Employee shareholdings protected when employer restructures?

In a restructuring, the question always arises: what may and may not be affected by a WHOA arrangement? Article 369(4) Bankruptcy Act (FW) excludes employee rights arising from the employment contract from restructuring. This means at the same time that these should always be paid in full (and preferably on time). But what about employee participations. Do they also fall under this protection and can therefore also not be included in a reorganisation?

Employee rights excluded

It is settled case law of the Supreme Court has that classic employee rights, including not only wages but also pension contributions, cannot be co-sanctioned. This gives a broad interpretation and scope to the interests to be protected and exception to the remediation possibilities. The rationale behind this is that employees should not under any circumstances become the victims of the employer's financially unhealthy situation and, moreover, that they should not be asked to make a 'sacrifice' or be able to reach a structural solution through debt restructuring. This category is thus formally excluded.

Participations: remuneration or capital interest?

Whether and to what extent employee shareholdings may also be covered by this protection and therefore exception depends very much on the material content of the rights granted or to be granted on this basis hereof.

• Equity-based participation: employees actually share in the value development of the company and bear entrepreneurial risk. This is similar to a shareholder interest and can therefore be touched in a WHOA deal.

• Disguised bonus arrangement: participation actually functions as (deferred) salary or bonus. In that case, the obvious choice is to apply the protection of section 369(4) Fw.

A first indication of the foregoing distinction could be found in the accounting treatment:

• If the participation is booked under equity, this indicates a capital interest.
• If it is treated as an employee expense or remuneration expense, this points towards a remuneration instrument.

Criteria for qualification

In addition to accounting, the answers to the following questions are also important: Does the right arise directly from the employment contract or a separate agreement?

• Does the participation continue upon termination of employment, or does it lapse?
• Is the goal value development (equity) or wage component (bonus)?

What does this mean in practice?

Under Section 369(4) of the Insolvency Act, protection applies automatically to rights arising from the employment contract. The Supreme Court has added that this applies equally to pension rights. With regard to employee share schemes, the substantive content in particular, but also the method of allocation/acquisition and the objective, will be decisive in determining whether or not these fall within the scope of this exception and are therefore excluded. This depends on various factors and is therefore highly case-specific in nature. Does your company make use of employee share schemes and are you interested in the options available in the context of a proposed reorganisation? If so, please consult Charlotte Crombag or Bas Besseling. They have extensive (practical) experience in the field of restructuring and knowledge of employee share schemes within this framework.