Paul Hodgson: Protecting Dutch Minority Shareholders: Law or Code?

Eumedion, the Dutch corporate governance forum, recently published its final position paper on the position of minority shareholders in Dutch companies with a controlling shareholder. The process by which the final paper was released began in October last year, when the forum published its draft paper, inviting comments on its proposals. The comment period ended on 10 February this year and Eumedion spent the intervening time reviewing the comments and deciding how and if to incorporate them. Unlike many consultations, this one actually affected the final paper’s conclusions.

The final paper notes that the number of Dutch listed AEX (Amsterdam Stock Exchange) companies with a controlling shareholder (defined as holding more than 30 per cent of the voting rights) has almost doubled compared to 10 years ago. There has been a similar proportionate rise in control for smaller companies and Dutch companies listed on foreign exchanges. In fact, there are currently no Dutch companies where share ownership is widely dispersed.

While there are a large number of controlled companies, in most instances voting rights are equal to economic interests. However, lately ‘special voting shares’ have become prominent. For example, there are loyalty voting rights (where large, long-term shareholders have more than one vote per share) at CNH Industrial, Fiat Chrysler Automobiles, and Cnova, and dual class shares at Yandex and Altice. The paper comments that many of these companies are foreign issuers which have reincorporated in the Netherlands to take advantage of its “lax” minority shareholder protection.

The paper also specifies that majority shareholders are increasingly seeking board seats. This is not always detrimental as their commitment can be seen as a driver of long-term value, but when they swamp out independent non-executives it can be a problem. For example, eight companies have no independent directors, including Altice, IMCD, Refresco-Gerber, and International Publishers.

There is also concern over the rights of minority shareholders in M&A situations. The paper says controlled companies are allowing acquirers: “to use other legal instruments, such as a legal merger, a legal triangular merger or sale of assets followed by liquidation of the company, than the statutory squeeze-out rules (at least 95% of the issued capital must have been tendered) to acquire full control over the target company (and ownership of the shares) and then delist it.”Eumedion’s participants feel that the interests of shareholders are not considered in such cases. On the other hand, a number of court cases have resulted in the development of jurisprudence that has offered some clarity to the position and protection of minority shareholders following a public offer.

In the final paper, Eumedion put forward proposals to protect minority shareholders both in existing companies and in takeover situations. In existing companies, Eumedion proposed:

1. Disclosure of relations between the company and majority shareholders and an annual report on these – best practice provision in Dutch Code.
2. At least half of a supervisory and/or one tier board should consist of independent members
3. Approval of any major transactions or grants of additional rights to controlling shareholder(s) should require the approval of a majority of independent shareholders – included in the bill to implement the Shareholder Rights Directive.
4. Changes to share structure, such as dual class or loyalty shares should include a sunset clause so it will lapse after three to five years – best practice provision in Dutch Code.

Other proposals in the draft paper, such as: independent members should have veto over matters detrimental to minority rights; or important changes, for example to company bylaws, must receive a two-thirds majority of shares and this should represent at least half of issued capital (not votes), guaranteeing that voting rights’ support represents economic exposure were dropped as a result of comments received during the consultation period.

In M&A situations, the checks and balances proposed largely relate to controls on preventing bidders from squeezing out minority shareholders. The Dutch government has already committed: “i) to consider in greater detail the way in which the squeezing out of and selling out by minority shareholders in Dutch listed companies takes place after a public offer has been launched, and the position of minority shareholders in general, as laid down in the Dutch Civil Code and ii) to evaluate the Management and Supervision (Public and Private Companies) Act in 2016”.

The final paper also repeats the existing protections for minority shareholders that are enshrined in, among other pieces of legislation, Book 2 of the Dutch Civil Code and the Dutch Corporate Governance Code.
However, those from the governance code are ‘comply or explain’ safeguards. The use of loyalty or dual class shares makes it dubious, the paper asserts, that such companies are properly complying with certain basic provisions of the codes, such as the duty of care of minority shareholders. Eumedion concluded in the initial position paper that its proposed checks and balances, therefore, should be reinforced by law.

The feedback statement, published at the same time as the final paper, contains an assessment of the comments during the consultation period and details which proposals were dropped (see above for examples). Comments, even from investors, according to Rients Abma, executive director at Eumedion, are equivocal about whether “self-regulation should be given a chance or whether hard legislation in the form of the Civil Code should be used.”

There were 32 reactions to the comment paper, said Abma, and a clear split of opinion, “not unexpected”, between companies, their advisors and lawyers, and investors. “Companies and their advisors are not in favour of new legislation and safeguards for minority shareholders, but investors are very much in favour,” he said. There were almost twice as many reactions from companies as from investors, as well as one from the Dutch Minister of Safety and Justice; as members of the Dutch parliament had asked questions about the position paper. “The minister responded that he had no firm opinion as yet and would wait for the final position paper,” said Abma, “though he made it clear that he’s hesitant to make new legislation.”Eumedion will ask the government to take this position paper into consideration regarding the position of minority shareholders in takeover situations and in general in the Dutch Civil Code and the Management and Supervision (Public and Private Companies) Act in 2016. Eumedion also hopes that a number of proposals made will be adopted by listed companies and their shareholders so that they become Dutch market practice over the next few years. “If this has not happened,” concludes the paper, “after a number of years, Eumedion will call for the proposals to be incorporated in the Dutch Corporate Governance Code or in legislation.

The ultimate objective of the paper is not simply to protect minority shareholders because that is a good thing, but to create long-term value for all. “This is also part of the first round of discussions on the reform of the Dutch code that will be finalised later this year,” said Abma. “The most important proposals being discussed are those which seek to change the objectives of companies from just shareholder value creation to creation of value for all stakeholders. The protection of minority shareholders is conducive to that aim,” stressed Abma.