Structuring options in distressed situations under Dutch law

Dutch corporate law offers several tools that can be used in respect of a Dutch private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) ("Dutch Company") to achieve this delicate balance. In this blog we examine three potential options available under Dutch corporate law: the appointment of board observers for enhanced oversight, the appointment of an independent board member and the strategic use of "golden share" structures that provide contingent control rights.

Board observer 

A way for lenders to monitor the group's financial position is to request appointment of a board observer with respect to the decision-making within the group, either at management board or supervisory board level of the Dutch Company. By observing meetings, board observers can help monitor board decisions and the financial circumstances of the Dutch Company. Furthermore, whilst not having formal voting power, board observers can ask targeted questions and provide feedback to the board. The board observer can therefore identify early warning signs and can inform lenders accordingly. Typically, board observers have the right to attend all board- and committee meetings and to receive the same meeting notifications and board materials as provided to the board, subject to certain limitations, for instance in respect of privileged information. Board observers will therefore often be required to enter into a non-disclosure agreement with the company. We see that the board observer rights and provisions are typically documented in agreements or board rules, rather than in the articles of association of a Dutch Company, which are publicly available.

Independent board member

Parties could also consider appointing an independent board member at the level of the Dutch Company, nominated by the lenders. Usually, an independent board member is appointed as a non-executive board member or supervisory board member. Such independent board member will have the same rights, duties and liabilities as the existing board members, including fiduciary duties. The independent board member will typically receive cost coverage and D&O insurance from the Dutch Company, which can either be arranged contractually or in board rules or articles of association. In order to provide for the appointment of an independent board member, the articles of association of the Dutch Company will need to be amended to provide for the right of the agent, representing the lenders, to nominate a board member, which amendment requires a notarial deed. It should be noted that the articles of association are publicly accessible through the Dutch Chamber of Commerce and therefore any information contained therein will be publicly available, including the details of the agent that is granted the nomination right. However, as the articles of association are binding upon the Dutch Company, its shareholder(s) and any other corporate bodies and provide conclusive evidence, we typically see that the right to nominate a board member by the agent is included in the articles of association. Other rights of the independent board member – such as a veto rights or voting thresholds – can either be documented in board rules that apply between and amongst the board and the Dutch Company or in the articles of association. After nomination, the general meeting (or supervisory board, depending on the corporate structure) will formally appoint the independent board member in accordance with the statutory provisions. The general meeting may also overrule the nomination by the lenders, taking into account the statutory requirements in this respect, but this will typically lead to a default under the finance documentation. The finance documentation will in addition generally contain restrictions for the shareholder to remove or replace the independent board member. We also see that finance documentation can include an obligation to appoint a chief restructuring officer (CRO) in certain financial distress circumstances. A CRO is typically appointed as an executive director or management board director. 

Shareholding

A final, more interfering, option is granting a lender direct shareholder rights by issuing one or more shares in the capital of the Dutch Company to the lender, which is sometimes referred to as a “golden share”. There is no Dutch law definition of golden share, so it is possible to tailor the rights of such share for each specific situation, taking into account both lender’s and borrower’s position and the limitations of the Dutch legal framework.

We often see that a non-voting share is issued by the Dutch Company to the lender and that the shares held by the borrower-shareholder (i.e. the current shareholder of the Dutch Company) retain all voting rights, resulting in the borrower-shareholder retaining control as a starting point. In case of a certain trigger moment as agreed between parties, for instance an Event of Default and a trigger event notice being sent by the agent, the lender-shareholder's share will 'flip' into a share with voting rights, and the borrower-shareholder’s shares will 'flip' into shares without voting rights. The lender now has full control over the general meeting of shareholders and in that capacity has the ability to exercise shareholder rights, such as directly appointing and dismissing managing directors or amending the articles of association. In case the golden share constitutes a separate class of shares, additional rights can be granted to the lender in its capacity as meeting of holders of that class of shares. This can, for example, be an approval right in case of certain management board and/or general meeting resolutions. These rights can be granted immediately upon issuance of the golden share, or again be made subject to a trigger event and a trigger event notice. 

We note for completeness sake that even where either the lender-shareholder or the borrower-shareholder holds only non-voting rights, the relevant party will retain certain shareholder rights in relation to such non-voting shares, including (i) the right to attend the general meeting and (ii) (limited) dividend rights. Other points that need to be considered when implementing any of the measures set out above are whether the lenders or agent can be considered a co-policy maker (feitelijk beleidsbepaler) and whether the measures will trigger any applicable change of control provisions in finance documentation or other contracts entered into by the borrower's group.

Conclusion 

Dutch law provides lenders and borrowers with a flexible toolkit to navigate and tailor the approach in distressed situations to match the severity of the financial distress and the specific dynamics of their relationship. For lenders, these measures can provide graduated levels of oversight and control to protect their interests whilst avoiding premature enforcement that could destroy value for all stakeholders, an approach we see more and more proactively being included in financing structures. From the borrower's perspective, these mechanisms can offer advantages over immediate acceleration or security enforcement. By granting lenders enhanced visibility and influence, borrowers may secure forbearance, additional funding or covenant waivers that provide breathing space for restructuring efforts. Board observers and independent board members can also bring valuable expertise and credibility to the decision-making process. That being said, each option carries distinct legal, practical and commercial implications that must be carefully assessed on a case-by-case basis.

If you have any questions, please contact Barbra Bulsing or get in touch with your usual Stibbe contact.