Abridged account of the facts

In 2010, the shares in childcare company Catalpa were acquired by NCC, an (indirect) subsidiary of private equity investor Providence. In order to finance the acquisition, NCC took out loans from a bank syndicate and its parent company. Catalpa requested the central employee representative body (CEB) for its advice based on article 25 of the Works Councils Act (WCA) on (i) the proposed decision of Catalpa's sole shareholder (Benca) to transfer the shares in Catalpa to Providence and (ii) the proposed financing of the acquisition (Request for Advice I).

Following the acquisition, Catalpa merged with NCC as company ceasing to exist, with the legal effect (as envisaged by the banks) that the debts of NCC came to weigh on Catalpa’s own assets (the so-called "debt push down"). Catalpa submitted a second request for advice to the CEB regarding the proposed merger between NCC (i.e. the new shareholder of Catalpa) and Catalpa (Request for Advice II).

Catalpa – meanwhile renamed “the Estro group” – was eventually declared bankrupt in 2014. The trustee in bankruptcy (curator) requested the Enterprise Chamber to determine that there had been mismanagement in connection with the acquisition of the Estro group, amongst others by the careless works council consultation process.

Decision of the Enterprise Chamber 

The Enterprise Chamber determines that both requests for advice are incomplete. For example, Request for Advice I does not contain any information regarding the conditions of the financing and the securities which had to be provided by the group companies of the Catalpa group, while the key considerations of the legal merger were not mentioned in Request for Advice II (i.e. that a full debt push down would take place as a result of such merger).

Furthermore, it was stipulated in Request for Advice I that Providence would finance the acquisition with equity capital (eigen vermogen) for more than 50%. However, one month after the CEB rendered its positive advice with regard to Request for Advice I, NCC entered into a shareholder loan with a group company of NCC of EUR 225 million with an annual interest rate of 15%. As a result of the debt push down, Catalpa would become liable (following the merger) for all obligations under this shareholder loan.

Further to this, the Enterprise Chamber determines that by means of entering into the shareholder loan, Catalpa's board must have had knowledge that the CEB was misled by the statement that "Providence would finance the acquisition with equity capital for more than 50%." Added to this is the fact that it was misleadingly suggested to the CEB in Request for Advice II that the merger would only be intended to simplify the legal structure of the Catalpa group.

Furthermore, the Enterprise Chamber concludes that two weeks prior to the acquisition, Catalpa's board had knowledge of the shareholder loan and the fact that Catalpa would become liable under this shareholder loan and the other financing entered into by NCC as a result of the merger (i.e. the debt push down). By not informing the CEB afterwards, by not seeking further advice of the CEB and by providing incomplete and misleading information to the CEB after the acquisition as well (by means of Request for Advice II), the Catalpa’s board did not give the CEB the opportunity to render its advice on the (financing of the) acquisition based on correct and complete information. The Enterprise Chamber determines that the conduct of Catalpa’s board with respect to the works council consultation process is so careless that (partly) on this basis mismanagement is given.

Importance of the Estro-Decision for (co-determination) practice

In the Estro-decision, the careless works council consultation process plays a prominent role in the determination of mismanagement. The Enterprise Chamber therefore allows to weigh the defects in the co-determination process heavily in the inquiry proceedings (enquêteprocedure) (as far as we know for the first time). In the second phase of the inquiry proceedings, the Enterprise Chamber can implement measures if it is established that there is mismanagement, such as (i) suspension or annulment of resolutions of directors, supervisory directors or the general meeting and/or (ii) suspension, dismissal or temporary appointment of one or more directors or supervisory directors. In the Estro-decision, the Enterprise Chamber annuled the resolutions of the general meeting in which discharge has been granted to the members of the executive board and supervisory board of Catalpa, to the extent such discharge relates to the mismanagement established by the Enterprise Chamber.

Furthermore, the Estro-decision demonstrates that the provision of information to the employee representative body must be correct and complete and that violation of the relevant information obligation can have far-reaching consequences in inquiry proceedings. Below we have listed a number of points of attention to consider for the purpose of a careful organization of the works council consultation process.

Points of attention for co-determination practice

With regard to Request for Advice I, the Enterprise Chamber notes that – as soon as Catalpa’s board was aware of the relevant information (i.e. the shareholder loan and the debt push down) – it would be up to the board to inform the CEB afterwards, so that the CEB would be given the opportunity to include such information in its advice in the context of Request for Advice II. Catalpa’s board, however, failed to correct the wrongly created image at the CEB and to request the CEB for further advice based on the correct and complete information, according to the Enterprise Chamber.

Taking into account the above, the Enterprise Chamber seems to provide room for remedying a request for advice that was drafted inadequately in the first place. This can be seen as innovative compared to the established case law in this respect. In a previous decision (the Uniface-decision), the Enterprise Chamber determined that a sufficiently documented request for advice must be submitted to the works council immediately. Sharing relevant information and answering questions at a later stage was "in that case" not sufficient to remedy the inadequate request for advice.

In the Estro-decision, the Enterprise Chamber thus seems to provide room for the practice of already initiating the consultation process and sharing additional information with the works council at a later stage – once there is more clarity about the decision-making process. This makes sense to us. After all, the ultimate goal is to provide the works council with sufficient information in order to enable them to render a proper advice. However, it is important that the works council is given sufficient time to digest the new information and incorporate such information in its advice.

To summarize, our recommendations for the co-determination practice are as follows:

  • The responsibility for a careful organization of the works council consultation process lies with the management board of the relevant The management board must ensure correct and complete provision of information to the works council and cannot hide behind, for example, non-cooperation by a potential buyer (or other parties involved who have relevant information about the decision-making process);
  • Relevant information known to the management board at the time of submitting the request for advice should be shared with the works council immediately if possible. The starting point is that the works council should be provided with a request for advice as complete as possible; and
  • If additional relevant information is provided to the works council at a later stage, it must be ensured that (i) the works council will be given the opportunity to its render advice (partly) on the basis of this information, (ii) the works council will be given the opportunity (if necessary) to provide further advice and, if necessary, (iii) the works council will be provided with additional time to render its If this opportunity is not given to the works council, then the works council cannot advise on the decision-making process based on the correct and complete information.

Finally, it should be ensured at any time that the works council will not be set on the wrong track during the consultation process. An important aspect of the Estro-decision is that Catalpa’s board is being held accountable for the fact that with regard to Request for Advice II, the key consequences of the legal merger were not shared with the CEB and it was wrongly suggested that such merger was only intended to simplify the legal structure of the Catalpa group.