30 June 2020
First Dutch judgments regarding COVID-19 in M&A transactions

judgement-M&A-Covid-19

For the past month, the summary judges of the relatively new Netherlands Commercial Court (NCC) and the District Court of Amsterdam rendered the first Dutch judgments regarding the consequences of COVID-19 in M&A transactions. In both cases, it seems that the Dutch courts are reluctant to amend commercial contracts following the COVID-19 outbreak. What are the key takeaways from these cases for the practice?

In this update, we describe to what extent COVID-19 can be considered as an unforeseen circumstance and the impact on amending contracts under Dutch law.

 

Unforeseen circumstances

Pursuant to article 6:258 paragraph 1 of the Dutch Civil Code, upon request of one of the parties, the court may amend or terminate the agreement, in whole or in part, on the basis of unforeseen circumstances. It relates to circumstances that occur after the conclusion of the contract and the parties have not taken the risks hereof into consideration. The unforeseen circumstance needs to be of such a nature that the other party may not expect the contract to be maintained in unaltered form in conformity with the Dutch standards of reasonableness and fairness. To the extent that a circumstance which is due to the nature of the agreement or generally accepted principles is for the account of the requested party, modification or termination of the contract will not be granted (article 6:258 paragraph 2 of the Dutch Civil Code).

In general, Dutch courts are reluctant to amend or terminate Dutch law contracts on the basis of unforeseen circumstances. Under Dutch case law, an economic crisis has not been considered as an unforeseen circumstance where it is possible to agree or amend the agreement. However, natural disasters and diseases could fall under the scope of the law. It ultimately depends on the actual circumstances of the case and the Dutch standards of reasonableness and fairness.

 

Case 1: Tennor vs. McCourt

The first case concerned Tennor Holding B.V. (Tennor) that had the intention to acquire 50% of the shares in McCourt Global Sports & Media LLC (McCourt), an US based equestrian show-jumping business. The parties signed a Dutch law Letter of Intent, pursuant to which each party may back out of the deal before March 2, 2020, but is obliged to pay a € 30 million break-up fee to the other party. McCourt executed and signed the required paperwork. However, Tennor refused and walked away from the deal.

In the summary proceedings before the NCC, McCourt claimed mainly specific performance of Tennor under the agreement – namely payment of the purchase price of € 169 million. The NCC declined the main claim. Alternatively, McCourt required payment of Tennor for the break-up fee of € 30 million. Tennor argued that the Letter of Intent needs to be terminated, or the break-up fee needs to be modified or reduced as COVID-19 needs to considered as an unforeseen circumstance.

The NCC ruled that under Dutch contract law the court may only interfere in the effects of the agreements if there are unprovided circumstances that would lead to an ‘unacceptable’ impact as assessed under the standards of reasonableness and fairness. In view of the fact that there is no well-established case law on COVID-19, the NCC relied on the ‘share the pain’ approach that focuses on preserving the contractual balance between the parties.

The parties agreed on the break-up fee which indicates the allocation of risks and equal commitment of both parties for entering into the agreement. The break-up fee also caps the exposure of the parties. In addition, there is no evidence that the parties discussed the potential impact of COVID-19 of the transaction during their negotiations. Hence, the NCC ruled that Tennor is ordered to pay the break-up fee in full.

 

Case 2: J-Club vs Nordian

The second case concerned Nordian Fund III Cooperatief U.A. (Nordian) that has been selected in a controlled auction to purchase shares in the capital of J-Club, the European market leader in the field of private-label fashion jewelry and accessories. On February 28, 2020, the shareholders of J-Club entered into a Signing Protocol with Nordian. An agreed form of the share purchase agreement (SPA) was attached to the Signing Protocol. Both contracts are governed by Dutch law. The SPA will be signed by the parties under the condition precedent that Nordian will take out the warranty and indemnity insurance ultimately by March 16, 2020.

On March 19, 2020, Nordian informed the shareholders of J-Club that reality had been so profoundly altered by the COVID-19 related measures that it felt to suspend its efforts to obtain the insurance. The focus should be on the implications of these measures on the transaction and the business of J-Club. Therefore, it cannot be expected from Nordian to fulfill the insurance condition precedent and signing the SPA without any amendment as COVID-19 needs to considered as an unforeseen circumstance.

The District Court of Amsterdam held that parties have been discussing the impact of the COVID-19 outbreak in China before signing the Signing Protocol. Even though the potential consequences of COVID-19 could not have been foreseen for Europe, the parties agreed that no material adverse change or COVID-19 clause was required. The sales of J-Club have furthermore declined, but it does not jeopardize the continuity of the company. Nordian has therefore not made it plausible that the COVID-19 needs to considered as an unforeseen circumstance that should result in amendment of the SPA.

 

Conclusion

Following the first Dutch judgments, the COVID-19 cannot be considered as unforeseen circumstances to modify Dutch law contracts. The outcome seems a foregone conclusion, but it ultimately depends on the circumstances of the case and the interpretation of the contractual provisions. If parties have not discussed the impact of COVID-19 and the target company is experiencing difficulties as a result hereof, this could possibly lead to successful reliance on unforeseen circumstances under Dutch law.

If you have any questions or would like to have advice regarding COVID-19 and Dutch law contracts, the Marxman M&A team will be more than glad to assist you.

 

Key contact
Susanna Tang, advocaat (attorney-at-law) Corporate M&A
E-mail: tang@marxman.nl / Telephone number: +31 (0)33 450 8000