JOR 2012/6 Court of Appeal of Amsterdam, 15 November 2011
On 15 November 2011 the Court of Appeal of Amsterdam rendered a judgment in a dispute between Koninklijke Luchtvaartmaatschappij NV ("KLM") and Air France KLM SA ("Air France") on the one hand, and two Dutch minority shareholders of KLM on the other hand, namely Vereniging VEB NCVB ("VEB") and Emarcy BV ("Emarcy").
The Facts
In April 2004 Air France made a public bid for all issued shares of KLM.
A majority of the shareholders accepted the bid, as a result of which Air France obtained 96.3% of the ordinary shares and priority shares of KLM. VEB and Emarcy, together with the other remaining shareholders who did not offer their shares to Air France, now only hold an interest of less than 1% in KLM. Subsequently, the listing was terminated.
On 3 July 2008 the meeting of the holders of priority shares of KLM (which are held by Air France) resolved, in accordance with the articles of association, to reserve a little over 90% of the profits of KLM over the financial year 2007/2008, with the result that the dividend distributed to the shareholders of KLM equaled the amount that Air France had distributed to its shareholders in that same financial year. However, the actual profits of KLM were a lot higher than the profits per share of Air France. Also in the previous financial years the dividend distributed at the level of KLM was approximately equal to the dividend distributed by Air France, whereas in the same period the profits of Air France were decreasing and the profits of KLM were not.
In the proceedings VEB and Emarcy argued that in view of the profits and the financial situation of KLM, too high an amount was reserved and that in the exercise of its powers to reserve profits, Air France had paid insufficient attention to the interests of the minority shareholders in a reasonable dividend. Since the sale of their shares was almost impossible (after all, the stock exchange listing had been terminated), the minority shareholders only had the dividend for return on their shares.
VEB and Emarcy are therefore of the view that the resolution to reserve is in conflict with the standards of reasonableness and fairness of Section 2:8 of the Dutch Civil Code ("DCC") and is therefore eligible for nullification pursuant to Section 2:15 (1) under b of the DCC.
KLM and Air France responded that the resolution to reserve was justified by the corporate interest of KLM. In this respect, the board and the supervisory board pointed to factors such as delay in the growth of the economy, the high fuel prices, the tight labor market, the large competition with other forms of transport and the costs of renewal of the fleet.
Judgment
In the present judgment the Court of Appeal put first and foremost that in its decision-making Air France should make an assessment of all interests involved in the resolution, including the interests of the company on the basis of KLM's own financial needs in the financial year which the dispute is about (in the case of reservation) and those of the minority shareholders (in the case of distribution of a reasonable dividend). Air France and the meeting of holders of priority shares must be granted considerable discretion in this respect.
The fact that Air France has geared the dividend of KLM to its own dividend does not immediately lead to a conflict with the standards of reasonableness and fairness. However, the meeting of the holders of priority shares will have to make its own consideration in its resolution to reserve the profits.
Also the argument that the minority shareholders do not have a real option of alienating their shares is deemed not sufficient by the Court of Appeal, since they themselves chose not to offer their shares.
The Court of Appeal furthermore considered that it is not in the interest of the company that the judiciary interferes in the discretionary power of the authorized bodies. If a body can motivate its resolution with reasonable arguments, there is no reason to reverse a resolution, even if certain parties involved think that the resolution should have read differently. Discretion implies the freedom to make (reasoned) choices to which not all parties involved may agree.
The Court of Appeal concluded that the distribution is not in conflict with Section 2:8 of the DCC and upheld the resolution of the meeting of the holders of priority shares to reserve a large part of the profits.
Conclusion
The assessment standard used in the judgment of the Court of Appeal is in accordance with earlier case law.
In principle, the profits must be distributed to the shareholders, unless the corporate interest requires that (a part of) the profits is reserved. In this respect the interests of the minority shareholders should be taken into account (including the interest of a reasonable compensation (in the form of dividend)). The interest of a (minority) shareholder in the distribution of dividend must therefore be weighed carefully against the interest of the company and its subsidiaries - not the interest of the parent company (Air France) or the group as a whole to attune the dividend policy within the group - to add the profits (wholly or partly) to the reserves.
It may be in conflict with Section 2.8 of the DCC with respect to a minority shareholder to maintain a reservation policy for an indefinite period of time whereby all profits (or a large part of them) are reserved without the interest of the company justifying this.
Depending on the circumstances, it does not have to be unreasonable to give more weight to the reservation of profits than to a minority shareholder's interest in and wish for the distribution of dividend, on the proviso that this is well-supported by reasons. The reasons themselves will only be tested for reasonableness.
Therefore, the standard for challenging the dividend policy of a company continues to be very high.
First published in the Kennedy Van der Laan newsletter - March 2012
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