Exit Provisions in Joint Venture & Shareholder Agreements: Lessons (to be) Learned – Looking Across the Ocean

By Thédoor Melchers and Rutger Sterk on Posted in contracts, Corporate Law, private equity

Legal scholars have been debating the method by which contractual provisions should be interpreted in the Netherlands since 1981, when the Dutch Supreme Court rendered its landmark Haviltex decision on the interpretation of contracts. Even though numerous relevant Dutch court decisions on contract interpretation have followed, the debate remains quite alive.

Irrespective of the applicable law, it is imperative for investors – such as private equity parties – to be precise when drafting exit provisions in joint venture or shareholder agreements. Across the ocean in the U.S., this was demonstrated in the Oxbow Carbon & Minerals Holdings, Inc. V. Crestview-Oxbow Acquisition, LLC decision rendered by the Delaware Supreme Court on Jan. 17, 2019. The Delaware Supreme Court provided guidance for investors drafting such provisions, which guidance can also be of relevance in other jurisdictions.

The Facts

A dispute arose as to whether two minority investors could force their co-investors to sell their equity interests (Units) by exercising their ‘Exit Sale Right’. The conditions for exercising this Exit Sale Right were laid down in the Limited Liability Company Agreement (Contract) entered into among all investors.

An Exit Sale was defined in the Contract as the “transfer of all, but not less than all of the then-outstanding Equity Securities of the Company and/or all of the assets of the company to any non-Affiliated Person(s) in a bona fide arms’-length transaction or series of related transactions (including by way of a purchase agreement, tender offer, merger or other business combination transaction or otherwise).” The Contract provided that the unidentified minority investors were entitled to drag the other investors in an Exit Sale.

The Exit Sale was, however, conditional, providing an investor could not be forced to sell its Units in the Exit Sale unless the investor received distributions equal to or higher than 1.5 times the investor’s initial capital contribution. This condition could not be fulfilled in relation to certain investors, each of whom obtained a minority equity interest in the company at a later time than the other investors and paid a higher price for their Units (the Small Holders).

Arguments

As to the proper interpretation of the exit provision, the parties’ arguments could generally be categorized as follows:

  • The Blocking Argument: If an Exit Sale does not satisfy the 1.5 times requirement for any investor and that investor chooses not to participate, then the Exit Sale cannot go forward, because it no longer would involve ‘all, but not less than all’ of the then-outstanding securities.
  • The Leaving Behind Argument: If an Exit Sale does not satisfy the 1.5 times requirement for any investor, then that investor can choose to participate in the Exit Sale, but cannot be forced to sell, and the Exit Sale can proceed without such investor. The other investors which satisfy the requirement, however, can be forced to participate in the Exit Sale.
  • The Top Off Argument: Assuming the ‘Blocking Argument’ were to be adopted and the Exit Sale would not satisfy the 1.5 times return on investment, the Exit Sale should still be able to proceed if the Small Holders (being the plaintiffs) were provided an additional amount of the sale proceeds such that they receive the 1.5 times return required by the Exit Sale provisions. This would effectively mean that the Small Holders would receive a higher purchase price than the other investors.

Dutch Legal Practice

The court in first instance found a gap in the Contract and used the implied covenant of good faith and fair dealing to imply a provision into the Contract which allowed the two minority investors to complete the Exit Sale if they came up with sufficient additional funds to satisfy the 1.5 times return for the Small Holders. The Delaware Supreme Court, on appeal, found that the court of first instance erred by finding that a gap existed in the Contract and implying a provision to fill such gap. Giving meaning to all of the provisions of the Contract, the Exit Sale provisions could only mean that an Exit Sale could not proceed where it does not satisfy the 1.5 times return for any of the investors and pay all of the investors the same consideration (which would result in paying all investors the amount necessary to satisfy the 1.5 times return for any investor). The Court found that the investors, being sophisticated parties, could have anticipated the impact that the admission of new investors would have on the Exit Sale, but did not elect to alter the Contract. The Court reiterated that the implied covenant of good faith and fair dealing should not be used as an equitable remedy to rebalance economic interests.

Dutch courts are in principle reluctant to fill any gaps by way of interpreting a contract (see Dutch Supreme Court, Dec. 9, 2016, ECLI:NL:HR:2016:2821, JOR 2017/55), even though the Dutch contract law doctrine of reasonableness and fairness could expand or limit the legal effects arising from a contract, which may lead to a similar result (see Clause 6:248, Dutch Civil Code ).

What the Delaware Supreme Court decision shows, irrespective of any debate on interpretation, is that clear drafting as well as identifying and addressing all potential contingencies remain vital, not only in private equity structures but in any contractual situation. This should be kept in mind in an era of ever-increasing deal speed and desire to reduce costs.

Lessons to be Learned

The Delaware Supreme Court decision highlights the need for parties drafting exit provisions in joint venture or shareholder agreements to address all potential contingencies, summarized as follows:

  • If the exit provisions include a minimum return on investment requirement, the contract language should be clear on whether that minimum return on investment requirement creates a blocking right or a leaving behind right.
  • Determine whether you want to have the flexibility of a topping off option or if the minimum return requirement may only be satisfied upon pro-rata and equal distribution of an exit sale’s proceeds.
  • Be careful to address how any minimum return on investment requirement will apply to any potential future (minor or major) shareholders/investors.
  • Be explicit regarding what type of exit sale (e.g., assets or equity) a member can force.
  • Be explicit how a leaving behind concept would work in the event of a sale of all of the assets of the company.

Any questions regarding Delaware law may be directed to GT Delaware office Managing Shareholder Diane Ibrahim.

For more on Dutch contract law, click here.

The ePrivacy Regulation: The Next European Initiative in Data Protection

By Dr. Viola Bensinger, Willeke Kemkers and Carsten Kociok on Posted in data protection, digital single market, ePrivacy, EU, European Directive, European Union Law, GDPR, privacy, Uncategorized

While many are still digesting the changes brought about by the EU General Data Protection Regulation (GDPR), a new privacy regulation is already on its way. The Regulation Concerning the Respect for Private Life and the Protection of Personal Data in Electronic Communications – in short, the ePrivacy Regulation  – is currently a draft under discussion (the latest version by the EU Council was published on 13 March 2019).

Unlike the GDPR, the draft ePrivacy Regulation focuses on privacy with respect to electronic communication services and on the data processed by electronic communication services. This means that in relation to such communication services, the ePrivacy Regulation provides the specific obligations that flesh out the more general provisions of the GDPR. The draft ePrivacy Regulation covers more than just data protection law; it also relates to non-personal data, such as metadata. Lastly, the draft ePrivacy Regulation contains provisions on telecommunication confidentiality.

Click here to read the full GT Alert.

European Law-Based Parental Tort Liability – Also in Civil Tort?

By Hans Urlus on Posted in Antitrust, Competition Law, Corporate Law, EU, litigation, mergers and acquisitions

The European Court of Justice ruled on March 14, 2019, that a parent company can in national civil tort proceedings also be held liable for the damage caused by a competition infringement committed by its subsidiary where such parent company (that holds all the shares in the subsidiary) has dissolved its subsidiary but continued the subsidiary’s economic activity.

Background

In 2004, the Finnish Competition Authority imposed fines on the participants in a Finnish asphalt cartel that existed between 1994 and 2002. By 2004, one of the cartel participants had been dissolved in voluntary liquidation proceedings and its assets acquired by its sole shareholder. Such sole shareholder continued the economic activity of its liquidated subsidiary. Based on the principle of ‘economic continuity’, the Finnish Competition Authority fined the shareholder for the competition infringement committed by liquidated subsidiary.

An alleged victim of the cartel claimed compensation from all companies that had been fined by the competition authority – including the above-mentioned sole shareholder – for the damage it incurred because of the cartel. In response, the sole shareholder argued as defense that it could not be held liable for the alleged harm caused by the anticompetitive behavior of another legal entity (i.e., its subsidiary).

Lower Court Rulings

The Finnish District Court and Court of Appeal reached diverging conclusions on the argument raised by the sole shareholder in its defense. Hence, the Finnish Supreme Court posed the following preliminary questions to the European Court of Justice (ECJ):

  1. Will EU law or national Finnish law determine who is to be liable for the damage caused by an infringement of Article 101 of the Treaty on the Functioning of the European Union (TFEU)?
  1. If EU law is to determine who is liable, should the EU concept of ‘undertaking’ also apply in private damages proceedings?
  1. If ‘national law’ is to determine the liable party, does the principle of effectiveness of EU law require that the parent companies in the case at hand be held liable for the damage of their dissolved subsidiaries?

ECJ Ruling

The ECJ ruled that it is for EU law to determine who is liable for harm caused by an Article 101 TFEU infringement. According to the ECJ, Article 101 TFEU says that a parent company is liable for the damage caused by its subsidiary when – as in the underlying case – the subsidiary that committed the infringement has been dissolved and the parent company continued the subsidiary’s economic activity.

The ECJ underscored that the right of parties to claim damages is also an integral part of the enforcement of EU competition law, a system that aims to deter companies from engaging in such conduct. If a company could escape liability by means of corporate or legal restructuring, the objectives of EU competition law would be compromised. Therefore, the notion of ‘undertaking’ should have the same meaning and scope in the context of the imposition fines by the EU Commission as in the context of private damage claims for violation of EU competition rules.

Conclusion

This judgment warrants serious consideration not only by competition law experts but by all involved in the transfer of assets and underlying businesses. A parallel can easily be drawn to situations where one party continues the economic activity of an (unrelated) party which committed a competition infringement, circumstances that can easily arise in common asset transactions by which a business is transferred. It will, among other considerations, require a more strategic approach to due diligence in relation to asset deals, pertinent representations and warranties, and the use of Warranty & Indemnity insurance.

Nike Fined €12.5 Million for Restricting Intra-EEA Sales

By Gillian Sproul and Addiped Cheng on Posted in Antitrust

In a warning shot to businesses using intellectual property rights to restrict cross-border sales within the European Economic Area (EEA), on 25 March 2019 the European Commission fined Nike €12.5 million for banning traders of licenced football merchandise from selling to other EEA countries. The decision underscores the Commission’s commitment to eliminating commercial practices that threaten the integrity of the internal market to the detriment of consumers.

To read the full alert, click here.

To read more about antitrust issues, click here.

Amendment to Dutch Patents Act (Rijksoctrooiwet) Allows for Extemporaneous Preparation of Medicine in Certain Circumstances

By Radboud Ribbert on Posted in dutch patents, governing law, health care, intellectual property, Intellectual Property Litigation, patents, pharmaceuticals

Article 53 (3) Dutch Patents Act

As of Feb. 1, 2019, the Dutch Patents Act 1995 (DPA) was amended to include a limitation of the exclusive right of the holder of a patent on a medicine. The exclusive right now includes an important exception in DPA Article 53(3):

The exclusive right…does not extend to the preparation for immediate use for individuals on the basis of a medical prescription of medicines in pharmacies, nor acts concerning the medicines so prepared.

This GT Alert examines this limitation. Under what conditions is a pharmacist allowed to prepare a patented medicine?

Click here to read the full alert.

Consumer Duty to Report a Lack of Conformity (Product Defect) Further Explained by Supreme Court in the Netherlands

By Monisha Sardjoe on Posted in Dutch Supreme Court, European Directive, litigation, products liability

Introduction

A consumer who has purchased a nonconforming (defective) product must report the lack of conformity to the seller within two months of discovery of the deficiency. See Article 7:23, Subsection 1 of the Dutch Civil Code (DCC); and the implementation of Article 5, Subsection 2 of the European Directive 1999/44/EG, which refers to the “detection” of the lack of conformity.

However, the moment of consumer discovery/detection of the lack of conformity was recently explored in a judgement (opinion in Dutch) by the Dutch Supreme Court (Hoge Raad) in the Netherlands, which ruled against the sellers.

Lack of Conformity

An object lacks conformity when it does not have the qualities a buyer can reasonably expect given the nature of the object (Article 7:17 DCC). The assessment of object conformity in consumer sales agreements includes statements made by the seller that could influence purchaser expectations (Article 7:18 DCC). Pursuant to Directive 1999/44/EG and Dutch consumer law, a consumer is defined as a natural person acting for purposes unrelated to his trade, business, or profession.

After reporting the lack of conformity to the seller (with reasonable speed after discovery), the buyer may demand that the seller: i) supplies what is missing, ii) repairs the supplied object, or iii) replaces the object. The seller is responsible for related costs. Alternatively, the consumer can rescind (ontbinden) the purchase agreement or reduce the price in proportion to the lack of conformity.

Case

The above-referenced Supreme Court case was decided on 15 February 2019 and concerned a horse that plaintiffs (consumers) bought from the defendant (seller) in February 2013. Before the purchase, the horse was inspected by a vet, who found it fit for use as a dressage horse. In April 2013, the horse started showing problems during training; the problems got progressively worse. A second examination at the end of August 2013 revealed that the horse had physical motor problems that had been present at the time of the purchase. Five months after the problem began to show, plaintiffs reported the lack of conformity to defendant.

The court of appeals in Arnhem-Leeuwarden found that five months was too long for plaintiffs to have waited to provide the notice of lack of conformity to defendants. The plaintiffs filed an appeal in cassation and argued that “discovery” did not occur when the problem first showed; they argued it only occurred once the defect was officially established by the vet, i.e., after the second examination.

The Advocate-General, advisor to the Supreme Court, concluded the appeal in cassation should be rejected, as the plaintiffs had to assume with a sufficient degree of probability (“voldoende mate van waarschijnlijkheid”) that the horse lacked conformity when the problem first began to show.

Supreme Court Judgement

The Supreme Court disagreed with the Advocate-General, holding that although the horse showed problems from April 2013 onwards, there was no reason to believe it lacked conformity. According to the Supreme Court, the clock started running on plaintiffs’ duty to report the lack of conformity to the seller at the moment the defect was established by the second examination, not when the horse began to show problems.

Relevance to Practice

Based on this decision, it could be argued that the consumer’s duty to report a lack of conformity to the seller starts from the moment the defect is established, and not when the purchased object is showing problems. However, based on case law involving non-consumers, the moment at which a purchased object begins showing problems still may be the starting point to provide notice to the seller.

This judgement strengthens the position of consumers. Companies selling products to consumers could face a longer time frame before consumers are required to issue notices of a lack of conformity, as the “discovery moment” pursuant to article 7:23 DCC, as well as the “detection moment” pursuant to Directive 1999/44/EG, will likely occur when lack of conformity is established, which might be later than when the lack of conformity first occurs. This is a fundamental consumer right that cannot be modified or limited by companies in contracts.

LIBOR and “No-Deal” Brexit

By Thédoor Melchers and Lotte Kuhn on Posted in Brexit, EU

One of the consequences of a “no-deal” Brexit would be that the United Kingdom would no longer have access to the European financial market. This would affect LIBOR as a trusted and widely used benchmark.

LIBOR vs. EURIBOR

Currently, two relevant benchmarks exist in the European Union: LIBOR and EURIBOR. LIBOR stands for “London Interbank Offered Rate” and is a benchmark that is used for – among other things – loans based on Loan Market Association documentation. LIBOR is made available in five different currencies: U.S. dollar, British pound, Japanese yen, Swiss franc, and euro. EURIBOR stands for “Euro Interbank Offered Rate” and is, simply put, the interest rate at which European banks lend money to each other. EURIBOR is only available in euros. Both benchmarks are determined daily, but while LIBOR focuses on the London banking system, EURIBOR takes into account the entire European Union.

Developments around LIBOR

LIBOR has been the subject of increased scrutiny after it emerged that certain banks had manipulated LIBOR rates. Furthermore, insufficient activity in the unsecured interbank market raised questions about the sustainability of the LIBOR benchmark. Closely related to these developments is the new EU Benchmarks Regulation (EU) nr. 2016/11 and the development of a new secured overnight interest rate by the European Central Bank (ECB). The Benchmarks Regulation went into effect on 1 January 2018 and includes a two-year transitional period. The new interest rate for the euro will be based on data already available to the Eurosystem and is anticipated to be finalized before 2020.

The Future of LIBOR

Andrew Bailey, chief executive of the UK Financial Conduct Authority (FCA), has spoken to all current panel banks about agreeing voluntarily to sustain LIBOR until the end of 2021. However, a “no-deal” Brexit most likely will cause LIBOR to lose its authorized benchmark status in the European Union. This would leave nine months for the reference rate’s administrator to reapply as a third-country provider. Thus, even if LIBOR survives until 2020, a no-deal Brexit could come with enormous risks.

Takeaway

Market participants may wish to review and consider the amendment and waivers provision in loan agreements being concluded now, taking into account a possible “no-deal” Brexit and the development of the new overnight interest rate by the ECB. Furthermore, lenders should closely review the requirements posed by the Benchmarks Regulation to ensure they are compliant with its provisions.

To read more about Brexit, click here.

Questions about this information can be directed to:

Modernization of EU Copyright Rules: A Good Idea With Bad Results?

By Willeke Kemkers on Posted in Copyright, EU, European Union Law

In a period of ongoing modernization of European legislation concerning the European Digital Single Market, the regulation of online copyright is a continuing concern. The proposed new copyright directive (‘the Copyright Directive’) would bring far-reaching changes to European copyright law and has been heavily debated by the member states over the last two years. It has also been intensely criticized in the media.

On Wednesday, 13 February 2019, however, a breakthrough was achieved when the three branches of European government – the European Commission, the Parliament, and the Council of the EU – reached a political agreement on the Copyright Directive. In the coming months, the European Parliament and the Council of the EU will have a final vote on the Copyright Directive.

At the same time, the media publish extensively about the directive. Their most common complaint concerns Article 13 and the duty of ‘online content sharing providers’ to filter content. Household-named tech giants are the online content sharing providers (‘Content Sharing Providers’). Some argue that such filtering could violate people’s freedom of expression, as defined in Article 10 of the European Convention of Human Rights.

But where does this fear of ‘filtering of the internet’ come from? Does it really pose a threat to human rights? And are there no countervailing advantages to be provided by the Copyright Directive?

Protection of the Creative Content Sector

To start with the last question: Yes, there are advantages, but only for a limited group of stakeholders. One of the objectives of the Copyright Directive is to create a ‘fairer and sustainable marketplace for authors, performers, the creative industries and the press’.

While these parties are at the heart of content creation and the creative sector, their remunerations are not considered reflective of the extensive online use of their content by Content Sharing Providers. This use is generally not addressed in agreements between creators and such providers.

Consequently, if content published on the Internet infringes a creator’s copyright, the content can only be removed afterwards, and no fixed arrangements on remuneration and/or compensation for damages are in place to make the creators whole. Uncertainty about the specific use of content creators’ material negatively affects their ability to determine appropriate use and remuneration. The European Union therefore finds it important to ‘foster the development of the licensing market between rightholders and the Content Sharing Providers’. These licensing agreements should be ‘fair and keep a reasonable balance for both parties’. (Recital 37 of the last proposal for the Copyright Directive).

Article 13 Copyright Directive – Conclusion of License Agreements

Article 13 of the Copyright Directive says that Content Sharing Providers shall:

‘obtain an authorization from the rightholders […], for instance by concluding a licensing agreement’.

The complete text of the amended (and agreed upon) Article 13 can be found here.

Subparagraph 2 of Article 13 sets out one main element of the license agreement: ‘acts carried out by users of the services’. This means that the license agreement would need to cover the possible acts of the platform’s users. This would impose a great burden on online platforms to control and manage user-generated content, thus   incentivizing the filtering of user-generated content on these online platforms.

Article 13 Copyright Directive –  Liability, unless….

Subparagraph 4 of Article 13 makes the duty to filter content explicitly clear, because if the rightholder does not grant the required authorization, the Content Sharing Provider is liable for the publication of the copyrighted work.

There is an exception to this strict liability, but only if the Content Sharing Provider complies with the following obligations.

The Content Sharing Provider must demonstrate that:

  1. it made best efforts to obtain an authorization; and
  2. it made best efforts to ensure the unavailability of the specific work; and in any event
  3. it acted expeditiously (upon receiving a notice by the rightholders to remove the specific work).

The most efficient way to ensure the “unavailability of the specific work” under (b) would likely be the filtering of all uploaded works on a platform. Using a filter would enable the practical detection of potentially infringing specific works.

Possible Infringements of Human Rights

While Content Sharing Providers are likely to filter user-generated content to protect themselves, automated content filters often fail to recognize the context and actual content of the specific material (link in Dutch). Such failures would contravene other provisions of  the Copyright Directive, which explicitly allow specific forms of expression that may not be recognized by a content filter.

The Copyright Directive even contains an obligation for the member states to ensure that users in the EU have the freedom for expressions such as:

  • quotation, criticism and review; and
  • use for the purpose of caricature, parody or pastiche

(Article 13 subparagraph 5 Copyright Directive)

This language would seem to require that a filter draw a clear distinction between the content and its specific purpose. This may be an impossible task in practical terms.

A further challenge for adequate filtering is the fact that a copyrighted work, like a video clip, may have multiple authors, each of whom would need to authorize a license to use the work. Consequently, a Content Sharing Provider’s filter system would need to be precise and fully accurate as to attribution, since a mistake regarding a single author’s authorization could lead to a claim.

Lastly, the use of Internet filters poses threats to user privacy. The filtering of content could easily result in the monitoring of users and their personal data. Objective and clear criteria for content filtering is thus required to prevent infringements of the General Data Protection Regulation (GDPR).

All the above will likely lead to the implementation of risk averse policies by online platforms, considering the high threat of many large claims. Such policies are likely to result in strict application of filters in order to block all content that poses a potential risk.

Thus, the risk of using strict upload filters is that ‘safe’ content is filtered out, limiting a free flow of information and freedom of expression. The fact that ‘new platforms’ (i.e., platforms on the market for less than three years and with an annual turnover below EUR 10 million) are exempted from the above obligations (b) and (c) may seem positive for start-ups, but it also means that there is really no way out for the large-scale platforms with millions of European users.

To be continued…

The European Parliament and the Council of Europe are expected to take their final vote in March and April 2019. Subsequently, the member states need to implement the Copyright Directive as national legislation. The future of the Copyright Directive and its potential impact are uncertain, and it remains to be seen if the (members of these) institutions are willing to obstruct the current proposal after years of numerous and lengthy negotiations. To be continued.

For more on copyright law, click here.

Greenberg Traurig Amsterdam Office Advised Amundi Real Estate on its Acquisition of INK Hotel Amsterdam, MGallery by Sofitel

By Greenberg Traurig on Posted in Announcements, real estate

AMSTERDAM – Feb. 19, 2019 – Global law firm Greenberg Traurig, LLP advised Amundi Real Estate on the acquisition of INK Hotel Amsterdam, located in the heart of Amsterdam.

INK Hotel Amsterdam, MGallery by Sofitel, which Principal purchased in 2012 in a sale-and-leaseback agreement with Accor Hotel, it was sold to Amundi Real Estate’s OPCI fund (a French real estate investment scheme) in December 2018.

To read the full press release, click here.

Greenberg Traurig Amsterdam and ULI Netherlands host the First Annual Netherlands Real Estate Leaders Roundtable

By Greenberg Traurig on Posted in Events, real estate

AMSTERDAM – Feb. 11, 2019 – Greenberg Traurig LLP’s Amsterdam office hosted the first annual Netherlands Real Estate Leaders Roundtable, in collaboration with Urban Land Institute (ULI) Netherlands. The event, which was held on 25th January 2019 at De Bazel (home of the Amsterdam City Archives and once the headquarters of the Netherlands Trading Company) has been hailed a great success with key decision-makers attending including a wide range of international and local investors, developers, asset managers, and government officials.

Moderated by Eric Rosedale, Greenberg Traurig’s Head of International Real Estate Development, the roundtable provided a special opportunity to share practical information, trends, and ideas about the Dutch real estate investment market.

To read the full press release, click here.

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