Since the beginning of 1970’s Dutch corporate law knows a special legal procedure to investigate the affairs and the course of action of a company, the so-called inquiry proceedings (in Dutch: enquêteprocedure). The Enterprise Chamber (hereafter: EC) can conduct such an investigation on request of shareholders or an involved industrial organization. A request for inquiry proceedings will only be allowed if the EC consider that there are well-founded reasons to doubt the correctness of the course of action followed by the corporation.
According to the Dutch Civil Code the following parties are entitled to request an inquiry into the affairs of a company:
• (in companies with subscribed capital of less than € 22.5m:) the share holders and depositary receipt holders jointly of 10% of the subscribed capital, or of shares with a nominal value of at least € 225.000,-.
• (in companies with subscribed capital over € 22.5m:) the shareholders and depositary receipt holders jointly who represent at least 1% of the subscribed capital, or whose shares/depositary receipts represent a market value of at least € 20m.
The right of inquiry is mainly aimed at restructuring and restoring of healthy balances and to solve deadlocks. However, it happens frequently that an inquiry is conducted in the affairs of a company that has already gone into bankruptcy. The Dutch Supreme Court has ruled more than once that a “postmortem” investigation can be a justified cause for inquiry proceedings as well.
The procedure at the EC can be a long one: sometimes it takes over a year. One of the benefits, however, of this procedure is the authority of the EC to order provisional remedies on request of a solicitor. Such immediate relief measures can be far-reaching. Examples hereof are: the suspension of a director, the appointment of a director or supervisory director with special authorities, the suspension of certain authorities of any body of the company, and the (temporarily) transfer of shares. There is no limit to the measures an EC can order. Provisional remedies often lead to a break through in a deadlock situation.
The inquiry proceedings are divided into two phases. In first phase of inquiry proceedings, the Enterprise Chamber decides whether an investigation (inquiry) shall be held. The EC can order such investigation is there are ‘well founded reasons to doubt the correctness of the course of action followed by the corporation‘. If the EC concludes that there are founded reasons, the will order an investigation. The EC shall specify on which time period and on which parts of the board’s policy the investigation should focus. The EC shall appoint one or more investigators. The company shall (in first instance, at least) bear the costs of the investigation. If the company cannot bear the costs, it is common practice that the plaintiffs secure payment. Depending on the outcome of the inquiry the costs will be recovered from either the plaintiffs or the board. The investigator has far-reaching powers. He may hear the parties involved, and can require access to the administration of the company. All parties involved are required to give fill cooperation. The first phase ends when the investigator files his report to the court.
The criterion “well found reasons to doubt course of action” is very factual in nature. The proven facts and circumstance together must given reason to believe that further investigation will show mismanagement. When the EC assesses whether there are found reasons to doubt the course of action, they have to respect certain discretion of the company though.
If the plaintiffs are of the opinion that the report shows mismanagement (incorrect course of action) the can ask the EC –within 2 months after the report is submitted- to establish mismanagement. If the EC establishes mismanagement, it can take one or further measures to put an end to this mismanagement, such as the dismissal of directors, the suspension or annulment of any decision of a body of the company or even order the dissolution of the corporation.
While our corporate litigation lawyers have gained broad experience in many different procedures in this legal area, the inquiry proceedings remains one of the more important procedures. Should you have any question with respect to corporate litigation (among which deadlock situations within the board of a limited or shareholders conflicts), please feel free to contact our corporate lawyers.