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Dutch corporate law implications of COVID-19
18 March 2020

Current developments regarding the novel coronavirus COVID-19 impact companies in various respects. This article informs you about relevant Dutch corporate law implications of COVID-19 that merit consideration by companies and their directors.

Termination of negotiations

Parties which are currently negotiating a transaction may reconsider proceeding with such transaction given the known and unknown consequences of COVID-19. The question is whether negotiations may be terminated without any negative consequences for the terminating party. The likelihood of such negative consequences and the possibilities to avert them depend on the facts and circumstances of the relevant case, while the main rule remains that parties are free to choose whether to enter into a contract and therefore whether to abort ongoing negotiations.

A relevant circumstance is the phase in which the negotiations are at the moment of termination. If the parties were only exploring the transaction and have not agreed on (all) essential items for the transaction, parties can in principle terminate negotiations without any obligation to pay damages (phase 1). If negotiations have proceeded beyond this phase, the terminating party may be obliged to reimburse the costs made by the other party (phase 2). If the negotiations have progressed so far that termination would be contrary to good faith, parties may be forced to proceed with the transaction or to compensate the other party for loss of profit in case of termination (phase 3).

In case parties have reached phase 2 or 3, the reason for terminating negotiations should be taken into account. If there are good and valid reasons to terminate the negotiations, a Dutch court may rule that no compensation is due by the terminating party. A relevant consideration for the court could be whether unforeseen circumstances have arisen in the course of the negotiations. It could be argued that COVID-19 and the measures taken to contain the virus can be regarded as foreseen circumstances for purposes of contract termination.

Possibilities to terminate negotiations for COVID-19 related reasons may also vary per sector and industry in which the terminating party or the counterparty is active. Certain industries – such as the aviation industry, travel agencies, event agencies and the hospitality industry – are affected more than others. This is a relevant factor for the courts when determining whether negotiations may be terminated without any negative consequences for the terminating party.

Material adverse change clauses and contract management

In addition to ongoing negotiations, current contractual relations may require the attention of companies in light of COVID-19. Prudent contract management requires that relations with contract parties are reevaluated. In this respect, the material adverse change (MAC) clause merits particular attention. The MAC clause is a common feature in both public- and private acquisitions. It gives the buyer the option to terminate a contractual relationship if an unforeseen and possibly harmful event of a certain magnitude occurs. Which circumstances are material can differ. The MAC clause is also often used in facility agreements as an event of default.

It is not unlikely that during because of the increasing impact of COVID-19 on supply chains and customer bases, MAC clauses may require special attention. The events and measures that are unfolding and will continue to dictate developments for the foreseeable future are likely to  impact underlying business processes of companies, including rising uncertainty of market conditions, hiccups in second- and third-party supplier services and workforce issues due to the current restrictions imposed by both the Dutch government, foreign governments and companies themselves .

In all cases the party invoking a MAC clause with reference to COVID-19 will have to prove the conditions of the particular clause are met. In M&A transactions, the buyer may have an advantage if the clause is triggered by specific events such as a drop in revenue or rising liquidity constraints. Generic MAC clauses are more difficult to invoke, but may be used in COVID-19 related cases and could provide a safe harbour in case specific conditions are not met.

For upcoming acquisitions the negotiation of MAC clauses will be very important, because both short-term and long-term consequences of the COVID-19 outbreak are unclear. For the already signed deals, the precise definition of the clause will determine whether the COVID-19 related events qualify as a circumstance which, alone or in conjunction with other circumstances, may trigger the MAC-clause. 

Management board and executive directors

COVID-19 and its impacts on health and the economy will in all likelihood be on top of mind of CEOs and management boards in various industries. Executive directors and/or members of the management board are responsible for protecting the company against any negative consequences of the COVID-19 outbreak. The company must ensure that adequate risk management procedures are in place to avert such negative consequences adequately, where possible. Seeing that various risks inherent to the current developments may result in director liability claims, managing directors must ensure their decisions are based on appropriate information and that relevant interests are taken into account.

In addition to their responsibilities towards the company, its shareholders and its creditors, members of the management board or executive directors may be liable towards the Dutch tax and social security authorities and towards a sector-wide pension fund (bedrijfstakpensioenfonds) in case of non or late payment of certain taxes and/or premiums. This liability may arise if the company fails to comply with its duty to notify and applies to management board members as well as shadow directors.

When it is foreseeable that the company is no longer able to pay its taxes, social security contributions or pension premiums, it has the duty to immediately notify the relevant authorities in writing. The consequences of failing to do so are severe, as the members of the management board become jointly and severally liable for the outstanding amounts, unless they prove that the failure to perform this duty cannot be attributed to the director against whom the claim is filed. It is therefore recommended that directors of companies affected by COVID-19 timely notify the relevant authorities and pension funds in case of foreseeable non-payment.

Supervisory board and non-executive directors

Additionally, the supervisory board and individual supervisory or non-executive directors have an important responsibility with regard to COVID-19 and accordingly may run related liability risks.

It is the duty of the supervisory board to closely monitor the company and to ensure that the management board serves its interests to the best of their ability. The supervisory board may assist with general policy matters and must act when improper performance of the board’s duties is imminent. In uncertain times, safety and health of all stakeholders are most important. The main task of the supervisory board and non-executive directors alike in this regard is risk management.

In practice, the supervisory board and non-executive directors need to communicate with management – both at board level and below – to liaise on procedures and mutual communication lines. It is advisable to implement an information protocol, which includes the timing, contents and nature of the information exchanged and the position of the management board members vis-à-vis the supervisory or non-executive directors. In addition, special attention shall be paid to internal risk management and audit capabilities, in accordance with the management board responsibilities in this regard outlined above.

Further to the general financial consequences, the impact on the stock market may pose risks relating to M&A-activities by opportunistic bidders or activist shareholders. On the other hand, the current situation may give rise to opportunities to acquire shares or to consider acquisitions under favourable terms. In any event, the supervisory board and non-executive directors require adequate information and advice from within the company, its management board as well as from external advisors.

Further corporate and contract law related developments will be monitored closely. Whereas the current circumstances may prove challenging, Van Doorne is well-positioned to render legal advice, e.g. on corporate governance matters and boardroom counseling.