Reviewing business case for which advisory reports are obligatory (art. 25 works counsils act – WOR)

22 april 2016 – Dorienke de Grave-Verkerk

In important decisions, the employer has to consult the organisation’s works council (Works Council-OR, Central Works Council-COR, Group Works Council-GOR, etc.). In doing so, a difference of opinion may arise about the business case, whether implementation of the decision is at all feasible and whether it will lead to the intended outcome? The classical doctrine is that the judge – for this type of disputes the Ondernemingskamer (OK) (i.e. the Enterprise Section of the Amsterdam Court of Appeal) – will completely assess whether or not the formal rules of the advisory process have been adhered to (think of timely notification, submitting the complete request for advice including a picture of the consequences for the employees and the absorption of those consequences, planning a consultation meeting), but not quite on the policy considerations. Entrepreneurial Independence is paramount, as the doctrine has it.

However, in a couple of recent cases before the OK, the objections of the works council to the decision´s “business case” were indeed completely reviewed. The OK reviewed the business case on the question whether or not the OR´s objections had been adequately met. Essentially a review of its contents, since the financial feasibility of the decision is after all being critically scrutinised by the OK. For instance, in the case of an intended shares sale of a health-care institution. The OR of this institution envisaged major risks to their own organisation because of the financial structuring of the shares purchase. The purchase price would have to be recouped quickly by the institution itself whereas the business case did not show a satisfactory operating result. Important to the OR was the fact that the predicted extra production had not been firmly substantiated, while it had indeed in part been based on its realisation.

The employer however did see enough promise in the plan because the synergy would yield obvious cost reductions. The OK doubted whether the financing was firmly substantiated and gave the benefit of that doubt not to the employer, the sellers of the shares, but to the OR (MDCA-Medisch Diagnostisch Centrum Amstelland, OK 17-12-2014).

This ruling is in line with a previous ruling in which, in response to objections raised by the works council, the OK also ruled that in the business case the financial risks have to be made manifest ànd addressed. In this instance, it concerned the decision to participate in an ailing institution. The business case for the participation had been drawn up with the assistance of external advisors and as such was not part of the discussion, except for an important detail in its implementation: the financing agreements with the bank turned out to be not guaranteed by the bank but could be infringed upon. The judge went along with the objections of the works council on the grounds of proportionality, and reviewed the entrepreneur´s plans completely on the point of financial feasibility (Fundis, OK: 27-02-2014).

It is noteworthy that in both cases the internal supervisory boards did consider the financial risks acceptable. The OK not only sets the bar high for the employer, but the effects of the works council being proven right on its contents are also reviewed by the OK at the risk of the decisions being reversed. This happened to the GOR (Group Works Council) which could not show adequate substantiation to cover the risks of a reversal of an already implemented shares transfer (Brink´s OK: 24-02-2015).

What does the OK´s restrained approach mean on the matter of financial risks to the practice of employee participation? It is necessary to base the business case firmly on financial feasibility, including its execution and if necessary to have it assessed externally. The internal supervisory board, too, will have to insist on this, given the developments in the case law, and if necessary have the business case tested independently, the more so when it concerns companies going through a bad patch. The works council can call in the assistance of external advisors, if announced timely (art.22 WOR-Works Councils Act). We now know that when the financial feasibility is doubted, the Ondernemingskamer will not accept any risk.

The requirement of a solidly based business case does indeed also apply to other important decisions, think of decisions on technological provisions such as an IT-project. In that case, though, a careful assessment of the feasibility of the project´s throughput is also to be commended.
The same goes for alternatives. These will have to introduced into the advisory process in a timely manner, if need be augmented by input from external experts (Akzo Nobel, OK: 12-05-2014). Irrespective of the input from external experts, to these alternatives also applies that the business case needs to provide for addressing the financial risks in order to pass the OK´s assessment.

Dorienke de Grave-Verkerk