The issue of environmental liabilities plays an increasingly important role in the Mergers & Acquisitions practice in the Netherlands. Sellers and Purchasers must take in-depth advice to be fully made aware of the potential pitfalls. The State has various means of, inter alia, recovering clean-up costs from (previous and current) owners and users of polluted land.
It is, in view of these contingent liabilities, not uncommon for parties to consider the interposition of separate legal entities, as well as asset (i.e. immovable property) transfers to other entities, with the aim of distancing the ultimate shareholders from (environmental) liabilities. This occurs both intra-group, as well as in the framework of mergers and acquisitions.
This practice focuses the attention on the issue of "piercing the corporate veil", i.e. direct shareholder liability, and the status of that legal concept under Dutch law. Generally, the legal doctrine in the Netherlands holds that each legal entity is liable to settle its obligations itself, and that all of its assets may be used for recourse by its creditors. Further, it is a principle that in the event of an acquisition of assets, as opposed to an acquisition of shares, liabilities remain with the transferor. The concept of piercing the corporate veil deviates from these principles, in that shareholders and subsequent owners of assets (i.e. different legal entities than the primarily liable entity) may nevertheless be held liable. Below we provide an outline of recent jurisprudence in point in the context of environmental liabilities. Developments since July 1995 will be dealt with in a subsequent article.
Piercing the corporate veil for environmental damage recovery purposes?
1. AAgrunol
In the AAgrunol-case (District Court of Groningen, 10 November 1989, TMA 90-6, p. 155 et seq.) the State initiated legal proceedings against two legal entities, AAgrunol B.V. and Schering AAgrunol B.V. for the purpose of recovering decontamination costs incurred by the State. These companies had, following assets acquisitions, continued the AAgrunol business. The Court granted the State's claim. The Court noted the "close link" ("nauwe verbondenheid") between the seller (N.V. AAgrunol) and the purchasers. The Court found that the transaction in itself amounted to a deliberate scheme to evade potential (environmental) claims.
This judgment was a first in the Netherlands; prior to it, a new owner of assets acquired pursuant to an asset transfer was in principle not liable to the State for pollution caused by the actions of its predecessor. In appeal, however, the Court of Appeal of Leeuwarden (20 October 1993, NJ 1994, 516) did not accept the District Court's finding that the "close link" between the entity that caused the pollution and its successor in title amounted to a scheme to avoid liability, and ruled that it was not supported by the facts in the case. The Court of Appeal rejected the State's claim but left open the possibility of accepting the concept of piercing the corporate veil if it were to be confronted with a different set of facts. Therefore, the AAgrunol case may be read as a step towards a judicial policy more inclined to pierce the corporate veil in cases of environmental damage.
2. Holdoh-Houtunie
In the case of Holdoh-Houtunie (District Court of Assen, 27 July 1993, TMA 1994-1, p. 28 et seq.) the State was clearly more successful. This case concerned the company N.V. Houtunie and its various operating companies. In 1982, the management of N.V. Houtunie and N.V. Holdoh decided to enter into a merger, the two companies further operating as a new legal entity under the new name N.V. Holdoh-Houtunie. One of the operating companies (which had caused the pollution) was renamed, prior to the legal merger, to N.V. Houtunie (the name of its former parent). N.V. Holdoh-Houtunie was held liable for pollution of the site on which its predecessor company conducted its business. The Court based the liability of the newly formed entity for its predecessor's tortious conduct primarily on identification of the new entity with the predecessor, and on the management influence exercised by the parent (N.V. Holdoh-Houtunie) over the operating company following the merger. The State's request that the corporate veil be pierced was granted.
3. Staat v. Roco B.V.
In Staat v. Roco B.V. (Court of Appeal of Arnhem, 10 May 1994, TMA 94-6, p. 155 et seq.), a family business that, since 1922, had been conducted in the form of a sole proprietorship was transferred by means of an asset sale to Roco B.V. inclusive of all movable property, rights, liabilities, goodwill and contractual relationships, but excluding the real property and the liabilities relating to it. This exclusion of real property and liabilities had been agreed upon pursuant to a financing condition imposed by the bank concerned for the specific purpose of avoiding potential liability for environmental damage. The District Court of Zutphen (1 August 1991, Vermande D-8-85) held that the claim against Roco B.V. was inadmissible, because this company had been incorporated after the polluting acts took place and because there was no proof of any transfer of the corresponding liabilities. The Court of Appeal, however, found that the sole purpose of the 1984 transaction was to evade potential claims by the State, as Roco B.V. had essentially continued the business of its predecessor. The Court of Appeal therefore ignored the fact that Roco B.V. was a separate legal entity. Where the State had failed with AAgrunol, it succeeded in this case. An appeal against this decision has been lodged with the Supreme Court.
4. Staat v. De Rouw
That the aforementioned case is not dispositive of the issue is demonstrated by a recent judgment of the Court of Appeal of Den Bosch (18 October 1994, TMA 95-2, pp. 63 et seq., Staat v. De Rouw). Mr. De Rouw incorporated De Rouw B.V. in 1975 and transferred the galvanization business of the sole proprietorship De Rouw as a going concern to De Rouw B.V., in which the business was simply continued. The property on which the business was conducted turned out to be polluted, and the State sought to recover damages from De Rouw B.V. The Court, however, found that the mere fact that the business of Mr. De Rouw was the same as that of De Rouw B.V. (compare AAgrunol and Roco B.V.) did not justify a finding that De Rouw B.V. should be liable for a tort committed prior to its incorporation by its incorporator.
Civil Law Recovery of Costs under Section 21 IBS and section 75 WBB
The above cases were all decided pursuant to section 21 IBS (the Interim Land Clean-Up Act), which was in 1994, by means of a separate act (the "Inbouwwet"), replaced by the current WBB (the Protection of Land Act). The underlying premise of the IBS was that the State should first clean up polluted land on its own initiative and at its own cost and thereafter attempt to recover its costs from the polluter in tort (section 21 IBS). The WBB approaches the matter from the opposite angle and emphasizes that clean-up orders can be given to the polluter, the user or owner, or the leasehold tenant, ordering them to investigate and, if necessary, clean up pollution at their own cost. Only if such clean-up order is likely to be ineffective for whatever reason will the State itself investigate and clean up the pollution at its own cost. However, the costs incurred in such investigations or clean-up actions can be recovered from the entity whose tortious conduct caused the pollution (section 75 WBB; the successor to section 21 IBS). It has meanwhile become clear that section 75 WBB, which was redrafted with the object of increasing the possibility of recovering clean-up costs, especially with regard to pollution that occurred prior to 1 January 1975, still does not provide the State with an effective remedy. This is primarily due to the fact that the State still has the burden of proof that a tortious act has occurred. This burden of proof is not easily satisfied. In the case of Staat v. Breustedt for instance, the State did not succeed in proving on the basis of section 75(5) WBB that Breustedt had acted negligently (District Court of Zutphen, 10 November 1994, TMA 95-1, p. 32 et seq.).
Public Law Clean-up Order pursuant to Sections 43 and 46 WBB
In addition to the Civil Law recovery of costs by the State (on the basis of section 75 WBB), the State may also issue clean-up orders on the basis of Sections 43 and 46 WBB. A clean-up order may be given to (i) the polluter, (ii) the succeeding owner, or (iii) the leasehold tenant of the polluted site concerned, irrespective of civil law liability (section 43(3) WBB). However, no clean-up order can be given to a "guiltless" owner or leasehold tenant. To be without guilt one must, according to section 46(1) of the WBB, comply with three criteria. The burden of proof rests on the owner or leasehold tenant to prove that he:
a. had no continued legal relationship with the polluter/polluters during the period when the pollution was caused; b. was neither directly nor indirectly involved in actions that caused the pollution; c. did not know and could not reasonably have known of the pollution at the time of acquisition of its rights to the property.
The concept of "legal relationship" in item a. above refers to relationships pursuant to which the decisions of the polluter are capable of being influenced by the owner or leasehold tenant, for instance in connection with shares held in the polluting entity. The administrative body that issues the clean-up order does not need to prove that decisions were in fact influenced. It is determinative whether there is a potential to influence the actions that caused the pollution. In addition, it is clear that it may be very difficult for an entity related, by shareholding, to a polluting company, to prove the two criteria mentioned under b. and c. above.
Conclusion
The following conclusions may be drawn from the foregoing:
(1) it is still very uncertain what the precise status is of the "piercing the corporate veil" doctrine in the Netherlands;
(2) the foregoing is also true for cases where the State seeks recourse on shareholders and/or successors in title for environmental damages;
(3) the fact that the State may issue clean-up orders (with the effect that the recipient of such order must prove to be without guilt) is, from the State's perspective, a material improvement of its position in recovering environmental damage costs.
Finally, it is clear that the clean-up orders mechanism affects contractual relationships between parties and, in general, acquisitions involving immovable property, not in the least because of the large sums involved in environmental liability claims generally. Without a thorough due diligence investigation of the immovable property concerned (compare section 46(1)(c) WBB), any transaction is of great importance, so as to avoid, from the purchaser's perspective, unquantified risks. Lastly, the environmental liability issue is an important factor in drafting guarantees and indemnities in merger and acquisition contracts.
This article is concluded per July 1995. For further information please contact Ewout J. Stumphius, Loeff Claeys Verbeke, Rotterdam (phone 31.10.4034644, fax 31.10.4149388).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
