Shareholder activism is a hot topic in many Dutch boardrooms. Discussions between boards and shareholders on matters such as strategy, corporate governance and executive compensation have become a regular feature within Dutch listed companies. This chapter gives an overview of the Dutch regulatory and legal framework in which listed companies and their shareholders operate, points out the key trends concerning shareholder activism in the Dutch market, and zooms in on a few topical battles between companies and activist shareholders.
II LEGAL AND REGULATORY FRAMEWORK
i Primary sources of law, regulation and practice
Dutch Civil Code
Book 2 of the Dutch Civil Code (DCC) is the primary source of law with regard to Dutch corporate law. As such, the DCC also covers the rights and duties of, and the division of powers between, the (one or two-tier) board and the general meeting of shareholders.
Dutch Corporate Governance Code
The Dutch Corporate Governance Code complements the DCC as it lays down principles and best practice provisions that regulate the relationship between the board(s) and the general meeting. The Corporate Governance Code is currently under revision and a new version is expected to come into force in 2017. The Corporate Governance Code applies on a comply-or-explain basis to, briefly stated, all Dutch listed companies.
Dutch Financial Markets Supervision Act and Market Abuse Directive
The Dutch Financial Markets Supervision Act (FMSA) contains, among others, disclosure obligations for listed companies, major shareholders and board members, and rules on takeovers of listed companies. The FMSA has implemented numerous EU directives, such as the Transparency Directive and the Takeover Directive. As per 3 July 2016, several market abuse provisions have been removed from the FMSA and are now dealt with in the Market Abuse Regulation. The MAR has direct effect in all EU Member States.
EU Alternative Investment Fund Managers Directive
For hedge funds and private equity funds specifically, the Alternative Investment Fund Managers Directive (AIFMD) is also relevant as it sets out rules and requirements for the authorisation, ongoing operation and transparency of AIFMs.
ii Division of powers – roles of the executive board, the supervisory board and the general meeting
Most Dutch public limited liability companies with a listing on the Amsterdam Stock Exchange have a two‑tier board, consisting of an executive and a supervisory board.1 In a two-tier board governance model, the roles of the main corporate bodies can be summarised as follows.
The executive board manages the company and is in charge of the company's aims, strategy, risk profile, results and corporate social responsibility issues. The executive board is accountable to the supervisory board and the general meeting of shareholders. The executive board has a fiduciary duty to the company's stakeholders (including, but not limited to, its shareholders).
The supervisory board is charged with supervising and advising the executive board. The supervisory board has certain rights regarding the appointment, suspension and dismissal of executive board members, and the approval of the supervisory board is required for certain important resolutions. The supervisory board is accountable to the general meeting and also has a fiduciary duty to all stakeholders of the company.
The general meeting monitors the performance of the executive board and the supervisory board. The powers of the general meeting are vested in the DCC and the company's articles of association. For example, in principle, a decision of the general meeting is needed for resolutions concerning issuance of shares, dissolution of the company, adoption of the annual accounts, board compensation, and amendment of the company's articles of association. Transactions regarding an important change in the company's identity or character (e.g., sale of the company) require prior approval of the general meeting. The general meeting also has the power to appoint and dismiss board members. The company's articles of association, however, may limit this power by stating that the appointment and dismissal occurs upon a (binding) proposal from the executive or the supervisory board, or can only be taken with an increased majority requirement.
iii The activist shareholder's toolbox
This section provides an overview of common tools that activist shareholders use in pursuing their agenda. See Table 1 for the different levels of aggression of these tools.
Private discussions and engagement with the company
In the Netherlands, the vast majority of shareholder activism starts with the activist engaging with the boards of the company in a private setting. This could take the form of informal one-on-one discussions or conference calls with the company's CEO to discuss strategy and measures to maximise shareholder value, or more formal communication by sending private 'Dear Board' letters.
Public engagement with the company
When a shareholder activist is not satisfied with the company's response to issues raised in private discussions, starting a public campaign might be an alternative to realise its agenda. Generally, this includes the use of (social) media, teaming up with other shareholders and institutional investors, and gaining support of the investor community at large.
In the Netherlands there have been few public campaigns by activist shareholders. The most notorious example in this respect is still the 2007 campaign of UK-based hedge fund The Children's Investment Fund against ABN AMRO.
For an activist shareholder to ramp up the pressure on the company's boards, enlarging its stake could be an effective tool. Even with a small stake, an activist shareholder could have significant influence.
When buying shares, the activist shareholder must observe the rules on disclosure of substantial shareholdings. Pursuant to the FMSA, a shareholder must immediately notify the AFM if its percentage of capital interest or voting rights exceeds (or falls below) a number of specific thresholds. Currently, the thresholds are: 3, 5, 10, 15, 20, 25, 30, 40, 50, 60, 75 and 95 per cent.2
An activist shareholder building up its stake should also be aware of the mandatory offer rules. Under the FMSA, a mandatory offer is triggered by a person, or a group of persons acting in concert, acquiring 'predominant control' (at least 30 per cent of voting rights). When a shareholder reaches this threshold it is in principle obliged to make an offer for all remaining shares of the target company.3
Right to participate in and exercise right to vote at general meeting
Every shareholder has the right to participate in and exercise its voting right at the company's general meeting. In principle, the holder of one share is entitled to one vote ('one share - one vote' principle). The articles of association may stipulate a voting record date 28 days prior to a general meeting. The record date therefore determines those shareholders entitled to vote at a general meeting. Shareholders may vote in person or by proxy, which proxy may be granted electronically.
In the Netherlands a 'vote no' campaign has been seen on numerous occasions. Recently, hedge fund Highfields Capital Management opposed the plans of insurer Delta Lloyd to pursue a rights offering. Another example is the 2016 'vote no' campaign of Dutch shareholders' association VEB against the pay package for Shell board members.
Right to place an item on the agenda
Shareholders holding individually or jointly 3 per cent of the company's stock have a right to submit items for the agenda of the general meeting. The company's articles of association can prescribe a lower percentage. The Corporate Governance Code stipulates that a shareholder may exercise this right only after he consulted the executive board. See in this respect also the company's right to invoke a 180-day response time (see below).
A notable example in this respect is the case concerning ASMI, a Dutch multinational active in the semiconductor industry, where hedge funds Fursa and Hermes put a proposal on the agenda of the 2008 general meeting to replace the CEO and most of the supervisory board members. More recently, Dutch civil rights group Follow This put a 'green' resolution on the agenda of the general meeting of oil giant Shell in which it requested the board to invest the profits from fossil fuels into renewable energy.
Shareholders can submit items on the agenda as either a voting item or a discussion item. However, shareholders cannot force the board to put an item on the agenda as a voting item if the general meeting does not have the power to resolve upon the topic; in other words, shareholders cannot use this right to organise referenda or 'motions' on topics belonging to the primacy of the board. See the recent (2016) case of Boskalis against Fugro in paragraph IV.
Right to convene a meeting
Shareholders holding individually or jointly 10 per cent of the company's stock are entitled to call a general meeting and put such items on the agenda as they deem appropriate. The company's articles of association can prescribe a lower percentage. A prominent example of activists exercising this right is Centaurus and Paulson & Co, who called shareholder meetings at Dutch industrial conglomerate Stork to vote on alternative strategies, including a public-to-private transaction, and on the dismissal of the entire executive board.
Shareholder litigation typically takes place in inquiry (mismanagement) proceedings before the Enterprise Chamber.4 Any shareholder that alone or acting jointly holds sufficient shares5 may initiate inquiry proceedings and request the Enterprise Chamber to order an inquiry into the policy of the company by independent court-appointed investigators.
The Enterprise Chamber may order an inquiry into the policy of a company if it is demonstrated that there are reasonable grounds to believe that there is mismanagement. This may, for instance, consist of abuse of minority shareholders, insufficient disclosure to shareholders, conflicts of interest of board members, or the unjustified use of takeover defences.
The Enterprise Chamber may at any time during the proceedings order interim measures. The interim measures ordered by the Enterprise Chamber may play an important role in takeover situations and activist campaigns. Interim measures may include suspending executive or supervisory board members, appointing interim executive or supervisory board members and suspending shareholders' voting rights. These interim decisions tend to carry great weight and, despite being provisional, are often decisive in the outcome of the matter.
The Enterprise Chamber has repeatedly demonstrated its willingness to act promptly and take rigorous action in takeover and activist situations. In the context of takeovers of public companies, shareholder interest groups and other activist shareholders often use (the threat of ) inquiry proceedings to protect the interests of minority shareholders against the boards of the target company (the members of which may no longer be independent) or a majority shareholder.
Originally published by Law Business Research Ltd.
1. Dutch law provides companies with the option to structure their boards based on a one-tier model (single board with both executive and non-executive board members) or a two-tier model (separate executive and supervisory boards). One-tier board structures are often seen with Dutch public limited liability companies with a listing on the NYSE or NASDAQ, for example Mylan NV, NXP Semiconductors NV, and Unilever NV.
2. For non-EU entities with a listing on the Amsterdam Stock Exchange that choose the Netherlands as their EU home Member State, the thresholds are: 5, 10, 15, 20, 25, 30, 50 and 75 per cent.
3. A mandatory offer will not be required if, within 30 days following the acquisition of control, the controlling party reduces its stake below the 30 per cent voting rights threshold, provided that the voting rights held by that controlling party have not been exercised during this period and the shares are not sold to another controlling shareholder of the company. The Enterprise Chamber may extend this period by an additional 60 days.
4. A shareholder can also initiate summary proceedings before the competent Dutch district court. However, summary proceedings are much less common, since the Enterprise Chamber is regarded as the specialised court regarding corporate litigation.
5. If the company's issued share capital does not exceed €22.5 million: persons who alone or acting jointly hold shares representing at least 10 per cent of the issued share capital or representing a nominal value of at least €225,000. If the company's issued share capital exceeds €22.5 million: persons who alone or acting jointly hold shares representing at least 1 per cent of the issued share capital or, if the shares are listed, representing a value of at least €20 million based on the closing price of the last trading day.
The threshold for an activist shareholder to have standing in the Enterprise Chamber can be extremely high as a result of the capital structure of the company. This was the case at Mylan where the nominal value of each share was set at €0.01 and the issued share capital did not exceed €22.5 million. As a result, a shareholder wanting to initiate inquiry proceedings would need to hold shares with a market value of more than US$1 billion to reach the threshold of €225,000 in nominal value.
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.