Lenders & borrowers beware: when Dutch works council advice enters the deal – New York office Snippet

A Dutch works council is an employee representative body established under the Dutch Works Councils Act (WOR). It gives employees statutory consultation rights in relation to certain business decisions. Dutch companies with 50 or more employees are required to have one, although a works council may also exist in smaller companies. Depending on the group structure, a central, group or joint works council may have advisory rights in relation to decisions concerning one or more group companies.

A Dutch company with a works council must, in certain circumstances, obtain its advice before implementing important decisions affecting the company or its business, a process that can impact transaction timing and, if not properly observed, may give rise to legal challenge. The advisory right under Article 25 WOR is intended to ensure that the works council is consulted at an early stage to allow its views to be considered before the final decision is made. If a company implements a decision without obtaining the required works council advice, or proceeds contrary to the advice given, the works council may challenge the decision before the court. Importantly, the court cannot affect third parties' accrued rights (for instance security interests granted to lenders without the advice procedure having been complied with). While the works council does not have a veto right, compliance with the applicable works council procedures is mandatory under Dutch law (and deemed important by the court).

In the context of financings, works council advice may be relevant where a Dutch company intends to take one of the decisions listed in Article 25 WOR. These include, among others, decisions to:

enter into a significant financing or investment;
provide guarantees or grant security for substantial debts of another group company, unless this falls within the ordinary course of business;
undertake a transaction that may result in a transfer of control over the company or part of its business – this covers a pledge over the shares in the company; or
implement a significant restructuring or reorganisation.

Whether a financing, guarantee, security package or transaction triggers the advisory right must be assessed on a case-by-case basis. While there are no fixed thresholds, the assessment depends on the significance of the proposed transaction and its expected impact on the company, its business and its employees.

Accordingly, it is important to identify early whether works council consultation applies. Work council compliance is often reflected in conditions precedent and Dutch legal opinions.