If a company is in urgent need of additional liquidity, while the bank is not at home and no real alternatives are available, shareholders will usually be called upon for financing.
In the event that the shareholders (and the board) cannot reach an agreement on this, for example because the required majority of votes for a share issue is not achieved, one will sometimes have to resort to emergency measures, such as forced share transfers or dilution of the stake of some of the shareholders.
Necessity, impasse and urgency
Such measures can only be taken when there is an impasse that results in a failure to secure financing and directly endangers the survival of the company.
Normally, the board will have to inform shareholders of the need for financing, clearly indicating the urgency of the situation (for example, in the form of a cash flow forecast). In doing so, the board will usually formulate a proposal as to how the liquidity need can be met. If that proposal or a reasonable alternative does not result in the necessary financing, there is usually not much left but to go to court.
Going to court
There are then roughly three options:
(i) an interim injunction proceeding before the Court of Preliminary Relief,
(ii) an inquiry procedure with the Enterprise Chamber or
(iii) an appeal to the statutory dispute resolution procedure at the Enterprise Chamber.
The Preliminary Relief Judge and the Enterprise Chamber have a wide range of measures from which to draw. In addition to setting aside statutory or agreed-upon provisions, shareholders can be forced to cooperate in the necessary decision-making for a share issue.
Directors can also be suspended and temporary officers appointed. Such an officer may be granted the authority to issue shares to one or more shareholders or to a third party. There is also the possibility of the shares being transferred (temporarily) to an officer for management purposes.
Another option is to (temporarily) assign the power to issue shares to another corporate body (for example, the management board or supervisory board). Furthermore, the enhanced majority, approval of a body and/or the pre-emptive right required for an issue can be set aside. In doing so, the court will always try not to change the control relations further than strictly necessary.
Of course, things become a lot easier if the shareholders' agreement or the articles of association already provide for how a necessity financing can be established.
Alternative: a forced composition agreement
The Law on Homologation of Private Compulsory Arrangements (WHOA) offers an alternative. The WHOA makes it possible to enforce an agreement without bankruptcy or suspension of payments. That agreement can also involve shareholders, who, for example, are required to cooperate in a conversion of their claim on the company into shares.
Here, too, the court can set aside the pre-emptive right and power of issue of the general meeting. The WHOA also provides that shareholders may not frustrate the restructuring of the company for improper or improper reasons.
One difference with the aforementioned route to the preliminary relief judge or Enterprise Chamber is that in a WHOA procedure there does not have to be a deadlock in the general meeting. In addition, a WHOA process can have far-reaching consequences. Additional arrangements can be included in the WHOA agreement, such as entering into new financing and changing shareholders' interests and their dividend rights. Dilution or even the complete buyout of one or more shareholders is also possible.
Thus, a WHOA agreement potentially goes beyond necessity financing.Although a WHOA process is usually not perceived as easy, it does provide some additional possibilities, for example in case a third party with securities on important assets stands in the way of (re)financing. However, there are strict rules attached to this: such creditors may not be worse off in a composition than in a liquidation in bankruptcy ("no creditor worse off").
In addition, the distribution of the amount offered under the agreement must not deviate from the legal order of recourse ("absolute priority rule"). If these conditions are met, secured creditors may also be bound by a WHOA agreement.
Conclusion
It is often only in times of financial stress that it becomes apparent how important it is for companies to make the right choices on time. By seeking legal advice and establishing clear agreements, companies can manage potential risks and ensure continuity, even in difficult times.
