The Works Council is potentially entitled to prior consultation in the context of a Letter of Intent regarding merger

Recently, a ruling by the Dutch Enterprise Section was published which concerned the right to prior consultation of the Works Council in the context of a Letter of Intent regarding  a merger. This is interesting - particularly for the Merger & Acquisition practice - as there is little case law to help clarify the grey area of letters of intent that are and that are not subject to mandatory prior consultation. Please note: omitting to consult the Works Council can potentially have serious consequences, even resulting in a situation where the adopted decision must be revoked.

Case: Letter of Intent regarding merger

The Nederlandse Patiënten Consumenten Federatie ("NPCF"; Dutch Patients Consumers Federation) has collaborated with the Chronisch zieken en Gehandicapten Raad Nederland ("CG-Raad"; Dutch Council for the Chronically Ill and Disabled) for some time now. Wishing to intensify this collaboration, Parties consider a merger. The Works Councils have been informed and their response is positive. Parties wish to set forth their intention to merge in a Letter of Intent. The Works Council of NPCF communicates its position that it is entitled to prior consultation in the meaning of article 25 par 1 WOR [Dutch Works Councils Act].

Parties disregard this position and sign the Letter of Intent without prior consultation with the Works Councils. In the Letter of Intent, Parties set forth not only the final date of the merger but also the commitments regarding the period of collaboration preceding said merger. The scope of the Letter of Intent covers the entire operational organization; budget, strategies in representing Parties' interests, policy development and the installation of a joint Works Council. The terms of this agreement are binding. Parties are however - on forfeiture of a penalty - permitted to unilaterally cancel the Letter of Intent.

The Works Council of NOCF persists in its position that it is entitled to prior consultation and lodges its appeal before the Enterprise Section of the Amsterdam Court of Appeal.

Letter of Intent or not?

The Enterprise Section rules that the signed Letter of Intent is an agreement based on a contemplated decision.

The Enterprise Section holds that the Letter of Intent is subject to mandatory consultation because:
-  it effectively created a sustained partnership for the duration of one year;

-  its terms are binding and reinforced through a penalty clause;

-  the scope of the partnership covers multiple facets of the organization.

Consequently, dealings between Parties are no longer (entirely) without obligation and the Works Council's right to prior consultation can no longer materially affect the merger.

NPCF is ordered to revoke the decision and undo all consequences. It is also ordered to refrain from any acts designed to further implement (parts of) the disputed decision.

Forewarned is forearmed

The courts consider all relevant facts and circumstances, the wording of the agreement, and the concrete consequences of the decision. The fact that the agreement is referred to as a 'Letter of Intent' does not alter this. If a Letter of Intent contains terms that as good as realize the merger then signing this Letter of Intent is - in principle - subject to mandatory consultation.

So each Letter of Intent must be considered in terms of the requirement of prior consultation of the Works Council. Forewarned is forearmed.