Mergers, takeovers and employee participation

Download article in original language : NL0004188FNL.DOC

Dutch legislation governing employee participation during mergers and takeovers is under pressure in 2000. Far-reaching internationalisation has certainly contributed, but new legislation, especially concerning hostile takeovers, has also served to tighten the screws. We examine the powers of the works council and trade unions, with specific reference to new legislation.

Dutch legislation provides for employee participation in the event of company mergers and takeovers through both works councils and trade unions.

Works councils

Based on the Works Councils Act (Wet op de ondernemingsraden, WOR), works councils have the right to issue recommendations concerning proposed mergers, takeovers, and entering into or splitting up long-term cooperative business relationships. This advisory right also covers outsourcing.

Advisory powers compel employers to submit information and give reasons for proposed decisions to the works council in advance of taking such decisions. The works council then issues its recommendation. If a difference of opinion arises between the employer and the works council, the employer must postpone the decision-making process for a month. Within this period, the works council can appeal to the Enterprise Section (Ondernemingskamer) of the Amsterdam Court of Appeal (Amsterdamse gerechtshof). If the employer is deemed to have acted without due consideration in reaching a decision, it can in most cases be compelled to withdraw such a decision and undo the possible consequences thereof.

A recent decision taken by the Enterprise Section regarding a proposed takeover illustrates clearly how the process works. VTR-groep, an inland shipping concern, wanted to transfer ownership of the owner's shares in VTR-groep to Atlantic Horizon BV. The works council issued a negative recommendation concerning the proposal and requested the employer to find an alternative solution. Although the works council itself acknowledged the importance of seeking cooperation with another company, it raised doubts about whether Atlantic Horizon would be the right choice. The Enterprise Section ruled that the employer had fallen short in a number of respects in terms of the information it had submitted to the works council, and that the information it did submit was in fact partially contradictory. The Enterprise Section ruled that the employer had not based the decision on reasonable grounds, and that the decision should be withdrawn.

Trade unions

Trade unions can influence mergers based on both the rules of conduct issued by the Social and Economic Council (Sociaal Economische Raad, SER), usually referred to as the SER Merger Code, and collective agreements. The SER Merger Code, established in 1971, comprises two sections. Section 1 contains rules to protect shareholders in the event of public takeover bids. Section 2 contains rules to protect the interests of all employees concerning all types of mergers and takeovers. Regarding mergers affecting 100 or more employees, the trade unions must be informed in time and must also be invited to enter into consultation. It is, however, not possible for trade unions to lodge an appeal if agreement cannot be reached in consultation with the unions. This is because the Merger Code does not enjoy the same status as the law. The heaviest penalty that can be imposed involves a public reprimand. Additionally, the Merger Code does not extend to mergers in the non-profit sector.

On 17 March 2000, the SER instituted a new code of conduct. The conceptual framework has been brought into line with the Works Councils Act, the threshold of 100 employees has been lowered to 50, and the code will also apply to the non-profit sector, the professional sector and the government sector. A committee consisting of three legal experts, an employer representative and an employee representative will adjudicate disputes. Although adopted, the code has yet to take effect. Before taking effect, the design of Section 1 of the code needs to be transposed into legislation governing securities. The intention is for this to take place this year.

Many collective agreements include agreements making it compulsory to enter into consultation with the unions concerning proposed mergers. Some collective agreements explicitly refer to the Merger Code.

Employee participation in group relations

On 29 June 1998, the new EU Directive (98/59/EC) on the transfer of undertakings was adopted (EU9806114N). In so doing, Article 6(4) of the existing Directive was amended. This now specifies that the obligation to inform and consult employees holds, regardless of whether a decision concerning the transfer is taken by the employer or a company that controls the employer. In other words, even if a decision is reached regarding the transfer of ownership of a company or subsidiary at a higher group level, the management of the subsidiary is obliged to inform and consult its the employees. What is the effect of the new Directive (which must be implemented in national provisions by 17 July 2001) on participation in the Netherlands?

Dutch case law on employee participation in group relations has oscillated between two poles over the past 20 years. One extreme corresponds with the provisions of the new EU Directive, in that employee participation obligations rest with the management of the company concerned, even if the decision is in fact taken at a higher group level. The other extreme entails that the party that actually makes the decision also bears responsibility for matters related to employee participation. On 26 January 2000, the highest court of justice in the Netherlands, the Supreme Court (Hoge Raad), determined (JOR 2000/550) that the approach stipulated in the Directive must serve as the point of departure. In exceptional cases, if systematic interference could be attributed to the group in terms of the subsidiary's policy, it is nonetheless conceivable that obligations regarding employee participation in fact rest at both levels.

Internationalisation

The Netherlands is one of the most active countries in the world when it comes to investments and takeovers abroad. Conversely, many Dutch companies are taken over by foreign groups. In terms of the latter, the Works Councils Act and the Merger Code apply unabated. This is not the case concerning takeovers abroad. The Works Councils Act and the Merger Code then apply only if the consequences of the proposed merger or takeover stand to be far-reaching for the Dutch establishments of the company. As a result of the increasing internationalisation of Dutch companies, a greater proportion of the mergers and takeovers are now unaffected by employee participation structures in the Netherlands (NL9810102F).

Hostile takeovers

From the perspective of employees of target companies, the difficulty concerning hostile takeovers is that although the works council may possess advisory rights on paper, its discussion partner is not necessarily the body responsible for the takeover decision, which includes – in addition to the bidder – the individual shareholders.

The Netherlands is not familiar with a tradition of hostile takeovers. The recent hostile bid made by Boskalis for HBG is still more the exception than the rule. Moreover, most Dutch companies listed on the stock exchange are well protected against hostile bids.

This protective structure is under fire from several directions. Proposed legislation that would, at the request of majority shareholders, award the Enterprise Section the right to annul protective structures under certain circumstances is still a subject of debate. Before the Enterprise Section adopts such an approach, it must at least hear the works council of the target company (NL9801154F).

The new factor is that since political agreement has been reached at EU level concerning the 13th company law Directive, which governs public takeover bids (EU9911211F), the Netherlands will be forced to amend its legislation. It then remains to be seen if it will be possible to maintain the current provisions of the Merger Code, which oblige the bidder and the target company as well as both companies and the trade unions to enter into consultation prior to the actual bid. With respect to the tension between the proposed 13th Directive and the Merger Code, the relevant minister has commented: "During negotiations in Brussels, it appeared that in the face of a hostile offer, prior consultation with trade unions in the other Member States is not customary."

Commentary

In the Netherlands, works councils possess a relatively high degree of authority concerning proposed mergers and takeovers. Employers which attach too little attention to their obligations to inform and consult are at a reasonable risk of being rebuked by the Enterprise Section. As a result of the new amendments to the Merger Code, the position of the trade unions in relation to mergers and takeovers will be somewhat strengthened in the foreseeable future.

However, this position of relative strength will gradually be undermined by advancing internationalisation and the increase of hostile takeovers in the Netherlands, and this at a time when protective measures against such takeovers are being partially undone. (Robbert van het Kaar, HSI)