Corporate │ M&A

Several liability towards pledge holder in the event of a share issue

By oktober 15, 2015No Comments

 

On 7 October 2015 the Oost-Brabant District Court (ECLI:NL:RBOBR:2015:5797) ruled that a share issue may result in the joint and several liability of board members personally as well as group companies towards a pledgee.

The case was as follows:

A granted B a loan and received a pledge on 50% of all shares in B’s subsidiary C as collateral. Following a share issue by entities related to B (hereinafter referred to as the B Group), A’s pledge was diluted to 4% of all shares in C. X was the sole board member of both the B Group and C as such involved in the establishment of the pledge on the shares and the share issue.

In the view of the Court X should, in his capacity of board member of both the B group and C, have ensured that A’s position was taken into account, for example by establishing adequate substitute collateral. After all, 50% of all shares in C were held by companies controlled by X and, as such, he was personally accountable for his acts and/or omissions in this regard. Furthermore, the Court is of the opinion that X’s knowledge and acts as sole board member of the B Group can be attributed to the B Group. For that reason alone, without prejudice to the potential applicability of Section 6:166 Civil Code, the B Group, alongside X, is jointly and severally liable for any damage incurred by A. According to the Court, the other requirements of Section 6:166 Civil Code have also been met.

The Court reached this decision on the following grounds:

There is no rule prohibiting a share issue in the event a pledge has already been established on all or part of the existing shares in a company. However, this does not mean that such a share issue, which does not take into account the interests of a pledgee, is always permitted. The B Group acts as if A were a random creditor who demanded collateral for the fulfilment of the loan contract and in doing so knowingly accepted the risk of dilution.

In the Court’s opinion, this representation is incorrect. A had been doing business with X’s company for several decades and had a claim against it up to several million euros in mid 2010. In light of the longstanding relationship, it decided not to pursue bankruptcy, but instead to restructure a substantial debt package. Part of this reorganisation entailed the conversion of a sum of EUR 279,000 owed to A to a loan by A to B. The longstanding business contacts between A and X and/or his company were the reason A chose not to stand firm, but to show leniency towards X and/or his company). For example, the conversion of the debt did not include the establishment of a specific security. A pledge on 50% of the shares in C, with a nominal value of only NLG 20,000 (Dutch guilders), entails that the collateral actually consisted of the execution value of these shares or, in other words, the value of the company, with all the risks involved.

In view of the above, the Court is of the opinion that X acted negligently vis à vis A by facilitating the share issue without taking A’s interests into account, and that A was disadvantaged by this course of action. In view of the circumstances it is not sufficient to simply say, as B Group does, that A could have addressed the risk of dilution and “should have handled its affairs more effectively”.

Despite the fact that the Court came to the pledgee’s aid in this instance, pledgees would do well, in general, to properly organize their affairs in advance.