Corporate Newsletter - December 2011 - Corporate and Company Law - Corporate/Commercial Law

Legislation Update

Bill on Management and Supervision - remedial bill and entry into force

The Minister of Justice does not expect the Bill on Management and Supervision which was adopted by parliament in May 2011 to enter into force before 1 July 2012.

To clarify the maximum number of supervisory positions that a supervisory director may hold, as well as which supervisory positions do not count when adding up the number of positions remedial legislation has been submitted to parliament. The restriction on the number of supervisory positions has received a great deal of criticism. As a result, some stipulations in the remedial bill have been clarified and amended such as the following:

when is a legal entity "large"? – when assessing whether the criteria for a large company apply, the point of departure is the figures on the balance sheet date on a consolidated basis. In addition, a transitional scheme will be introduced so that if a legal entity is "large" for a period of two consecutive years, the restriction will apply.
void appointment of director/supervisor – the Minister has proposed an amendment under which the participation in decision-making by a director/supervisor who holds more than the number of positions permitted will not have any effect on the legal validity of the decision-making.

The Minister added that no exception will be made for temporary directors and/or supervisors appointed by the Enterprise Chamber during inquiry proceedings. Particularly for those appointments, there is a considerable chance that an appeal would be made on the time and deployment of that director and/or supervisor.

Bill adopted on notification of cash settled instruments

This Bill has been adopted by the First Chamber of parliament and is expected to come into force on 1 January 2012. The Bill requires notification of financial instruments where the increase in value of the instruments is partly dependent on the increase in value of the underlying shares or related dividends. Cash settled instruments can be used to avoid the existing disclosure regime by secretly building up a stake in the instruments that can easily be converted into voting rights at a later stage. The Bill remedies this.

The AFM has drawn up a draft policy guideline setting out the method of calculating the number of shares to which financial instruments relate and specifying the circumstances in which a basket or index of shares should be notified. The AFM has asked interested parties to comment on the draft guidelines. The consultation closed on 16 December 2011.

Bill on revision and claw back of bonuses – executive shares and public offers

The provisions in this Bill with regard to executive pay in takeover situations have been amended again. The recently added provisions on freezing the value of executive shares or options during takeovers have been changed.

The current proposal is that, at the time that the public offer is announced, the company determines whether the shares, depositary receipts or options have increased in value. This determination concerns shares, depositary receipts or options granted to the director by way of remuneration.

The moments at which the value is determined are:

four weeks before the day that the public offer is announced
four weeks after the completion of the offer
on the day that the director disposes of his shares, depositary receipts or options or the day that his appointment ends

If there is an increase in value, this amount will be deducted from the director's pay, but subject to a maximum. This maximum is the increase in value between the first moment – four weeks before the announcement - and the second moment – four weeks after the offer's completion. Shares which the director bought himself or inherited do not fall under the Bill's provisions.

Proposed amendments to Exemption Decree Takeover Bids FMSA

The Minister of Finance has published revisions to the Exemption Decree Takeover Bids FMSA. The proposed changes are:

90% - formerly 95% - or more of the independent votes at the general meeting of shareholders can exempt a bidder from making a mandatory offer
A new exemption is introduced where a controlling stake is acquired as a result of underwriting of a share issue
A new exemption is introduced for major shareholders entering into certain "irrevocable undertakings" in connection with an (imminent) public offer
A party entering a joint venture that already existed when the Bill on Public Offers entered into force on 28 October 2007, will be exempted from making a mandatory offer.

The Minister is aiming for the amended Decree to take effect as of 1 July 2012

Other

Monitoring Committee Corporate Governance Code publishes 2011 report

This is the third report published by the Committee on listed companies' compliance with the Dutch Corporate Governance Code.

The Monitoring Committee expresses concerns about legislative initiatives (e.g., bonus claw-back) to incorporate sections of the Code into statutory law. The Committee criticises the legislature for not waiting to see how the Code has been complied with.

The Monitoring Committee concludes that:

compliance with the principles and best practices is good, and parts of the Code are applied by almost all listed companies
existing arrangements concerning appointment and redundancy payment which deviate from the Code can only be invoked by directors who were appointed before 2004
a redundancy payment is not appropriate if a director resigns voluntarily
a simple referral by a company to its own rules without further elaboration does not constitute an explanation and can be regarded as non-compliance
the minimum five-year period for which directors must hold their shares can start from the moment that the shares are conditionally granted; directors may sell within the five-year period to pay tax liabilities connected with the shares
if the board acts in accordance with the Code, it is only acceptable in exceptional circumstances for the shareholders to disregard the response time – of 180 days maximum - invoked by the directors
the number of female members of supervisory boards has not increased
the supervisory board's report should provide an insight into its activities, attendance percentages, and evaluation process

In its 2012 report the Monitoring Committee intends to focus attention on the supervisory board and its performance – in particular its diversity and reporting, and the position of the chairman. The Committee will also assess the role of proxy advisors and look at the quality of the explanations of non-compliance with the Code.

Monitoring Committee Banking Code issues 2011 report

This is the Committee's first integral report on the implementation of the Banking Code, which entered into force on 1 January 2010. The report, issued in December 2011, states that larger banks have made more progress in implementing the Banking Code than other banks. Larger banks also report more extensively than other banks on the degree of compliance with the Code. The supervisory board is more intensively involved in risk management than was previously the case. And all banks have made considerable progress in implementing the customer-centred approach by tightening the approval process for products and paying considerable attention to communication with customers about the products that the banks offer.

The Monitoring Committee had published a positive interim report on compliance with remuneration principles in September 2011.

AFM report on 10 years of public offer supervision

The AFM has published a report summarising its ten years of public offer supervision. Its main conclusions are:

Dutch offer rules have formed a good basis for supervision
market parties have, as a general rule, dealt prudently with the public offer rules and their aims
the AFM has adequately fulfilled its role as supervisor

The report also contains a list of all public offers supervised by the AFM since September 2001.

AFM and financial reporting: theme-based reviews

The AFM has conducted three theme-based reviews of financial reporting for 2010: business combinations, profit per share and fixed-income funds. The business combinations review shows that listed companies are successful to a large extent in explaining the effects of business combinations to the users of the annual accounts. In 2010, 18% of listed companies took over one or more businesses. Areas of improvement identified by the AFM include:

specification of the total takeover consideration and its various components
the explanation of the conditional portion of the takeover consideration and its potential effect on the result over the financial year
specification of the costs related to the takeover

Europe

European proposal for audit market reforms

European Commissioner Barnier has presented his plans for reforms to the audit market. The aim of the reforms is to strengthen the independence of auditors, stimulate competition, and enhance the quality of audit services. The proposals focus on audits at large public-interest entities, such as banks, insurers and listed companies. The key elements of the proposed reforms are:

A prohibition on audit firms against providing non-audit services to their audit clients; an additional requirement for the four big audit firms to separate their audit and advisory activities.
A mandatory rotation of audit firms after six years, or nine years for a joint audit, - which promotes the system of joint audit - and a cooling off period of four years.
No mandatory joint audit at large entities, but large companies will always have to include a non-Big Four firm in their tendering process
Introduction of a European audit passport enabling auditors and audit firms to offer their services across the European market
An obligation to have a more open and transparent tender procedure when selecting a new auditor, and closer involvement by the audit committee
European supervision and coordination of the audit sector within the ESMA framework

The proposals for the new auditing directive will next be discussed in the European Parliament. It is as yet uncertain if the European Parliament will adopt the proposals.

European Commission press release

Revision of Transparency Directive

The European Commission has published a proposal to revise the Transparency Directive and the Accounting Directives. The revision forms part of a set of measures to support, among other things, responsible business. The main changes are:

the disclosure regime is extended to include all financial instruments that have the same economic effect as shareholding, so as to prevent investors from secretly building up a majority stake in a listed company
the obligation for companies to publish quarterly financial statements is removed to reduce costs and discourage short-termism

European Commission modifies Transparency Directive

European Commission proposes new market abuse and insider dealing rules

The European Commission has launched proposals for a new regulation to replace the Market Abuse Directive. Under the proposals, the investigative and sanctioning powers of regulators in market abuse cases are strengthened. There is also a separate proposal for a directive on criminal sanctions for market abuse. This directive aims to ensure that member states introduce criminal sanctions for deliberate insider trading and market manipulation. "Attempted market manipulation" is proposed as a new criminal offence.