Netherlands: Merger Code revision considered

On 10 February 2014, the Netherlands’ Social and Economic Council (SER) established a commission to investigate whether its Merger Code should be revised. The code sets out information and consultation rights for unions when companies merge or are taken over. The commission is scheduled to announce its advice at the end of 2014.

SER Merger Code

The first version of the Merger Code came into force in 1975 and was revised in 2001. The code establishes information and consultation rights for unions when companies are merged, acquired or demerged if 50 or more employees are affected. All firms that are involved in this kind of company restructuring, whether Dutch or foreign, buyer or seller, are obliged to inform and consult the unions that are active in the firms concerned.

Unions are considered active when they can show that they have members in the firm, or when they are involved in collective bargaining rounds in these firms. Information and consultation rights are not restricted to employee matters (employment levels, conditions of employment) but cover all issues related to the merger, including legal and financial matters, and the viability of the proposed transaction.

Compared to the information and consultation rights of works councils, union rights are relatively weak. Works councils have the right to challenge merger decisions in court when their advice is not followed by the employer(s). Their chance of success is greatest when employers have significantly infringed their information and consultation obligations.

The strongest sanction when employers breach their obligations deriving from the Merger Code, however, is a public announcement of infringement by the competent authority. This is the Merger Code Dispute Board (GF), which comprises three independent lawyers and two members nominated by the social partners. The main reason for the lack of a serious sanction is that the Merger Code is not legislation in a formal sense, but a code of conduct (so-called ‘soft law’). This makes it an exception in Dutch information and consultation legislation.

In the past, this has led to some debate on the added value of the Merger Code, compared to the Act on Works Councils. A major asset of the code, despite its soft law character, is that the unions have no dependent relationship with the employer. They also have knowledge and expertise at sector level, while the knowledge of works councils is in many cases restricted to their own firm.

The newly established commission will focus on:

  • the scope of the code;
  • the legal character of the code;
  • further technical issues.

Scope of the code

At present, the Merger Code only covers the private sector, and then mainly the profit sector. This is because the code was established by the SER which only deals with the private commercial and industrial sector. The code does not cover the public sector, the not-for-profit sector (including healthcare and educational institutions) or professions such as lawyers, notaries and accountants. However, the distinction between these different sectors has become more and more blurred in recent years. Large law and accountancy firms operate using the same classic for-profit model as most commercial firms. The same is true for certain sections of the healthcare sector and similar activities.

To some extent the problem of coverage has been solved through provisions in some collective agreements that either declare the Merger Code applicable, or include comparable information and consultation agreements. Not all firms are covered by such agreements. The commission has to investigate whether the scope of the code should be broadened and if so, to what extent – should it cover only the not-for-profit sector, or should it cover the public sector as well?

Legal character of the code

The issue of the legal character or the code is largely one of scope. Because not all sectors are represented in the SER, it is doubtful whether a code amended to include other sectors could have a sufficiently valid legal basis. If not, then legislation may be necessary. However, this does not automatically imply that the legal character of the Merger Code, as a code of conduct, changes as well. There are other examples, such as the Dutch Corporate Governance Code for listed companies, where soft law has been incorporated into or linked to legislation.

Other issues

Impact of securities legislation needs to be addressed

Some of the provisions of the 2001 version of the Merger Code are outdated, mainly because of developments in securities legislation. Stricter rules on insider trading when a merger is underway between listed companies seem to preclude giving information to unions or works councils at an early stage before this information is (also) made public. Although Member States were allowed to uphold existing employee rights, the Netherlands (unlike Sweden) has not done so. It appears that the Code must be adapted to conform to the new securities legislation.

Defining the concept of ‘merger’

The existing definition and explanation of the concept of merger needs scrutiny. At present the core of the concept is acquiring control over the target company. However, it is not always clear when this is the case. In most cases, acquiring the majority of the shares will result in control. However, legal constructs (such as Dutch structure law, in which the supervisory board hires and fires the executive board, as in the German Mitbestimming system) or provisions in the articles of association of a company can result in unclear situations. The same is true, again in the case of listed companies, for defensive measures taken against hostile takeovers.

Defining the concept of ‘employee’

In the Netherlands there has been a substantial increase in the number of flexible workers. Information and consultation legislation does not cover these employees, or only does so to a very limited extent. With regard to the Merger Code, the definition of employee closely follows the Act on Works Councils (WOR). If the Merger Code is revised, the redefinition of this concept will probably be synchronised with a revision of the WOR.

Useful? Interesting? Tell us what you think. Hide comments

Eurofound welcomes feedback and updates on this regulation