified for the application of the 'quasi in-house' exemption. The underlying reason for the preliminary reference were the articles of association of Setco, which contained the possibility of opening up the capital to private participation. The company’s capital had, however, not (yet) been actually opened up to private capital. The ECJ ruled that the relevant date for the examination of private participation in the capital should be the date on which the contract in question was awarded.61 As an exception in special circumstances, also events after the award may be taken into account.62 The ECJ held that the principle of legal certainty did not allow the mere possibility of future private participation to stand in the way of the determination of the public nature of the capital.63 59 60 61 62 63

ECJ 6 April 2006, C-410/04 (ANAV), par. 30. ECJ 10 September 2009, C-573/07 (Sea). ECJ 10 September 2009, C-573/07 (Sea), par. 47. ECJ 10 September 2009, C-573/07 (Sea), par. 48. ECJ 10 September 2009, C-573/07 (Sea), par. 49.

188

12

Who Is in Control in Public Procurement?

The opening of the capital of a company that has been awarded a public contract may therefore not be taken into account, unless there exists, at the time of the awarding of the contract, 'a real prospect in the short term of such an opening'.64 The sole possibility that the company can potentially open its capital to private investors is not enough to preclude the fulfilment of the control criterion.65 This view by the Court is understandable: a theoretical extension to private shareholders is not a significant change to a contract. On the other hand, the ECJ confirmed that in the event that a company did open up its capital during a public contract that was validly awarded to it without a call for tenders, this would constitute an alteration of the fundamental conditions of the contract. Opening to private capital therefore has the effect that a new contract has to be awarded in accordance with the public procurement rules.66 The direct award of a public contract to a company that subsequently opens its capital to private investors therefore only has retroactive effect if the award is part of a construction which is meant to evade the public procurement rules. If no such construction is involved, then opening to private capital merely creates obligations for the contracting authority ex nunc unlike the evasion situation. This situation will be difficult for the contracting authority: the contracting entity will oppose any modification of the contract or a prior termination.

Indirect control The control criterion can only be fulfilled, according to the Teckal judgment, if the contracting authority exercises control over the contracting party which is similar to that which it exercises over its own departments.67 The wording of this phrase seems to indicate that the contracting authority must exercise direct control. However, the ECJ accepted that a contracting authority can exercise its influence through another entity that it controls.68 The ECJ held in the case of Carbotermo69: ‘the intervention of such an intermediary may, depending on the circumstances of the case, weaken any control possibly exercised by the contracting authority’. The ECJ then decided, on basis of the concept of indirect control and other facts of this particular case such as the considerable freedom of the management of the company, that the control criterion had not been fulfilled.70 Indirect control seems to be an indication of

64 65 66 67 68 69 70

ECJ 10 September 2009, C-573/07 (Sea), par. 50. ECJ 10 September 2009, C-573/07 (Sea), par. 51. ECJ 10 September 2009, C-573/07 (Sea), par. 53. ECJ 18 November 1999, C-107/98 (Teckal), par. 50. ECJ 11 May 2006, C-340/04 (Carbotermo), par. 30. ECJ 11 May 2006, C-340/04 (Carbotermo), par. 39. ECJ 11 May 2006, C-340/04 (Carbotermo), par. 40.

189

Pieter Kuypers weakened control. From a company law perspective this is a sound view, because in principle the contracting authority does not exercise the same control over its granddaughter as it does over its daughter. The contracting authority is only a shareholder and is normally not likely to be able to influence decisions on the level of its granddaughter. However, it does not absolutely preclude the fulfilment of the control criterion. The possibility of indirect control leads to the question of how far the ‘quasi in-house’ exemption can be stretched. Does the current case law of the ECJ define the limits of the exemption or are its boundaries still to be explored? The ECJ has repeatedly held that all exemptions from the obligation to tender need to be interpreted strictly.71 On the other hand, the Court seems to be constantly expanding the range of situations that may be exempted. A part of these extensions can be found in the weakening of the similar control criterion. I believe that the ECJ is unfortunately gradually moving away from its initial view: control means a decisive influence on all strategic and important decisions which is similar to control over an entity’s own departments. Scope of quasi in-house: a ‘horizontal in-house’ situation The term ‘horizontal in-house’ refers to a situation in which a contracting authority awards a public contract to an entity which is formally and legally distinct from it, but in which both the contracting authority and the contracting party are subject to similar control exercised by another contracting authority that is higher up in the hierarchy. Contracting authority A is controlled by its ‘mother’ entity contracting authority B. Both contracting authority A and contracting party C are ‘daughter’ entities of authority B and could therefore be described as ‘sister’ entities. According to Advocate General Mengozzi, there are ‘horizontal in-house’ situations which are imaginable that would be in alignment with the rationale behind the ‘quasi in-house’ exemption which is vertical by nature. The rationale behind the ‘quasi in-house’ exemption is that the controlled entity does not have its own will that could deviate from the will of the (joint) controlling authority.72 According to Advocate General Mengozzi, it would be a logical exception that falls within the scope of the ‘quasi in-house’ doctrine if one entity that acts only according to the will of its controlling entity were to award a contract to another entity that also acts solely according to the will of that same controlling entity. In that case, there would still be only one will of ‘mother B’ that guides the execution of the contract.73 Under certain conditions, the existence of a ‘horizontal in-house’ exemption would therefore be a plausible extension of the ‘quasi in-house’ exemption as long as similar control over both entities exists. 71 ECJ 11 January 2005, C-26/03 (Stadt Halle), par. 46; ECJ 8 May 2014, C-15/13 (Datenlotsen), par. 23. 72 Opinion of Advocate General Mengozzi 23 January 2014, C-13/15 (Datenlotsen), par. 41. 73 Opinion of Advocate General Mengozzi23 January 2014, C-13/15 (Datenlotsen), par. 42 – 43.

190

12

Who Is in Control in Public Procurement?

The ECJ was recently presented with an opportunity to clarify the possible existence of the so-called ‘horizontal quasi in-house’ situation in the case of Datenlotsen.74 A German national court asked the ECJ if the obligation to tender would not be applicable in the case of a ‘horizontal in-house’ exemption. The German national court enquired about the possibility of the ‘horizontal in-house’ exemption. The ECJ neither denied nor confirmed the existence of the ‘horizontal in-house’ exemption in its judgment. It simply declared that there was no relationship of control between the University of Hamburg and HIS and that, in any event, the city of Hamburg was not in a position to exercise control over the university. The city of Hamburg was only capable of influencing the university’s decisions concerning (public) procurement, but not in other areas. The Court held that there was ‘no need to examine whether the exception concerning in-house awards is capable of applying to so-called ‘horizontal in-house transactions’.75 The ECJ therefore left the question of the existence of a ‘horizontal in-house’ exemption unanswered. Article 12 par. 2 Directive 2014/24/EU opens the possibility for ‘horizontal in-house transactions’ if the ‘quasi in-house’ conditions are met. Similar control in this situation is a decisive influence over both contracting parties. Other ‘quasi in-house’ situations The idea of a ‘reverse vertical in-house’ situation came up as well. Reverse vertical inhouse describes a situation in which a contracting authority directly awards a public contract to an entity by which it is controlled: an assignment from a daughter to a mother entity. This is a 180-degree deviation from the traditional ‘quasi in-house’ where the assignment is made by the mother to the daughter. It could therefore be described as the reverse situation of the normal ‘quasi in-house’ situation.76 There are ideas that go even further than this. In the event that ‘reverse in-house’ and ‘horizontal in-house’ exemptions are possible, the limits of the exemption can be further stretched: Would it also be plausible for an entity to award a contract to its ‘grandmother’, an entity which indirectly controls the awarding contracting entity, for example through a holding construction? Although the ECJ has remained silent on this point, Article 12 par. 2 Directive 2014/24/EU accepts the grandmother option provided that the grandmother exercises similar control (Article 12 par. 1 sub. (a)). Constructions in which an entity has indirect control over two entities and one of them awards a contract to the other might also be justifiable. In the absence of clarification by the ECJ, the limits of the ‘in-house’ exemption are uncertain, but neither of these situations has been accepted by the ECJ as falling within the ‘quasi in-house’ exception. In all these examples the ‘similar control’ criterion was not fulfilled until the entry into force of Directive 2014/24/EU on 18 April 2016. 74 ECJ 8 May 2014, C-15/13 (Datenlotsen). 75 ECJ 8 May 2014, C-15/13 (Datenlotsen), par. 33. 76 Commission Staff Working Paper concerning the application of EU public procurement law to relations between contracting authorities ('public-public cooperation'), SEC(2011) 1169 final, p. 12.

191

Pieter Kuypers Outstanding questions With the Teckal judgment the ECJ started a series of judgments that defined, little by little, the ‘quasi in-house’ exception. In these judgments the ECJ contributed, without doubt, to the clarity of the control criterion. I sometimes wonder whether the Court was really aware of the consequences when it handed down its judgment in the Teckal case. Nevertheless, there remains uncertainty concerning the criterion, partly because the ECJ did not promote legal certainty in several judgments. The approach that the Court chose in Carbotermo with regard to indirect control neither clarified the scope nor the consequences of indirect control. Arrowsmith even believes that a further condition for the assessment of the control criterion was established by the ECJ.77 Another example is the judgment in Sea, where the ECJ held that the market-oriented nature of an entity may preclude contracting entities from having sufficient control over the entity.78 Hower, this condition was not repeated later on, and one could question whether it still has to be taken into account.

12.4

Conclusion

The ‘quasi in-house’ exemption was created by the CJEU in the Teckal case.79 In the public procurement directives at that time there was no legal exception for public – public contracts. The background of this exception to the obligation to tender public contracts is the rationale that contracting authorities are free to organise the performance of their public tasks by means of their own resources. Own resources are own departments (‘inhouse’) as well as entities that are functionally and formally distinct from the contracting authority (‘quasi in-house’). Since there are two legal entities, a contract must be concluded. And such a contract in public procurement law falls, in principle, within the scope of the Public Procurement Directives. The similar control criterion required for the ‘quasi in-house’ exemption can be summarized as follows: The contracting authority exercises control over the contracting party which is similar to that which it exercises over its own departments as is now codified in Article 12 par. 1 sub. (a) Directive 2014/24/EU. Since the case law of the ECJ remains relevant80, it can be expected that the similar control which is necessary for the ‘quasi in-house’ situation must meet the following minimum standards:

77 Sue Arrowsmith, The law of public and utilities procurement – Regulation in the EU and UK (Volume I, 3rd edition, 2014). London: Sweet & Maxwell. p. 509. 78 ECJ 10 September 2009, C-573/07 (Sea), par. 73. 79 CJEU 18 November 1999, C-107/98 (Teckal). 80 Recital 31 Drective 2014/24/EU and the unchanged provision in Article 12 par. 1 sub. (a) concerning similar control.

192

12

Who Is in Control in Public Procurement?

a. This control by the contracting authority must be effective; b. The contracting authority must have a decisive influence on both the strategic objectives and the significant decisions of the controlled entity; c. The participation of private parties in the capital of the contracting entity, regardless of the size or influence resulting from the participation, precludes the contracting authority from exercising control over that entity81: – Private capital participation after the conclusion of the contract can only have retroactive effect in the event that at the time of the conclusion there were indications of opening up to private capital in the short term – In the event that the controlled entity opens up to private capital within the duration of the contract, the contract needs to be awarded anew in accordance with the public procurement rules d. All relevant legal provisions, including the articles of association or statutes of the contracting entity, as well as the particular circumstances must be taken into account for the assessment of the criterion; e. If the contracting authority directly holds 100% of the shares in the contracting entity in question, the existence of control can be assumed; f. A quasi in-house construction in which the contracting authority indirectly exercises control over the contracting partner will weaken the control exercisedand it will be more difficult to prove that the control is effective. g. The ‘similar control’ criterion may be fulfilled jointly by two or more contracting authorities. In that situation, the relevant activities are the activities that the contracting party carries out for all the controlling entities together, even if the controlling entities are ordered to contract with other public entities that are non-controlling. h. The control criterion may also be fulfilled jointly; it is not necessary that only the individual contracting authority exercises similar control. However, the individual controlling entity must at least have the possibility to influence the controlled entity’s management in order to be able to exercise joint control. Article 12 Directive 2014/24/EU uses exactly the same wording as the ECJ used in the Teckal judgment. I therefore do not expect that the ECJ will deviate from its case law in the next few years. This view is supported by Recital 31 Directive 2014/24/EU providing that the clarification in Article 12 should be guided by the principles set out in the relevant case law of the ECJ. Furthermore, Article 12 par. 1 last paragraph reproduces the Stadt Halle judgment regarding the extent of the decisive influence and accepts indirect control. It is therefore safe to say that the EU in Article 12 Directive 2014/24/EU has chosen the same functional approach to similar control as the CJEU in its case law. It is 81 Article 12 par. 1 sub. c Directive 2014/24/EU opens up a possibility for private capital under very strict conditions. This provision is not relevant in Dutch practice, because, under Dutch law, private capital participation is not required in (semi-)public entities.

193

Pieter Kuypers also self-explanatory that the control criterion, which requires a decisive influence, therefore requires actual and effective control over the controlled entity. I foresee that we shall need the assistance of company law scholars to shed light on the similar control analysis. Control is in many cases a question of interpreting the legal context and corporate governance of the contracting entities and the structure. Adriaan Dorresteijn’s expertise will be needed beyond his retirement as a Professor at Utrecht University. And I am looking forward to our cooperation. Retirement, these days, should not be considered as the end of one’s career, but the start of the ‘troisième age’.

194

13

Enforcing Annulled Arbitral Awards in the Netherlands

Vesna Lazić

13.1

Introduction

The enforcement of annulled arbitral awards remains highly controversial in arbitration theory and practice.1 Thus, some legal systems expressly reject the idea of enforcing awards that were set aside in ‘their country of origin’.2 In others, such as France3 and other countries having a comparable legislative framework,4 it has become a well-estab1

2

3

4

Clearly, the annulment of an award in the country where the award was rendered may be disregarded by the enforcement court in another country within the legal framework of Article IX of the 1961 European (Geneva) Arbitration Convention and its supplementary character to the provision of Article V(1)(e) of the 1958 New York Convention. Convention on International Commercial Arbitration, Geneva, 21 April 1961, United Nations, Treaty Series (1963-64), Vol. 484, p. 364, NO. 7041 (hereinafter: 1961 European Convention). The Netherlands is not a contracting state to this Convention. See e.g., Judgment of the Rostock Court of Appeal of 28 October 1999, OLG Rostock, excerpt in XXV Yearbook Commercial Arbitration (2000) p. 717. See also the judgment of the German Supreme Court (Bundesgerichtshof) of 22 February 2001, No. III ZB 71/99, excerpt in XXIX Yearbook Commercial Arbitration, Germany no. 63. Although the prevailing view in the legal literature is that awards annulled in the country where they were rendered cannot be enforced in Germany, some authors have expressed the view that there may be exceptional circumstances in which the enforcement of such awards could be granted, such as when the judgement annulling the award does not comply with the requirements for enforcement in Germany. Schlosser, P., Kommentar zur Zivilprozessordnung par. 1044 n . 89 (Stein/Jonas, 21 st. ed., 1994). However, such a view does not find support in German case law. In particular, it differs from the view expressed by the Rostock Court of Appeal in its holding that the decision to set the award aside ‘must be recognized without examining whether it would be recognizable according to the standards for the recognition of foreign decisions.’ Since Germany is a contracting state to the 1961 European Convention, the enforcement of annulled awards remains possible within the context of Article IX and its supplementary nature to Article V(1)(e) of the 1958 New York Convention. Already in 1984 the Cour de Cassasion announced that it was prepared to enforce an annulled award in Pabalk Ticaret Sirketi v. Norsolor S A., Cass. Civ. Ire, 9 October 1984, Rev. arb. (1985) 421, excerpt published in XI Yearbook Commercial Arbitration (1986), pp. 484 et seq.. In its decision of 23 March 1994, the Cour de Cassasion finally enforced the annulled award. Hilmarton Ltd. v. Omnium de traitement et de valorisation (OTV), Cass. Civ., 23 March 1994, Revue de /'arbitrage (1994) p. 327, excerpt published in XX Yearbook Commercial Arbitration (1995) p. 663 et seq. This approach was subsequently confirmed, see e.g., Chromalloy Aeroservices v. Arab Republic of Egypt, Cour d 'appel de Paris, 14 January1997, Mealey’s International Arbitration Report, 12 (1997) 4, p. B- l; Société PT Putrabali Adyamulia c/ SA Rena Holdings, Cour de cassation, 1ere civ 29 juin 2007, Bulletin 2007, I, N° 250; Paris Court of Appeal, Bechtel v. DAC, 29 September 2005, Juris-Data n°2005-287354, Rev. arb. 2006.695, commentary by H. Muir Watt; Paris Court of Appeal, SNF v. Cytec, 23 March 2006, Rev. arb. 2007. 100, commentary by S. Bollée See e.g., the enforcement in Belgium of an award set aside in Algeria in Sonatrach v. Ford, Bacon and Davis Inc., Brussels Court of First Instance, 6 December 1988, excerpt in XV Yearbook Commercial Arbitration

195

Vesna Lazić lished practice. As the present author has already noted in an earlier publication,5 it proved difficult to accommodate the idea of the enforcement of an annulled award within the framework of the 1958 New York Convention.6 Yet the Amsterdam Court of Appeal in the Yukos judgment7 developed a rather unique approach in interpreting the 1958 New York Convention when enforcing the arbitral award set aside in the country of origin. This contribution provides a critical view of this judgment and of the decision subsequently rendered by the Dutch Supreme Court in the same case.8

13.2

Enforcement under national arbitration law

In France and jurisdictions with a comparable legal framework, an annulled award may be enforced under national arbitration law. As an annulment in the country of origin is not amongst the reasons for refusing enforcement according to the relevant provision of French law in Article 1520 of the French New Code of Civil Procedure,9 a party may request enforcement by relying on this provision instead of Article V(1) of the New York Convention. The latter lists the reasons for refusing enforcement which may be invoked by a party resisting the enforcement. The fact that an award has been set aside in the country where it was rendered or under the law of which it was rendered presents a ground on which enforcement can be refused in Article V(1)(e) of the Convention. A party may rely on a national law providing for a more favourable enforcement regime by

5 6 7

8

9

(1990) p. 370 et seq. The 1958 New York Convention was held to be inapplicable, since Algeria was not a party to it. Accordingly, the enforcement was based on the domestic law on the enforcement of foreign awards. The court concluded that no reasons for refusing the enforcement could have been found under Belgian law and declared the award enforceable. Lazić, V., ‘Enforcement of the Arbitral Awards Annulled in the Country of Origin’, Croatian Arbitration Yearbook, Vol. 13 (2006), pp. 179-204. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 10 June 1958, United Nations Treaty Series (1959) Vol. 330, No. 4739 (hereinafter: 1958 New York Convention). Decision of the Amsterdam Court of Appeal (Gerechtshof Amsterdam) of 28 April 2009, 200,005,269, Yukos Capital s.a.r.l. (Luxembourg) v. OAO Rosneft (Russian Federation), Tijdschrift voor Arbitrage (TvA) 2011/1, p. 15, excerpt in Yearbook Commercial Arbitration 2009 – Volume XXXIV, Kluwer Law International (2009), Netherlands No. 31 pp. 703 – 714. . Decision of the Supreme Court (Hoge Raad) of 25 June 2010, First Chamber, 09/02565 EE,Y OAO Rosneft (Russian Federation) v. Yukos Capital s.a.r.l. (Luxembourg), original decision in Case No. LJN: BM1679 available at http://www.rechtspraak.nl, excerpt in English in Yearbook Commercial Arbitration 2010 – Volume XXXV, Kluwer Law International (2010) Netherlands No. 34, pp. 423 – 426. As revised in 2012. Under the previous legislation when Norsolor and Hilmarton were decided it was a provision under Article 1502.

196

13

Enforcing Annulled Arbitral Awards in the Netherlands

invoking Article VII(1) of the Convention. Consequently, Article V of the 1958 New York Convention has virtually no relevance there.10 Obviously the ‘French approach’ can be followed in other jurisdictions which have a comparable legal framework, i.e., as long as a domestic regime on enforcement does not contain the annulment of an award in the country of origin amongst the reasons for rejecting the enforcement. Since there is no such or similar legal framework in the Netherlands, there is no possibility of ‘importing’ the French approach in order to enforce arbitral awards set aside in the country of origin.

13.3

Enforcement under the 1958 New York Convention – The Dutch Approach

An analysis of the relevant case law, especially the United States’ decision in Chromalloy11, illustrates that the enforcement of an annulled award may appear to be difficult within the framework of the 1958 New York Convention which applies when a more favourable domestic enforcement regime does not exist.12 In the view of the present author, as expressed earlier,13 an enforcement under more favourable domestic law could only be possible if the law of the enforcing state does not provide for the annulment of awards as a reason to refuse the recognition or enforcement of a foreign arbitral award, as is the case under French law. In the latter case, on the basis of Article VII(I) of the New York Convention a party may rely on a more favourable national law for the enforcement of foreign arbitral awards. Consequently, in the Netherlands it would be impossible to rely on a more favourable domestic law in order to enforce an annulled award as the relevant provision of Article 1076(1)(A)(e) of the 1986 Dutch Arbitration Act14 provides for the same reason to refuse

10 See e.g., Chromalloy Aeroservices v. Arab Republic of Egypt, Cour d 'appel de Paris, 14 January1997, Mealey’s International Arbitration Report, 12 (1997) 4, p. B- l (stating, inter alia, that the application of Art. V ‘must then be set aside’, at p. B-2). 11 Chromalloy Aeroservices v. Arab Republic of Egypt, 939 F Supp. 907 ( D.D.C. 1996). 12 For more details on the relevant case law in the United States, see Lazić, V., ‘The Yukos and Pemex judgments: Do the Courts in the Netherlands and in the United States Follow the same Approach when Enforcing Annulled Arbitral Awards? available on the UNCITRAL website: http://www.uncitral.org/pdf/english/ congress/Papers_for_Congress/95-LAZIC-The_Yukos_and_Pemex_judgments.pdf 13 Lazić, V., ‘Enforcement of the Arbitral Awards Annulled in the Country of Origin’, Croatian Arbitration Yearbook, Vol. 13 (2006), pp. 179-204. Generally, on the possible approaches in the enforcement of annulled arbitral awards, see Berg., A.J. van den, ‘Enforcement of Arbitral Awards Annulled in Russia’, Journal of International Arbitration, Volume 27 Issue 2, Kluwer Law International (2010) p. 182-197. 14 The Dutch statutory arbitration law is codified in Book Four of the Code on Civil Procedure (Burgerlijke Rechtsvordering (Rv) – Boek vier), and consists of Articles 1020-1076. It was amended in 2015 – a revised Act came into force on 1 January 2015 (hereinafter: 1986 Arbitration Act and 2015 Act respectively or Dutch

197

Vesna Lazić recognition or enforcement as Article V(1)(e) of the Convention. Therefore, it would not to be expected that the courts in the Netherlands could follow the ‘French approach.’ The latter assumes a more favourable regime for the enforcement of foreign arbitral awards than the New York Convention which does not provide for this particular reason to refuse enforcement.15 Considering that the Dutch law on the enforcement of foreign arbitral awards does contain this ground to refuse enforcement, the French approach cannot be ‘imported’ into the Netherlands. 13.3.1

Yukos case – Amsterdam Court of Appeal

Yet the Amsterdam Court of Appeal in its decision of 28 April 200916 developed another formula for the enforcement of an award that had been set aside by the competent court in the country where the award was rendered. It was the first and so far the only decision to enforce annulled awards in the Netherlands.17 In deciding on a request for enforcement under the New York Convention, the President of the Amsterdam District Court (Voorzieningenrechter) denied the enforcement of awards rendered in Russia under the Rules of the International Commercial Arbitration Court (ICAC) at the Chamber of Trade and Industry of the Russian Federation in Russia, because the awards had been set aside by the competent court in Russia.18 In its judgment of 28 April 2009, the Am-

15

16

17 18

Arbitration Act). With respect to Article 1076, there are some relatively minor changes. In addition to slight adaptations in the wording, the time limit for recourse in cassation is three months instead of two months. Further, there is an express reference to Articles 261-291 of the Code of Civil Procedure (ie, general rules on the allocation of jurisdiction, as well as general procedural rules on the service of documents and the conduct of proceedings). Finally, the 2015 Act provides for the jurisdiction of the Court of Appeal to deal with requests for the enforcement of foreign arbitral awards instead of the President of the District Court. Additionally, the possibility to rely on the objection of arbitrators exceeding the authority as a reason to refuse the enforcement under Article 1076 is in the Act of 2015 further limited. Thus, the enforcement of a foreign award will not be refused if the excess of authority was not serious (Art. 1076 paragraph 4). The enforcement of domestic awards – awards rendered in the Netherlands – remains within the competence the District Court under the 2015 Act. For more details on the issue of the possibility to follow the approach of the French courts in other jurisdictions, see Van den Berg., A.J., ‘Enforcement of Arbitral Awards Annulled in Russia, Journal of International Arbitration, Volume 27 Issue 2, Kluwer Law International (2010) pp. 179 – 198, addressing the possibilities for the enforcement of annulled awards. Decision of the Amsterdam Court of Appeal (Gerechtshof Amsterdam) of 28 April 2009, 200,005,269, Yukos Capital s.a.r.l. (Luxembourg) v. OAO Rosneft (Russian Federation), Tijdschrift voor Arbitrage (TvA) 2011/1, p. 15, excerpt in Yearbook Commercial Arbitration 2009 – Volume XXXIV, Kluwer Law International (2009), Netherlands No. 31 pp. 703 – 714. Here only the relevant legal issues are addressed. References to the rather peculiar facts and circumstances of the case, as well as other ‘arbitration unrelated’ aspects and considerations, are omitted. Judgment of the Amsterdam District Court of 28 February 2008, ECLI:NL:RBAMS:2008:BC8150.

198

13

Enforcing Annulled Arbitral Awards in the Netherlands

sterdam Court of Appeal overturned this decision and granted enforcement for reasons that can be summarised as follows: 1. The 1958 New York Convention does not require an automatic recognition of annulment decisions in the country where their enforcement is sought. According to the reasoning in paras 3.5 and 3.6 of the judgment ‘the New York Convention does not require an automatic recognition of annulment decisions in the country where their enforcement is sought. Instead, Dutch general private international law determines whether the annulment decision can be recognised in the Netherlands.’ 2. Press articles and the reports of international organisations, as well as court decisions in a number of jurisdictions, notably in England and Wales, Lithuania, Switzerland and the Netherlands, illustrate that there is a lack of impartiality and independence on the part of the Russian courts in cases involving the interests of the Russian State. For these reasons, the decision of the Russian court annulling the awards should not be given effect in the Netherlands. 3. It is irrelevant that the party requesting the enforcement of the award in Yukos Capital did not provide direct evidence of partiality and dependence in the case at hand ‘in part because partiality and dependence by their very nature take place behind the scenes’.19 Points (2) and especially (3) do not relate to the interpretation of the New York Convention. From a legal point of view, they do not deserve any comment, as they are clearly not based on legal considerations. The arguments used have been rightly subjected to criticism,20 especially the obviously inappropriate view that there was no need to prove a lack of impartiality in the case at hand. It is to be met with approval that it was not followed in subsequent decisions by the Dutch courts. Thus, the Amsterdam District Court in its decision of 17 November 201121 clearly took into consideration whether the issue of the lack of impartiality or independence could be determined in that particular case. This approach is in stark contrast to the line of reasoning adopted by the Court in the Yukos case. The latter held that there was no need to ascertain the lack of impartiality in the case

19 Decision of the Amsterdam Court of Appeal (Gerechtshof) of 28 April 2009 200,005,269, Yukos Capital s.a.r.l. (Luxembourg) v. OAO Rosneft (Russian Federation), case No. ECLI:NL:GHAMS:2009:BI2451, available at http://www.rechtspraak.nl; excerpt in Yearbook Commercial Arbitration – Volume XXXIV, Kluwer Law International (2009). Netherlands No. 31, para. 21. However, see the subsequent judgment of the Amsterdam District Court of 17 November 2011, ECLI:NL:RBAMS:2011:BV5646, par. 4.9. In this case the Court considered that this reasoning was too general to lead to the conclusion that the Russian judges in this particular case were biased. 20 For a criticism of this decision, see Berg., A.J. van den, Enforcement of Arbitral Awards Annulled in Russia, Journal of International Arbitration, Volume 27 Issue 2 (2010) pp. 179 – 198. 21 President of the District Court of Amsterdam (‘Voorzieningenrechter, rechtbank Amsterdam) of 7 November 2011, 491569/KG RK 11-1722, Nikolai Viktorovich Maximov v. OJSC Novolipetsky Metallurgichesky Kombinat, excerpt in Yearbook Commercial Arbitration 2012 – Volume XXXVII, Kluwer Law International (2012), Netherlands No. 41, pp. 274 – 276, Kluwer.

199

Vesna Lazić that it dealt with. Instead it relied on information in the press and selected literature which was entirely unrelated to the facts and circumstances of the case at hand. However, this part of the reasoning will not be further discussed as it is of no relevance for a legal analysis and interpretation of the Convention. As for the reasoning under point (1), the Court first held, inter alia, as follows: ‘[4] (…) However, neither this provision [of Art. V(1)(e)], nor the further provisions of the 1958 New York Convention or any other convention compel the Dutch enforcement court to recognize such decision of the Russian civil court directly. The question whether the decision of the Russian civil court annulling the arbitral awards can be recognized in the Netherlands must be answered pursuant to the rules of general private international law.’22 After stating that ‘a Dutch court is not compelled to deny leave for recognition of an annulled arbitral award if the foreign decision annulling the arbitral award cannot be recognized in the Netherlands’,23 the Court continued to reason that: ‘[6] This court shall therefore first examine under general law [commune recht] whether the decisions of the Russian civil court annulling the arbitral awards of 19 September 2006 can be recognized in the Netherlands, starting from the consideration that a foreign decision, regardless of its nature and scope, is recognized if a number of minimum requirements are complied with, one of them being the foreign decision came into existence [in proceedings complying with] due process. There is no due process when it must be deemed that the foreign decision was rendered by a judicial authority that was not impartial and independent.’ Thus, the Court held that reliance on the reason under Article V(1)(e) of the Convention depended on whether or not a decision on the annulment in the country of origin could be recognised in the Netherlands. This reasoning finds no support either in the text and preparatory documents of the New York Convention or in court decisions applying the Convention in and outside the Netherlands. In this context, the reasoning of the US Pemex judgment must be distinguished from the reasoning of the Dutch court in the Yukos case in view of the repeatedly emphasised ‘exceptional circumstances’ prevailing 22 Decision of the Amsterdam Court of Appeal (Gerechtshof Amsterdam) of 28 April 2009 200,005,269, Yukos Capital s.a.r.l. (Luxembourg) v. OAO Rosneft (Russian Federation), case No. ECLI:NL:GHAMS:2009:BI2451, available at http://www.rechtspraak.nl, excerpt in Yearbook Commercial Arbitration – Volume XXXIV, Kluwer Law International (2009), Netherlands No. 31 para. [4]. 23 Id., para. [5].

200

13

Enforcing Annulled Arbitral Awards in the Netherlands

in the US Pemex case. There is not much to be added to the view expressed by van den Berg in his criticism of the decision.24 Yet another point may be raised with respect to the Court’s reliance on ‘general private international law’ (commune recht). In the view of the Court, the enforcement of an annulled arbitral award depends on whether or not the annulment judgment fulfils the conditions for recognition and enforcement under the general private international law rules of the country of enforcement. Presumably it was meant to refer to the rules on the recognition of foreign judgments developed on the basis of the case law in the Netherlands, as the Court does not refer to any particular provision of any law in the Netherlands. Even though Article 431 of the Dutch Code of Civil Procedure reflects the relevant case law concerning the conditions for the enforcement of foreign judgments, the Court could not have expressly referred to this provision as it relates to the ‘enforcement’ of condemnatory judgments. As such, it cannot be relied upon in the context of recognising a foreign annulment judgment. According to the rules developed by the courts in the Netherlands, a foreign judgment may be recognised if certain conditions are satisfied, in particular: whether the foreign court had jurisdiction to decide the case on the basis of internationally accepted criteria, that the requirement of due process has been complied with and the decision is not contrary to Dutch public policy. However, it is questionable whether it is appropriate to apply the ‘commune recht’ with respect to the recognition of foreign decisions to foreign judgments annulling an arbitral award. Namely, the developed case law relates to the recognition of foreign decisions that mainly concern ‘substantive’ claims and obligations of the parties – constitutive, declaratory and condemnatory decisions and judgments rejecting a claim.25 It is doubtful whether it is appropriate to apply the concept and system of recognition provided for judgments dealing with substantive claims in the context of recognising foreign annulment judgments. The latter do not deal with and do not affect the substantive entitlements and obligations of the parties. Instead they have procedural legal consequences and effects: they determine the (lack of) effectiveness of another decision – an arbitral award. It should be emphasised that the issue of the recognition of foreign annulment judgments has never been previously raised before the Dutch courts. In a similar vein, all decisions relating to arbitration, thus also decisions rendered in setting aside proceedings, fall outside the scope of the Brussels I(bis) Regulation on the recognition and enforcement of foreign judgments.

24 Berg., A.J. van den, ‘Enforcement of Arbitral Awards Annulled in Russia’, Journal of International Arbitration, Volume 27 Issue 2 (2010), p. 189. 25 Strikwerda, L., Inleiding tot het Nederlandse internationaal privaatrecht, Kluwer, Deventer (2015), pp. 291 and 293.

201

Vesna Lazić 13.3.2

Yukos case – An incorrect interpretation of Article III of the 1958 New York Convention by the Dutch Supreme Court

The controversial decision of the Amsterdam Court of Appeal did reach the Dutch Supreme Court,26 but unfortunately the latter did not engage in a discussion on the appropriateness of the enforcement of annulled arbitral awards in the Netherlands. Namely, the Supreme Court simply declared that recourse in cassation was inadmissible. It based its decision on the interpretation of the relevant provisions of Articles 1062 and 1063 of the Arbitration Act in connection with Article III of the New York Convention. The provisions of Articles 1062 and 1063 relate to the enforcement of arbitral awards rendered in the Netherlands. Considering that recourse in cassation is inadmissible against leave for enforcement with respect to the awards rendered in the Netherlands, the Supreme Court concluded that it was also inadmissible in proceedings for the enforcement of foreign arbitral awards, according to Article III of the New York Convention. Namely, it construed the wording in Article III that ‘[t]here shall not be imposed substantially more onerous conditions or higher fees or charges on the recognition or enforcement of arbitral awards … than are imposed on the recognition or enforcement of domestic arbitral awards’ so as to imply that the relevant provisions on the enforcement of domestic awards had to be analogously applied in enforcement under the Convention. This is the first time since the Netherlands ratified the Convention that such an interpretation has been applied. After it was raised for the first time in the literature,27 it received little or no support in legal writings. Yet the Supreme Court based its decision almost exclusively on this particular publication. Before that no doubts were even raised against the fact that an appeal or recourse in cassation would be unavailable against a decision granting enforcement when the enforcement is requested on the basis of Article 1075, i.e., under the New York Convention.28 The correctness of the decision of the Supreme Court must be questioned, especially the relevance of the mentioned provisions of the Dutch Act on the ‘conditions for enforce26 Decision of the Supreme Court (Hoge Raad) of 25 June 2010, First Chamber, 09/02565 EE,Y OAO Rosneft (Russian Federation) v. Yukos Capital s.a.r.l. (Luxembourg), original decision in Case no. ECLI:NL:HR:2009:BM1679 available at http://www.rechtspraak.nl, excerpt in English in Yearbook Commercial Arbitration 2010 – Volume XXXV, Kluwer Law International (2010), Netherlands No. 34, pp. 423 – 426. 27 For the first time the issue of the ‘prohibition of discrimination under Article III of the New York Convention on leave for an enforcement procedure in the Netherlands’ was raised in a publication by the Dutch practising lawyer Ph. De Korte, ‘Welke consequenties heft het discriminatieverbod van artikel III van het Verdrag van New York voor de Nederlandse exequaturprocedure’ TvA no. 3 (2007). 28 Decision of the Court of Appeal (Gerechtshof) of Amsterdam of 16 July 1992, G.W.L. Kersten & Co. B.V. v. Société Commerciale Raoul-Duval et Cie, excerpt in Yearbook Commercial Arbitration, Kluwer Law International (1992), Netherlands No. 16 – the District Court of Utrecht had granted the request for enforcement and an appeal was permitted.

202

13

Enforcing Annulled Arbitral Awards in the Netherlands

ment’ within the meaning of Article III of the New York Convention. Such an interpretation erroneously implies that the purpose of Article III was to unify not only the conditions for the recognition and enforcement of foreign arbitral awards, but also the conditions and procedures for the enforcement of domestic awards. Furthermore, it would seem as if the purpose of Article III was to impose the obligation upon the Member States to have a uniform system of enforcement for both domestic and foreign awards. There is no doubt that the Convention was never intended to achieve such an effect and purpose. As rightly pointed out in the commentary to this decision, the interpretation of this provision followed by the Dutch Supreme Court finds no support either in the text of the Convention or in the legislative history of Article III.29 It is not only that the Supreme Court incorrectly interpreted the Convention, but it also erroneously applied the relevant provisions of the Dutch Arbitration Act. In particular, it is obviously inappropriate to analogously apply Articles 1062 and 1063 in the context of the enforcement of ‘foreign’ arbitral awards. This is especially so considering that a party against whom the enforcement of a ‘domestic’ award is granted does have a remedy against this decision, which is an action for setting aside. In other words, there is no right of appeal or a right of recourse in cassation, but there is another available remedy or means of recourse – an action for setting aside and, in exceptional circumstances, a request for the revocation of the award.30 In the procedure for setting aside, a party will have the possibility of both an appeal and recourse in cassation. Obviously, these remedies – setting aside or, exceptionally, revocation – are not available to a party against which an enforcement of a foreign arbitral award is requested in the Netherlands, as the seat of arbitration is not in the Netherlands. Consequently, the decision of the Supreme Court of 25 June 2010 leaves such a party with no remedy at all even if the lower courts – a District Court or a Court of Appeal – would have rendered obviously incorrect decisions when applying the New York Convention or Dutch law.31 The reasoning of the Supreme Court that a possibility for setting aside is available in the country of the seat of 29 Berg., A.J., van den, ‘Enforcement of Arbitral Awards Annulled in Russia – Case Comment on Dutch Supreme Court of 25 June 2010, 28 Journal of International Arbitration, Issue 6 (2011) pp. 617-641. Yet in its decision of 20 December 2012 The Hague Court of Appeal confirmed the judgment of the Supreme Court and decided that the prohibition of recourse when leave is granted for a foreign arbitral award that falls within the scope of the New York Convention does not infringe the right to a fair trial in Article 6 of the European Convention on Human Rights. See, The Hague Court of Appeal 20 December 2011, ECLI:NL:GHSGR:2011:BU8275, par. 9-13. A similar decision was reached by the Amsterdam Court of Appeal in 2016. See, Amsterdam Court of Appeal, 19 July 2016, ECLI:NL:GHAMS:2016:2948, par. 3.12-3.14. See also the judgment of the Amsterdam Court of Appeal of 24 June 2014, ECLI:NL:GHAMS:2014:2442, par. 2.6-2.10. 30 For criticism of the judgment of the Supreme Court, see Berg, A.J. van den, Enforcement of Arbitral Awards Annulled in Russia – Case Comment on Dutch Supreme Court of 25 June 2010, Journal of International Arbitration, Kluwer Law International (2011) Volume 28 Issue 6, pp. 617-641. 31 Such a result may be contrary to the constitutional right to legal remedies, a right which is also incorporated in the EU (Charter on Fundamental Rights).

203

Vesna Lazić arbitration, so that a party is not without a remedy, is difficult to comprehend, especially considering that any such decision can apparently be ignored by the Dutch courts. It is even more difficult to understand the reasoning of the Supreme Court when the scope of application of the Arbitration Act is taken into consideration. In particular, the scope of application is very clearly defined: there are provisions that apply when arbitration is held in the Netherlands (Title One) and provisions that apply to arbitrations outside the Netherlands (Title Two). There is no doubt that Articles 1062 and 1063 are contained in Title One which regulates arbitration within the Netherlands. Accordingly, the provisions on which the Supreme Court relied upon are not meant to be applied in the context of foreign arbitrations. It should be emphasised that the legal reasoning of the Supreme Court implies that the possibility to appeal and to file recourse in cassation against a decision granting enforcement is available when the enforcement is under Article 1076, i.e., when no treaty applies or when its applicability is permitted under a treaty, such as Article VII(1) of the Convention. In the reasoning of the Court this is so because in the enforcement under Article 1076 there is no such requirement which is allegedly imposed under Article III of the Convention. This is an apparent paradox, considering that the Dutch Act provides for the applicability of the same provisions of the Code of Civil Procedure regarding the enforcement of foreign arbitral awards.32 Consequently, the ruling of the Supreme Court renders this provision meaningless even though it contains more favourable conditions for the enforcement of foreign arbitral awards. Such legal reasoning significantly undermines the effectiveness of the more favourable legal provision of Article 1076. It renders the provision of Article 1076 less likely to be relied upon, even though it contains more favourable grounds for enforcement. Consequently, this provision remains more favourable only with respect to the grounds on the basis of which the enforcement may be refused. Before the ruling of the Supreme Court of 25 June 2010, the provision of Article 1076 had been rather frequently invoked,33 as it

32 The different approach in applying these provisions has been explained by the Supreme Court to the effect that these provisions of the Code of Civil Procedure apply unless a treaty provides otherwise (and Article III allegedly does provide otherwise in the view of the Court). 33 See e.g., Decision of Dubai Drydocks v. Bureau voor Scheeps- en Werktuigbouw [X] B.V., President of the District Court of Dordrecht (Voorzieningenrechter, Rechtbank, Dordrecht) of 30 June 2010, Case No. 79684 / KG RK 09-85, Yearbook Commercial Arbitration, (Kluwer Law International) Netherlands No. 35, p. 299 et seq., relying primarily on Art. 1076 and subsidiarily on Art. 1075 of the Act); President of the District Court of Amsterdam of 18 June 2009, Voorzieningenrechter, Rechtbank, Amsterdam, LoJack Equipment Ireland Ltd. (Ireland) v. A, 411230/KG RK 08-3652, 18 June 2009, Netherlands No. 32; Decision of the District Court (Arrondissementsrechtbank) of Almelo of 19 July 2000, Société d'Etudes et de Commerce SA v. Weyl Beef Products BV, Yearbook Commercial Arbitration, Kluwer Law International (2001) Netherlands

204

13

Enforcing Annulled Arbitral Awards in the Netherlands

does provide for a more liberal enforcement regime than Article V of the New York Convention within the meaning of Article VII(1) of the Convention. In conclusion, the decision of the Supreme Court is the result of an incorrect interpretation and application of both the New York Convention and Dutch statutory arbitration law. Unfortunately, the Dutch legislator when revising the law in 2015 missed the opportunity to remedy the unsatisfactory legal reasoning of the Supreme Court in the decision concerned.34 Yet under the new 2015 Arbitration Act jurisdiction for the enforcement of foreign arbitral awards is vested in the Courts of Appeal, whereas jurisdiction for the enforcement of domestic awards has remained with the District Courts. Vesting jurisdiction in different courts could be seen as an indication that the analogous application of Title One on the enforcement of foreign arbitral awards is inappropriate. It is still to be seen in practice whether vesting jurisdiction in the Court of Appeal for enforcing foreign awards in the new 2015 Arbitration will imply the possibility to deviate from the legal reasoning in the decision of 25 June 2010 but, unfortunately, it is unlikely that the amendment concerned would in any way alter the Yukos rule. Regrettably the incorrect interpretation that Article III precludes the right to appeal and recourse in cassation has been firmly established as a part of Dutch law and has been confirmed in subsequent decisions.35 In conclusion, the Dutch Supreme Court in its decision of 25 June 201036 refused to rule on a recourse in cassation filed against the decision of the Amsterdam Court of Appeal holding the application to be inadmissible. The Court held that Article III of the 1958 New York Convention deprived parties of the right to appeal and recourse in cassation. Thus, a contrario, both an appeal and recourse in cassation are available against leave for

No. 26.; Decision of the President of the District Court (Rechtbank) of Rotterdam of 24 November 1994, Isaac Glecer v. Moses Israel Glecer and, Estera Glecer-Nottman, Yearbook Commercial Arbitration (1996) Netherlands No. 19. 34 Unfortunately, the wording in the final text of the 2015 Act does not seem to imply changes in that respect. 35 See e.g., the judgment of the Amsterdam Court of Appeal of 16 October 2012ECLI:NL:GHAMS:2012:2875 published in 2014 at http://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:GHAMS:2012:2875; judgment of the Supreme Court of 15 April 2015 ECLI:NL:HR2015:1077 published on http://deeplink.rechtspraak.nl/ uitspraak?id=ECLI:NL:HR:2015:1077; judgment of the Amsterdam Court of Appeal of 17 July 2016, ECLI:NL:GHAMS:2016:2948 available on http://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:GHAMS: 2016:2948; judgment of the Amsterdam Court of Appeal of 24 June 2014, ECLI:NL:GHAMS:2014:2442 available on http://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:GHAMS:2014:2442 (last seen on 9 January 2017) 36 Decision of the Supreme Court (Hoge Raad) of 25 June 2010, First Chamber, 09/02565 EE,Y OAO Rosneft (Russian Federation) v. Yukos Capital s.a.r.l. (Luxembourg), original decision in Case No. LJN: BM1679 available on http://www.rechtspraak.nl, excerpt in English in Yearbook Commercial Arbitration 2010 – Volume XXXV, Kluwer Law International (2010) Netherlands No. 34, pp. 423 – 426.

205

Vesna Lazić enforcement granted under Article 1076 of the Dutch Arbitration Act,37 but not if the enforcement is granted under Article 1075,38 i.e., under the 1958 New York Convention.39

13.4

Conclusions

The Amsterdam Court of Appeal introduced a rather unique approach in interpreting the 1958 New York Convention in order to enforce an award that had been set aside in the country where it had been rendered. Thus, when applying Article V (1) (e) of the 1958 New York Convention, each annulment judgment is to be subjected to the requirements as set out in Dutch general private international law. As a Dutch recognising court always has to consider whether a foreign ‘setting aside judgement’ fulfils Dutch general (‘commune’) private international law requirements, it makes Article V (1) (e) redundant.40 Such an interpretation of Article V (1) (e) of the 1958 New York Convention is incorrect for several reasons. First of all, there is nothing in the Preparatory Documents of the Convention suggesting such an approach when applying Article V(1)(e). Besides, it is doubtful whether Article 431 of the Dutch Code of Civil can be relied upon with respect to foreign annulment decisions. Most importantly, this approach is rather unwelcome and counterproductive as it undermines the certainty of the enforcement regime of the Convention which presents a globally unified system for the recognition and enforcement of foreign arbitral awards.41 It is to be regretted that the reasoning of the Amsterdam Court of Appeal has been upheld in several subsequent cases and accordingly represents the current state of the law in the Netherlands. The decision of the Supreme Court on the inadmissibility of recourse in cassation against a decision granting enforcement is the result of an incorrect interpretation of Article III of the Convention and an inappropriate application of the clearly defined scope of application of the Dutch Arbitration Act.

37 Article 1076 of the 2015 Arbitration Act applies to the enforcement of foreign arbitral awards when no treaty is applicable, i.e., when the enforcement is sought on the basis of the domestic law on arbitration. 38 Article 1075 applies when the enforcement is sought on the basis of a treaty, i.e., on the basis of the 1958 New York Convention which is the relevant treaty in this respect. 39 This a contrario argumentation was subsequently affirmed by the Amsterdam Court of Appeal on 16 October 2012, ECLI:NL:GHAMS:2012:2875, par. 2.5. Here the court decided that Article 1076 did not prohibit recourse in cassation since this prohibition was a matter of national law and found application to foreign arbitral awards only through Article. III of the 1958 New York Convention. See also the judgment of the Dutch Supreme Court of 17 April 2015, ECLI:NL:HR:2015:1077. 40 A.J. van den Berg, ‘Enforcement of Arbitral Awards Annulled in Russia, Case comment on Court of Appeal of Amsterdam, April 28, 2009’, Journal of International Arbitration 2010, p. 189-190. 41 Id.

206

13

Enforcing Annulled Arbitral Awards in the Netherlands

As to the enforcement of annulled arbitral awards in general, it seems that the prevailing view in the theory of international arbitration is that there may be circumstances in which an annulment judgment may and should be ignored. The present author is of the opinion that annulled arbitral awards in principle should not be given effect in other jurisdictions where the enforcement is sought, even when the annulment was the result of excessive court control in the country where the award was rendered. By choosing the seat of arbitration in a legal system which has an arbitration-unfriendly legal framework the parties are deemed to accept such excessive court control and must be aware of the risk that the award may ultimately be annulled for reasons that do not meet internationally accepted standards. The only exception should be if the annulment would imply a denial of access to justice, i.e., if it would result in a loss of the right to a legal remedy in any forum.

207

14

What Is the Difference between a Worker and an Undertaking? New Developments in EU Labour Law and Competition Law

Frans Pennings

14.1

Introduction

In a world where companies are increasingly feeling the effects of competition, they try to reduce the costs of labour in various ways. In the Netherlands the use of contracts for a definite period, on-call contracts and temporary agency workers has increased considerably in the past decade and this phenomenon can also be seen in other countries. A relatively new phenomenon is the growing number of self-employed persons without staff. These are persons who do not employ employees themselves but offer their own services to a principal. A great advantage for this principal is that these workers do not fall under labour law, and thus neither dismissal compensation is due nor social security contributions for workers’ schemes or, depending on the scheme, payments in case of sickness. For the self-employed themselves the advantage is that their earnings are not reduced by social security contributions. However, in the case of sickness, disability, a lack of work and old age, employees’ social security schemes do not provide for compensation for the loss of income and if the self-employed have not made their own provisions, they may be in precarious situations. However, this is not the issue that I want to address here. Instead, I will discuss the situation where the self-employed are still at work, i.e. are an undertaking themselves and perform work for another company. In some cases they have a very weak position to bargain the rates to be paid for their work. Notable examples are cases of translators and text editors, who are paid by the word. The question then arises whether it is possible to make arrangements, e.g. by a collective labour agreement, for minimum rates, that ensure a minimum income for them. This is the issue discussed in my chapter and fits well with the broad interests of Adriaan Dorresteijn, who is not only interested in big companies, but also in medium-sized companies and in start-ups, and who is a clear advocate of approaching companies from an international and corporate social responsibility perspective. Moreover, he has been a director of the Master’s programme in Busi209

Frans Pennings ness and Law, in which business law, labour law and competition law are the core areas, and the present topic fits very well in this mix of disciplines.

14.2

14.2.1

The case of the orchestra substitutes

The collective agreement on substitutes

A Dutch trade union (the FNV) and the Netherlands Musicians’ Union, on the one hand, and the Association of Foundations for Substitutes in Dutch Orchestras, an employers’ association, entered into a collective labour agreement that provided minimum hourly rates for substitutes for musicians in orchestras. These substitutes have the task of replacing the permanent orchestra members; some of them have a contract of service and are treated as self-employed by the orchestra; others have a contract of employment. The issue was a matter of principle as the FNV trade union declared that it wanted to make such collective labour agreements also for other categories of self-employed persons doing work for which low rates are paid. This policy was not only developed in order to improve the position of the self-employed themselves, but also for protecting the position of employees, who might otherwise, if the self-employed remained much cheaper, be gradually replaced by them. The views on this policy of the FNV vary considerably in Dutch society. One organisation of the self-employed argued that it was ‘absolutely ridiculous’ to include provisions on self-employed persons in collective agreements, since the purpose of entrepreneurship is exactly to bear one’s own risks.1 Others argue that in this segment of the labour market there may be a problem of undesirable competition: self-employed persons can push employees doing the same work out of the market by lower prices. This may be a form of ‘social dumping’, and both labour law and EU law are basically aimed at avoiding social dumping.2 Also the very marginal bargaining position of the self-employed in some markets may be a reason to interfere; after all, the State has a constitutional obligation to care for the ‘subsistence security and distribution of welfare’ (Article 20 Dutch Constitution). How far this obligation extends and what it means for the present topic is certainly an issue of dispute, but in any case this is a good reason to address this issue.

1 2

https://www.pzo-zzp.nl/nieuws/20-03-2006/754952/PZO-minimumtarieven-voor-zzp%27ers-in-CAO% 27s-ridicuul. See, for instance, Article 45 TFEU that requires that persons with the nationality of another Member State have to be awarded the same labour conditions as national workers.

210

14

14.2.2

What Is the Difference between a Worker and an Undertaking? New Developments in EU Labour Law and Competition Law The Dutch Competition Authority and collective agreement provisions on the substitutes

The collective agreement for the self-employed substitutes and the announcement by the trade union that it was planning to have more of these kinds of collective agreements led to an investigation by the Dutch Competition Authority (currently called the Consumers and Market Authority). This organisation came to the conclusion that the provisions on the self-employed in the collective labour agreement were contrary to competition law.3 The employers’ organization subsequently denounced the collective labour agreement. The Competition Authority argued that the agreement infringed competition law since the self-employed involved are to be considered as undertakings. The employees who were affected by the collective labour agreement are obviously not enterprises, since they are integrated during their time of working in the enterprise for which they work.4 They do not bear the direct commercial risk of transactions. However, natural persons not being employees who perform services or offer goods against remuneration in a certain market are undertakings for competition law purposes. Trade unions are therefore, in so far as they represent the self-employed, an association of undertakings. The Competition Authority rejected the argument that minimum tariff provisions for the self-employed reduce the downward pressure on the collective labour agreement for employees.5 It argued that the aim to lay down fixed or minimum prices for self-employed persons in order to improve the employment and labour conditions of employees is not a purely social aim since the ensuing restriction of competition goes further than is necessary for reaching this aim. In the view of the Authority employees benefit more from arrangements which directly improve their employment and labour conditions, such as those on pay and pensions. The latter remark is not completely clear; employees may indeed benefit from a higher wage, but if they lose their job because of competition by the self-employed they will certainly not benefit from a higher wage. The Authority does not seem to completely understand the (labour) market mechanism.

3 4 5

The competition authority laid down its view in Cao-tariefbepalingen voor zelfstandigen en de Mededingingswet, Visiedocument van de Nederlandse Mededingingsautoriteit, The Hague, December 2007. Idem p. 8. Idem p. 24.

211

Frans Pennings 14.2.3

The Case before the Court of first instance and the Court of second instance

Subsequently the FNV started a procedure before the District Court of The Hague in order to obtain a formal declaration by the Court that the minimum rates laid down in a collective labour agreement are not inconsistent with competition law. The Court rejected this request.6 The FNV then appealed to the Court of Appeal in The Hague and this Court directed preliminary questions to the Court of Justice of the EU in order to be able to decide the case. The Dutch Court remarked that it was inclined to consider the self-employed substitutes as undertakings on the ground that their income depends on the commissions they acquire on the market of substitutes, since they compete with other substitutes and invest in their musical instruments. Still, the Court of Appeal acknowledged that the solution to this case could not be clearly distilled from the Treaty or the case law of the Court of Justice.7 The questions by the Court of Appeal of The Hague were the following: ‘(1) Must the competition rules of EU law be interpreted as meaning that a provision in a collective labour agreement concluded between associations of employers and associations of employees, which provides that self-employed persons who, on the basis of a contract for professional services, perform the same work for an employer as the employees who come within the scope of that collective labour agreement must receive a specific minimum fee, falls outside the scope of Article 101 TFEU, specifically on the ground that that provision occurs in a collective labour agreement? (2) If the answer to the first question is in the negative, does that provision then fall outside the scope of Article 101 TFEU in the case where that provision is (also) intended to improve the working conditions of the employees who come within the scope of the collective labour agreement, and is it also relevant in that regard whether those working conditions are thereby improved directly or only indirectly?’

6 7

Rechtbank Den Haag (District Court of The Hague) 27 October 2010, ECLI:NL:RBSGR:2010:BO3551. http://www.ie-forum.nl/backoffice/uploads/file/IE-Forum%20Hof%20Den%20Haag%209%20juli%202013, %20zaaknr_%20200_082_996_01;%20zaak%20C-413_13%20(FNV%20KIEM%20tegen%20De%20Staat). pdf, point 15.

212

14

14.3

What Is the Difference between a Worker and an Undertaking? New Developments in EU Labour Law and Competition Law

The Albany Case law of the Court of Justice on collective agreements and competition

Before I will discuss the answers of the Court of Justice I will first sketch the previous case law of the Court in order to better understand the approach of the Court of Justice. The landmark decision on the compatibility of collective agreements is the Albany judgment.8 In this judgment from 1999, the Court answered the question whether compulsory affiliation with a pension fund is compatible with EU competition rules. The case concerned the negative reply to the request of the employers concerned to be exempted from compulsory affiliation with a pension fund. These employers preferred to keep their own pension scheme with an insurance company. The Court answered that (what is now) Article 3 TEU requires that the activities of the Community are to include not only a system ensuring that competition in the internal market is not distorted, but also a policy in the social sphere. A particular task of the Community is to promote ‘throughout the Community a harmonious and balanced development of economic activities’ and ‘a high level of employment and of social protection’. Article 154 TFEU provides that the European Commission shall have the task of promoting the consultation of management and labour at Union level and shall take any relevant measure to facilitate their dialogue by ensuring balanced support for the parties. The Court considered that it is beyond question that certain restrictions of competition are inherent in collective agreements between organisations representing employers and workers. However, the social policy objectives pursued by such agreements would be seriously undermined if management and labour were subject to (what is now) Article 101(1) TFEU when seeking jointly to adopt measures to improve conditions of work and employment.9 It therefore follows from an interpretation of the provisions of the Treaty as a whole which is both effective and consistent that agreements concluded in the context of collective negotiations between management and labour in pursuit of such objectives must, by virtue of their nature and purpose, be regarded as falling outside the scope of Article 101(1) TFEU, the Court decided.10

8

Court of Justice 21 September 1999, case C-67/96, Albany, [1999] ECR I-5751, ECLI:EU:C:1999:430. On the same day two other judgments were delivered on comparable questions: Court of Justice 21 September 1999, case C-219/97, Drijvende Bokken, ECLI:EU:C:1999:437; and Court of Justice 21 September 1999, case C-115/ 97, Brentjes, ECLI:EU:C:1999:434. See also R. Bruun and J. Hellsten (ed.), Collective Agreement and Competition in the EU, Copenhagen 2001; M.S. Wirtz, Collisie tussen cao’s en mededingingsrecht, Deventer 2006. 9 Albany judgment, consideration 59. 10 Albany judgment, consideration 60.

213

Frans Pennings From this judgment it follows that decisive for immunity from competition law is that (1) a provision has been adopted as a result of collective bargaining by an employer or employers’ organisation, on the one hand, and an employees’ organisation, on the other, and (2) that the objective of the agreement concerned justifies that it is outside the scope of Article 101(1) TFEU, and such objective promotes the social dialogue on labour conditions.11 Thus in the Albany judgment ‘price agreements’ are allowed for employees, which restricts competition in the area of wages and thus affects the costs for employers. The question was now why would this not be allowed as well for self-employed persons in particular sectors, in particular in cases where they are to a large extent depended on one principal and are paid low tariffs. A second, related issue, was that if the arrangements are not allowed for the self-employed, making minimum tariffs for them may be beneficial for employees as this may reduce the risk that the latter become the victim of social dumping; the question was now whether this argument could serve as a justification for immunity from the competition clauses for provisions on the self-employed. These questions led to the FNV Kiem judgment, to be discussed in the following section.

14.4

14.4.1

The FNV Kiem judgment

The self-employed and competition law

In answer to the questions of The Hague Court of Appeal, on 4 December 2014 the Court of Justice released the FNV Kunsten, Informatie en Media versus the Netherlands judgment (henceforth: FNV Kiem judgment),12 in which the question was answered whether minimum tariffs can be agreed upon in collective labour agreements to the benefit of persons who work on the basis of a service contract. The Court of Justice first decided that it has jurisdiction to answer the preliminary questions of the Court of Appeal, even though the issue concerned primarily the application of the Dutch Competition Act. It considered that Article 6(1) of the Mededingingswet (the Dutch Competition Act) faithfully reproduces Article 101(1) TFEU. Therefore it is clearly in the interest of the European Union that, in order to forestall future differences of interpretation, provisions or concepts taken from EU law should be interpreted uniformly, irrespective of the circumstances in which they are to apply.

11 Albany judgment, consideration 63. 12 Court of Justice 4 December 2014, Case C-413/13, ECLI:EU:C:2014:2411.

214

14

What Is the Difference between a Worker and an Undertaking? New Developments in EU Labour Law and Competition Law

The Court then dealt with the main questions: does a provision of a collective labour agreement which sets minimum fees for self-employed service providers who are members of one of the contracting employees’ organisations and perform for an employer, under a works or service contract, the same activity as that employer’s employed workers, fall within the scope of Article 101(1) TFEU or not? The Court first referred to the Albany case law in which it decided that the social policy objectives pursued by collective labour agreements would be seriously compromised if management and labour were subject to Article 101(1) TFEU when seeking jointly to adopt measures to improve conditions of work and employment. Agreements entered into within the framework of collective bargaining between employers and employees and intended to improve employment and working conditions must, by virtue of their nature and purpose, be regarded as not falling within the scope of Article 101(1) TFEU. In the present case, however, the agreement concerned was concluded between an employers’ organisation and employees’ organisations of mixed composition, which negotiated, in accordance with national law, not only for employed substitutes but also for affiliated self-employed substitutes. The Court remarked that the agreement, specifically as regards the provision on minimum fees, is the result of negotiations between an employers’ organisation and employees’ organisations which also represent the interests of self-employed substitutes who provide services to orchestras under a works or service contract. Although they perform the same activities as employees, service providers such as the substitutes, are, in principle, undertakings within the meaning of Article 101(1) TFEU, as they offer their services for remuneration on a given market and perform their activities as independent economic operators in relation to their principal. In so far as an organisation representing workers carries out negotiations acting in the name, and on behalf, of those self-employed persons who are its members, it does not act as a trade union association and therefore as a social partner, but, in reality, acts as an association of undertakings. Although the Treaty encourages dialogue between management and labour, it does not, however, contain provisions, like Articles 153 TFEU and 155 TFEU, encouraging self-employed service providers to open a dialogue with the employers to which they provide services under a works or service contract and, therefore, to conclude collective agreements with a view to improving their terms of employment and working conditions. The Court concluded from this that a provision of a collective labour agreement, such as that dealing with the substitutes, in so far as it was concluded by an employees’ organisation in the name, and on behalf, of the self-employed services providers who are its members, does not constitute the result of a collective negotiation between employers and employees, and cannot be excluded, by reason of its nature, from the scope of Article 101(1) TFEU.

215

Frans Pennings 14.4.2

False self-employed

Then, however, the Court raised the possibility that the service providers concerned, on whose behalf the trade unions have undertaken collective bargaining, are in fact false selfemployed, who have to be compared with employees. This gave an interesting twist to the judgment. A self-employed person is someone who presents himself as self-employed or who is treated as such, whereas s/he is in reality an employee. For knowing what the ‘reality’ is, Dutch national law implies that it is relevant whether a person has, according to the criteria laid down in national labour law, a contract of employment. In Dutch labour law, for instance, it means that there is a supervision relationship between the worker and the principal and the worker has the obligation to do the work him/herself (he/she cannot, without the consent of the employer, ask someone else to do the work). In practice it may be difficult to demonstrate whether these criteria are fulfilled.13 This is also true for the substitutes: do they have the possibility to have themselves substituted by another person? It is quite likely that the orchestra wants to have those persons who participated in the rehearsals and are of the quality of those selected as substitutes. However, there may not be a formal prohibition of substitution, and then uncertainty remains. Is it relevant that they have to buy their own instruments? Is it also relevant that they present themselves as self-employed and that they have more than one principal throughout the year? The Court of Justice followed a somewhat different approach. It considered that in today’s economy it is not always easy to establish the status of some self-employed contractors as ‘undertakings’, such as the substitutes. A service provider can lose his or her status of an independent trader, and hence of an undertaking, if s/he does not determine independently his or her own conduct on the market, but is entirely dependent on his or her principal, because s/he does not bear any of the financial or commercial risks arising out of the latter’s activity and operates as an auxiliary within the principal’s undertaking. Relevant is also that the term ‘employee’ for the purpose of EU law must itself be defined according to objective criteria that characterise the employment relationship, taking into consideration the rights and responsibilities of the persons concerned. The essential feature of that relationship is that for a certain period of time one person performs services for and under the direction of another person in return for which he receives remuneration. The classification of a ‘self-employed person’ under national law does not prevent that person being classified as an employee within the meaning of EU law if his or her independence is merely notional, thereby disguising an employment relationship.

13 See, for instance, Frans Pennings and Claire Bosse (eds), The Protection of Working Relationships. A comparative study. Alphen aan den Rijn: Kluwer Law International, 2011.

216

14

What Is the Difference between a Worker and an Undertaking? New Developments in EU Labour Law and Competition Law

It follows, the Court decided, that the status of a ‘worker’ within the meaning of EU law is not affected by the fact that a person has been hired as a self-employed person under national law for tax, administrative or organisational reasons, as long as that person acts under the direction of his/her employer as regards, in particular, his/her freedom to choose the time, place and content of his/her work, does not share in the employer’s commercial risks, and, for the duration of that relationship, forms an integral part of that employer’s undertaking, so forming an economic unit with that undertaking. In order that the self-employed substitutes may be classified not as ‘workers’ within the meaning of EU law, but as genuine ‘undertakings’ within the meaning of that law, it is for the national court to ascertain that their relationship with the orchestra concerned is not one of subordination during the contractual relationship, so that they enjoy more independence and flexibility than employees who perform the same activity, as regards the determination of the working hours and the place and manner of performing the tasks assigned, in other words, the rehearsals and concerts. If the persons are false self-employed, then the collective agreement, that directly contributes to the improvement of the employment and working conditions of those substitutes, in so far as it sets minimum fees for service providers who are ‘false self-employed’, cannot, by reason of its nature and purpose, be subject to the scope of Article 101(1) TFEU. The criteria of the Court can be different from national criteria. As we saw, the Dutch criteria mention inter alia a supervision relationship and the obligation to personally perform work. The Court uses as criteria to consider a person as an employee: does the person act under the direction of his employer as regards, in particular, his freedom to choose the time, place and content of his work, does not share in the employer’s commercial risks, and, for the duration of that relationship, forms an integral part of that employer’s undertaking, so forming an economic unit with that undertaking. The criterion of a supervision relationship and personally doing the work is thus elaborated in the criterion that one fits in the organisation of the employer concerning the working schedule, the place and the way of performing work. The latter criteria will most likely be easily fulfilled by the substitutes, so these can be considered to be employees under this part of EU law but not under national law. Even if the substitutes are allowed to ask another person to replace them or if there are doubts as to the supervision relationship they can be considered as employees for EU law, and that is the case if they do not have more freedom than employees as regards the working schedule, the place and performance of the work. Indeed, substitutes have to obey instructions on the place, time and performance as otherwise the orchestra cannot do its work.

217

Frans Pennings For these ‘false self-employed’ provisions can be laid down in collective labour agreements without infringing competition law. They can still be treated as being self-employed for national law, meaning, for instance, that dismissal law is not applicable to them or the provisions on pay during periods of absence from work or illness. As a result they may still be considerably cheaper than employees. This is relevant, since even if it is allowed to make collective labour agreement provisions for these false self-employment, the social partners have the freedom to do so or not. If the self-employed remain cheaper than employees and only the worst situations of ‘exploitation’ are addressed, it may be acceptable for employers’ organisations to agree with collective agreements having provisions on minimum rates for these false self-employed.

14.4.3

The Follow-up to the FNV Kiem judgment

On 1 September 2015 the Court of Appeal of The Hague gave its final decision in the FNV Kiem case.14 The Court referred in its judgment to the description by the trade union of the position and actual activities of the self-employed substitutes, a description which was confirmed by the other party, the State. According to this, self-employed substitutes are musicians who replace others in one or more orchestras and who do the same work as musicians employed by the orchestra. It is therefore possible that the self-employed substitute violinist is sitting behind the same music stand as an employee violinist and that they play the same music. Self-employed substitutes have to be present according to a fixed work schedule, in the same way as employees for the rehearsals and performances of the orchestra and they have to follow the instructions by the conductor. The quality of the performance depends on the continuity of the presence of the musicians and from this it follows that the self-employed substitutes are not allowed to have themselves replaced by a person chosen by themselves. On the basis of this description the Court of Appeal decided that the self-employed substitutes are to be considered as false self-employed in the sense of the FNV Kiem judgment of the Court of Justice. The self-employed substitutes are in a dependency relationship with the principal during their contractual period and in this respect they are different from ‘real’ undertakings. 14.4.4

Policy aspects

This judgment allows the social partners to make a collective labour agreement on false self-employment within the meaning of the FNV Kiem judgment. There are of course also 14 ECLI:NL:GHDHA:2015:2305

218

14

What Is the Difference between a Worker and an Undertaking? New Developments in EU Labour Law and Competition Law

self-employed persons who do not work in a particular organisation, but at home, such as translators, who do not benefit from the Court’s definition of false self-employed. However, there are considerable numbers of the self-employed who satisfy the Court’s criteria of false employment, such as those working on construction sites on places and at times determined by the principal, since cooperation with other workers is essential for this type of work. This may also be the case for persons working as bus drivers for group transport: a collective agreement provided that the self-employed could only be employed as on-call bus drivers (so on a contract of employment). The contracting partners requested the District Court of Midden-Zeeland to declare that this provision was not contrary to competition law. The court decided that this was indeed not the case for those self-employed that are considered false self-employed according to the FNV Kiem criteria.15 For other self-employed persons, this provision is not valid, the court decided,16 and also for persons providing healthcare at home, as these also have to follow a very strict work schedule. The EU case law is not only relevant for immunity from competition law in the case of collective labour agreement provisions for the false self-employed, but also the obligation for them to be affiliated with a pension scheme for their professional sector (after all, the Albany judgment itself concerned such affiliation).17 Another consequence of the FNV Kiem judgment is that some forms of minimum tariffs were not allowed. An example is the collective labour agreement on architects that mentioned minimum tariffs for self-employed architects. As the contracting partners declared: ‘they are fully convinced that the chapter on minimum tariffs is based on reasonableness, fairness, equality and decency. The purpose of these minimum rates is to create an equal playing field within and between architects offices, with equal pay for equal work as a starting point, and thus: no unfair competition in terms of employment. It is precisely at a time when the share of flexible labour rises, that it is important to facilitate the offices in this.’ However, the Minister of Social Affairs did not declare this part of the collective labour agreement to be generally binding and the Dutch Competition Authority decided, after the FNV Kiem judgment, that these rules on the (real) self-employed are contrary to competition law. Consequently, these provisions are not included in the succeeding collective agreement (for the period 2017-2019).

15 Rechtbank Zeeland-West Brabant 11 February 2015, ECLI:NL:RBZWB:2015:813. 16 See also A. Stege, ‘De cao en bepalingen die betrekking hebben op zzp’ers’, Arbeidsrecht 2016/44, p. 6. 17 See also M.E.C. Boumans, ‘Het FNV-Kiem-arrest en de verplichte deelname van zelfstandigen in een bpf’, TPV 2016/21.

219

Frans Pennings

14.5

Conclusion

As a result of the FNV Kiem judgment there remain ‘undertakings’ that are persons working under precarious circumstances, doing the same work as employees, but who have freedom to choose the time, place and content of their work and have to bear their own commercial risks. For these persons competition law applies and it is not possible to make minimum tariff provisions for them.18 So the policy of the FNV to make such provisions, as discussed in Section 2.1, satisfies the limits set by the FNV Kiem judgment. Some persons may disappear from the field of undertakings and be treated partially as workers, that is those who fit completely in the organisation of the enterprise for which they are working. In this respect there is a shift from undertakings to workers, though only for some parts of the law, such as competition law. In order to have a more satisfactory approach that deals with more categories of undertakings that belong more to the category of workers other measures are necessary that are more within the remit of the national legislature. An important issue is that of tax advantages that are granted to undertakings only. By revising the conditions for these the distribution of persons over undertakings and workers can be more systematically adjusted. This contribution thus shows the interaction between business law, labour law and competition law; it both reveals the complications of this interaction in that it shows that it is difficult to organise social policy measures in a world where economic values have such an important role for organizing the order as well as the fact that there may be redistributions of persons from the area of undertakings to that of employees and vice versa as a result of definitions by the legislature and case law. For that purpose a joint approach, as advocated by Adriaan Dorresteijn, shows its value in a European approach to undertakings.

18 See, for a detailed discussion of the remaining possibilities, A. Gerbrandy and P. Kreijger, Position Paper. Mededingingsrecht in relatie tot samenwerking tussen zzp-ers ten behoeve van de Vaste Kamercommissie voor Economische Zaken, Utrecht University, 2017. See for an assessment of this judgment within the context of EU social policy also A.Ph.C.M. Jaspers, ‘Grenzen aan sociale concurrentie bij vrij verkeer van diensten en bij mededinging’, Arbeidsrechtelijke Annotaties 9(2) (2015), p. 35 ff.

220

15

Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control

Catalin Rusu

15.1

Introduction

The regime of minority shareholdings in the EU is covered by multiple disciplines: on the one hand, domestic and EU corporate law instruments design the rights that such stakes entail and, consequently, the protection that the owners of such shareholdings are entitled to in specific situations; economic theory, on the other hand, highlights the effects that minority shareholdings have on the behaviour of the parties to transactions involving such stakes, and at the end of the day, on the markets in which such structural links are present; and then there are the competition law instruments (antitrust and merger control), which are meant to prevent or remedy (as the case may be) the negative impact that minority shareholdings have on the competition status in the affected markets. With regard to the latter instruments, interesting debates have occurred in the recent past in connection with the appropriateness of and the need for EU antitrust and especially merger control intervention in non-controlling minority shareholdings. The Ryanair / Aer Lingus saga1 seems to have signalled the existence of a gap in the functioning of the EU competition law rules, due to the European Commission’s inability to properly deal with the consequences created by the acquisition of minority stakes by Ryanair in the competing Irish flag carrier, Aer Lingus. The former Competition Commissioner Almunia took action in this respect: in 2013 a public consultation was initiated in order to investigate the possibility of improving the EU Merger Control Regulation’s2 ability to deal with non-controlling minority stakes,3 which was followed by a refined White Paper

1 2 3

Case COMP/M.4439; Case T-342/07, Ryanair v. Commission, ECLI:EU:T:2010:280. Regulation 139/2004 on the control of concentrations between undertakings, OJ L 24, 29.01.2004 (hereinafter EUMR). Commission Staff Working Document – ‘Towards more effective EU merger control’, SWD (2013) 239 final (hereinafter 2013 SWD) and its annexes: Annex I – Economic Literature on Non-Controlling Minority Shareholdings (‘Structural links’) and Annex II – Non-controlling minority shareholdings and EU merger control, http://ec.europa.eu/competition/consultations/2013_merger_control/index_en.html, accessed on 30 March 2017.

221

Catalin Rusu in 2014.4 The current Competition Commissioner Vestager seemed unconvinced, at first, by the need to alter the current EU merger control regime to include non-controlling minority shareholdings within its scope.5 However, the more recent Support study for impact assessment concerning the review of Merger Regulation regarding minority shareholdings (hereinafter the Support Study)6 completed (at the Commission’s request) by the Spark Legal Network and the Queen Mary University of London, signals that the minority shareholdings issue is still alive and (somewhat) kicking on the Commission’s agenda.7 The interaction between corporate law, competition law and economics has always been an interesting and relevant research item. Certain aspects of the interplay between these disciplines have formed the subject of my PhD work. To this day, I recall with great pleasure the experience of the years spent on the PhD project co-supervised by Professors Dorresteijn and Schenk. While addressing Adriaan in the acknowledgments section of my thesis, I wrote the following: ‘[…] I appreciate the interest you showed in my research and would like to thank you for the challenging and fruitful discussions we had over the last four years: ranging from law to economics and from sports to music. […] I would like to thank you for the care and valuable academic guidance you showed towards me, starting from the days when I was following your European Corporate Law master’s class, through the period of writing my master’s thesis and during the PhD research. You have a big heart for taking me under your wing and I will always appreciate that.’ I stand by these words now, almost ten years down the line, as I did then at the end my PhD research. Adriaan had a great influence on my academic career and it is therefore an honour to contribute to this book dedicated to his prolific academic work. While the focus of my recent research has been placed more on competition law issues than anything else, when it comes to minority shareholdings, one has to return to properly assessing the relationship between corporate law, competition law and economics. In this chapter I will dwell upon the value of these different regimes for the purpose of their 4

5

6 7

White Paper ‘Towards More Effective EU Merger Control’, COM (2014) 449 final (hereinafter WP). The WP is accompanied by the following supporting documents: Commission Staff Working Document, SWD (2014) 221 final (hereinafter 2014 SWD); Commission Staff Working Document – Impact Assessment, SWD (2014) 217 final (hereinafter IA); Commission Staff Working Document – Executive Summary of the Impact Assessment, SWD (2014) 218 final (hereinafter ESIA). M. Vestager, ‘Thoughts on Merger Reform and Market Definition’, Keynote Address at Studienvereinigung Kartellrecht Brussels, 12 March 2015, http://ec.europa.eu/commission/2014-2019/vestager/announcements/ thoughts-merger-reform-and-market-definition_en, accessed on 30 March 2017. See http://ec.europa.eu/competition/publications/reports/KD0416839ENN.pdf, accessed on 30 March 2017. See C.S. Rusu, Minority Shareholdings in the EU – Alive, Yet Still Kicking?, Radboud Economic Law Blog, 11/2016, available at: http://www.ru.nl/law/research/radboud-economic-law-conference/radboud-economic-law-blog/2016/minority-shareholdings-eu-alive-yet-still-kicking/, accessed on 30 March 2017.

222

15

Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control

application to minority shareholdings, while attempting to discern whether the recent plans of the Commission to alter the (EU merger control) approach to such stakes are indeed appropriate.

15.2

What Are Minority Shareholdings?

Minority shareholding acquisitions are legitimate business transactions performed for a variety of reasons, such as access to specific assets or additional financial resources, to tapping new technologies and innovative managerial practices.8 According to Meadowcroft and Thompson,9 such deals may materialize in numerous practical scenarios, such as pre-merger holdings (staggered operations), blocking holdings (meant to prevent the target’s acquisition by a third party), holdings providing effective control (according to the EUMR), diversification (meant to access new markets) and proxy agreements (the socalled substitutes to agreements potentially caught by the cartel prohibition). Each of these scenarios has a different impact on the competitive process, ranging from minimal to particularly suspect, also depending on the type of rights acquired: financial interests / cash-flow rights and / or corporate / control rights.10 It is important to correctly understand how the minority shareholdings concept is defined, given the multitude of delineations put forward in various legal documents and academic works. Properly gauging the scope and defining features of this concept is key when it comes to applying the diverse provisions which are part of the minority shareholdings legal regime(s). Broadly speaking, minority shareholdings may be defined as those stakes which afford less than 50% of the voting or equity rights in a target firm.11 A narrower approach views minority shareholdings in relation to the EUMR notions of control and decisive influence: minority shareholdings are interests in a firm’s financial performance, through share capital participation, which are insufficient to attribute control.12 While the 2013 SWD makes mention of the so-called structural links, the 2014 WP further narrows down this concept by defining minority shareholdings as ‘competitively significant links’: share-

See also 2013 SWD – Annex I, par. 21. S. Meadowcroft, D. Thompson, Minority Share Acquisition: An Impact upon Competition, Office for Official Publications of the European Communities, 1986. 10 See 2013 SWD – Annex I, par. 1. See also D. Spector, Some Economics of Minority Shareholdings – ‘Merger Control and Minority Shareholdings: Time for a Change?’, Concurrences – Revue des droits de la concurrence, no. 3/2011, p. 14-15; C.S. Rusu, (Non-Controlling) Minority Shareholdings as Self-Standing Transactions under EU Merger Control Analysis – Prospective Solutions, 37 World Competition 4, 2014, p. 489. 11 OECD Directorate for Financial and Enterprise Affairs – Competition Committee, Antitrust Issues Involving Minority Shareholding and Interlocking Directorates, DAF/COMP (2008) 30, 2009, p. 9. 12 Study on the importance of minority shareholdings in the EU, COMP/2011/016; Provisions of data for the assessment of the importance of minority shareholdings in the EU, COMP/2011/029. See also par. 56 and the following of the Commission’s Consolidated Jurisdictional Notice, OJ C 95, 2008. 8 9

223

Catalin Rusu holding acquisitions of around 20%, or between 5% and 20%, when accompanied by additional factors, such as de facto minorities, seats on the target’s board of directors, or access to commercially sensitive information, only when the acquirer and the target are competitors or vertically related undertakings.13 Lastly, minority shareholdings are also defined in those domestic laws from the jurisdictions which tackle such transactions under their domestic competition law regimes. For example, in the UK relevant merger situations include transactions allowing the ability to ‘materially influence’ an enterprise’s policy;14 in Germany, the (competition law) control system covers acquisitions of 25% of capital or voting rights, or any combination enabling the exercise of a ‘competitively significant influence’.15 One may immediately observe that the large majority of the existing definitions of the minority shareholding concept point to features which are relevant in the context of diverse disciplines and areas of the law. The question which then arises is what are the functions and values of the various economic theories, and corporate law, antitrust and merger control instruments, as far as minority shareholdings are concerned?

15.3

Corporate Law and Minority Shareholdings

From the outset, it has to be mentioned that there are mainly two different perspectives from which minority participations in companies’ equity capital may be analysed: the classic perspective of protection, and the undue anti-competitive advantage approach.16 I will come to the latter issue later on in this contribution, when discussing the interaction between corporate law and competition law instruments, and the use of competition law for intervening in minority shareholdings. For now, when it comes to the former, the starting point of the discussion should be that improved protection of minority shareholders’ rights is of paramount importance in the ordinary development of everyday economic life. This approach fosters participation in the company equity and prevents conflicts relating to management choices which were unforeseeable at the time of the acquisition of shares, and which are not agreed upon by, or are financially detrimental to the (minority) shareholders. Equally, such protection is driven by the increasingly internationalized economic environment, where also due to

13 WP, par. 47. 14 Enterprise Act 2002, s 26 (3); CMA’s Mergers: Guidance on the CMA’s Jurisdiction and Procedure, CMA 2 (2014), part 4; CC / OFT, Merger Assessment Guidelines, CC2 (Revised) / OFT (2010), part 3. 15 Act against Restraints of Competition, Chapter VII. 16 F. Russo, Abuse of Protected Position? Minority Shareholdings and Restriction of Markets’ Competitiveness in the European Union, 29 World Competition 4, 2006, p. 608.

224

15

Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control

more business-friendly regulatory systems, foreign capital participations are tending to become the rule rather than the exception.17 But how is this protection conceived in EU and domestic law?

15.3.1

The EU

Various EU soft-law and hard-law instruments18 have significantly contributed to achieving this goal, especially when it comes to conferring protection on minority shareholders against company mismanagement, a change of company structure and objectives, or exclusion from the effective decision-making process. For example, Recital 9 and Article 5 of the Takeover Bids Directive19 deal with the protection of minority shareholders and the mandatory bid rule. Essentially, the EU Member States should ensure that where a natural or legal person, as a result of an acquisition, holds securities of a company (which are admitted to trading on a regulated market) which directly or indirectly give him / her a specified percentage of the voting rights in that company, giving him / her control of that company, such a person is required to make a bid as a means of protecting the minority shareholders of that company, and also with a view to preventing speculative bids. The offer should be set at an equitable price and for all the holdings under discussion.

15.3.2

Domestic Jurisdictions

Moving on, what other ways of protecting minority shareholders may be conceived in practice in the various European jurisdictions? As one may observe in the discussion below, a (somewhat large) degree of diversity characterizes the regimes within the different domestic ambits. However, generally speaking, the protection of minority shareholders is achieved by affording certain corporate rights to the owners of such stakes, either by granting them automatically in domestic corporate laws, or by simply affording them in practice, depending on the type of the transaction at hand. How far-reaching these corporate rights are depends on the size of the minority shareholding acquired and 17 Ibid, p. 608-611. See also C.S. Rusu, EU Merger Control and Acquisitions of (Non-Controlling) Minority Shareholdings – The State of Play, CLaSF WP Series 10, 2014, p. 17. 18 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe, Brussels, 2002, Communication from the Commission – ‘Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward’, COM/2003/0284 final, Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies, OJ L 184, 14.7.2007, Directive 2005/56/EC on cross-border mergers of limited liability companies, OJ L 310, 25.11.2005, Commission’s Communication – ‘Action Plan: European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies’, COM(2012) 740 final. 19 Directive 2004/25/EC on takeover bids, OJ L 142, 30.4.2004.

225

Catalin Rusu also on the types of the companies involved in the minority stake deals. All in all, these corporate rights attached to a specific level of shareholding acquired secure a particular presence of the acquirer in the target’s structure, its involvement in the target’s internal matters, and / or its ability to influence the direction of the target’s business. Therefore, understanding the weight of these rights is important for discerning how strong an influence the acquirer may exert on the target’s behaviour in practice, but also in order to correctly map the incentives provided for the market players to engage in minority shareholding transactions. The 2016 Support Study20 effectively shows how such rights may unfold in practice in various domestic jurisdictions in Europe. Let us consider a couple of examples.

Germany In Germany, the Limited Liability Companies Act (GmbHG) grants shareholders owning 10% or more of the target’s shares an entitlement to request the convening of a general meeting, the right to bring proceedings for a judicial resolution against the company, the right to request a court-appointed liquidator, and the (limited) right to request information and inspect the books and documents of the company.21 I will come back to this latter item in the following sections of this chapter. When the 25% shareholding threshold is met, the minority shareholder has the right to block special resolutions relating to amending the articles of association, or winding up the company. When it comes to public limited companies, the German Stock Corporation Act (AktG) provides that owners of shareholdings of 5% have the right to convene a shareholders meeting. At 10%, shareholders have the right to table a motion for the removal of a member of the supervisory board. At 25%, the right to block certain special resolutions (for example, amending the articles of association, acquisitions of more than 10% share capital, the dissolution of the company, increasing or reducing share capital, etc.) arises. One relevant observation here is that for both private limited and public limited companies, the 25% shareholding threshold triggers the existence of control over the target, since the acquirer is able to exert a ‘competitively significant influence’ over its behaviour. As will be detailed below, such influence warrants competition law intervention by the Bundeskartellamt based on the Act Against Restraints of Competition.22 Lastly, if these are the rights conferred upon minority shareholders by the domestic laws in Germany, no significant differences exist between the rights which tend to be granted in practice when acquiring a shareholding in a private limited company and those which tend to be granted in respect of a public limited company: certain strategic vetoes and

20 See Support Study, p. 42 and the following. 21 See section 51(a) of the GmbHG. 22 See Rusu, supra n 10, p. 496-497.

226

15

Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control

observer status may be (exceptionally) negotiated for owners of 10% or more shareholdings on a case-by-case basis, whereas shareholdings of 15% or more may allow for the right to nominate a supervisory board member.23

The Netherlands In the Netherlands, Book 2 of the Dutch Civil Code provides minority shareholders in private limited companies (BVs) and public limited companies (NVs) with certain rights. The BV is known to be the more flexible form of business organisation, given the wideranging provisions that may be included in the articles of association. Still, in a BV, the law provides the basics when it comes to the rights allotted to minority shareholders. First, every shareholder in a BV has at least one vote (Article 2:228(1)). Further, when a (combined) shareholding of at least 1% is reached, the shareholders may request a general meeting, which in turn may request the board to provide information. The owners of a shareholding of 5% may prevent the board of directors from deciding on a proposed merger (Article 2:331) or a division of the company (Article 2:334). A shareholding of 10% may also prevent the conversion of the company to another type of legal entity (Article 2:18). No specific rights are granted by law at the 15%, 20% or 25% shareholding level. However, when a shareholding of 33% is reached, the shareholders can demand in court that another shareholder must give up his shares in the company when such a shareholder acts in a way which harms the company’s interests to such an extent that their shareholding cannot be reasonably tolerated (Article 2:336).24 A 33% shareholding may also block decisions appointing a director of a company (Article 2:243). Lastly, in practice, most rights that minority shareholders of a BV have are established during the negotiation process and are laid down in the BV’s articles of association. Therefore, the level of rights acquired do not necessarily correlate with the percentage of shareholding acquired.25 Still, such negotiations are more often than not expected to lead to the creation of veto rights regarding important decisions (for example, investment strategies, dividend policy, etc.). A general (yet tentative) conclusion that may be drawn from all the domestic examples discussed above is that the larger the shareholding, the more rights the acquirer would (be entitled to) expect. With this comes a stronger impact on the target’s business (and as will be detailed in the following section, on the acquirer’s business too) and consequently on its (their) behaviour in the market. Speaking of which, what effects do minority shareholding acquisitions create in this respect? In order to answer this question, it is time to turn the attention to the economic theories of harm pertaining to minority shareholdings. 23 See Support Study, p. 47-48. 24 Ibid, p. 52. 25 Ibid, p. 52-53.

227

Catalin Rusu

15.4

Economics of Minority Shareholdings

Above it was stated that minority shareholdings secure the acquirer’s presence in the target’s structure, its involvement in the target’s internal matters, and generally speaking, influencing the direction of the business. This is achieved primarily via the corporate rights attached to the shareholding itself, some examples of which were discussed above. Yet, the economic effects of minority shareholdings on competition also depend significantly on the financial interests (cash-flow rights) that flow from such stakes, which essentially entitle the shareholder to a percentage of the profits of the target company.26 While in settings entailing full control (i.e. concentrations within the meaning of Article 3 EUMR) such (corporate and cash-flow) rights may very well overlap, in the case of noncontrolling minority shareholdings with more extensive cash-flow rights (the so-called silent investments), the incentives the acquirer has to behave in a certain way or to compete less vigorously may be problematic from a competition point of view.27 Extensive research has been performed on the effects of minority shareholdings on competition.28 I will summarize the main economic effects that such ownerships may create, with reference to the corporate rights / cash-flow rights dichotomy, by explaining how anti-competitive risks may occur in horizontal (i.e. between competitors) and vertical (i.e. between parties active at different levels of the economic chain) market circumstances, and with reference to the unilateral and coordinated effects theories of harm.

15.4.1

Horizontal Unilateral Effects

In horizontal settings, the existence of significant cash-flow rights in a competitor, even in the absence of control acquired via corporate rights, may induce the acquirer to unilaterally increase its prices,29 since the losses it may incur due to customers switching to the target’s offering will be compensated by appropriating a percentage of the target’s profits, 26 See also 2013 SWD – Annex I, par. 1 and 27. 27 See also B. Ignjatovic, D. Ridyard, Minority Shareholdings: Material Effects?, CPI Antitrust Chronicle, January 2012 (1), p. 2-3. 28 See, for example, Meadowcroft, Thompson, supra n 9; OECD (2009), supra n 11; S. Salop, D. O’Brien, Competitive Effects on Partial Ownership: Financial Interest and Corporate Control, Antitrust Law Journal 67, 2000; R.J. Reynolds, B.R. Snapp, The Competitive Effects of Partial Equity Interest and Joint Ventures, 4 International Journal of Industrial Organisation 2, 1986; J.B. Dubrow, Challenging The Economic Incentives Analysis of Competitive Effects in Acquisitions of Passive Minority Equity Interests, Antitrust Law Journal 69, 2001; D. Gilo, Y. Moshe, Y. Spiegel, Partial Cross Ownership and Tacit Collusion, RAND Journal of Economics 37, 2006; K. Kühn, M. Rimler, The Comparative Statics of Collusion Models, CEPR Discussion Paper 5742, 2006. For an extensive list of relevant literature on the economics of minority shareholdings see 2013 SWD – Annex I, p. 24-26. 29 See, for example, case COMP/M.4150 – Abbott / Guidant and case COMP/M.1712 – Generali / INA.

228

15

Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control

proportionate to the acquirer’s shareholding in the target. This type of unilateral effects is known as the internalisation of the price-setting decisions, which is prone to take place if the relevant market is concentrated, when the parties are close competitors, or key market players, and when the magnitude of the passive investment is large enough.30 However, such adverse outcomes are proportionately lower for minority shareholdings when compared to fully-fledged concentrations, since the target’s pricing policy remains unchanged.31 Should significant corporate rights be at stake, even if no decisive influence is exerted upon the target, the acquirer may have the ability and incentive to raise the target’s prices or degrade its offering altogether. The acquirer would benefit from such a scenario, due to the fact that consumers would be inclined to switch to the acquirer’s product, when faced with such a price increase concerning the target’s product. The acquirer would bear only part of the costs, proportional to its financial interest in the target. Speaking of cash-flow rights, such a scenario would be feasible even in the absence of such interests: first, the acquirer has little incentive to increase its prices, since it has little or nothing to gain (financially) from such tactics; second, the cost of the actual acquisition of shares would be smaller. Given these considerations, the horizontal unilateral effects of minority shareholdings are again less significant than those of fully-fledged mergers,32 although they are not negligible.

15.4.2

Horizontal Coordinated Effects

Minority shareholdings may also hinder competition via horizontal coordinated effects, especially in situations of cross-participation.33 Such scenarios are particularly prone to materialise when the market is sufficiently transparent to allow the participants to monitor each other’s behaviour and to detect and deter deviations from the desired coordination. Also, reactions from outsiders must not be able to undermine the expected coordination results.34 Coordination may occur in the presence of corporate rights, again, even if outright control of the target is not reached. The acquirer may be able to push the target

30 L. Idot, ‘Non-controlling minority shareholdings in European merger control and under Article 101 TFEU, EU Competition Law Forum’, Brussels, 9 March 2012; J.P. Schmidt, Germany: Merger control analysis of minority shareholdings – A model for the EU?, Horizons – Concurrences – Revue des droits de la concurrence, no. 2/2013, p. 209. 31 See 2013 SWD – Annex I, par. 5 and 41. See also Ignjatovic, Ridyard, supra n 27, p. 3-4. 32 See 2013 SWD – Annex I, par. 6 and 38. See also Spector, supra n 10, p. 15. 33 See, for example, case COMP/M.1673, VEBA / VIAG and case IV/M.1080, Thyssen / Krupp. 34 2013 SWD – Annex I, par. 8.

229

Catalin Rusu closer to the coordinated pattern of behaviour, which obviously entails increased prices for both the acquirer and the target. Further, minority shareholdings can enhance transparency if they offer the acquiring firm a privileged insight into the commercial activities (for example, plans to expand or invest) of the target,35 that an independent competitor would normally not have. This would also allow a higher degree of sensitive information exchanges, which in turn may allow for better monitoring of the competitors’ behaviour, altering the firms’ incentive to deviate from the desired coordination, and deterring against such deviations via price wars.36 Moving on, financial interests may also contribute to facilitating collusion. Such shareholdings may signal deviations on behalf of the target, if suspiciously high profits may reveal that this competitor secretly undercut rivals and acquired new customers.37 Consequently, this would allow for aggressive deterrence strategies being engaged in by the acquirer, since it would also suffer losses (due to its financial interests) if the target decides to lower its prices. For the sake of completeness, minority ownerships in competing companies may also signal to the rest of the market that there is an intention to compete less vigorously. This may induce the whole industry to reduce competition and favour a collusive equilibrium to the detriment of consumers.38

15.4.3

Vertical Effects

In vertically-related markets minority shareholdings may also raise competition concerns,39 via input or customer anti-competitive foreclosure, either in the case of forward (an upstream firm is the acquirer and a downstream firm is the target) or backward (a downstream firm is the acquirer and an upstream firm is the target) shareholdings. Furthermore, vertical integration via minority shareholdings can aid the creation or strengthening of a dominant position on behalf of the acquirer, be it located in the upstream or the downstream market. Generally speaking, competition risks in vertically-related markets materialise mainly through preferential treatment, facilitating reciprocal or exclusive dealing, and tying arrangements.40 For example, if the downstream firm acquires corporate rights (even with-

35 36 37 38 39 40

Ibid, par. 9 and 47; OECD (2009), p. 30. 2013 SWD – Annex I, par. 10. Spector, supra n 10, p. 18. Rusu, supra n 17, p. 26. See, for example, case COMP/M.5096, RCA / MAV Cargo. Idot, supra n 30.

230

15

Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control

out outright control) in the upstream supplier, it may have an incentive to induce the target to foreclose inputs to its downstream rivals. Should cash-flow rights only be acquired in the upstream target that supplies the downstream acquirer’s competitors, the acquirer will apportion part of the target’s profits obtained from the (target’s) sales to the competitors downstream, thus internalising the positive effects on its competitor of competing less aggressively through the financial interest. Conversely, should the upstream supplier acquire minority shareholdings (primarily corporate rights) in a target downstream, this may lead to the supplier’s ability and incentive to foreclose the target’s competitor.41 Lastly, minority shareholdings in vertical settings may (in certain circumstances) have more pronounced effects than fully-fledged vertical concentrations, since the same degree of foreclosure may be achieved at a lower cost (since purchasing a minority shareholding is cheaper than acquiring control), while also exposing the acquirer to less lost profits.42 Still, non-horizontal transactions are less likely to significantly impede competition since there is no loss of direct competition,43 and are more prone to creating efficiencies.44

15.4.4

Market Entry Effects

Last but not least, minority shareholdings may also have an impact on market entry, by inducing potential competitors not to enter a market, in cases where the acquirer has a stake in the incumbent target. Also, a minority shareholding may confer sufficient influence, which allows the minority shareholder to prevent a potential entrant from entering. Lastly, the prospect of foreclosure as a consequence of partial backward or forward vertical integration may deter entry as well.45 Summing up, the main anti-competitive risks relating to minority shareholdings may materialise via financial interests / cash-flow rights in a target firm, which tend to provide incentives for the acquiring firm to increase its own prices, to compete less aggressively, or to foreclose competition (in vertically-related markets), and via acquisitions of significant influence by means of corporate rights, which give the acquirer the ability to raise the target firm’s prices, increased incentives to collude (should the market circumstances

41 See also 2013 SWD – Annex I, par. 11-12, 70 and 75. 42 For example, a supplier with a controlling partial forward shareholding fully benefits from increased upstream sales when inducing its downstream target not to buy inputs from competing customers, but only bears a share of the foregone profits of the downstream firm. See 2013 SWD – Annex I, par. 65. 43 See par. 11-13 of the Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings, OJ C 265/6, 18.10.2008. 44 2013 SWD – Annex I, par. 18. 45 Ibid, par. 14-16.

231

Catalin Rusu be prone to such behaviour), or the ability to engage in input and customer foreclosure (in vertical settings).

15.5

15.5.1

Corporate Law / Competition Law Interaction and the Use of (EU) Competition Law Tools (Antitrust and Merger Control) for Intervention in Minority Shareholdings

Corporate Law / Competition Law Interaction

If this is the impact that minority shareholdings may create in practice, the natural question is how does the law deal with such effects? This is where one has to first return to the value of the (domestic) corporate law rules, before delving into the role that competition law instruments may have when it comes to minority shareholdings. This is so, given that certain provisions of corporate law may indeed curtail the need for competition law intervention. This is the first facet of the corporate law / competition law interaction that may warrant at least a short discussion. Let us again consider a few examples. In Germany, the AktG provides that the votes pertaining to a minority shareholding can only block certain corporate matters. In an AG, shareholders’ meetings do not decide in substance upon important business matters, as executive board members are managing the company independently, while not being subject to direct instructions by the shareholders or the supervisory board.46 Furthermore, shareholders in an AG have a (somewhat limited) right of information during shareholders’ meetings, typically in connection with assets, finance and profit. The depth of this information is controlled by the board, to the effect that if such information is damaging to the company, it will not be disclosed to the shareholders.47 Furthermore, the GmbHG provides that the members of the general shareholders’ meeting exercise general control over the managing directors. Shareholders may also issue binding instructions to the managers.48 Thus, the subject matter of shareholders’ meetings of limited liability companies has business relevance.49 As far as the right of information is concerned, any shareholder has a wide-ranging right to information with respect to all matters of the company, with the exception of such a right being rejected by the managing director if there are concerns that the shareholder may use the information inappropriately, which will cause damage to the company.50 Conse46 See also A. Dorresteijn, T. Monteiro, C. Teichmann, E. Werlauff, European Corporate Law, 2nd Edition, Wolters Kluwer – Company Law Series, 2009, p. 172. 47 See also Rusu, supra n 17, p. 20. 48 Dorresteijn, Monteiro, Teichmann, Werlauff, supra n 46, p. 171. 49 Schmidt, supra n 30, p. 211. 50 See section 51(a) GmbHG.

232

15

Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control

quently, in German law there are statutory provisions aimed at restricting such rights, so that potential competitive concerns do not arise. Last but not least, as far as sensitive information exchanges between the minority shareholder and the target are concerned, the AktG and GmbHG provide for a balance between the minority shareholder’s right to information, on the one hand, and the antitrust constraints imposed on all shareholders of the target, on the other. Should sensitive information exchanges fall under the German legal provisions on cartel prohibition, these provisions will apply with the effect of limiting the possibility of influence and of access to information by the minority shareholder.51 In the Netherlands, the right to information that a minority shareholder may have is treated much in the same way. The general meeting in a BV may legally request the board for information, which must be provided, unless an overriding interest of the company is at stake.52 Furthermore, although every shareholder has the right to ask questions at the general meeting and the board must – to the extent possible – answer these questions, a single shareholder or group of shareholders does/do not have the right to be provided with information.53 In Dutch practice, the principles of reasonableness and fairness are also important since they may restrict the shareholders’ rights to a certain extent: for example, even in cases where a shareholder under Dutch law might have the right to convene a general meeting, doing so without the consent of the board of directors can in practice be seen as a deed of mistrust which can harm the interests of the company.54 Last but not least, the revised 2016 Dutch Corporate Governance Code places certain limits on the possibility of acting as a member of a supervisory board in a target company, which may be very relevant as far as the incentives for engaging in minority shareholdings transactions are concerned.55 These examples show that domestic corporate laws and regulations contain safeguards that may prevent the exercise of corporate rights by minority shareholders, which would otherwise create effects that may be problematic from a competition law perspective. Therefore, with regard to this first facet of the corporate law / competition law interaction, should such safeguards work properly in practice, corporate law instruments may be apt to neutralise the minority shareholding-related risks emphasized by economic theory.

51 52 53 54 55

Schmidt, supra n 30, p. 211. Article 2:217 Dutch Civil Code. See also Support Study, p. 51. Ibid, p. 53. See Section 2.1.8 on the independence of the supervisory board members, Dutch Corporate Governance Code, 2016.

233

Catalin Rusu Conversely, it is only when such risks are not appropriately dealt with by corporate law that competition law intervention should come into play.56 The second facet of the corporate law / competition law relationship when it comes to minority shareholdings is primarily relevant for merger control intervention. The corporate rights bestowed upon minority shareholders by domestic corporate laws may be so far-reaching that the acquirer gains (some form of) actual control over the behaviour of the target. This means that the acquisition of a minority shareholding may amount to a concentration or a relevant merger situation, as the case may be. Such a setting is prone to be assessed under domestic competition / merger control rules, or under the EUMR, should the other jurisdictional criteria (i.e. Internal Market dimension of a concentration) in Regulation 139/2004 be met. For example, in Germany, as stated above, an acquisition of 25% of a company’s capital or voting rights, or any other combination (independent of the acquired shareholding) enabling direct or indirect exercise of a ‘competitively significant influence’ over the target’s behaviour, calls for competition law intervention by the Bundeskartellamt under Chapter VII of the Act Against Restraints of Competition. All in all, the second facet of the corporate law / competition law interaction relates to corporate law instruments pushing minority shareholding transactions into the competition law realm, by conferring comprehensive rights to the acquirer, the use of which may be detrimental to competition. Such effects must then be dealt with via competition law tools (primarily merger control). Lastly, when speaking of how far-reaching the rights afforded by corporate law may be, it is important to pay close attention to the actual shareholding levels and the specific rights they entail. This is so especially in light of the discussion in the following sections on altering the existing EU merger control system so as to include non-controlling minority shareholdings within its scope: understanding the reach of the corporate law rights and the shareholding levels (cash-flow / financial rights) discussed above may be useful in designing the threshold for (competition law) intervention under the prospective / reframed EUMR. I will come back to this issue in the following sections.

56 See also Schmidt, supra n 30, p. 210. For a somewhat more nuanced opinion on this matter see Ignjatovic, Ridyard, supra n 27, p. 7. These authors suggest that the ability of minority shareholders to influence company policy will generally be contrary to the commercial interests of the other (majority) shareholders. Such an ability would only exist in the presence of some failure of corporate governance. If such failures were found to be prevalent, this would raise public policy concerns that go beyond the functioning of competition policy, and may be more appropriately dealt with by reforms of corporate governance norms rather than by tweaking competition law and / or merger control rules.

234

15

15.5.2

Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control EU Antitrust Law

From the outset, the fact that minority shareholdings may be non-controlling (i.e. they do not entail a decisive influence exerted on the target and consequently they do not fall under the EUMR) does not mean that they are immune from EU competition law. In the past, Article 101 TFEU, dealing with anti-competitive agreements, and Article 102 TFEU, dealing with the abuse of a dominant position, were used, although sporadically, to tackle self-standing minority shareholding transactions. For example, Article 101 TFEU was used in the Philip Morris / Rothmans case57 to tackle the potential anti-competitive effects stemming from minority shareholdings, where the acquisition was a tool for commercial cooperation between competing parties. The case concerned the acquisition of a 30.8% shareholding by Philip Morris in the competitor cigarette manufacturer Rothmans. The voting rights pertaining to this shareholding were limited to 24.9%, while Philip Morris had neither board representation, nor managerial influence over Rothmans. The ECJ ruled that this agreement itself had neither the object nor the effect to restrict competition; however, the acquisition could have served as an instrument for influencing the commercial conduct of the parties, so as to restrict or distort competition on the market on which they carry on business. The Court also listed the most likely situations in which such distortions may occur, especially in oligopolistic markets with high barriers to entry: where legal or de facto control of the commercial conduct of the target is obtained; where the agreement provides for commercial cooperation between the parties and supporting structure to this end; and where the agreement gives the acquirer the possibility of reinforcing its position at a later stage and taking effective control of the target.58 The possibility of applying Article 101 TFEU was later confirmed in cases like Olivetti / Digital59 and BT / MCI.60 Specifically in the latter case, the Court refined the Philip Morris / Rothmans doctrine by stating that the TFEU cartel prohibition does not apply to agreements for the sale of shares.61 Further, Article 102 TFEU can only be applied to minority shareholdings if a dominant position exists, as was the case in Gillette.62 In this case, the Commission picked up on the statements made in Philip Morris / Rothmans regarding the application of the abuse of a dominant position doctrine to minority shareholdings that confer ‘some influence’. In par. 24 of its decision, the Commission observed that Gillette’s capacity to influence the 57 Cases 142/85, 156/84, British American Tobacco Company and R.J. Reynolds Industries v. Commission, [1987] ECR 4487. 58 See Rusu, supra n 17, p. 7. 59 Case IV/34.410. 60 Case IV/34.857. 61 See also the Commission’s 14th Report on Competition Policy (1985), p. 98-100. 62 Case IV/33.440.

235

Catalin Rusu commercial conduct of both Eemland (which was the owner of Wilkinson Sword – also, a part of the participation of Eemland in Wilkinson Sword was acquired by Gillette) and Wilkinson Sword (Gillette’s main competitor) was much less likely to be effectively used because of the absence of any voting rights in Wilkinson Sword. However, Gillette became the main shareholder and creditor of Eemland. Furthermore, Gillette could have used its rights to prevent future concentration plans that Eemland would have had, and Gillette would have not approved of. The economic links created between the companies involved could not have been perceived as not impacting the independent determination of market conduct. Consequently, an infringement of Article 102 TFEU was established since the transaction influenced the structure of the market.63 All in all, the antitrust provisions of the TFEU are apt to be applied to cases involving (non-controlling) minority shareholdings. However, there are important limitations:64 Articles 101 and 102 TFEU are not applicable in all situations,65 since either an agreement between undertakings, or a dominant position needs to be present; these provisions are not necessarily designed to deal with structural changes in the market,66 and their enforcement procedures apply ex-post, are lengthy and somewhat inflexible.

15.5.3

EU Merger Control

If antitrust intervention in minority shareholdings may be limited in scope, the EUMR may prove useful to this end. Several scenarios are possible in this respect. First, minority shareholdings may allow for a decisive influence to be exerted on the target, on a lasting basis. According to par. 56 et seq. of the Commission’s Consolidated Jurisdictional Notice such control may occur on a legal basis when specific rights (i.e. the possibility to determine the target’s strategic commercial behaviour, the power to appoint more than half of the target’s board members, the possibility of vetoing the target’s important business strategy decisions, etc.) are attached to the minority shareholding,67 or on a de facto basis (i.e. when the acquirer will likely achieve a majority at the shareholders' meetings, given its shareholding level and the shareholders’ attendance at past meetings).68 In these situations, the minority shareholding acquisitions are actually control63 64 65 66

See Rusu, supra n 17, p. 8. See also WP, par. 39-41. 2013 SWD, par. 5. C.S. Rusu, European Merger Control: The Challenges Raised by Twenty Years of Enforcement Experience, Wolters Kluwer Law & Business / Kluwer Law International, European Company Law / CECL Series, vol. 7, 2010, p. 115-116. 67 Case IV/M.258, CCIE / GTE. 68 Cases COMP/M.3330, RTL / M6; IV/M.159, Mediobanca / Generali.

236

15

Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control

ling in nature, and therefore they amount to full-blown self-standing concentrations, according to Article 3 EUMR. Consequently, the ex-ante EU merger control system applies with full force in this scenario.69 Second, the EUMR also applies to pre-existing non-controlling minority stakes of 10% or higher and interlocking directorates, which concern the affected product markets that relate to a main concentration transaction, notified to the Commission following the standard EUMR procedure. Such stakes have to be presented in the notification Form CO (sections 4.2.1 and 4.2.2), as ancillary to this main self-standing transaction. The minority stakes are then substantively assessed by the Commission in the context of the main concentration deal which has been notified, either during Phase I proceedings, thus aiming for an unconditional concentration clearance,70 or during the appraisal process when formal divestments are proposed as a clearance condition.71 Third, intervention in non-controlling minority shareholdings is possible if such stakes are part of an already notified and implemented concentration. When the Commission prohibits such a concentration, it may use Article 8 (4) EUMR so as to order the divestment of the minority stake. This was the case in Tetra Laval / Sidel72 where after the prohibition of the concentration, contrary to Tetra’s argument that it should retain a minority shareholding in Sidel, since this holding does not allow it to exercise decisive influence on the target and consequently no EUMR clearance is required in this respect, the Commission ordered the full divestiture, arguing that restoring effective competition would be impeded by the minority shareholding, as this would allow the retention of economic incentives to refrain from competition.73 Consequently, Article 8 (4) EUMR may be used to divest minority shareholdings which are part of an implemented and then prohibited concentration. However, this EUMR provision may not be used to intervene in / divest minority stakes acquired before the launching of a public bid, together with which they form a so-called single concentration, which is then prohibited by the Commission. This was the case in the famous Ryanair / Aer Lingus transaction. Briefly, in 2006 Ryanair acquired roughly a 19% shareholding in its competitor Aer Lingus and then it launched a public bid to acquire control over this company. This ‘single concentration’ was notified to the Com69 See also Rusu, supra n 10, p. 491; G. Drauz, S. Mavroghenis, S. Ashall, Recent Developments in EU Merger Control, 3 Journal of European Competition Law & Practice 1, 2012, p. 58; Schmidt, supra n 30, p. 207. 70 Case M.113, Courtaulds / SNIA. 71 Case M.5406, IPIC / MAN Ferrostaal. 72 Case COMP/M. 2416, Tetra Laval / Sidel; T-5/02, Tetra Laval v. Commission [2002], ECR II-04381; C-12/03 P, [2005], ECR I-00987; C-13/03 P [2005], ECR I-01113. 73 A. Toth, TEU Competition Law Aspects of Minority Shareholdings, 35 World Competition 4, 2012, p. 609610.

237

Catalin Rusu mission, which blocked the deal on the basis of Article 8 (3) EUMR. In other words, it was the acquisition of control over Aer Lingus that was prohibited. Since control did not change hands (as it did in the Tetra Laval / Sidel case discussed above), the transaction was not implemented, the consequence of this being that the Commission could not use Article 8 (4) EUMR to order the divestment of the minority shareholding that Ryanair held in Aer Lingus. What this meant was that the acquirer of a minority shareholding could retain its influence on the target, without the Commission being able to do anything to counteract the potential anti-competitive effects that might occur. This practical setting occurred also due to the existing differences in the corporate law regimes between the two domestic jurisdictions in which the Tetra Laval / Sidel and Ryanair / Aer Lingus cases occurred: in Tetra Laval / Sidel the acquirer was obliged under the French corporate law rules to acquire the remaining shares before the Commission’s (prohibition) decision. In Ryanair / Aer Lingus, the bid was (under Irish law) conditional upon the Commission’s approval and it lapsed when Phase II proceedings were initiated under the EUMR.74 For the sake of completeness, it must be stated that, luckily, the Ryanair / Aer Lingus minority shareholding issue returned for investigation to the UK authorities, which were finally able to remedy the problem by ordering the divestment of the shareholding under discussion, up to the 5% level.75 However, this may not always be the case, especially if the domestic jurisdiction where a case may occur does not enforce rules dealing with minority shareholdings (the large majority of the EU Member States fit in this picture). All in all, the divestment problems in Ryanair / Aer Lingus emphasize the EUMR’s limits regarding potential intervention in non-controlling minority stakes. Generalising this statement, and also to summarise the discussion so far, the EU competition law instruments (antitrust and merger control) are apt to tackle the economic effects of minority shareholdings (generated either by the corporate rights or by the cash-flow rights pertaining to a given stake), but only up to a particular point, namely where a non-controlling minority shareholding cannot be divested if it is acquired before a public bid which is prohibited by the Commission. Therefore, also given the already discussed limitations of using Articles 101 and 102 TFEU for intervention in minority shareholdings, it may very well be the case that we are facing a so-called enforcement / regulatory gap in the functioning of the EU competition law instruments. This gap, which was mentioned in the introduction to this chapter as well, has given rise to fierce discussions on how to best address the problem of the (non-controlling) minority shareholdings regime in the EU. The approach most often pointed to in the academic and practice circles was addressing 74 Rusu, supra n 17, p. 12-17, 21. 75 See Competition Appeal Tribunal, Case [2015] CAT 14, 1239/4/12/15, Ryanair v. CMA & Aer Lingus, available at: http://www.catribunal.org.uk/files/1239_Ryanair_Judgment_CAT_14_150715.pdf, accessed on 10 April 2017.

238

15

Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control

this issue within the confines of the EU merger control system, since, as discussed above, the theories of harm arising from acquisitions of minority shareholdings are similar to those arising from acquisitions of control.76 I will turn to these issues in the following section of this chapter.

15.6

EU Merger Control Reform and Minority Shareholdings

The projected reform of the EUMR meant to include non-controlling minority shareholdings within its scope has gained ground with the 2013 public consultation77 and with the issuing of the 2014 WP. This last document fine-tunes the Commission’s approach to the proposed EUMR amendments. In the following sections, I will dwell upon the key provisions of the WP in order to assess whether the Commission’s proposals regarding non-controlling minority shareholdings are appropriate and proportionate.

15.6.1

The Magnitude of the Problem

Before embarking on a reform project of the existing EU merger control system dealing with minority shareholdings, a discussion on the magnitude of the problem to be addressed by the projected reform is necessary. In other words, if a regulatory / enforcement gap exists, is it sufficiently serious to warrant a change in the enforcement approach? The opinions on this matter differ substantially. Some authors and stakeholders argue that either the gap does not exist, or that if it exists, it raises only theoretical risks of anticompetitiveness; it should therefore be regarded as negligible and, consequently, no legislative action should be undertaken.78 The recent signals coming from Competition Commissioner Vestager’s office point in this direction too. Other opinions, on the other hand, including that of former Competition Commissioner Almunia, suggest that one single case where the Commission cannot properly intervene (Ryanair / Aer Lingus) is actually one too many. The 2013 SWD79 and the 2014 WP80 formulate solid arguments in this respect. But how wide is this enforcement gap? Studies81 have been performed in order to map the spread of minority shareholdings which are worthy of investigation.

76 WP, par. 41. 77 Supra n 3. 78 See, for example, Toth, supra n 73; N. Levy, EU Merger Control and Non-controlling Minority Shareholdings: The Case against Change, 9 European Competition Journal 3, 2013. See also some of the stakeholders’ responses to the 2013 consultation, available at: http://ec.europa.eu/competition/consultations/2013_merger_control/index_en.html, accessed on 10 April 2017. 79 2013 SWD, p. 5. 80 WP, par. 25. 81 See the Zephyr Database Analysis mentioned in the 2013 SWD – Annex II. See also the 2014 IA, supra n 4 and the 2011 tender studies, supra n 12.

239

Catalin Rusu The general conclusion reached is that bearing in mind the Commission’s current intervention rate in concentrations under the EUMR, and taking inspiration from the domestic intervention experience relating to minority shareholdings, if a reform of the EU merger control system is implemented, it may very well be the case that the Commission would intervene in roughly 1-2 transactions per year, out of the 20-30 transactions per year that would meet the existing EUMR turnover thresholds (of course, depending on the method of intervention chosen).82

15.6.2

The Guiding Principles of the Projected Reform

Should the Commission go through with the project of amending the EUMR, this endeavour should comply with the following principles: the new control system should capture the potentially anti-competitive acquisitions of non-controlling minority shareholdings, it should avoid any unnecessary and disproportionate administrative burden on companies, the Commission and NCAs, and it should fit within the merger control regimes currently in place at both the EU and national level.83 Essentially, fulfilling these three principles relates to the following issues: first, closing the enforcement / regulatory gap and avoiding future Ryanair / Aer Lingus scenarios. In this way, more effective competition enforcement in the Internal Market would be ensured, consequently preventing consumer harm. This target sits comfortably in the EUMR’s objectives.84 Second, the envisaged control system for non-controlling minority shareholdings should observe the proportionality principle. No undue administrative burdens should be imposed either on the authorities assessing the potentially problematic transactions, or on the market players. With regard to the latter, innocuous transactions such as recapitalization by financial institutions should not be deterred.85 This endeavour is consistent with the Commission’s procedural simplification efforts,86 which allow businesses to reduce costs and administrative burdens. Third, as mentioned above, minority shareholding deals are performed in practice via similar means to full-blown concentrations. The theories of harm pertaining to these categories of transactions are also similar. Consequently, it makes sense to address minority shareholdings issues on the terrain of merger control, rather than stretching the meaning and use of the cartel prohibition and the prohibition of abusing a dominant position under the TFEU provisions.

82 83 84 85

See Rusu, supra n 10, p. 500. WP, par. 42. IA, par. 71. 2014 SWD, par. 69. See also ‘Minority Power – EU Merger Control and the acquisition of Minority Shareholdings’, 15 Competition Policy Brief, 2014, p. 5. 86 2013 Commission Simplification Package. See http://europa.eu/rapid/press-release_IP-13-1214_en.htm, accessed on 19 April 2017.

240

15

Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control

If these are the principles which should stand at the core of the EUMR’s reform, their practical fulfilment depends,87 of course, on the threshold of intervention and on the procedural requirements that will be designed. Finding the correct balance between these items is key to ensuring a more coherent legal regime for minority shareholdings in the EU.

15.6.3

The Intervention Threshold

Which minority shareholding transactions should be assessed by the Commission according to the envisaged control system? In other words, where exactly should the intervention threshold be set? As already previewed in section 2 of this chapter, the WP deems it appropriate that intervention should be conceived only in those deals that create ‘competitively significant links’, as defined in par. 47 by the following cumulative dimensions: the ‘competitive dimension’ – acquisitions of minority shareholdings in a competitor or vertically-related company; the ‘significance dimension’ – the acquired shareholding in a target company is around 20% or between 5% and around 20%, but accompanied by additional factors such as rights which give the acquirer a de facto blocking minority, a seat on the target’s board of directors, or access to commercially sensitive information of the target. This approach makes sense to a certain extent, given that if only a few transactions would be problematic according to the economic theories discussed above, indiscriminately subjecting all minority stakes to a mandatory review might go beyond what is necessary to prevent anti-competitiveness.88 Consequently, reviewing only deals that create ‘competitively significant links’ seems to be in keeping with the proportionality principle. But how clear and exact is this definition of minority shareholdings put forward by the WP? First, with regard to the ‘competitive dimension’, circumscribing the projected control system’s reach only to deals between competitively-related parties (and not to conglomerate deals)89 is to be appreciated since it again seems to be in keeping with the proportionality principle. However, the WP could have been more forthcoming in nuancing the competitor and vertically-related company concepts. Do these notions cover only actual competitors and directly vertically-related companies? Or are they to be perceived as including potential competitors and indirectly vertically-related companies. Guidance 87 For more information of how to measure these principles’ fulfilment, see C.S. Rusu, The 2014 White Paper on EU Merger Control: Added Value for (Non-Controlling) Minority Shareholdings?, 11 European Competition Journal 1, Taylor & Francis, 2015, p. 6-10. 88 Ibid, p. 5. 89 C. Riis-Madsen, S. Stephanou, K. Kehoe, Reform of the EU Merger Regulation: Looking Out for the Minority, CPI Antitrust Chronicle 1, 2012, p. 4-5.

241

Catalin Rusu in this respect seems necessary since the economic theories of harm unveil different types of potentially anti-competitive foreclosure and market entry effects for such scenarios.90 The ‘significance dimension’ is meant to reveal whether the acquirer has the ability to influence the target’s commercial policy, to access the target’s commercially sensitive information, or whether incentives to change market behaviour are present.91 The WP creates, first of all, a ‘safe harbour’ for acquisitions of shareholdings lower than 5%. This set-up induces legal certainty since the parties engaging in such deals know that their transaction will not be reviewed. Also, this may seem reasonable at least at first sight, since such transactions are often passive investments, with presumed minimal impact on competition. This finding is in keeping with the analysis of the rights conferred by domestic corporate law instruments provided in section 3 of this chapter. Also, in practice it seems unlikely that the owners of such small stakes would be able to successfully negotiate important veto rights. The bottom line is that as such low levels of shareholding are acquired, it is unlikely that influence on the behaviour of the target may be exerted; also, the financial incentives to change the acquirer’s market behaviour due to the potential financial benefits it may draw from such stakes are quite limited. Still, it seems odd that the ‘safe harbour’ level is set at such a low limit, given that the 2013 and 2014 SWDs point to a 10% shareholding ‘safe harbour’, when referring to the practice in the US,92 and also, as seen above in section 5.3 of this chapter, when reference is made to pre-existing noncontrolling minority shareholdings of 10% or higher which must be acknowledged in Form CO when notifying a concentration transaction. The risk of setting the ‘safe harbour’ at 5% may be that too many harmless deals would be caught by the review net. The (lack of) proportionality of the control system would thus be an issue. It is thus not surprising that the Support Study proposes a ‘safe harbour’ set at a 10%-15% shareholding.93 Above the 5% threshold, the WP creates two tiers for qualifying a minority shareholding as a ‘competitively significant link’: between 5% and 20%, if additional factors are present, and around 20%. First, percentage thresholds are generally useful since they create legal certainty for the market players. However, by opting for loose formulations such as ‘around 20%’94 or ‘approximately 20%’,95 the effect may be exactly the opposite. After all, imprecision when it comes to percentage thresholds or when defining ‘safe harbours’

90 See also C.S. Rusu, Targeted Transparency Control of Competitively Significant Links: Heading Towards Regulatory Overkill?, Romanian Competition Journal 1-2, 2015, p. 5. 91 Ibid. 92 2013 SWD, p. 7; 2014 SWD, par. 93. 93 Support Study, p. 5. 94 WP, par. 47 and 2014 SWD, par. 78 and 89. 95 2014 SWD, par. 91.

242

15

Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control

may result in legal uncertainty,96 exactly where one would expect otherwise. One can imagine that the Commission preferred this approach in order to prevent the circumvention of the law, by allowing itself the possibility to tackle acquisitions of shareholdings just below the stipulated threshold.97 In order to probably avoid confusion, the Support Study opts for a single threshold established at a level of a 25% shareholding, given that such a level is generally not considered to be passive.98 The WP however uses the two-tier method, given the corporate rights / cash-flow rights dichotomy, discussed in section 3 of this chapter. At around 20% shareholding, the financial interests acquired seem sufficient to trigger a change of incentives as far as competition is concerned. Regarding the corporate rights acquired, it may be that, as the Support Study suggests, a 25% shareholding could have been more appropriate, given that most domestic corporate laws directly attach important rights to shareholdings exceeding such a level. At such a level, the likelihood of material influence being exerted on the target’s behaviour may be inferred from the shareholding itself. However, if the shareholding is lower (i.e. between 5% and 20%), such influence may not be necessarily inferred from the shareholding level itself, but the presence of additional factors (listed in a non-exhaustive manner in the WP) must be established. This is where blocking de facto minorities, seats on the target’s board of directors, or access to commercially sensitive information come into play. This approach makes sense, bearing in mind that given the lower level of the shareholding, cash-flow rights play a more limited role here. The corporate rights, either conferred directly by virtue of domestic corporate laws, or negotiated by the parties in practice play a more significant role in this respect. The stronger such rights are, the higher the likelihood the minority shareholding will be brought within the realm of the ‘competitively significant links’ concept, since material influence may be exerted on the target, or the possibility of collusion may be more evident. In any case, shareholdings between 5% and 20%, supported by additional corporate rights, should then be assessed on a case-by-case basis, with a thorough view of the domestic corporate laws applicable in the respective jurisdictions, in order to identify whether they exceed the threshold for intervention by the envisaged control system. All things considered, although the ‘significance dimension’ is not completely bug-free, it provides a valuable methodology for approaching (bright-line) shareholding thresholds, on the one hand, and corporate law-related factors, on the other, while attempting to explore their dynamic interrelationship.99 Similarly, the ‘competitive dimension’, although not presented in the most crystal-clear manner in the WP, has the important value of circumscribing the reach of the control system to only those deals that are likely 96 97 98 99

2013 SWD, p. 7. See also Rusu, supra n 90, p. 6-7. Support Study, p. 5. See also Rusu, supra n 90, p. 7.

243

Catalin Rusu to have an impact on competition, while excluding legitimate investment mechanisms from the review ambit. For the sake of completeness, regarding the intervention threshold, the Commission’s jurisdiction would only be engaged when the ‘competitively significant links’ meet the turnover thresholds of the EUMR currently in place, in a similar fashion to full-blown concentrations.100

15.6.4

The Control Method

Once the intervention threshold is circumscribed, it is time to take a look at the mechanisms used by the Commission to review ‘competitively significant links’, according to the envisaged control system. The 2013 consultation documents put forward three potential alternatives regarding the procedure to be followed: extending the ex-ante notification system to non-controlling shareholdings (‘notification system’), discretionary Commission interventions, relying on the parties’ self-assessment (ex-post ‘self-assessment system’), or a simplified notification system (ex-ante ‘transparency system’).101 The WP narrows this choice down, by providing that a ‘targeted transparency system’ is probably the most appropriate for dealing with ‘competitively significant links’, since it would comply with the guiding principles outlined in section 6.2 of this chapter, it would allow potentially problematic transactions to be targeted from the outset, and it would ensure that the transactions thus identified can be effectively controlled by the Commission, even without the need for a full notification obligation.102 So, how would the Commission go about implementing this ‘targeted transparency control system’?103 The undertaking contemplating an acquisition of a minority shareholding must first selfassess whether the deal will create a ‘competitively significant link’. If so, a short information notice (containing information about the parties, the transaction and the affected markets) must be submitted to the Commission, which then has fifteen days (during which the deal cannot be implemented) to decide whether to initiate proceedings. If the Commission takes the case on, a full notification (filling in the Form CO) is required, similar to full concentrations. Then, the known EUMR ex-ante Phase I – (and potentially) the Phase II appraisal process is followed, ending with a Commission decision on 100 2013 SWD, p. 6-8. 101 2013 SWD, p. 5. 102 WP, par. 45. 103 The procedure is outlined in par. 48-52 of the WP.

244

15

Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control

the compatibility of the transaction with the Internal Market. If the Commission, however, does not act within the waiting period, the parties may implement the transaction after the fifteen-day deadline. Yet, the Commission may still have the possibility to intervene ex-post, even if the transaction is fully implemented, within a prescription period of four to six months. In such a scenario, a full notification would again be required and the investigation would conclude with a Commission decision, based on Article 6 or 8 of the EUMR, as the case may be. Does the ‘targeted transparency system’ embody the most balanced mix of proportionality, legal certainty and effectiveness when it comes to intervening in ‘competitively significant links’? The WP certainly argues so. However, to my mind, it is still debatable whether certain items of this procedure may be reconciled with the proportionality principle. While the discussion below does not aim to be exhaustive in nature, I believe that at least the waiting period and the possibility to intervene ex-post warrant further analysis. First, the waiting period is designed to allow the Member States to formulate case referral requests, but also to give the Commission some breathing space in deciding whether to take on a case or not. Yet, such a waiting period would delay the transaction’s implementation. This seems to be disproportionate, especially when comparing this set-up to that currently in place for full-blown concentrations. While acknowledging that minority shareholding acquisitions are often legitimate business transactions, often viewed as less problematic than full-blown concentrations, it seems odd to subject the former type of deals to longer and likely disruptive procedural timeframes than the latter. Then again, the parties to minority shareholding transactions may opt to voluntarily notify their deals immediately after the submission of the short information notice, in search of more legal certainty. This scenario would create an extra workload for the Commission, thus furthering the disproportionality problem. Second, the possibility to intervene ex-post in already implemented ‘competitively significant links’ does not seem to fit the picture of the already established merger control mechanisms, traditionally conceived as an ex-ante exercise. The Commission argues that the possibility to intervene retroactively would make it less tempted to start proceedings in a precautionary manner. To my mind, this argument does not stand, especially since the Commission has a generous fifteen-day timeframe (the waiting period) to decide whether the deal is worthy of investigation.104 Again, it seems odd to subject minority shareholding acquisitions to procedural requirements which seem more burdensome than those applied to full-blown concentrations. Moving on, it is true that after the deal’s implementation, complaints may be submitted by competitors with regard to

104 See also Rusu, supra n 7.

245

Catalin Rusu the transaction’s impact on the market, yet this possibility seems rather remote given that such competitors may play along with the market collusive equilibrium which may be established via the transaction at hand.105 And at the end of the day, the possibility to intervene ex-post may be eliminated altogether, should the parties opt for a full voluntary notification of their transaction before the expiration of the waiting period. In such a scenario, the standstill obligation in Article 7 of the EUMR would apply and the Commission would have to perform an ex-ante appraisal, concluding with a decision adopted either under Article 6 or 8 of the EUMR. All in all, designing a (more nuanced) procedural roadmap under the ‘targeted transparency control system’ for the assessment of potentially problematic ‘competitively significant links’ is, generally speaking, a valuable addition to the debate surrounding the legal regime of minority shareholdings in the EU. However, this control system requires further fine-tuning. Among other items which put into question the observance of the proportionality principle, the combination of a waiting period with the possibility of expost intervention reduces the parties’ legal certainty, increases their costs, and delays their deal’s implementation. In an economic environment where transparency, predictability and reduced costs are key elements in attracting business, the EU cannot really afford over-regulating the important aspect of performing business in the Internal Market.

15.7

Conclusion

Summing up, minority shareholding acquisitions are important business transactions, which can at the same time provide solid incentives for EU economic development, in the broader picture. Yet, minority shareholdings as business mechanisms are only as attractive as the benefits (financial, or of any other kind) that the acquirer draws from such deals, and the protection conferred upon minority shareholders within the target’s structure. With such benefits, though, come incentives to alter market behaviour, to collude with competitors, or to influence their policies. The question is then how to prevent or remedy such undesirable outcomes. The existing EU competition law tools discussed in this chapter are apt, but only to a certain extent, to handle this task. The projected EUMR amendment to bring non-controlling minority stakes within the merger control appraisal realm is designed to remedy the existing enforcement gap. While doing so, it seems to me that reliance on economic theory and also keeping smooth consistency with the rights conferred by domestic corporate laws are key items to keep into account, in order to create a proportionate, transparent and efficient EU regime for assessing minority shareholdings. The minority shareholdings discussion in the EU has come a long

105 For a more detailed analysis of this point, see Rusu, supra n 90.

246

15

Minority Shareholdings in the EU: Between Economics, Corporate Law, Antitrust and Merger Control

way, and although significant progress has been made in the recent past (at least on the competition law front), it is far from over. ‘Balance’ seems to me to be the keyword for the future steps to be taken: a balance between the need to tackle anti-competitiveness, legal certainty, administrative burdens, costs, and predictability; and for that matter, a balance between the available economic, corporate law and competition law instruments.

247

16

Cross-Border Conversions after Vale – the German Experience

Christoph Teichmann

16.1

Introduction

A cross-border conversion is the legal operation whereby a company incorporated under the law of a particular state reincorporates under the law of another state.1 The main objective of such an operation consists of changing the applicable company law.2 Conversion means that the same legal entity continues to exist.3 To a certain extent, the crossborder conversion of a company is comparable to a change of nationality for natural persons.4 Whereas the legal status of the person will change, the identity of the person will remain the same; contracts and other legal relationships entered into by that person will continue to exist. As will be further elaborated in section 16.2, the cross-border conversion of a company is to be regarded as a means of establishment protected by Articles 49 and 54 TFEU (Treaty on the Functioning of the European Union). In the cases of Cartesio5 and Vale6, the European Court of Justice held that neither the Member State of origin nor the Member State of destination may prohibit a conversion from the company law of one Member State to another. There is, however, no secondary law governing the procedure for such a cross-border conversion. In real-life cases, therefore, the cross-border conversion will have to follow a long and winding road. The company has to convince the national authorities of both states involved to accept the cross-border conversion even if there are no provisions in national company law expressly regulating such an operation.

1

2 3 4 5

6

See amongst others: Gerner-Beuerle/Mucciarelli/Schuster/Siems, Journal of Corporate Law Studies (JoCLS) 2017, DOI: 10.1080/14735970.2017, 1349428, p. 4; Stiegler, Grenzüberschreitende Sitzverlegung nach deutschem und europäischem Recht, 2017, p. 39 ff.; Szydło, European Company and Financial Law Review (ECFR) 2010, 414, 415. Gerner-Beuerle/Mucciarelli/Schuster/Siems, see above (fn 1), p. 4; Szydło, ECFR 2010, 414, 415. Mörsdorf, Common Market Law Review (CMLR) 2012, 629, 630; Szydło, ECFR 2010, 414, 415. See Borg-Barthel, International and Comparative Law Quarterly (ICLQ) (62) 2013, 503, 509 f. ECJ decision of 16.12.2008 – C-210/06, ECLI:EU:C:2008:723 = ECR 2008, I-9641; thereto Korom/Metzinger, ECFR 2009, 125; Mörsdorf, CMLR 2012, 629, 633 ff.; Teichmann, Zeitschrift für Wirtschaftsrecht (ZIP) 2009, 393. ECJ decision of 12.07.2012 – C-378/10, ECLI:EU:C:2012:440 = NJW 2012, 2715; thereto Hansen, ECFR 2013, 1; Biermeyer, CMLR 2013, 571; McEleavy, ICQLQ (62) 2013, 503.

249

Christoph Teichmann Germany is amongst the numerous Member States that do not have cross-border conversion rules in their national company law. Consequently, companies are struggling hard to convince commercial registers and courts to accept the cross-border conversion or to discover the legal requirements that are deemed necessary by the competent registers and courts. In fact, the actors will have to apply a ‘trial and error’ approach to find out what procedure the competent commercial register would like to apply in their case.7 Section 16.3 therefore takes a closer look at the cross-border conversion from the point of view of German company law. It will introduce the reader to the German case law so far. Section 16.4 will draw a conclusion and describe the steps which have to be taken for carrying out a cross-border conversion with Germany being the state of destination (inbound) or the state of origin (outbound). This analysis is dedicated to Adriaan Dorresteijn, who was one of the first scholars to acknowledge the European influences on company law and to whom the author of these lines owes a debt of gratitude for having been invited to share this academic passion.8

16.2

16.2.1

Conversion as a Means of Cross-Border Establishment

Sevic (2005)

If we take a closer look at European case law, we see that the basic principles applying to cross-border conversions were already elaborated in the Sevic judgment.9 Security Visions Concept SA, a public company incorporated in Luxembourg, intended to merge with SEVIC Systems AG, a public company incorporated in Germany. The merger contract provided for the dissolution without liquidation of the Luxembourg company and the transfer of all its assets to the German company.10 The competent German court (Amtsgericht) rejected the application for the registration of the merger. It argued that the German law on transformations provided only for domestic mergers, that is for two companies which are both incorporated in Germany.11

7

A public consultation carried out by the European Commission revealed that among the respondents who gave an opinion on the question whether ECJ case law provides an adequate solution for the cross-border transfer of registered offices, only 28 % answered positively while 43 % stated that the VALE judgement did not provide an adequate solution for the cross-border transfer of registered offices, see Summary of responses to the Public Consultation on Cross-border transfers of registered offices of companies, September 2013, p. 11, http://ec.europa.eu/internal_market/consultations/2013/seat-transfer/docs/summary-ofresponses_en.pdf (26.6.2017). 8 See Dorresteijn/Kuiper/Morse, European Corporate Law, 1995, with the author as a co-author since the second edition 2011 (since then Dorresteijn/Monteiro/Teichmann/Werlauff). 9 ECJ decision of 13.12.2005 – C-411/03 (Sevic), ECLI:EU:C:2005:762 = ECR 2005, I-10805. 10 ECJ (Sevic), see above (fn. 9), marg. No. 6. 11 ECJ (Sevic), see above (fn. 9), marg. No. 7.

250

16

Cross-Border Conversions after Vale – the German Experience

The first important step was to acknowledge that such an operation falls under the European freedom of establishment (former Articles 43 and 48 EC, today Articles 49 and 54 TFEU).12 According to the European Court of Justice, the cross-border merger, like other company transformation operations, responded to the needs for cooperation and consolidation between companies established in different Member States.13 The Court stressed that the merger ‘makes it possible, within the framework of a single operation, to pursue a particular activity in new forms and without interruption, thereby reducing the complications, times and costs associated with other forms of company consolidation such as those which entail, for example, the dissolution of a company with liquidation of assets and the subsequent formation of a new company with the transfer of assets to the latter.’14 This reasoning could also be applied, almost word for word, to the cross-border conversion which permits the pursuit of a particular activity ‘within the framework of one single operation’, thereby avoiding the time-consuming and costly procedure of dissolving the existing company and forming a new company. Germany, at the time of the Sevic judgment, was in breach of European law because it established ‘a difference in treatment between companies according to the internal or cross-border nature of the merger, which is likely to deter the exercise of the freedom of establishment’.15 The Court further stressed that ‘the existence of harmonisation rules cannot be made a precondition for the implementation of the freedom of establishment’.16 It is common ground that restrictions on the freedom of establishment may be justified by imperative reasons in the public interest.17 Restrictions on cross-border operations may also be justified by imperative reasons in the public interest such as the protection of the interests of creditors, minority shareholders and employees, the effectiveness of fiscal supervision and the fairness of commercial transactions.18 To generally refuse the registration of a cross-border merger, however, went beyond what is necessary to protect those interests.19 After the Sevic ruling, it was to be expected that these conclusions would also apply to other types of cross-border operations.20 But national courts were reluctant to acknowledge these consequences. It took two more steps taken by the European Court to pave the

12 13 14 15 16 17

ECJ (Sevic), see above (fn. 9), marg. No. 16. ECJ (Sevic), see above (fn. 9), marg. No. 19. ECJ (Sevic), see above (fn. 9), marg. No. 21. ECJ (Sevic), see above (fn. 9), marg. No. 22. ECJ (Sevic), see above (fn. 9), marg. No. 26. ECJ decision of 30.09.2003 – C-167/01 (Inspire Art), ECLI:EU:C:2003:512 = ECR 2003, I-10155, marg. No. 123, 133. 18 ECJ (Sevic), see above (fn. 9), marg. No. 28. 19 ECJ (Sevic), see above (fn. 9), marg. No. 30. 20 Teichmann, ZIP 2009, 393, 401 ff.

251

Christoph Teichmann way for cross-border conversions: the cases of Cartesio (see below under 2) and Vale (see below under 3).

16.2.2

Cartesio (2008)

The Cartesio judgment already indicated the applicability of the European freedom of establishment to cross-border conversions.21 Cartesio Oktató és Szolgáltató bt was a limited partnership under the law of Hungary and filed an application with the commercial court for the registration of the transfer of its seat (in the meaning of its central administration) to Italy.22 This application was rejected on the ground that Hungarian law did not allow a company incorporated in Hungary to transfer its seat abroad while continuing to be subject to Hungarian law.23 It is important to note, however, that Cartesio did not want to change its legal situation and, in particular, did not want to convert into an Italian partnership or company. It wanted to retain its status as a partnership governed by Hungarian law.24 In the light of these facts, the ECJ acknowledged that a Member State has the power to define the connecting factor required of a company governed by its own national law.25 Hungary therefore had the power not to permit a company or partnership governed by its law to retain that status if the company or partnership intends to move its seat to the territory of another Member State,26 provided that the central administration as a connecting factor is generally required by Hungarian law from partnerships or companies that are governed by the law of Hungary. The ECJ, however, distinguished the case at hand, where the company wanted to retain its legal status in Hungary, from the situation where a company governed by the law of one Member State moves to another Member State with a change in the applicable national law. The court continued: ‘In the latter situation the company is converted into a form of company which is governed by the law of the Member State to which it has moved.’27 In such a situation it would not be justified to require the winding up or 21 ECJ decision of 16.12.2008 – C-210/06 (Cartesio), ECLI:EU:C:2008:723 = ECR 2008, I-9641; thereto Korom/ Metzinger, ECFR 2009, 125; Mörsdorf, CMLR 2012, 629, 633 ff.; Teichmann, ZIP 2009, 393. 22 ECJ (Cartesio), see above (fn. 21), marg. No. 23. The ‘seat’ according to Hungarian law was to be the place where the company’s central administration is situated (see marg. No. 17). 23 ECJ (Cartesio), see above (fn. 21), marg. No. 24. 24 ECJ (Cartesio), see above (fn. 21), marg. No. 99 (the ECJ is talking about retaining the status as a ‘company’ which is misleading since Cartesio was a limited partnership under Hungarian law and obviously wanted to retain this status). 25 ECJ (Cartesio), see above (fn. 21), marg. No. 110. 26 ECJ (Cartesio), see above (fn. 21), marg. No. 110. 27 ECJ (Cartesio), see above (fn. 21), marg. No. 111.

252

16

Cross-Border Conversions after Vale – the German Experience

liquidation of that company by preventing that company from converting itself into a company governed by the law of another Member State.28 Such a barrier to the actual conversion of a company would constitute a restriction of the freedom of establishment of the company concerned.29 But the Court added a somewhat cryptic consideration. The conversion into a company governed by the law of another Member State should only be possible ‘to the extent that it is permitted under that law to do so.’30 From now on, national authorities in a Member State of destination where the cross-border conversion was not regulated could argue that the cross-border conversion was not permitted under their own national law and consequently not possible at all. It took another European case to clarify the interconnection between cross-border conversions and the freedom of establishment; this was to be the Vale case.

16.2.3

Vale (2012)

Vale Costruzionie S.r.l. was an Italian company that wished to transfer its seat to Hungary and to continue its operations there as a company governed by Hungarian law. This time, the Italian company clearly expressed its wish to change the applicable company law and to become a company governed by the law of Hungary. The Hungarian commercial court, nevertheless, rejected the application to register the company Vale Építési kft as the successor in law of the former Italian company.31 It argued that such a registration was not possible under Hungarian law and thereby simply rejected the possibility of continuing the existence of a company incorporated under the law of an EU Member State by converting into a legal form of another Member State. If the company could not be registered in Hungary as the successor of an Italian company, its existing rights and obligations might be at stake and it could not demonstrate its legal continuity to third parties. These consequences amount to a de facto dissolution of the Italian company, a consequence which had already been classified as an unjustified restriction in the Cartesio case. The European Court of Justice applied the same argument as in the Sevic case: An operation that is permitted for national companies must not be excluded for companies incorporated in other Member States. National legislation which enables national companies to convert, but does not allow companies governed by the law of another Member

28 29 30 31

ECJ (Cartesio), see above (fn. 21), marg. No. 112. ECJ (Cartesio), see above (fn. 21), marg. No. 113. ECJ (Cartesio), see above (fn. 21), marg. No. 112. Critical also Szydło, ECFR 2010, 414, 428. ECJ decision of 12.07.2012 – C-378/10 (Vale), ECLI:EU:C:2012:440, marg. No. 10.

253

Christoph Teichmann State to do so, treats companies differently according to whether the conversion is domestic or is of a cross-border nature. This amounts to a restriction of the European freedom of establishment.32 A justification of this restriction was rejected, like in Sevic, in the light of the fact that Hungary precluded cross-border conversions in a general manner.33 The Court came to the following conclusion: ‘Articles 49 TFEU and 54 TFEU require Member States which make provisions for the conversion of companies governed by their national law to grant the same possibility to companies governed by the law of another Member State which are seeking to convert to companies governed by the law of the first Member State.’34 The Court even offered some guidelines as to how the legal rules for cross-border conversion could be found in the absence of European secondary law. This will be discussed in more detail below when we deal with the cases that have been decided so far by German courts.

16.3

Cross-border Conversions in Germany

In Germany, companies had to wait for the Vale decision to overcome the traditional resistance to cross-border conversions (see below under 1). Based on the guidance given by Vale, the appropriate procedure for cross-border conversions may be structured along the lines of the domestic conversion, the cross-border merger and the transfer of the registered office of a European company (see below under 2). In this respect it is important to note, however, that inbound cross-border conversions (see below under 3) may require different treatment than outbound conversions (see below under 4).

16.3.1

The Development of German Case Law

a) Traditional Resistance to Cross-border Conversions In German case law, there was a long-standing tradition not to accept cross-border conversions. It is interesting to analyse this case law against the time line of European case law. Prior to Sevic (2005), German courts referred to the Daily Mail case of 1988 where the European Court of Justice held that companies are ‘creatures of national law’35 and had no right to transfer their seat to another Member State and at the same time to continue their existence as a company governed by the law of the Member State of origin36. Based on this, cross-border conversions were rejected, for instance, in 2001 by the 32 33 34 35 36

ECJ (Vale), see above (fn. 31), marg. No. 36. ECJ (Vale), see above (fn. 31), marg. No. 40. ECJ (Vale), see above (fn. 31), marg. No. 46. ECJ decision of 27.09.1988 – C-81/87 (Daily Mail), ECLI:EU:C:1988:456, marg. No. 19. ECJ (Daily Mail), see above (fn. 35), marg. No. 24.

254

16

Cross-Border Conversions after Vale – the German Experience

Courts of Appeal in Hamm37 and Düsseldorf38 as well as in 2004 by the Court of Appeal in Brandenburg39. The Sevic case of 2005, even though laying the ground for a cross-border extension of all corporate operations that are provided for domestically, did not really change the picture. Two years after Sevic, in 2007, the Court of Appeal in Munich still rejected a cross-border conversion without feeling the need to ask for a preliminary ruling by the European Court of Justice.40 The Cartesio judgment in 2008 was not sufficient to change German judges’ minds either. Even as late as in February 2012, the Court of Appeal in Nuremberg still rejected an application for cross-border conversion41 – seven years after Sevic, four years after Cartesio and with the Vale case already pending42. It should be conceded, however, that the Court of Appeal in 2012 at least discussed the possibility that European Union law might force Germany to accept cross-border conversions. It left the issue open with a very sophisticated argument: Even if it was to be acknowledged as a principle that domestic conversions should be extended to cross-border conversions, the company in the case at hand had not fulfilled the necessary requirements for such a cross-border conversion. That is slightly unfair against the background of German law not offering any explicit rules for cross-border conversions and given the fact that the academic literature of the time was still debating what the appropriate procedure would look like. It may not be the duty of the courts to fill the gaps left open by the legislature, but this overall attitude of Member States like Germany means that companies wishing to convert cross-border are left without guidance. They are forced to shoot in the dark and to start their operations without knowing what is expected of them. They face the risk that their application will be rejected for the simple reason that they did not find the philosopher’s stone which could have told them the correct procedure.

b) Vale as the Turning Point It was only after the Vale judgment, rendered in July 2012, that the picture changed. The Court of Appeal in Nuremberg, which had just rejected a cross-border conversion a few months earlier, was soon offered the opportunity to change its view. According to the facts reported in the two judgments, it can be assumed that it was the same company 37 Oberlandesgericht Hamm decision of 01.02.2001 – 15 W 390/00, Neue Juristische Wochenschrift (NJW) 2001, 2183. 38 Oberlandesgericht Düsseldorf decision of 26.03.2001 – 3 Wx 88/01, NJW 2001, 2184. 39 Oberlandesgericht Brandenburg decision of 30.11.2004 – 6 Wx 4/04, GmbH-Rundschau (GmbHR) 2005, 484. 40 Oberlandesgericht München decision of 04.10.2007 – 31 Wx 36/07, GmbHR 2007, 1273. 41 Oberlandesgericht Nürnberg decision of 13.02.2012 – 12 W 2361/11, Neue Zeitschrift für Gesellschaftsrecht (NZG) 2012, 468 (= Betriebs-Berater (BB) 2012, 988, with a note by C. Schneider). 42 The Vale procedure started in 2010.

255

Christoph Teichmann applying for cross-border conversion once again. The commercial register was still reluctant and did not register the operation. But this time, the Court of Appeal granted relief. And so, based on the Vale judgment, the Court of Appeal in Nuremberg was the first German court to effectively acknowledge a cross-border conversion.43 The Courts of Appeal in Berlin and Frankfurt were to follow in 201644 and 201745. For our further analysis, we can also draw on an article published by an Austrian judge who reported having successfully converted a German private company into an Austrian private company.46

16.3.2

Guidelines for Cross-border Conversions to be found in European and National Law

Once the principles elaborated by Vale had been acknowledged in Germany, the question arose as to how the cross-border conversion should be carried out in practice.47 First of all, the indications given by the European Court of Justice in the Vale judgment will have to be taken into account (see below under a). These indications are helpful but they do not fully determine the procedure to be followed in the case of a cross-border conversion. The question remains as to what rules should be applied to correctly fulfil the legal requirements of a change in the legal form. The ECJ does not force Member States to be more favourable to companies incorporated under the law of another Member State than to companies incorporated under their own national law. Moreover, the ECJ acknowledges that the Member State of destination may apply its rules on the incorporation and foundation of a new company, except for the fact that the legal continuity of the company should not be put into question. It therefore seems appropriate to draw on existing rules governing domestic conversions when carrying out the cross-border conversion (see below under b). It may also sound reasonable to have a look at the provisions governing

43 Oberlandesgericht Nürnberg decision of 19.06.2013 – 12 W 520/13, NZG 2014, 349 with a note by Stiegler; GmbHR 2014, 96 with a note by Wachter. 44 Kammergericht Berlin, 21.3.2016 – 22 W 64/15, NZG 2016, 834 with a note by Stiegler; thereto Zwirlein, ZGR 2017, 114. 45 Oberlandesgericht Frankfurt, 3.1.2017 – 20 W 88/15, GmbHR 2017, 392 with a note by Stiegler; thereto Teichmann, ZIP 2017, 1190. 46 Jennewein, Der Gesellschafter (GesRZ) 2016, 277. 47 For the most recent accounts of cross-border conversions from a practitioner’s perspective see Knaier, in: Limmer/Hertel/Frenz/Mayer, Würzburger Notarhandbuch, 5th ed. 2017, part 5, chapter 6, marg. No. 352 ff. (in print) as well as Limmer, in: Limmer, Handbuch der Unternehmensumwandlung, 5th ed. 2016, part 6, chapter 2, marg. No. 16 ff. Out of the numerous articles and monographies in recent years see: Hushahn, Rheinische Notar-Zeitschrift (RNotZ) 2014, 137, 138; Heckschen, ZIP 2015, 2049; Teichmann, in: Herrler (editor), Aktuelle gesellschaftsrechtliche Herausforderungen, 2016, p. 111; and monographic Behme, Rechtsformwahrende Sitzverlegung und Formwechsel von Gesellschaften über die Grenze, 2015; Frank, Formwechsel im Binnenmarkt, 2016; Stiegler, Grenzüberschreitende Sitzverlegung nach deutschem und europäischem Recht, 2017.

256

16

Cross-Border Conversions after Vale – the German Experience

other cross-border operations such as the cross-border merger and the cross-border transfer of the registered office of a European Company (see below under c).

a) Guidelines offered by the Vale Judgment The Vale judgment offers important guidelines regarding the legal provisions that govern the operation of a cross-border conversion. First of all, the absence of European secondary law does not justify a rejection of a cross-border conversion.48 Secondly, the provisions which enable the cross-border conversion can only be found in national law. In this respect, the European Court of Justice starts with the assumption that cross-border conversions presuppose the consecutive application of two national laws.49 This can be fully endorsed. It reflects the approach which is taken by national company law. The procedure of a domestic conversion consists of combining the rules governing the existing legal form and the provisions governing the foundation of the new legal form.50 Since the operation presupposes a consecutive application of two national laws, the national law of the Member State of origin and the national law of the Member State of destination, both have to be taken into account.51 These two Member States are in principle free to determine the connecting factor required of a company which is to be regarded as incorporated under its national law.52 Consequently, the company wishing to convert cross-border will have to give up the connecting factor required by its Member State of origin and will then have to comply with the connecting factor required by the Member State of destination. The Member State of destination also has the power to determine the rules governing the incorporation and functioning of the company resulting from the cross-border conversion.53 After the cross-border conversion, the company will be governed solely by the national law of the Member State of destination, which determines the connecting factor required and the rules governing its incorporation and functioning.54 The wording in Cartesio, whereby the cross-border conversion to the host Member State was only possible ‘to the extent that it is permitted under that law to do so’, is clarified by Vale in the sense that the Member State of destination may not generally exclude the cross-border conversion but may apply its national conditions laid down for the incorporation of companies in general.55 48 49 50 51 52 53 54 55

ECJ (Vale), see above (fn. 31), marg. No. 38. ECJ (Vale), see above (fn. 31), marg. No. 37. See below under 16.4 for domestic conversions in Germany. ECJ (Vale), see above (fn. 31), marg. No. 43. ECJ (Vale), see above (fn. 31), marg. No. 29. ECJ (Vale), see above (fn. 31), marg. No. 30. ECJ (Vale), see above (fn. 31), marg. No. 31. ECJ (Vale), see above (fn. 31), marg. No. 32.

257

Christoph Teichmann In the Member State of destination, the conversion leads to the incorporation of a company governed by the law of that Member State.56 According to the principle of equivalence, cross-border operations may not be treated less favourably than similar situations under national law.57 Based on the principle of effectiveness, the Member State of destination will have to take due account of any certificate issued by the Member State of origin and certifying that the company wishing to convert cross-border has complied with the conditions laid down by that Member State.58

b) German Act on Transformations (Umwandlungsgesetz) It follows from European case law that Member States which offer provisions for domestic conversions should grant the same possibility to companies governed by the law of other Member States. The ECJ in Vale also considered that a Member State should not treat companies which are incorporated under the law of another Member State less favourably than domestic companies. Structuring the cross-border conversion along the lines of the domestic conversion seems, therefore, to be an appropriate solution. The domestic conversion is regulated in the German Act on Transformations (Umwandlungsgesetz – UmwG) which offers a coherent set of rules for any type of domestic restructuring, including conversions, mergers and divisions. It also regulates the cross-border merger59, based on the tenth company law directive60. But it does not provide rules for cross-border conversions. Based on the assumption that Member States which offer a certain procedure domestically should also extend it to cross-border operations, the provisions on domestic conversions may be applied, mutatis mutandis, to the cross-border conversion, too. Many authors follow this line of argument and draw on the domestic conversion as a blueprint for elaborating the cross-border conversion procedure by way of analogy.61 It is worth mentioning that the Act on Transformations offers a wide range of domestic conversions, starting from the conversion of a private company to a public company, accompanied by conversions from co-operative societies to either private or public companies or vice versa. Even partnerships may convert into either private or public companies and vice versa. Based on the general principles stated by the ECJ, Germany should allow all these conversions for cross-border cases, too.

56 57 58 59 60 61

ECJ (Vale), see above (fn. 31), marg. No. 51. ECJ (Vale), see above (fn. 31), marg. No. 54. ECJ (Vale), see above (fn. 31), marg. No. 61. §§ 122a-l Act on Transformations cover the specialties of cross-border mergers. Directive 2005/56/EG of 26.10.2005, OJEU of 25.11.2005, L 310. For cases of inbound conversion see Schall, Zeitschrift für die gesamte Privatrechtswissenschaft (ZfPW) 2016, 407, 429; Seibold, ZIP 2017, 456, 458 f.; for cases of outbound conversion see Heckschen, ZIP 2015, 2049, 2059.

258

16

Cross-Border Conversions after Vale – the German Experience

One may argue, however, that the provisions on cross-border mergers are better suited to serve as a blueprint, insofar as they take into account the cross-border nature of the operation.62 It may constitute a specific disadvantage for minority shareholders or creditors to find themselves being dragged against their will into a new legal environment. Given the fact that company law is not fully harmonised within the European Union, a change in the applicable law may considerably change the legal status of the shareholders and the protection of creditors. This is the reason why the German provisions on crossborder mergers offer minority shareholders a right of withdrawal against cash compensation and creditors a right to claim securities if the payment of the debt is jeopardized by the cross-border transaction.63 There are good reasons to extend these remedies to crossborder conversions, since the interests involved are identical.

c) Cross-border Transfer of a European Company A procedure which is similar to the cross-border conversion can be found in the Regulation on the European Company (the ‘SE Regulation’).64 According to Art. 8 SE Regulation, the European Company has the option to transfer its registered office to another Member State. This is not a cross-border conversion in the proper sense since the European Company incorporated in one Member State will still be a European Company even after having transferred its registered office to another Member State. But there are similarities with the cross-border conversion of a national company. The cross-border conversion of a national company results in a change of the applicable company law. In contrast, the applicable company law of the European Company is determined by the SE Regulation which is directly applicable in every Member State. In many areas of company law, however, the SE Regulation does not offer substantive rules but rather refers to the national company law of the Member State where the SE is registered. This is, in a general way, expressed by the catch-all clause in Article 9 SE Regulation which is followed by dozens of special references scattered all over the SE Regulation. It follows that the company law applicable to a European company, to a great extent, will be determined by the national law of the Member State where the European company has its registered office. Hence, a transfer of the registered office will in many respects lead to a change in the applicable company law rules. The ECJ in the Cartesio decision rightly paralleled the transfer of the registered office of a European company to a change in the applicable company law.65 One could argue that, in the absence of EU secondary law for the cross-border conversion of national companies, it would be the best solution to draw 62 See Teichmann in Herrler (editor), (fn. 47), p. 111, 124 ff. 63 § 122i Act on Transformations, thereon Knaier, (Fn. 47), 5th ed. 2017, part 5, chapter 6, marg. No. 399 (in print) and Limmer, (Fn. 47), 5th ed. 2016, part 6, chapter 3, marg. No. 81 ff. 64 Regulation (EC) No. 2157/2001, OJEU of 10.11.2001, L 294/1. 65 ECJ (Cartesio), see above (fn. 21), marg. No. 117.

259

Christoph Teichmann on the existing European rules which can be found in the SE Regulation when discussing the proper procedure for a cross-border conversion. The SE Regulation even offers Member States the possibility to protect the interests of minority shareholders and creditors who may be affected by the change of the applicable company law. The German Act on the Implementation of the European Company (SE-Ausführungsgesetz) makes use of these options and grants minority shareholders who opposed the transfer of the registered office a right of withdrawal against cash compensation.66 Creditors may claim security in cases where their claims are endangered by the cross-border transfer of the registered office.67

16.3.3

Cross-border Conversions to Germany (inbound)

a) Court of Appeal of Nuremberg (2012) In order to describe the shift in German case law, our analysis starts with the last case where the cross-border conversion was still rejected.68 In 2011, a private company incorporated in Luxembourg (société à responsabilité limitée – s.a.r.l.) applied at the German commercial register in Fürth to convert to German law and to be registered as a German private company (Gesellschaft mit beschränkter Haftung – GmbH). It is not by accident that the company came from Luxembourg. The law of Luxembourg allows for cross-border conversions and therefore offers more legal certainty than Member States such as Germany whose written law does not acknowledge this operation. Based on the law of Luxembourg, the shareholders of the company had passed a unanimous resolution to transfer the registered office and headquarters to Germany and thereby to convert into a German company. The shareholders then engaged a German notary, which seems to be fully appropriate in order to comply with the company law rules of both the Member State of origin and the Member State of destination. In the notarial deed, the shareholders once more passed the conversion resolution including new articles of association taking into account the legal requirements of the German Act on Private Companies (GmbH-Gesetz). The commercial register as well as the competent lower court (Amtsgericht) nevertheless rejected the application arguing that a cross-border conversion was not possible under German law. The parties appealed to the Court of Appeal (Oberlandesgericht Nürnberg) which rejected the appeal. The Court of Appeal, too, argued that German law did not provide for a cross-border conversion. The German Act on Transformations (Umwandlungsgesetz) only regulates national conversions and, based on the tenth company law directive, the cross-border merger, but not the cross-border conversion. European case 66 See § 12 SE-Ausführungsgesetz which is based on Art. 8 para. 5 SE Regulation. 67 § 13 SE-Ausführungsgesetz, based on Art. 8 para. 7 SE Regulation. 68 Oberlandesgericht Nürnberg, see above (fn. 41).

260

16

Cross-Border Conversions after Vale – the German Experience

law, as the Court of Appeal interpreted it, would not force Germany to accept the crossborder conversion. It claimed that Cartesio only addressed the Member State of origin and not the Member State of destination. The Member State of origin might not prevent a company from converting itself into a company governed by the law of another Member State, but this was only admissible ‘to the extent that it is permitted under that law to do so’69. Since Germany as the Member State of destination did not permit the cross-border conversion, the rationale of Cartesio would not apply. The Court of Appeal acknowledged that, based on the Sevic case, the Member State of destination might be obliged to allow for the cross-border conversion insofar as it offers the same operation for national companies. The Court also mentioned the Vale case which was already pending at the time. But it concluded that even if Germany was obliged to allow the cross-border conversion, the foreign company would have to comply with the German rules on national conversions. It concluded that this was not the case and therefore rejected the appeal.

b) Court of Appeal of Nuremberg (2013) In July 2012 the ECJ rendered the Vale decision where it applied the general principle it had already elaborated in the Sevic case. Shortly afterwards, the same Luxembourg private company again knocked on the door of the Court of Appeal in Nuremberg.70 The application had again been rejected by the commercial register and by the court of first instance (Amtsgericht), even though, in the meantime, the European Court of Justice had rendered its Vale judgment.71 One procedural problem consisted of the fact that the commercial register in Luxembourg had already registered the transfer of the registered office to Germany. The court of first instance therefore argued that the Luxembourg company had ceased to exist and that, consequently, a German private company to be registered in Germany could not be regarded as being the identical legal person. The applicants again appealed to the Court of Appeal in Nuremberg. The Court of Appeal now endorsed the principle that cross-border conversions are covered by the European freedom of establishment.72 The restrictive language of the German Act on Transformations (being only applicable to ‘legal entities having their seat inside Germany’) should no longer be an obstacle and should be construed in such a way that it does not exclude companies incorporated in other Member States from carrying out cross-border conversions to Germany.73 The Court even overcame the problem that the

69 See ECJ (Cartesio), see above (fn. 21), marg. No. 112. 70 Oberlandesgericht Nürnberg, see above (fn. 43). According to the facts reported in the case, the private company seems to be exactly the same one that had already been the subject of the first decision, as mentioned above, by the High Court of Nuremberg. 71 AG Fürth decision of 27.02.2013 – 61 AR 442/12, not published. 72 OLG Nürnberg, see above (fn. 43). 73 OLG Nürnberg, see above (fn. 43).

261

Christoph Teichmann company had already been deleted in Luxembourg. In the light of European Union law, this fact should not lead to a rejection of the cross-border conversion, because otherwise the conversion in the case at hand would not be possible at all. Consequently, it ordered the commercial register to register the former Luxembourg private company as a German private company (GmbH). This judgment seemed to be reassuring and encouraging for corporate lawyers. But daily life in the Internal Market can sometimes be hard. In company law seminars held by the author after the publication of the judgment, practising lawyers in Frankfurt told him that they had immediately tried to repeat the successful cross-border conversion and to convert another foreign company in the same commercial register which had already been forced by the Court of Appeal in Nuremberg to register the first cross-border conversion. When they contacted the commercial register, however, they were deeply disappointed. The person answering the phone simply told them that they would never do this again. Of course, this attitude could once again lead to the next appeal to the Court of Appeal. But the lawyers’ client was not at all eager to start its corporate transaction with litigation. Hence, the lawyers dropped the idea of the cross-border conversion. This anecdotal evidence underpins the usefulness of European secondary law. Registrars and other national authorities would not usually reject an application that is based on provisions expressly enshrined in their written national law. But they have ample leeway to make life difficult for applicants, if there is no written procedure on which they can rely. Cross-border operations, however, will simply not be undertaken if they depend on the goodwill of the competent authorities. Legal certainty by means of a clear procedure is required. 74

c) Court of Appeal of Berlin (2016) In a case which was decided in 2016 by the Court of Appeal of Berlin (Kammergericht Berlin), a French private company converted into a German private company.75 The court of first instance (Amtsgericht Charlottenburg) acknowledged that in principle it should be possible to carry out a cross-border conversion based on ECJ case law. But the court did not accept the procedural steps the company had applied. The French private company had first complied with the French rules on cross-border conversions. 74 Commentators in German academic literature frequently come to the conclusion that European secondary law was needed in order to render the cross-border conversion effective (see Stiegler, NZG 2014, 352, note to OLG Nürnberg). See also J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate?, study upon request of the JURI committee of the European Parliament, June 2016, PE 559.960, http://www.europarl.europa.eu/RegData/etudes/STUD/2016/556960/IPOL_STU(2016)556960_EN.pdf (26.01.2017). 75 Kammergericht Berlin, see above (fn. 44).

262

16

Cross-Border Conversions after Vale – the German Experience

This was confirmed by a certificate issued by the French commercial register. The company had also tried to follow the German rules on the foundation of a German private company. It raised its capital to an amount of more than 25,000 Euros. And it redrafted its articles of association in accordance with the German GmbH-Gesetz; in this respect it correctly engaged a German notary in order to comply with the requirement of a notarial deed for the articles of association (see § 3 (1) GmbH-Gesetz). The court of first instance, however, argued that the company should have applied – by analogy – the provisions on the cross-border transfer of the registered office of a European company (Societas Europaea – SE). The company then appealed to the Court of Appeal in Berlin (Kammergericht Berlin). The appeal was successful. The Court of Appeal argued that an analogy to the transfer of the registered office of a European company was not appropriate because the company involved in the case was a private company whereas the provisions governing the SE were designed for the use of public companies.76 The judgment of Kammergericht Berlin deserves approval insofar as it finally ordered the commercial register to accept the cross-border conversion; but the reasons given for this decision are not fully convincing. The Court argued that the European company is a public company whereas the company wishing to convert was a private company. But this is not the core of the problem. Had the French company been a public company, German courts should have nevertheless not applied the SE Regulation. This is for the simple reason that the steps of the conversion procedure which are carried out in France are governed by French law. It is not the business of German courts to establish legal requirements for the procedure which is to be carried out in France and to be scrutinized by French authorities. The French commercial register had issued a certificate conclusively attesting the proper fulfilment of the legal steps required by French law. German courts should simply accept this certificate and not impose additional requirements. This is the real justification for not applying the SE Regulation to an inbound conversion. German courts, in the case of an inbound conversion, only have to apply, mutatis mutandis, the German provisions on the incorporation of a new private company. And these are obviously not to be found in the SE Regulation but in the national law on private companies. The French company had complied with these requirement and therefore was to be reregistered as a German private company.

16.3.4

Cross-border Conversions to other EU Member States (outbound)

a) Amtsgericht Landshut (2016) A successful outbound cross-border conversion – from Germany to Austria – has been reported by the Austrian judge Jennewein77 who has been involved in the case. Jennewein 76 Kammergericht Berlin, see above (fn. 44), NZG 2016, 834, 834. 77 GesRZ 2016, 277.

263

Christoph Teichmann reports that a German private company had decided to convert into an Austrian private company. The company had been incorporated in Germany in the company register in the Bavarian town Landshut, actually very close to the German-Austrian border. The lower court in Landshut which is competent to deal with the company register had issued a document certifying that, under German law, the required legal steps had been fulfilled. The Austrian judge, however, required additional safeguards which he derived from the Austrian law on private companies. This is correct, since the Member State of destination may apply its national requirements for the incorporation of a new company. The German company subsequently complied with these requirements and so the cross-border conversion could finally be successfully registered.

b) Court of Appeal of Frankfurt (2017) The most recent outbound case refers to the cross-border conversion of a German private company into an Italian private company.78 The company applied to the company register in Frankfurt for the registration of the cross-border conversion. The registrar initially rejected the application arguing that German law did not regulate such a procedure. The notary who represented the company objected by referring to the Vale case as well as to the recent decision rendered by the Court of Appeal of Nuremberg (see above under 16.3.3.b). This finally convinced the registrar to generally accept the cross-border conversion. Now the registrar checked the documents filed by the company and found several aspects where the company had not complied with the German provisions on domestic conversions which should in principle be applied to the cross-border conversion. She pointed out, in particular, that the shareholders’ resolution did not fulfil the usual requirements for a conversion. In the meantime, however, the Italian register of destination had already registered the cross-border conversion. Now the question of whether this decision by the Italian registrar was in any way relevant for the German procedure was raised. The notary argued that registration in the company register of destination was the final step of such a procedure after which any defects that may have occurred in the course of the preceding procedure could no longer be raised by the German courts. The registrar rejected this view and the notary appealed to the Court of Appeal in Frankfurt (Oberlandesgericht Frankfurt). The Court of Appeal agreed with the notary’s argument and decided that the lower court was no longer allowed to raise any additional issues since the conversion had already been given final and irreversible effect by virtue of the Italian registration. This decision is not at all convincing.79 It neglects the basic principle that the crossborder conversion presupposes the consecutive application of two national legal systems. 78 Oberlandesgericht Frankfurt, see above (fn. 45). 79 See in more detail Teichmann, ZIP 2017, 1190.

264

16

Cross-Border Conversions after Vale – the German Experience

The Italian registrar had no right to finalize the conversion without having received a certificate from the German registrar conclusively attesting the completion of the German part of the procedure. And the German courts should by no means feel obliged by such a premature registration in the Member State of destination not to scrutinize any longer the legality of the conversion procedure in Germany. Let us assume, for instance, that some shareholders had maliciously not been invited to the general meeting which decided on the cross-border conversion. In such a case, the decision of the general meeting would be null and void. The decision would also be null and void if it was taken without the presence of a notary. Such violations of fundamental principles of German company law have to be checked by German courts before issuing a pre-conversion certificate which could be sent to the registrar in the state of destination. Without the receipt of such a confirmation by the competent authorities in the state of origin the commercial register in the state of destination has no legal basis to register the crossborder conversion. It neither has the knowledge nor the formal competence to check the procedural steps that have been taken place or ought to have taken place in Germany. If the German courts finally decide that the resolution passed by the general meeting of the German company violated fundamental principles of German company law, the conversion cannot enter into effect. The premature registration in Italy that does not take into account this consecutive application of two legal systems is deprived of any legal basis. It may have created a new Italian company, this is an issue to be decided by Italian law, but it cannot claim that the company registered in Italy was the successor in law of the German company. As long as the German company does not comply with the legal requirements which are stipulated in Germany for changing the applicable company law it is still a German company.

16.4

The legal procedure to be applied to cross-border conversions

Even in the absence of an explicit regulation in the German Act on Transformations we can now, in the light of the case law reported above, elaborate the procedure for crossborder conversions from a German perspective. If we use the domestic conversion as a blueprint we will find a twofold procedure: The first stage is to be carried out within the legal entity in its existing legal form and will therefore be governed by the rules applicable to the existing legal form. The second stage concerns the formalities and requirements of the chosen new legal form. For this second stage, German law on domestic conversions provides for an application of the provisions that would apply in the case where such a legal entity was to be newly founded (§ 197 Act on Transformations). These rules will have to be applied mutatis mutandis, taking into account the continuity of the already existing legal entity.

265

Christoph Teichmann This separation of two different stages of the procedure is also reflected in the Vale judgment where the ECJ correctly stated that the conversion presupposes the consecutive application of two different legal systems: The legal system of the state of origin for taking the decision on the cross-border conversion, and the legal system of the state of destination for incorporation under the new applicable company law. We therefore need to distinguish between outbound and inbound conversions: In the case of an outbound conversion (see below under 1), the first stage of the procedure will be governed by German law, in the case of an inbound conversion (see below under 2), the second stage will be governed by German law.

16.4.1

Outbound Conversion

In the case of an outbound conversion the company to be converted is governed by German law. The procedure to be followed should therefore be structured along the lines of the German Act on Transformations. This Act applies common principles to all kinds of transformations which would also be suitable for cross-border conversions: Any transformation requires a resolution passed by a qualified majority of the shareholders;80 this resolution has to be notarized in the case of private or public companies;81 and the resolution will only become effective after the registration of the transformation.82 German law also acknowledges that minority shareholders and creditors may need particular protection in such operations.83 The general procedure of the domestic conversion, no matter what legal form is involved, requires a preparatory management report explaining and justifying the economic and legal aspects of the conversion (§ 192 Act on Transformations). Based on the information given in this report, the partners or shareholders will take their decision in the general meeting and pass a resolution on the conversion (§ 193 Act on Transformations). The resolution must, inter alia, determine the new legal form and the name of the legal entity subsequent to the conversion (§ 194 Nos. 1 and 2 Act on Transformations). It must also offer cash compensation for members who voted against the conversion and it must explain the possible repercussions of the conversion on employees (§ 194 Nos. 6 and 7 Act on Transformations).

80 Decker, in: Henssler/Strohn, GesR, 3rd ed. 2016, § 1 Act on Transformations, marg. No. 6; Mayer, in: Widmann/Mayer, UmwR, ed. 6/2017, Act on Transformations Introduction, marg. No. 138. 81 Decker, in: Henssler/Strohn, GesR, 3rd ed. 2016, § 1 Act on Transformations, marg. No. 6; Mayer, in: Widmann/Mayer, UmwR, ed. 6/2017, Act on Transformations Introduction, marg. No. 142. 82 Mayer, in: Widmann/Mayer, UmwR, ed. 6/2017, Act on Transformations Introduction, marg. No. 150. 83 See in detail Mayer, in: Widmann/Mayer, UmwR, ed. 6/2017, Act on Transformations Introduction, marg. No. 160 ff.

266

16

Cross-Border Conversions after Vale – the German Experience

The resolution on the conversion requires a majority of three quarters of the votes cast in private companies, or, in public companies, three quarters of the capital represented at the meeting (§ 240 (1) Act on Transformations). In deviation from the principle mentioned above, a company converting from public to private or vice versa will not be obliged to offer cash compensation to minority shareholders. The conversion from a private to a public company is not considered as such a fundamental change that it would justify a right to withdraw from the company. This will be assessed differently, however, when the company is to be converted into a company governed by the law of another Member State. In such a case, the provisions of the domestic conversion should be accompanied by specific provisions for the protection of minority shareholders and creditors taking into account the cross-border nature of the operation.84 These rules can be derived from the provisions on the cross-border merger (see above 16.3.2 b), but also from the provisions on the transfer of the registered office of a European company (see above 16.3.2 c). As a matter of fact, the analogy could easily be based on both sets of rules, since they both provide for the same protective measures: minority shareholders will have a right to withdraw in exchange for cash compensation; creditors may claim security if they can credibly argue that the cross-border operation will endanger their claim. These protective measures are obviously only applicable when a company incorporated under German company law intends to leave Germany. In such a case, shareholders and creditors rely on being attached to a company governed by German company law. They have a legitimate expectation that they are protected in accordance with the general principles to be found in German company law.

16.4.2

Inbound Conversion

In the case of a company converting into Germany, the first stage of the procedure will be governed by the law of another Member State. The competent authorities of this Member State should issue a document certifying the proper completion of this stage and the German commercial register will have to take due account of this document.85 This means that, in principle, the German competent authorities should not scrutinize the procedural steps which are governed by the law of the Member State of origin, insofar as the completion of these steps has been certified by the competent authority of this Member State. Only in cases of serious doubts can the German authorities check whether the procedure in the Member State of origin has been carried out correctly.86 84 For a general view on the policy and legal issues involved in outbound reincorporations see Gerner-Beuerle/ Mucciarelli/Schuster/Siems, see above (fn 1), p. 14 et seq. 85 See in this respect ECJ (Vale), see above (fn. 31), marg. No. 61. 86 Teichmann, Der Betrieb (DB) 2012, 2085, 2090 f.; Hushahn, RNotZ 2014, 137, 149 f.; Frank, (Fn. 47), 2016, p. 288 f.

267

Christoph Teichmann The German part of the procedure in the case of an inbound conversion consists of applying the rules on the foundation and incorporation of a new company. This case could be treated, mutatis mutandis, comparably to the new incorporation of a German company. In the case of converting into a German private company this would require drafting articles of association by means of a notarial deed and raising the capital to the minimum amount of 25,000 Euros. The new subtype of the GmbH which does not require a minimum capital, the so-called ‘Unternehmergesellschaft (haftungsbeschränkt)’, is not eligible for a cross-border conversion because it does not allow contributions in kind (§ 5a para. 2 GmbHG). The conversion of an existing company is to be regarded as a contribution in kind, because the capital of the newly incorporated German company will be represented by the assets which the pre-existing company brings along with it when moving to Germany.87 Some authors are of the opinion that the company converting into Germany will have to prove that it is really planning an establishment within Germany.88 This is based on the assumption that European Union law only protects cross-border conversions which are accompanied by an establishment in the sense of Article 49 TFEU.89 The requirement of a real establishment is, however, not admissible, since it would treat foreign companies worse than national companies. For the incorporation of a national company, German law no longer requires the existence of an economic activity within Germany.90 Even if the operation should not fall within the scope of the freedom of establishment it would not be acceptable, under the general principles of European Union law, to discriminate against foreign companies for the only reason that they have been incorporated in another Member State.91

16.5

Conclusion

As we have seen, there have already been several cases of successful cross-border conversions, both inbound and outbound, in Germany. It would, however, be a premature assessment to thereby conclude that there is no longer a need for adopting EU secondary law in this area. First of all, the existence of court decisions is not evidence of a well87 See Frank, (Fn. 47), 2016, p. 276; Stiegler, (Fn. 47), 2017, p. 152. 88 Hushahn, RNotZ 2014, 137, 139 and 147; Melchior, GmbHR 2014, R311, R312. 89 This has been indicated in the Vale case, see above (fn. 31), marg. No. 34). The ECJ will have to decide this question once more in the currently pending Polbud/Wykonawstwo sp. z o.o. in liquidation case (C-106/16); the recently published opinion of the Advocate General indicates that a cross-border conversion without a real establishment in the state of origin might not be protected by the Treaty. 90 This rule was introduced by the major company law reform in 2008 (see Teichmann/Knaier, in: Viera Gonzalez/Teichmann (editors), Private Company Law Reform in Europe: The Race for Flexibility, 2015, p. 209, 220, 221). 91 See Teichmann, Der Betrieb (DB) 2012, 2085.

268

16

Cross-Border Conversions after Vale – the German Experience

functioning procedure; quite the contrary, it proves that companies wishing to convert cross-border are facing considerable obstacles. The resistance by commercial registers and courts of first instance could only be overcome by appealing to the competent Courts of Appeal. These difficulties are mainly due to the lack of clear legal provisions structuring the cross-border operation. Secondly, the cross-border conversions that we have seen so far have not been very complex cases. As far as can be derived from the facts reported by the courts, all these operations had been decided unanimously by the shareholders and there were neither creditors nor employees challenging the operation. This indicates that companies do not start the cross-border operation if they have reasonable grounds to expect complicated discussions with minority shareholders, creditors or employees. In such cases, the lack of a legal procedure prevents companies from even contemplating a cross-border conversion. It would be the function of EU secondary law to offer legal certainty and to balance, in the context of a cross-border operation, the interests of the majority shareholders who wish to convert cross-border and the interests of minority shareholders, creditors and employees who may fear that this operation will negatively affect their legal and economic position. After all, such legislation would be particularly important for Germany, where the participation rights of employees to be nominated to the supervisory board might be circumvented by converting into a foreign company type. Already today, the incorporation of foreign legal entities is quite frequently used by companies that want to avoid the application of the German rules on employee participation.92 Cross-border conversions might therefore immediately become a political issue if a company tried to convert for the only reason that it wishes to evade employee participation rights. European secondary law could help to mitigate this conflict, which it already does in the cross-border merger directive by offering the possibility to negotiate on employee participation rights.93 Whether and how this procedure could be applied by analogy to a cross-border conversion is an open question which could best be solved by a European cross-border conversion directive.

92 See Sick, Mitbestimmungsförderung, Report No. 8, February 2015, https://www.boeckler.de/pdf/p_mbf_report_2015_8.pdf (12.07.2017); Hoffmann, Die Aktiengesellschaft (AG) 2016, R167. 93 Article 16, Directive 2005/56/EC of 26.10.2005, OJEU of 25.11.2005, L 310.

269

17

Shareholders’ Fundamental Rights in Listed Companies Some Relevant and Some Undesirable EU Initiatives

Erik Werlauff

17.1

Introduction to the Article – and to Professor Adriaan Dorresteijn

It is a pleasure and an honour for me to contribute to the Liber Amicorum for Professor Adriaan Dorresteijn. Very few scholars in the world of law have done more for the development of EU law within the field of business law, especially corporate law. No wonder that Adriaan’s chair at the Utrecht University School of Law is focused on transnational aspects of corporate law. His list of publications demonstrates numerous scholarly articles and books on this topic, and he is a member of the editorial boards of numerous highly esteemed law journals, among them European Company Law (ECL). I am certain that my colleagues will emphasize a number of professional qualities that Adriaan possesses, and rightfully so. Let me just mention one of these qualities – Adriaan’s outstanding ability to always see the use, for practical purposes, of the scholarly knowledge he possesses. Which state of EU law and national law will be optimal for business undertakings’ options for operating transnationally? He is always on the lookout for the current answer to this question, and he has had an enormous impact on the development of EU and national business law. Finally, it is worth mentioning that Adriaan has joined the excellent club of law professors who, as a useful part-time occupation, practise as lawyers concentrating on special cases where they, possessing the legal qualifications that they have, can be of special service. Adriaan is a part-time practising lawyer with the AKD law firm (AKD Advocaten en notarissen) and there is no doubt that he comes back to his students and readers with important practical knowledge and skills that can improve his lectures and scholarly books and articles.

271

Erik Werlauff

17.2

Directive 2007/36 on shareholders’ fundamental rights and the future perspectives for the directive

As a topic for this contribution to Adriaan’s Liber Amicorum I have chosen the question of shareholders’1 exercise of fundamental (‘certain’) rights in listed companies, thereby focusing on important EU initiatives. There is no doubt that the EU’s initiatives in this area have considerably improved the legal position of shareholders in listed companies. It has simply become somewhat easier to be shareholder in companies in other EU countries. And if one looks at it from the company’s perspective, this should not be regarded as an increased burden, but rather as increased opportunities to increase investors’ focus on one’s company. It is, of course, an advantage for any listed company to have both domestic and foreign investors; the more potential investors, the greater opportunity there is to raise capital. As the title of Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies states, the scope of the directive is listed companies. However, nothing forbids an individual state from applying some or all of the directive’s shareholders’ rights also to unlisted companies, thereby gold-plating the directive’s requirements. Denmark has done so, thereby applying most of the provisions of the directive also to non-listed private and public limited companies. The directive does not prevent Member States from imposing further obligations on companies or from otherwise taking further measures to facilitate the exercise by shareholders of the rights referred to in the directive.2 In its proposal, COM (2014) 213 final, for a directive amending Directive 2007/36 ‘as regards the encouragement of long-term shareholder engagement’, and Directive 2013/34 ‘as regards certain elements of the corporate governance statement’, the European Commission has suggested numerous amendments to the two directives mentioned. I cannot help but think that the good, simple and shareholder-friendly intentions behind Directive 2007/36 on fundamental rights are now about to be diluted. The directive, with the suggested amendments, is growing into a more technical directive, regulating intermediaries (maintaining securities accounts for clients, cf. the suggested

1 2

A ‘shareholder’ means the natural or legal person that is recognised as a shareholder under the applicable law, cf. Article 2(b) of the directive on the fundamental rights of shareholders. Cf. Article 3 of the directive. This means that the directive is merely a minimum directive; it does not aim at total harmonization.

272

17

Shareholders’ Fundamental Rights in Listed Companies Some Relevant and Some Undesirable EU Initiatives

new Articles 3a, 3b, 3c and 3d), asset managers and proxy advisors (in the suggested new Articles 3f, 3g, 3h and 3i), and only in a few articles also regulating substantial questions like the right to vote on the company’s remuneration policy and remuneration report (the suggested new Articles 9a and 9b) and to vote on related party transactions (the suggested new Article 9c). Too bad! The very fine directive on fundamental rights is now diluted through the adoption of numerous provisions on intermediaries, asset managers and proxy advisors, the certain way of castrating a hitherto useful and powerful directive, which could have moved on from being a directive into being eventually a powerful regulation, a ‘bible’ for shareholders in listed companies.

17.3

Applicable law

In the field of international choice of law within corporate law (‘private international corporate law’), it is always a question of to which country’s laws the individual company is subjected. There is the choice between the country of the registered office3 and the country of the main seat, and for company law questions the registered office is often the right choice of law; this is basically what we learned from Centros (C-212/97)4, Überseering (C-208/00)5, and Inspire Art (C-167/01)6. If the company is listed,7 the international choice of law becomes somewhat more complicated. Now we have to distinguish between corporate law matters, where normally the 3

4

5

6

7

Before 2010, Denmark would apply the wording ‘the seat according to its articles of association’ (Danish: vedtægtsmæssigt hjemsted’), but realizing that the EU directives on corporate law do not require the articles of association to mention the seat of the company, Danish company law removed this requirement with effect from 1 March 2010. Danish practice regarding the establishment of branches in Denmark by foreign (British) private limited companies required that they complied with current Danish capital requirements for private limited companies, i.e., the foreign company was deprived of its legal personality in respect of one item under company law (the right to establish branches). The objective was to prevent any circumvention of the current Danish capital requirements via the use of a foreign company from a country with smaller capital requirements. The means to achieve this objective (to prevent circumvention) was to make the establishment of a branch conditional upon compliance with Danish capital requirements. The Court overruled the Danish practice. A long-standing German practice stipulating that a foreign company that had its real seat in Germany should comply with German capital requirements. Otherwise the company could not be a party in a court case in Germany; i.e. its legal personality was denied with respect to procedural law. The objective was to prevent a circumvention of German capital requirements. The Court overruled the German practice. Dutch legal rules that stipulated that management was liable for damages in a foreign company that had its actual (real) seat in the Netherlands. That is, the foreign company’s legal personality was denied in relation to liability limitations. Here, too, the intention was to prevent a circumvention of Dutch capital requirements; and here, too, the Court set aside the Dutch rules. Among the words defined by the directive are also the terminology ‘regulated market’, cf. Article 2(a). This means a market as defined in Article 4 § 1, point 14, of Directive 2004/39 on markets in financial instru-

273

Erik Werlauff state where the company has its registered office is competent, and stock exchange law matters, where yet another state comes into the picture, i.e. the state where the stock exchange (the regulated market) is situated. Here, no absolute direction as to the choice of law between the company’s registered office and the location of the stock exchange can be given, but in general terms the law of the country where the stock exchange is situated is applied for more technical stock questions, whereas the law of the country where the company’s registered office is located is applied for more fundamental questions that affect the corporate law relationship between the company and its shareholders. The directive on the fundamental (‘certain’) rights of shareholders follows this pattern: The directive establishes requirements in relation to the exercise of some fundamental shareholder rights attaching to voting shares in relation to general meetings of companies which have their registered office in a Member State and whose shares are admitted to trading on a regulated market situated or operating within a Member State.8 The Member State which is competent to regulate matters covered in the directive shall thus be the Member State where the company has its registered office, and references to the ‘applicable law’ are references to the law of that Member State.9

17.4

Equal treatment of shareholders

The company shall ensure equal treatment for all shareholders who are in the same position with regard to participation and the exercise of voting rights in the general meeting.10

ments. According to this, the words ‘Regulated market’ means a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments – in the system and in accordance with its non-discretionary rules – in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorized and functions regularly and in accordance with the provisions of Title III of Directive 2004/39. 8 Cf. Article 1 § 1 of the Directive. 9 Cf. Article 1 § 2 of the Directive. 10 Cf. Article 4 of the Directive.

274

17

17.5

Shareholders’ Fundamental Rights in Listed Companies Some Relevant and Some Undesirable EU Initiatives

Convocation of the general meeting

The principal rule on the notice is that Member States shall ensure that the company issues the convocation of the general meeting in one of the ways specified in Article 5 § 2 of the Directive on fundamental rights and not later than on the 21st day before the day of the meeting of shareholders.11 There are some exceptions to this principal rule: E-1. The Directive itself, Article 5 § 1, 2nd part: Member States may provide that, where the company offers the facility for shareholders to vote by electronic means accessible to all shareholders, the general meeting of shareholders may decide that it shall issue the convocation of a general meeting which is not an annual general meeting not later than on the 14th day before the day of the meeting.12 E-2. The Directive itself, Article 5 § 1, 3rd part: Member States need not apply the minimum periods referred to in the first and second subparagraphs for the second or subsequent convocation of a general meeting issued for a lack of the quorum required for the meeting convened by the first convocation, provided that this Article has been complied with for the first convocation and no new item is put on the agenda, and that at least 10 days elapse between the final convocation and the date of the general meeting. E-3. Article 9 § 4 on the takeover Directive, 2004/25, referred to in Article 5 § 1, 1st part, in the directive on fundamental rights: For the purpose of obtaining the prior approval of the shareholders to take any action (other than seeking alternative bids) which may result in the frustration of a bid, Member States may adopt rules allowing a general meeting of shareholders to be called at short notice, provided that the meeting does not take place within two weeks of the notification being given. E-4. Article 11 § 4 on the takeover directive, 2004/25, referred to in Article 5 § 1, 1st part, in the directive on fundamental rights: Where, following a bid, the offeror holds 75 percent or more of the capital carrying voting rights, no restrictions on the transfer of securities or on voting rights nor any extraordinary rights of shareholders concerning the appointment or removal of board members

11 Cf. Article 5 § 1, subparagraph 1, of the Directive. 12 This decision is to be taken by a majority of not less than two-thirds of the votes attaching to the shares or the subscribed capital represented and for a duration not later than the next annual general meeting.

275

Erik Werlauff provided for in the articles of association of the offeree company shall apply; multiplevote securities shall carry only one vote each at the first general meeting of shareholders following the closure of the bid, called by the offeror in order to amend the articles of association or to remove or appoint board members. To that end, the offeror shall have the right to convene a general meeting of shareholders at short notice, provided that the meeting does not take place within two weeks of notification. Now back to the requirements prior to the general meeting: The company shall be required to issue the convocation referred in a manner ensuring rapid access thereto on a non-discriminatory basis.13 The Member State shall require the company to use such media as may reasonably be relied upon for the effective dissemination of information to the public throughout the Community.14 However, if the company is able to identify the names and addresses of (all!) their shareholders from a current register of shareholders, and the company is under an obligation to send the convocation to each of its registered shareholders, Member States need not (but may nevertheless) apply the above requirement on using the media.15 Regardless of whether the company must apply media etc. for the convocation as required in Article 5 § 2, subparagraph 1, of the directive on fundamental rights, or whether the company is allowed to send the convocation to each of its registered shareholders, the company may not charge any specific fee for issuing the convocation.16

17.6

Content of the convocation

The convocation shall at least (emphasis added):17

13 Cf. Article 5 § 2, subparagraph 1, of the directive on fundamental rights. This part starts with the words: ‘Without prejudice to further requirements for notification or publication laid down by the competent Member State …’, again indicating that the directive is a minimum directive, cf. the already mentioned Article 3, according to which ‘(t)he directive does not prevent Member States from imposing further obligations on companies or from otherwise taking further measures to facilitate the exercise by shareholders of the rights referred to in the directive.’ 14 The Member State may not impose an obligation to use only media whose operators are established on its territory, cf. Article 5 § 2, subparagraph 1, last sentence, of the Directive on fundamental rights. One could add: Of course not; this result would undoubtedly already follow from primary EU law, e.g. Article 18 on the general prohibition on discrimination on grounds of nationality, and Article 56 on services. However, it is an excellent step to have this repeated and emphasized in the directive. 15 Cf. Article 5 § 2, subparagraph 1, in the Directive on fundamental rights. 16 Cf. Article 5 § 2, subparagraph 3, of the Directive on fundamental rights. 17 Cf Article 5 § 3, with sub-paras, of the Directive on fundamental rights.

276

17

Shareholders’ Fundamental Rights in Listed Companies Some Relevant and Some Undesirable EU Initiatives

a. indicate precisely when and where the general meeting is to take place, and the proposed agenda for the general meeting; b. contain a clear and precise description of the procedures that shareholders must comply with in order to be able to participate and to cast their vote in the general meeting. This includes information concerning: i. the rights available to shareholders under Article 6 (the right to put items on the agenda of the general meeting and to table draft resolutions), to the extent that those rights can be exercised after the issuing of the convocation, and under Article 9 (the right to ask questions), and the deadlines by which those rights may be exercised; the convocation may confine itself to stating only the deadlines by which those rights may be exercised, provided that it contains a reference to more detailed information concerning those rights being made available on the company’s Internet site; ii. the procedure for voting by proxy,18 notably the forms to be used to vote by proxy and the means by which the company is prepared to accept electronic notifications of the appointment of proxy holders; and iii. where applicable, the procedures for casting votes by correspondence or by electronic means; c. where applicable, state the record date19 as defined in Article 7(2) and explain that only those who are shareholders on that date shall have the right to participate and vote in the general meeting; d. indicate where and how the full, unabridged text of the documents and draft resolutions referred to in points (c) and (d) of paragraph 4 (see below in this article) may be obtained; e. indicate the address of the Internet site on which the information referred to in paragraph 4 (see below) will be made available.

17.7

Availability of documents prior to the general meeting

Member States shall ensure that, for a continuous period beginning not later than on the 21st day20 before the day of the general meeting and including the day of the meeting, the 18 A ‘Proxy’ being defined by the directive as the empowerment of a natural or legal person by a shareholder to exercise some or all rights of that shareholder at the general meeting in his name, cf. Article 2(c) of the directive on fundamental rights. 19 Returning to the record date in Article 7 § 2, it should already be mentioned here that the concept of ‘record date’ plays a very important role in all Member States’ provisions on the general meetings in listed companies. Danish law applies the word registreringsdatoen; French law applies the word date d’enregistrement; German law applies the word Nachweisstichtag; Swedish law applies the word avstämningsdagen. 20 Where, pursuant to Articles 9(4) or 11(4) of the Takeover Directive 2004/25, or to the second subparagraph of Article 5 § 1, subparagraph 2, of the Directive on fundamental rights (i.e. that the company offers the facility for shareholders to vote by electronic means accessible to all shareholders), the convocation of the

277

Erik Werlauff company shall make available to its shareholders on its Internet site at least the following information:21 a. the convocation referred to above (Article 5 § 1 of the Directive); b. the total number of shares and voting rights at the date of the convocation (including separate totals for each class of shares where the company’s capital is divided into two or more classes of shares); c. the documents to be submitted to the general meeting; d. a draft resolution or, where no resolution is proposed to be adopted, a comment from a competent body within the company, to be designated by the applicable law, for each item on the proposed agenda of the general meeting; moreover, draft resolutions tabled by shareholders shall be added to the Internet site as soon as practicable after the company has received them; e. where applicable, the forms to be used to vote by proxy and to vote by correspondence, unless those forms are sent directly to each shareholder.22

17.8

Right to put items on the agenda and to table draft resolutions

Member States shall ensure that shareholders, acting individually or collectively:23 a. have the right to put items on the agenda of the general meeting,24 provided that each such item is accompanied by a justification or a draft resolution to be adopted in the general meeting;25 and

21 22

23 24

25

general meeting is issued later than on the 21st day before the meeting, the period specified in this paragraph shall be shortened accordingly, cf. Article 5 § 4, last subparagraph, of the Directive on fundamental rights. Cf. Article 5 § 4 of the Directive on fundamental rights. Where the forms referred to in point (e) cannot be made available on the Internet for technical reasons, the company shall indicate on its Internet site how the forms can be obtained on paper. In this case the company shall be required to send the forms by postal services and free of charge to every shareholder who so requests. See Article 5 § 4, 2nd- last subparagraph of the Directive on fundamental rights. Cf. Article 6 § 1 of the Directive on fundamental rights. Member States shall ensure that, where the exercise of the right to put items on the agenda entails a modification of the agenda for the general meeting already communicated to shareholders, the company shall make available a revised agenda in the same manner as the previous agenda – and in advance of the applicable record date as defined in Article 7 § 2 of the Directive on fundamental rights (or, if no record date applies, sufficiently in advance of the date of the general meeting so as to enable other shareholders to appoint a proxy or, where applicable, to vote by correspondence), cf. Article 6 § 4 of the Directive on fundamental right. Member States may provide that the right referred to in point (a) may be exercised only in relation to the annual general meeting, provided that shareholders, acting individually or collectively, have the right to call, or to require the company to call, a general meeting which is not an annual general meeting with an agenda including at least all the items requested by those shareholders, cf. Article 6 § 1, 2nd--last subparagraph, of the directive on fundamental rights.

278

17

Shareholders’ Fundamental Rights in Listed Companies Some Relevant and Some Undesirable EU Initiatives

b. have the right to table draft resolutions for items included or to be included on the agenda of a general meeting. Member States may provide that the rights mentioned above shall be exercised in writing (submitted by postal services or electronic means). Where any of the rights (i.e., to put items on the agenda, or to draft resolutions for items on the agenda) is subject to the condition (i.e.: according to national law) that the relevant shareholder or shareholders hold a minimum stake in the company, such minimum stake shall not exceed 5 percent of the share capital. This is remarkable because in a number of countries the right to put items on the agenda belongs to individual rights that can be exercised by each shareholder alone. The EU accepts that a country instead defines this right as a minority right, but not defined above 5 percent of the share capital. Each Member State shall set a single deadline, with reference to a specified number of days prior to the general meeting or the convocation, by which shareholders may exercise the right to put items on the agenda. In the same manner each Member State may set a deadline for the exercise of the right to table draft resolutions.26

17.9

Requirements for participation and voting

Member States shall ensure:27 a. that the rights of a shareholder to participate in a general meeting and to vote in respect of any of his shares are not subject to any requirement that his shares be deposited with, or transferred to, or registered in the name of, another natural or legal person before the general meeting; and b. that the rights of a shareholder to sell or otherwise transfer his shares during the period between the record date and the general meeting to which it applies are not subject to any restriction to which they are not subject at other times. The record date:28 Member States shall provide that the rights of a shareholder to participate in a general meeting and to vote in respect of his shares shall be determined with

26 Cf. Article 6 § 3 of the Directive on fundamental rights. 27 Cf. Article 7 § 1 of the Directive on fundamental rights. 28 Already in section 6 it was mentioned that the concept of ‘record date’ plays a very important role in Member States’ provisions on the general meetings in listed companies. Danish law applies the word registreringsdatoen; French law applies the word date d’enregistrement; German law applies the word Nachweisstichtag; Swedish law applies the word avstämningsdagen.

279

Erik Werlauff respect to the shares held by that shareholder on a specified date prior to the general meeting (the record date).29 Each Member State shall ensure that a single record date applies to all companies.30 However, a Member State may set one record date for companies which have issued bearer shares, and another record date for companies which have issued registered shares, provided that a single record date applies to each company which has issued both types of shares. The record date shall not be more than 30 days before the date of the general meeting to which it applies. Each Member State shall ensure that at least eight days elapse between the latest permissible date for the convocation of the general meeting and the record date.31 In calculating that number of days, those two dates shall not be included.32 Proof of qualification as a shareholder may be made subject only to such requirements as are necessary to ensure the identification of shareholders, and only to the extent that they are proportionate to achieving that objective.33

17.10 Participation by electronic means Member States shall permit companies to offer to their shareholders34 any form of participation in the general meeting by electronic means, notably any or all of the following forms of participation: a. real-time transmission of the general meeting; b. real-time two-way communication enabling shareholders to address the general meeting from a remote location;

29 Cf. Article 7 § 2, 1st subparagraph, of the Directive on fundamental rights. However, Member States need not apply Article 7 § 2, 1st subparagraph, to companies that are able to identify the names and addresses of their shareholders from a current register of shareholders on the day of the general meeting, cf. Article 7 § 2, 2nd subparagraph. 30 Cf. Article 7 § 3 of the Directive on fundamental rights. 31 Cf. Article 7 § 3 of the Directive on fundamental rights. 32 In the circumstances described in Article 5(1), 3rd subparagraph, however (i.e., in the case of the second or subsequent convocation of a general meeting issued due to the lack of the quorum required for the meeting convened by the first convocation), a Member State may require that at least six days elapse between the latest permissible date for the second or subsequent convocation of the general meeting and the record date. In calculating the number of days, those two dates shall not be included. 33 Cf. Article 7 § 4 of the Directive on fundamental rights. 34 One should observe the double use of the ‘offer’ terminology. 1) Member states shall 2) permit the companies to offer (or not to offer) to their shareholders 3) to participate (or not to participate) electronically.

280

17

Shareholders’ Fundamental Rights in Listed Companies Some Relevant and Some Undesirable EU Initiatives

c. a mechanism for casting votes, whether before or during the general meeting, without the need to appoint a proxy holder who is physically present at the meeting. The use of electronic means for the purpose of enabling shareholders to participate in the general meeting may be made subject only to such requirements and constraints as are necessary to ensure the identification of shareholders and the security of the electronic communication, and only to the extent that they are proportionate to achieving those objectives.35

17.11

Right to ask questions

Every shareholder shall have the right to ask questions related to items on the agenda of the general meeting, and the company shall answer the questions put to it by shareholders.36 The right to ask questions and the obligation to answer them are subject to the measures that Member States may take, or allow companies to take, to ensure the identification of shareholders, the good order of general meetings and their preparation and the protection of the confidentiality and business interests of companies. Member States may allow companies to provide one overall answer to questions having the same content.37 Member States may provide that an answer shall be considered as already given if the relevant information is available on the company’s Internet site in a question and answer format.38

17.12 Proxy voting Every shareholder shall have the right to appoint any other natural or legal person as a proxy holder to attend and vote at a general meeting in his name.39 The proxy holder shall enjoy the same rights to speak and ask questions in the general meeting as those to which the shareholder thus represented would be entitled.

35 Cf. Article 8 § 2, 1st subparagraph, of the Directive on fundamental rights which adds in the 2nd subparagraph of Article 8 § 2: ‘This is without prejudice to any legal rules that Member States have adopted or may adopt concerning the decision-making process within the company for the introduction or implementation of any form of participation by electronic means.’ 36 Cf. Article 9 § 1 of the Directive on fundamental rights. 37 Cf. Article 9 § 2, 1st subparagraph, of the Directive on fundamental rights. 38 Cf. Article 9 § 2, 2nd subparagraph, of the Directive on fundamental rights. 39 Cf. Article 10 § 1, 1st subparagraph, of the Directive on fundamental rights.

281

Erik Werlauff Apart from the requirement that the proxy holder possess legal capacity, Member States shall abolish any legal rule that restricts, or allows companies to restrict, the eligibility of persons to be appointed as proxy holders.40 Member States may limit the appointment of a proxy holder to a single meeting, or to such meetings as may be held during a specified period.41 Member States may, as a principal rule, limit the number of persons whom a shareholder may appoint as proxy holders in relation to any one general meeting.42 However, there are some important exceptions to this principal rule: E-1. Shares held in more than one securities account If a shareholder has shares of a company held in more than one securities account, a limitation as mentioned above shall not prevent the shareholder from appointing a separate proxy holder as regards shares held in each securities account in relation to any one general meeting. This does not affect rules prescribed by the applicable law that prohibit the casting of votes differently in respect of shares held by one and the same shareholder.43 E-2. Shareholder acting in the course of his business on behalf of a client If a natural or legal person who is recognised as a shareholder by the applicable law acts in the course of a business on behalf of another natural or legal person (the client),44 and if the applicable law limits the number of persons whom a shareholder may appoint as proxy holders, such limitation shall nevertheless not prevent a shareholder acting in the course of his business from granting a proxy to each of his clients or to any third party designated by a client.45 Apart from the very few limitations expressly mentioned above, Member States shall not restrict or allow companies to restrict the exercise of shareholder rights through proxy holders for any purpose other than to address potential conflicts of interest between the proxy holder and the shareholder, in whose interest the proxy holder is bound to act, and in doing so Member States shall not impose any requirements other than the following:46

40 41 42 43 44 45 46

Cf. Article 10 § 1, 2nd subparagraph, of the Directive on fundamental rights. Cf. Article 10 § 2, 1st subparagraph, of the Directive on fundamental rights. Cf. Article 10 § 2, 2nd subparagraph, 1st sentence of the Directive on fundamental rights. Cf. Article 10 § 2, 2nd subparagraph, of the Directive on fundamental rights. As defined in Article 13 § 1 of the Directive on fundamental rights. Cf. Article 13 § 1 of the Directive on fundamental rights. Cf. Article 10 § 3, 1st subparagraph, with points (a) – (c), of the Directive on fundamental rights.

282

17

Shareholders’ Fundamental Rights in Listed Companies Some Relevant and Some Undesirable EU Initiatives

a. Member States may prescribe that the proxy holder must disclose certain specified facts which may be relevant for the shareholders in assessing any risk that the proxy holder might pursue any interest other than the interest of the shareholder; b. Member States may restrict or exclude the exercise of shareholder rights through proxy holders without specific voting instructions for each resolution in respect of which the proxy holder is to vote on behalf of the shareholder; c. Member States may restrict or exclude the transfer of the proxy to another person, but this shall not prevent a proxy holder who is a legal person from exercising the powers conferred upon it through any member of its administrative or management body or any of its employees. A conflict of interest within the meaning of this paragraph may in particular arise where the proxy holder:47 i. is a controlling shareholder of the company, or is another entity controlled by such shareholder; ii. is a member of the administrative, management or supervisory body of the company, or of a controlling shareholder or controlled entity referred to in point (i); iii. is an employee or an auditor of the company, or of a controlling shareholder or controlled entity referred to in (i); iv. has a family relationship with a natural person referred to in points (i) to (iii). The proxy holder shall cast votes in accordance with the instructions issued by the appointing shareholder,48 and the Member States may require proxy holders to keep a record of the voting instructions for a defined minimum period and to confirm, on request, that the voting instructions have been carried out.49 A person acting as a proxy holder may hold a proxy from more than one shareholder without limitation as to the number of shareholders so represented. Where a proxy holder holds proxies from several shareholders, the applicable law shall enable him to cast votes for a certain shareholder differently from votes cast for another shareholder.50

17.13 Formalities for a proxy holder appointment and notification Member States shall permit shareholders to appoint a proxy holder by electronic means. Moreover, Member States shall permit companies to accept the notification of the ap-

47 48 49 50

Cf. Article 10 § Cf. Article 10 § Cf. Article 10 § Cf. Article 10 §

3, 2nd subparagraph, with points (i) – (iv), of the Directive on fundamental rights. 4, 1st subparagraph, of the Directive on fundamental rights. 4, 2nd subparagraph, of the Directive on fundamental rights. 5 of the Directive on fundamental rights.

283

Erik Werlauff pointment by electronic means, and shall ensure that every company offers to its shareholders at least one effective method of notification by electronic means.51 Member States shall ensure that proxy holders may be appointed, and that such appointment be notified to the company, but only in writing. Beyond this basic formal requirement, the appointment of a proxy holder, the notification of the appointment to the company and the issuance of voting instructions, if any, to the proxy holder may be made subject to only such formal requirements as are necessary to ensure the identification of the shareholder and of the proxy holder, or to ensure the possibility of verifying the content of voting instructions, respectively, and only to the extent that they are proportionate to achieving those objectives.52 The provisions of this article shall apply mutatis mutandis for the revocation of the appointment of a proxy holder.53

17.14 Voting by correspondence Member States shall permit companies to offer their shareholders the possibility to vote by correspondence in advance of the general meeting. Voting by correspondence may be made subject to only such requirements and constraints as are necessary to ensure the identification of shareholders and only to the extent that they are proportionate to achieving that objective.54

17.15 Where a natural or legal person acts in the course of a business on behalf of his client It was mentioned above that the Directive on fundamental rights recognizes that a natural or legal person who is recognised as a shareholder by the applicable law acts in the course of a business on behalf of another natural or legal person (the client).55| It was also mentioned (in exception No. 2 to the principal rule that Member States may limit the number of persons whom a shareholder may appoint as proxy holders in relation to any one general meeting56) that if a natural or legal person who is recognised as a 51 52 53 54 55 56

Cf. Article 11 § 1 of the Directive on fundamental rights. Cf. Article 11 § 2 of the Directive on fundamental rights. Cf. Article 11 § 3 of the Directive on fundamental rights. Cf. Article 12 of the Directive on fundamental rights. As defined in Article 13 § 1 of the Directive on fundamental rights. Cf. Article 10 § 2, 2nd subparagraph, 1st sentence of the Directive on fundamental rights.

284

17

Shareholders’ Fundamental Rights in Listed Companies Some Relevant and Some Undesirable EU Initiatives

shareholder by the applicable law acts in the course of a business on behalf of another natural or legal person (the client),57 and if the applicable law limits the number of persons whom a shareholder may appoint as proxy holders, such limitation shall nevertheless not prevent a shareholder acting in the course of his business from granting a proxy to each of his clients or to any third party designated by a client.58 Under the headline ‘Removal of certain impediments to the effective exercise of voting rights’, Article 13 of the Directive on fundamental rights also contains other provisions ensuring that natural and legal persons (often called nominees) can act on behalf of their clients: Where the applicable law imposes disclosure requirements as a prerequisite for the exercise of voting rights by a shareholder who acts in the course of his business on behalf of another natural or legal person (the client), such requirements shall not go beyond a list disclosing to the company the identity of each client and the number of shares voted on on his behalf.59 – E contrario, the company cannot demand from such a professional shareholder that he discloses any voting instructions given to him, or how he has voted. Where the applicable law imposes formal requirements on the authorization of a shareholder who acts in the course of his business on behalf of another natural or legal person (the client), or formal requirements on voting instructions, such formal requirements shall not go beyond what is necessary to ensure the identification of the client, or the possibility of verifying the content of voting instructions, respectively, and is proportionate to achieving those objectives.60 A shareholder who acts in the course of his business on behalf of another natural or legal person (the client) shall be permitted to cast votes attaching to some of the shares differently from votes attaching to the other shares.61

17.16 Voting results The Directive on fundamental rights regulates what to publish about the voting results and how to publish them. The directive is silent, and should be silent, on the formalities

57 58 59 60 61

As defined in Article 13 § 1 of the Directive on fundamental rights. Cf. Article 13 § 1 of the Directive on fundamental rights. Cf. Article 13 § 2 of the Directive on fundamental rights. Cf. Article 13 § 3 of the Directive on fundamental rights. Cf. Article 13 § 4 of the Directive on fundamental rights.

285

Erik Werlauff required in order for a resolution to become valid or the possibility of a subsequent legal challenge to the voting result.62 The company shall establish for each resolution at least the number of shares for which votes have been validly cast, the proportion of the share capital represented by those votes, the total number of votes validly cast as well as the number of votes cast in favour of and against each resolution and, where applicable, the number of abstentions.63 However, Member States may provide or allow companies to provide that if no shareholder requests a full account of the voting, it shall be sufficient to establish the voting results only to the extent needed to ensure that the required majority is reached for each resolution.64 Within a period of time to be determined by the applicable law, which shall not exceed 15 days after the general meeting, the company shall publish on its Internet site the voting results as defined in Article 14 § 1 of the Directive on fundamental rights.65

17.17 Conclusions and perspectives There can be no reasonable doubt that the EU’s initiatives in the field of shareholders’ fundamental rights in listed companies are among the successful, relevant and necessary provisions under EU corporate and stock exchange law. This also holds true for the main Directive 2007/36. When considering the whole spirit and idea of the EU and its competences, the field of basic shareholders’ rights, including cross-border shareholding, is to be regarded as a welcome initiative that has facilitated the exercise of fundamental rights also in crossborder shareholding. The success is further emphasized by the fact that some countries, including Denmark, have regarded a number of the fundamental rights vested in the directive as being so well formulated that the countries have chosen to gold-plate their own legislation by introducing rights which are similar to those in the directive also for non-listed companies, even including both public limited companies and private limited companies. When it comes to the suggested amendments, cf. COM (2014) 213 final, my approach to this is somewhat different. The very fine main Directive on fundamental rights is now 62 63 64 65

Cf. Article 14 § Cf. Article 14 § Cf. Article 14 § Cf. Article 14 §

3 of the Directive on fundamental rights. 1, 1st subparagraph, of the Directive on fundamental rights. 1, 2nd subparagraph, of the Directive on fundamental rights. 2 of the Directive on fundamental rights.

286

17

Shareholders’ Fundamental Rights in Listed Companies Some Relevant and Some Undesirable EU Initiatives

being diluted through the adoption of numerous provisions on intermediaries, asset managers and proxy advisors, the certain way of castrating a hitherto useful and powerful directive, which could have moved on from being a directive into being eventually a powerful regulation, a ‘bible’ for shareholders in listed companies. One could exploit this as an opportunity to rethink some of the provisions in the directive – which is, after all, 10 years old today – concerning the digital exercise of fundamental rights, e.g. by creating the same kind of pampering of shareholders as is applied today concerning analysts; they can very often participate electronically in video sessions, meetings with board and management, etc., and why not demand from listed companies that this be arranged also in listed companies. There is no doubt that the total value of European listed shares will increase the more it is facilitated to follow the individual company’s development by taking the pulse of the company and its general meetings. One should in my opinion simply 1) keep the directive basically as it is, perhaps with the adjustments mentioned immediately above, 2) consider changing the EU provisions on fundamental shareholders’ rights into a regulation, instead of a directive, thereby following the path that has been shown in other important fields where ‘harmonisation’ is not enough, but where parallel European law is desirable (e.g. in the field of market abuse, data protection etc.), and finally 3) keep the vast majority of the technical rules included in COM (2014) 213 final in a separate set of provisions, be it the the form of a directive or a regulation. It might even develop to a short and popular ‘shareholders’ bible’ across all European borders, thereby taking advantage of the simple fact that common tangible economic goods have a tendency to unite us. Such a development will be entirely within the spirit of our colleague and friend, Professor Adriaan Dorresteijn.

287

Contributors T.M.C. Arons (Tomas) is professor of financial law and collective redress at Utrecht University and senior legal counsel at the Dutch Association of Stockholders (VEB). He knows Adriaan as a colleague from the Molengraaff Institute. S.M. Bartman (Steef) is professor of company law at Leiden University and a practising lawyer in the Netherlands. Together with Adriaan Dorresteijn he initiated the writing of a book titled Van het concern (About Corporate Groups), the first edition of which appeared in 1992. The name combination ‘Bartman/Dorresteijn’ has been established in Dutch company law ever since. But more importanly, Steef and Adriaan are the best of friends. E. Bauw (Eddy) is professor of private law at Utrecht University and Deputy Judge at the Court of Appeal in The Hague and the Court of Appeal in Arnhem-Leeuwarden. He is head of the Molengraaff Institute for Private Law where Adriaan was professor of international corporate law since 2000. E.E. van Bemmelen van Gent (Ernst) is lecturer of private law and corporate law at the Molengraaff Institute, Utrecht University, lecturer at The Hague University of Applied Sciences and attorney-at-law. He shared a room with Adriaan at the Molengraaff Institute. A.P.W. Duijkersloot (Ton) is assistant professor at the Centre of Regulation and Enforcement of EU law (Renforce) of Utrecht University. He knows Adriaan as a colleague. A.L.H. Ernes (Anka) is professor of principles of civil law at Open University (OU) and Deputy Judge at the Court of Appeal in Arnhem-Leeuwarden. Adriaan Dorresteijn and Herman Schoordijk were supervisors of her PhD dissertation between 1996 and 2000 at the OU. I. Giesen (Ivo) is professor of private law at the Molengraaff Institute for Private Law (UU) and research director of the School of Law. Ivo knows Adriaan as the (former) Dean that appointed him and as a colleague from the Molengraaff Institute.

289

Essays on Private and Business Law E.H. Hondius (Ewoud) is professor of European private law at the Molengraaff Institute (UU) and founder of the European Review of Private Law and the Nederlands Tijdschrift voor Burgerlijk Recht. He is a long-standing colleague of Adriaan. A.W. Jongbloed (Ton) is professor of the law of enforcement and seizure at the Molengraaff Institute (UU) and Deputy Judge at the Court of Appeal in Amsterdam and in Arnhem-Leeuwarden. He knows Adriaan as a colleague from the Molengraaff Institute. B. Kemp (Bastiaan) is assistant professor of private law at Maastricht University and lawyer at Loyens & Loeff N.V. He knows Adriaan through academic networks of Dutch universities. H. Koster (Harold) is associate professor of corporate law at the Molengraaff Institute (UU) and Deputy Judge at the Court of Appeal in Amsterdam. He knows Adriaan as a colleague from the Molengraaff Institute. P.H.L.M. Kuypers (Pieter) is professor of European and national procurement law at Radboud University in Nijmegen and a partner at the Dutch law firm AKD. They first met on the occasion of the public defence of one of the PhD candidates of Adriaan. He later became a colleague at AKD where they both became members of the AKD board which assesses and promotes the legal knowledge of the lawyers of AKD. V. Lazić (Vesna) is associate professor of the law of international commercial arbitration at the Molengraaff Institute (UU), senior researcher at the T.M.C. Asser Institute in The Hague and professor of the law of European civil procedure at the University of Rijeka. She knows Adriaan as a colleague from the Molengraaff Institute. M. Olaerts (Mieke) is professor of comparative and national company law at Maastricht University and director of the Maastricht Institute for Corporate Law, Governance and Innovation Policies (ICGI). She has cooperated with Adriaan for several years in the Ius Commune Research School and is co-author of the latest edition of the book Van het concern together with Adriaan and Steef Bartman. F.J.L. Pennings (Frans) is professor of labour law at Utrecht University. He has cooperated closely with Adriaan in coordinating the Master Enterprises and the Law. R. Rijnhout (Rianka) is associate professor of private law at the Molengraaff Institute for Private Law (UU). She knows Adriaan as a colleague from the Molengraaff Institute and from their joint dealing for Utrecht Law College (ULC). 290

Contributors C.S. Rusu (Catalin) is associate professor of European law at Radboud University Nijmegen. He wrote his PhD dissertation under Adriaan’s supervision at Utrecht University, between 2005 and 2009. C. Teichman (Cristoph) is professor of company law at the University of Würzburg. He is co-author, together with Adriaan Dorresteijn, Tiago Monteiro and Erik Werlauff, of a handbook on European Corporate Law published by Kluwer Law International. E. Werlauff (Erik) is professor of corporate law at Aalborg University, member of the Danish Civil Justice Council, arbitrator in several cases, and counsel in cases on tort after collapses in financial sector. He knows Adriaan through academic networks of EU scholars connected to, i.a., Leiden and Utrecht Universities. R.J.G.M. (Rob) Widdershoven is professor of European administrative law and Advocate-General of administrative law of the Netherlands. He knows Adriaan as colleague and as former Dean of the Faculty of Law, Economics and Governance.

291