Under Dutch corporate law it is possible for the Enterprise Section of the Amsterdam Court of Appeal to order an inquiry into the policies and affairs of a company and to interfere with the internal organization of such legal entity in order to settle corporate disputes between shareholders, the management and supervisory boards and the works council. The present article creates an overview of these legal proceedings.
1. What are inquiry proceedings?
Inquiry proceedings are a special legal procedure to take interim measures and investigate the policies and affairs within a company in order to (i) solve structural disputes and problems within the company; (ii) restore the relationship between the stakeholders in the company; (iii) disclose the state of affairs within the company; or (iv) determine responsibility for evident mismanagement. The inquiry proceedings cover any misconduct of the company's constituent bodies (e.g. the general meeting of shareholders, management board, supervisory board) as well as of the persons acting as part of the constituent bodies.
2. Who can initiate inquiry proceedings?
Inquiry proceedings can be initiated by (i) shareholders who hold a certain amount of capital shares (10% for limited liability companies); (ii) the company; (iii) trade unions with members employed by the company; (iv) the trustee in bankruptcy (curator); (v) in case of public interest the advocate general; and (vi) any other third party that has been granted with such right by the company (together the "petitioner").
3. What can the petitioner rely on in his request for inquiry proceedings?
The court grants a request for an inquiry only if there is a well-founded reason to doubt the policies of and affairs within the company. Examples of well-founded reasons to doubt the policies of and affairs within the company are:
- providing insufficient information to those who have a legitimate interest within the company (e.g. shareholders);
- deadlock in the decision-making process within the company that has a negative impact on the company;
- conflict of interest between the company and its managing directors/supervisory directors/shareholders;
- conducting an unreasonable dividend policy;
- substantial decline of the financial position of the company or disappointing financial results in combination with a lack of internal control and incorrect expense claims;
- acting in violation of statutory regulations.
4. When can the petitioner initiate inquiry proceedings?
Before submitting a request for inquiry proceedings to the court, the petitioner must notify the company's management board and the supervisory board in writing about his objections against the company's policies and affairs. Furthermore, the petitioner must provide reasonable time for the company's management to investigate his objections and, based on their findings, take the appropriate measures. Only thereafter the petitioner can be received in its request.
5. The first phase of inquiry proceedings
Inquiry proceedings consist of two main stages. The first phase can be divided into the following sub-phases: (i) the procedure before the court; and (ii) the inquiry itself. The court proceedings start with the submission of a petition for an inquiry. The court will allow both the company and any other known interested parties to respond to the petition. The submission of the petitioner's request is followed by a public hearing before the court where the latter decides on the merits of (i) the petitioner's request for the inquiry; and (ii) the parties' requests for interim measures, such as suspension or actually appointment of (new) members of the management and supervisory boards, temporary suspension of voting rights of specific shareholders or the temporary setting aside of certain provisions in the articles of association to facilitate emergency financing. These are just examples of interim measures, but the court has wide authority to interfere in the company with interim measures and also issue interim measures that have not been specifically requested by the petitioner. It is for the same reason in practice party debate to a large extent focuses on interim measures in the first phase, after which sometimes not even an inquiry follows.
In case the court decides in favor of the petitioner and the parties wish to continue with the inquiry, the second sub-phase begins during which the court appoints one or more investigators and determines the scope and the length of the inquiry. During the inquiry the investigators could (i) review the books, documents and other data carriers of the company; and (ii) demand information from both the current and the former managing directors/supervisory directors/employees. Furthermore, if it is deemed necessary in the context of the inquiry, the investigators can also carry out the investigation procedure in other legal entities closely related to the company regardless of where such entities are established.
The first stage of the inquiry proceeding ends with the investigators submitting a report of their findings to the court and sending a copy of the report to the petitioner, the company and the advocate general. The duration of the inquiry varies but in practice it usually takes at least a year. The cost of the inquiry as well as any appointed board members are borne by the company itself.
6. The second phase of inquiry proceedings
On the basis of the report the petitioner can submit a request to the court to establish that there has been mismanagement by the company and to order definitive measures. Such request must be filed within two months after the investigators have submitted their report to the court. The request and the written remarks on it by the parties will be considered on the merits during the hearing held before the court. Subsequently, the court may order one or more of the following definitive measures: (i) suspension or annulment of a resolution of the management board/supervisory board/general meeting of the shareholders; (ii) suspension or dismissal of managing director/supervisory director; (iii) temporary appointment of a managing director/supervisory director; (iv) temporary suspension of the application of one or more provisions of the company's articles of association; (v) temporary transfer of shares into a trust; and (vi) dissolution of the company. In its decision the court could also state which individual is personally responsible for the mismanagement.
7. How can the company limit the consequences of inquiry proceedings?
Not only inquiry proceedings itself can be burdensome, but in particular the interim and the definitive measures awarded by the court could lead to irreversible consequences for the company.
In order to avoid or to decrease the consequences, the company has two options: (i) appeal the court's decision in the inquiry proceeding and/or the establishment of the mismanagement within three months after the decision has been rendered; or (ii) settle with the petitioner. As highlighted above, In practice, only a limited number of inquiry proceedings reach the second stage as the parties prefer to rather reach an amicable settlement to avoid interim measures or an inquiry at an early stage.