Following the entering into force of the Dutch Scheme on 1 January this year, allowing for court confirmation of private restructuring plans, the Dutch legal toolbox for national and international restructurings has become even more diverse. This development forms part of a broader trend in the Dutch legal framework to facilitate effective restructurings of businesses, in which context one of the key techniques is the enforcement of share security, including through credit bidding.
In this blog post, we will focus on recent trends in case law regarding enforcement of security over shares held in a Dutch private limited liability company, which continue to be relevant both in circumstances where the new scheme is used, and otherwise.
Executive summary and key takeaways
The enforcement of security over shares held in a Dutch private limited liability company with court consent requires proper preparation (among other things, by conducting a market-testing exercise and preparing a valuation report), but can be implemented fairly quickly and, as such, forms an effective restructuring tool for Dutch businesses in financial distress that have a viable business case, but suffer from a burdensome debt profile.
Enforcement of share security
Dutch law provides for three alternatives when it comes to enforcement of Dutch share security:
- a public sale of the shares through a public auction;
- a private sale agreed between the pledgor and the pledgee after the security has become enforceable; and
- a private sale with consent of the Dutch court.
The route of the court consent is the most common one, considering the inherent (practical) disadvantages of the other methods; selling large, complex (international) businesses through an auction is virtually impossible, bearing in mind that the security agent may not have access to all relevant documents in order to set up a proper due diligence trajectory and the time pressure the business is under.
As to the second method, consent from the pledgor is in an enforcement scenario usually not feasible. Hence, in practice, court consent is requested, which, as evidenced by the recent case law discussed below and if well-prepared, can be obtained very quickly. If so, and provided the court is convinced of the urgency of the matter, it may take no longer than two to four weeks to obtain the court approval.
Recent case law
Dutch courts recently provided consent for share security enforcement in various large, international restructuring matters, effectively facilitating a restructuring of the business (and related debt profile) through a debt-for-equity swap. Examples are the lender-led enforcements in respect of Airopack in 2019 and Royal IHC in 2020, as well as the enforcements led by the bondholders of Lebara (2019) and HEMA (2020), in each case following the business defaulting under its debt documentation, triggering the right of the financiers to accelerate the debt and enforce their security.
A private sale of the shares with court consent is often structured as a sale of the shares to a newly incorporated vehicle set up by the lenders or bondholders, enabling them to take control of the business, either for a longer term or for purposes of preparing the business for an M&A process. The two core advantages of the financiers in such process are around (i) access to information (as lenders, the banks or bondholders will usually have detailed knowledge of the financial status of the group) and (ii) financing. The latter is the result of the use of credit bidding by the lenders, allowing them to offer a (significant) consideration without additional liquidity being required from them. For example, in the Lebara case, Lebara’s debt package was reduced by approximately €200m, which reduction was part of the consideration by the bondholders for the shares in the business. The use of credit bidding has been subject to debate in Dutch enforcement transactions, in particular in light of the test applied by Dutch courts in the context of private share security enforcement transactions.
The key question for a court to answer in the context of a request for consent for a private sale of shares as part of an enforcement process is whether the proposed transaction leads to the highest possible value considering the interests of all creditors of the business.
In light thereof, the common denominator in all recent matters is the courts' analysis of the following elements to verify whether the proposed private sale indeed leads to the highest possible value:
- has a form of market testing been conducted; and/or
- what is the ‘going-concern value’ and/or the ‘liquidation value’ of the business?
As per case law, the market testing serves to illustrate that there are no other potential purchasers interested in acquiring the business on the terms proposed by the financiers as part of the debt-for-equity transaction. In addition, a valuation report, prepared by a reputable firm that has a credible track-record in the valuation of (distressed) businesses of comparable size and nature, should demonstrate that the value of the business is (considerably) less than the amount of the debt and therefore, the existing shareholders are effectively out-of-the-money.
In all recent matters involving Airopack, Lebara, IHC and HEMA, the courts took a holistic approach in relation to the proposed transactions. That is, all elements of the consideration for the shares were assessed and weighted against the interest of the pledgor (ie the shareholder(s)), other secured creditors and other creditors generally. This implies that not only the purchase price for the shares is relevant, but also the ‘non-cash consideration’ offered as part of the bid (ie the amount by which the company’s debt will be reduced and/or new financing will be made available).
This was best demonstrated in the HEMA case, where the court had to compare the proposed private sale to a newly incorporated bondholder-owned vehicle ('the HEMA proposed sale') to an unconditional bid that was made during the court hearing ('the HEMA competitive bid'). As part of the HEMA proposed sale, the purchase price for the shares was €1, the debt package would be reduced by €450m and new funds would be made available to the HEMA group. The competitive bidder offered a purchase price of €800,000 for the shares, but the debt package of the business would remain unaffected (ie would not be restructured, as the lenders and bondholders were for obvious reasons only willing to do so as part of the transaction they had prepared). Importantly, the court ruled that the entire restructuring package, being both the cash consideration and the non-cash consideration, of the HEMA proposed sale and the HEMA competitive bid should be considered in assessing which bid realises the maximum possible value. As such, the €800,000 offered under the HEMA competitive bid was compared with the two elements of the HEMA proposed sale (€1 in cash, and €450m in debt conversion), leading the court to conclude that the HEMA proposed sale would realise the maximum value possible.
As it is in principle not possible to appeal against the approval decision of the District Courts and the Chamber for International Commercial Matters of the Amsterdam District Court, the Airopack, Lebara, Royal IHC and HEMA cases illustrate how similar cases likely can be dealt with.