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[No. 50] Best Practices v. Corporate Ethics?

1. The current chairman of the Enterprise Chamber Huub Willems (pictured) caused quite a stir last week in an interview by the Dutch newspaper Het Financieele Dagblad, that took place in view of Willems' departure as of August 1, 2009 as the court's chairman.

2. When asked about his opinion of the Dutch corporate governance code (drafted in 2003 and last updated late 2008), that is directed to listed corporations and provides both principles and corresponding best practices of good corporate governance (company's can deviate from the best practices on a comply-or-explain basis), he basically answered that the code should be way more compact and that the best practices could be deleted. His reasoning is that due to the high level of detail of the best practices, in practice officers and directors seem more concerned with complying to 'the rules' - or trying to get around them, with the help of a whole battery of lawyers looking for loopholes - than with trying to entrepreneur in a way that is also ethically sound (i.e., doing 'the right thing'). In other words: more rules lead to less concern with ethics.

3. The proposal is interesting, as it invites a revisiting of the code's framework: does it make sense, on balance, to have a code that contains:

• not just pretty much generally accepted principles of corporate governance;
• but also far more detailled best practices, that attempt to give 'hands and feet' to those principles?

I believe it does, mostly for practical reasons: the principles in itself do not provide real guidance to officers, directors and shareholders in terms of 'what is expected/preferred conduct' in specific situations in the corporate governance realm. Think of self-dealing transactions, just to name one example. That is where the real upside of the best practices comes into play. They provide an 'off-the-rack' set of rules that - although not carved in stone - give practical guidance and provide more clarity, that can be used by the actors involved, or not; the latter as long as there is a reasonable explanation - in the annual accounts - for why a different course is taken (Dutch statute provides that listed companies must explain to what extent the code is adhered to). Without these best practices, the code would have less teeth, and would arguably play a smaller role in every day corporate governance.

4. But what about the concern of Willems, that the best practice parts of the code actually tend to stand in the way of ethically sound behavior in the corporate setting? The trick, I believe, is essentially threefold:

• First, these best practices should not be seen as based in law, as legally required standards of conduct, but as a set of helpful default guidelines - based on what many believe to be sound practical adaptations of these principles, although I think discussion is possible as to some elements of these principles and best practices - that allow explained deviation depending on the circumstances (i.e., there is nothing wrong really with deviation, as long as it's the explained version). In view of this, courts should be reluctant to use terms like 'rules' or 'norms of corporate governance' when applying a legal analysis in a certain case (as the Enterprise Chamber does frequently), as this could easily muddy the waters.

Chief Justice Veasey made a clarifying distinction in the Delaware Supreme Court's 2001 Brehm v. Eisner decision: All good corporate governance practices include compliance with statutory law and case law establishing fiduciary duties. But the law of corporate fiduciary duties and remedies for violation of those duties are distinct from the aspirational goals of ideal corporate governance. Aspirational ideals of good corporate governance practices for boards of directors that go beyond the minimal legal requirements of the corporation law are highly desirable, often tend to benefit stockholders, sometimes reduce litigation and can usually help directors avoid liability. But they are not required by the corporation law and do not define standards of liability. Also see Chancellor Chandler's analysis in the Delaware Court of Chancery's 2005 decision re The Walt Disney Company Derivative Litigation (and - on appeal in the same case - Justice Jacobs' similar analysis in the Delaware Supreme Court's 2006 decision re The Walt Disney Company Derivative Litigation).

• Second, deviations from the default rules (best practices) should not in itself be perceived as 'wrong'; corporate fiduciaries should not be forced to comply with them, in fear of upheaval among shareholders and other stakeholders. This is not to say that deviations may not be subject of debate within the company, especially the general meeting; to me that seems a healthy consequence of the code, that is after all based on the notion of comply or explain, which increases - or so goes the argument - the accountability of officers and directors in key fields of corporate governance. Nothing wrong with debate.
• Third, although the code provides principles and best practices of good corporate governance, this does not mean that what is not expressly prohibited is allowed. That reasoning runs dead.

5. So where does this take us?

1. In the end, at least theoretically, there should not be any significant tension between essentially aspirational and flexible best practices of good corporate governance on the one hand and sound ethical behavior on the other; one could say they're part of a continuum.
2. To the extent this is perceived differently in practice, a change of mindset would be in order.

6. I am not 100% sure the Supreme Court acknowledged the above in its September 14, 2007 decision re Versatel, in which it seemed to have 'upgraded' certain best practices - regarding conflict of interests - to a legal status without providing any justification for this; if so, I belief that is a wrong course to embark on. In its July 13, 2007 decision re ABN AMRO, the Supreme Court seemed to limit the scope of it analysis to certain principles laid down in the code, but the gist of its reasoning was still far-reaching: I, for one, am not inclined to fully qualify the principles laid down in the code as expressions of the law.

7. I discussed the difference between standards of conduct that are legally binding for corporate fiduciaries and those that are not in Judicial Review of Director Conduct - Under Dutch and Delaware Corporate Law, Deventer: Kluwer 2007, no. 8 and 34. See the contribution by WinterCools to the discussion triggered by Willems here (Dutch only).

[No. 49] The Right of a Contracting Party to Suspend Performance during a Suspension of Payments

1. Recently I came across an interesting judgment - which to my knowledge is not (yet) published - rendered by the Amsterdam District Court on 9 April 2009 (KG ZA 09-718) in interlocutory proceedings instituted by Oilily - a Dutch company that is part of the Oilily Group and has been granted a suspension of payments on 31 March 2009 - and its administrator against SaaSplaza, one of its important suppliers. The dispute concerned the following question of law: to what extent is the non-debtor party to a contract during a suspension of payments allowed to suspend its own performance because of non-payment by the debtor of pre-petition debts (i.e. debts that already existed on the date the suspension of payments was granted)?

2. What was the case? In December 2008 SaaSplaza and Oilily entered into a contract, pursuant to which SaaSplaza was obliged to establish and manage an IT infrastructure for the benefit of the Oilily Group. During the following months SaaSplaza sent Oilily several invoices for services provided. On 31 March 2009, the day Oilily was granted a suspension of payments, these invoices were - to a large extent - unpaid. On 2 April 2009 SaaSplaza informed Oilily that if payment would not be forthcoming, it would have no other option then to suspend performance of its contractual obligations as from 6 April. Subsequently, Oilily and its administrator requested the court to order SaaSplaza to continue its services for a period of four weeks, stating that an immediate discontinuing would lead to - in short - prejudice to the (other) creditors and would jeopardize a possible restart of viable parts of the Oilily Group.    

3. The claimants acknowledged that the provisions of section 6:52 DCC - in which a general right of suspension in case of sufficiently connected obligations is laid down - were satisfied. They, however, took the position that under the current circumstances an immediate suspension of services was not permitted. They argued that:

(i) recent developments demanded a broad interpretation of section 237b DBC, which section - in short - witholds utility companies the right to suspend performance or terminate the contract, because of non-payment of a pre-petition debt. 

(ii) in a balancing of interests, the interest of the Oilily Group in a successful restart clearly outweighed the interest of SaaSplaza in a better recovery position.

4. Before presenting the ruling of the court, I would like two make a few remarks up front. 

(a) In their discussions, parties apparantly took as a point of departure, the general right of suspension laid down in section 6:52 DCC, while the contract in question appears to be a reciprocal agreement. In case of such agreement, the right of a contracting party to suspend performance is primarily based on the special provision laid down in section 6:262 DCC, instead of section 6:52 DCC.

b) Section 237b DBC concerns an exceptional provision. Starting point is that, in principle, a right to suspend performance may (also) be exercised during a suspension of payments or bankruptcy, in order to enforce payment of pre-petition debts. Neither a guarantee that new deliveries will be paid, nor the fact that the exercise of a right of suspension may jeopardize a transfer of the business going concern or otherwise causes damage, is enough to deprive a creditor of its right to suspend performance. I refer to both casebook judgments of the Supreme Court in this respect: HR 20 March 1981, NJ 1981, 640 (Veluwse Nutsbedrijven/Blokland q.q. and HR 16 October 1998, NJ 1998, 896 (Van der Hel q.q./Edon).    

c) By stating that recent developments demand a broad interpretation of section 237b DBC, the claimants most likely refer to the recently presented preliminary draft for a new Insolvency Code (het voorontwerp Insolventiewet). Section 3.4.2 thereof contains a provision that deprives not only utilities, but (nearly) all suppliers of their right of suspension, (obviously) to the extent that it is used to receive payment of debts that already existed at the opening of the insolvency proceedings. See for a detailed discussion of this provision T.T. van Zanten, 'Wederkerige overeenkomsten in het Voorontwerp', TvI 2008/2, p. 61-64 and p. 68.     

5. In re Oilily/SaaSplaza, the Amsterdam District Court considered, inter alia, that the exercise of a right of suspension by SaaSplaza could be prohibited in case the services it provides appear to be of such importance for Oilily's business operations, that without its services Oilily can't continue its business operations in a responsible manner and Oilily was not offered the opportunity to find an alternative solution. In Dutch:

Onderzocht dient te worden of de gegeven omstandigheden eraan in de weg staan dat SaaSplaza haar opschortingsrechten uitoefent. Dit zou het geval kunnen zijn indien het gaat om het staken van voor de bedrijfsvoering van de Oilily Groep zo noodzakelijke diensten, dat zonder die dienstverlening Oilily haar bedrijfsvoering niet op een aanvaardbare wijze kan voortzetten en zonder dat Oilily voldoende gelegenheid is geboden te voorzien in een andere oplossing.

In the end, the court ruled that the services provided to the Oilily Group by SaaSplaza are of such importance to Oilily's business operations, that under the current circumstances SaaSplaza was not allowed to an immediate suspension of her obligations towards Oilily. According to the court, Oilily had to be granted a reasonable period to prepare for a termination of its contractual relationship with SaaSplaza. In Dutch:

Vooralsnog is dan ook aannemelijk dat de door SaaSplaza aan de Oilily Groep geleverde diensten zo wezenlijk zijn voor de bedrijfsvoering van de Oilily Groep, dat SaaSplaza in de gegeven omstandigheden niet zonder meer tot onmiddelijke opschorting van haar verplichtingen kan overgaan. Aan Oilily dient daarom in beginsel een redelijke termijn te worden gegund om zich voor te bereiden op beeindiging van de contractuele relatie met SaaSplaza.

6. I doubt whether this judgment would be upheld in proceedings before the Supreme Court. As indicated, the general rule is that a right to suspend performance can be exercised in order to enforce payment of pre-petition debts, even when the exercise of this right jeopardizes a transfer of the business going concern or otherwise causes damage. One could point out that SaaSplaza is only deprived of its right to suspend performance for a short period of time, but in my view that argument only has relative value. Oilily is granted the opportunity to find an alternative solution, so SaaSplaza can no longer use its right of suspension to enforce payment of pre-petition debts. What would the court have ruled in case it would not have been possible to prepare for a termination of the contractual relationship with SaaSplaza within the short term? The wordings used by the court seem to imply that in that case the court simply would have granted Oililiy and its administrator a longer period.

7. The decision by the court deserves appreciation. Although It is unclear whether the court anticipates possible future legislation, it clearly recognizes that in a suspension of payments not only the services provided by utilities, but also those provided by other creditors can be essential in such a way, that there is reason to also - whether or not temporary - deprive these creditors of their right of suspension. 

8. That's all for now. On Friday 27 November 2009 the association of Dutch insolvency lawyers (Insolad) holds its annual convention. This year the convention will be devoted to the position of the administrator and the bankruptcy trustee towards the creditors. In my contribution to the book that will be published on this occasion, I will touch upon the position of the administrator and the bankruptcy trustee towards essential suppliers of the company in more detail.

[No. 48] Personal Liability of the Bankruptcy Trustee Revisited

1. The impact of the current crisis on the financial markets on the economy is rising. Recent figures of the Central Bureau of Statistics (CBR) show a sustained growth in the number of bankruptcies in the Netherlands. Another trend in this respect - one that has been visible for a longer period of time and does not seem to be a direct consequence of the current worldwide economic downturn - is a comparatively increasing number of bankruptcies in which the estate does not contain sufficient means to even pay all debts of the estate (boedelschulden). In 2007 this concerned about 75 per cent of all bankrupties! See A.P.K. Luttikhuis & R.E. Timmermans, Insolventierecht in cijfers en modellen: schuldeisersbenadeling en conclusies, 2007, p. 30. 

2. An increase in the number of bankrupties almost automatically entails a rise in proceedings instituted by third parties that claim to have been prejudiced due to the bankruptcy trustee's conduct. Under Dutch law, the bankruptcy trustee can be held liable (i) in his capacity, which in effect is a liability of the estate, or (ii) personally. Although for personal liability - in short - a raised liability treshold is applicable (see in more detail post No. 30 and under 4 hereafter), there are various circumstances under which it stands to reason to (also) initiate proceedings against the bankruptcy trustee in person. For example, when a creditor is of the opinion that the bankruptcy trustee who sold part of the debtor's assets, should have realized a higher price, holding the bankruptcy trustee liable in his capacity - i.e. the estate - does not make sense. Another reason can be found in the fact that the estate does not contain sufficient means to fully comply with a possible judgment in favour of the prejudiced creditor. As mentioned, this situation occurs in about three quarters of the bankruptcies. In such case, creditor's often adopt a two-pronged approach. 

3. On 8 May 2009 the Supreme Court of the Netherlands rendered judgment in a case in which a third party held a bankruptcy trustee liable, both in his capacity and personally. On appeal, the Court of Appeals of Amsterdam had only partly allowed the claimant's claim against the bankruptcy trustee in his capacity. All other claims - including the claim instituted against the bankruptcy trustee in person - were dismissed. On appeal in cassation, The Supreme Court set aside the judgment of the Court of Appeals, stating that the Court of Appeals had either failed to take into account a number of circumstances put forward by the claimant, or - if it did take those into account - failed to give a sound reasoning for its rejection. For this reason, the Supreme Court referred the case to the Court of Appeals of The Hague for a decision.

4. The judgment by the Supreme Court itself does not contain any passages that are worth mentioning. The opinion by the recently appointed Advocate General Rank-Berenschot, however, does. In Dutch:

3.10 Ter zake van de aansprakelijkheid van de faillissementscurator pleegt, gelijk ook in de onderhavige zaak het geval is, te worden onderscheiden tussen aansprakelijkheid in hoedanigheid (q.q.) en persoonlijke aansprakelijkheid (pro se). De aansprakelijkheid van een curator q.q. dient te worden beoordeeld naar de maatstaven van art. 6:162 BW (HR 19 december 2003, NJ 2004, 293 m.nt. PvS, rov. 3.3). Voor de beoordeling van de persoonlijke aansprakelijkheid van de faillissementscurator geldt volgens vaste rechtspraak sedert 1996 de zogenoemde Maclou-norm. Deze norm is ontleend aan het arrest van de Hoge Raad van 19 april 1996, NJ 1996, 727 m.nt. WMK (Maclou en Prouvost/curatoren Van Schuppen). Daarin heeft Uw Raad de stelling verworpen dat de aan een faillissementscurator te stellen zorgvuldigheidsnorm in beginsel gelijk is aan die welke geldt voor advocaten en vergelijkbare beroepsbeoefenaren. Overwogen wordt dat een curator, ook al beoefent hij het beroep van advocaat of een daarmee vergelijkbaar beroep, bij het vervullen van zijn taak als curator niet optreedt als beoefenaar van dat beroep. Een curator staat, anders dan de beoefenaar van een beroep als dat van advocaat, niet in een contractuele betrekking tot degenen wier belangen aan hem in zijn hoedanigheid zijn toevertrouwd. Tevens moet de curator bij de uitoefening van zijn taak uiteenlopende, soms tegenstrijdige belangen behartigen en behoort hij bij het nemen van zijn beslissingen - die vaak geen uitstel kunnen leiden - óók rekening te houden met belangen van maatschappelijke aard. Deze bijzondere kenmerken van de taak van de curator brengen mee dat zijn eventuele persoonlijke aansprakelijkheid dient te worden getoetst aan een zorgvuldigheidsnorm die daarop is afgestemd. Deze norm komt hierop neer dat een curator behoort te handelen zoals in redelijkheid mag worden verlangd van een over voldoende inzicht en ervaring beschikkende curator die zijn taak met nauwgezetheid en inzet verricht, aldus nog steeds de Hoge Raad (rov. 3.6). Opgemerkt is dat de structuur van deze zorgvuldigheidsnorm niet zo veel verschilt van die voor de advocaat of andere beroepsbeoefenaren nu, net als daar het geval is, de handelwijze van de curator wordt getoetst aan die van een functioneel vergelijkingstype (de 'modelcurator'). Deze pleegt bij beroepsbeoefenaren te worden aangeduid als de 'redelijk bekwaam en redelijk handelend vakgenoot'. De daarin te onderkennen elementen van een zekere bekwaamheid en een zekere zorg vallen ook terug te vinden in de Maclou-norm (voldoende inzicht en ervaring, verrichten van de taak met nauwgezetheid en inzet). Betoogd is dan ook dat het verschil in bewoordingen niet veel meer dan een woordenspel lijkt, en dat het onderscheid tussen de curator en (bijv.) de advocaat eerst aan de orde komt bij de toepassing en invulling van het criterium.

3.11 Aangenomen moet worden dat ook het Maclou-criterium voor persoonlijke aansprakelijkheid, bij gebreke van een bijzondere bepaling, gegrond is op art. 6:162 BW. Dit doet de vraag rijzen of er voor de kwalitatieve respectievelijk persoonlijke aansprakelijkheid verschillende maatstaven gelden. In zijn conclusie vóór het arrest van 19 december 2003, NJ 2004, 293 m.nt. PvS (onder 2.2) heeft A-G Timmerman betoogd dat het Maclou-criterium in beginsel ook geldt wanneer de vraag beantwoord moet worden of de boedel voor een bepaald handelen van de curator q.q. uit hoofde van onrechtmatige daad aansprakelijk is, omdat niet in te zien valt dat voor beide situaties wezenlijk verschillende maatstaven zouden gelden. Niettemin is er volgens hem wel enig verschil. Nu het bij de aansprakelijkheid pro se om persoonlijke aansprakelijkheid van de curator gaat, acht hij het verdedigbaar dat schending van de Maclou-norm in dat kader iets minder snel wordt aangenomen dan wanneer het gaat om de aansprakelijkheid van de boedel voor handelingen die de curator q.q. verricht. Het verschil schuilt in de persoonlijke verwijtbaarheid. Het lijkt redelijk in het geval van persoonlijke aansprakelijkheid dit aspect iets zwaarder te benadrukken dan in geval het gaat om de aansprakelijkheid van de curator q.q.. Ook door A-G Hartkamp in zijn conclusie voor het Maclou-arrest (onder 9) was reeds betoogd dat voor persoonlijke aansprakelijkheid vereist is dat de curator, gelet op de omstandigheden van het geval, een persoonlijk verwijt kan worden gemaakt van zijn handelen in strijd met de door hem naar verkeersnormen persoonlijk jegens de crediteur in acht te nemen zorgvuldigheid. In zijn annotatie onder het arrest van 19 december 2003 stelt Van Schilfgaarde in dit verband dat het aspect van de persoonlijke verwijtbaarheid in de Maclou-norm onvoldoende tot uitdrukking komt. Het vereiste van persoonlijke verwijtbaarheid heeft niettemin ingang gevonden in de lagere jurisprudentie. Meer in algemene zin wordt ook door andere auteurs bepleit bij het aannemen van persoonlijke aansprakelijkheid (meer) terughoudendheid te betrachten. De in het Maclou-arrest genoemde kenmerken van de taak van de curator, waaronder bijvoorbeeld de noodzaak om (onder tijdsdruk) een afweging te moeten maken tussen tegenstrijdige belangen, brengen dit mee. Hierbij speelt tevens een rol dat de curator bij de uitoefening van zijn taak, afhankelijk van de aan de orde zijnde norm, een zekere beleids- en beoordelingsvrijheid kan toekomen. De curator kan binnen een bepaalde bandbreedte tot verschillende keuzes komen, die alle de toets aan de Maclou-norm kunnen doorstaan. Voor persoonlijke aansprakelijkheid is pas plaats indien buiten deze bandbreedte wordt getreden doordat de curator in redelijkheid niet tot zijn keuze heeft kunnen komen. De omstandigheid dat de verweten gedraging bestaat in het schenden van een boedelverplichting die de curator in zijn hoedanigheid heeft doen ontstaan - waarvoor in beginsel de boedel aansprakelijk is -, sluit persoonlijke aansprakelijkheid niet uit. Naar analogie van hetgeen geldt met betrekking tot de aansprakelijkheid van bestuurders van een rechtspersoon valt te verdedigen dat bijkomende omstandigheden zulk een aansprakelijkheid in het leven kunnen roepen.

5. In my view, these quoted passages provide an accurate overview of the prevailing doctrine with respect to liability of a bankruptcy trustee. This does, however, not mean that there is no room for improvement. I once more refer to post No. 30, where Bastiaan Assink proposes a different tack, namely the use of a specific standard of review, inspired by the business judgment rule, in cases where the focus is on the trustee's conduct in the business judgment realm. 

6. As soon as the Court of Appeals of The Hague has rendered judgment in the abovementioned proceedings, I will provide an update.                  

[No. 47] Recent Developments in Right of Inquiry Proceedings

1. In post No. 25 and post No. 35 I discussed whether something like a Dutch version of business judgment review is taking place in inquiry proceeding case law, in view of the Enterprise Chamber's decisions re Lycos Europe and Nedelko Holding of February and March 2009. Now there is a third decision - re Allstar Consulting Holding of April 24, 2009 (ARO 2009, 64) - in which the court repeated the key reasoning (s. 3.9), again with some differences, but only minor ones. This again involves a case in which the plaintiff has asked for an inquiry and for preliminary measures. The court grants the requests, and rules that there are well founded reasons to doubt the correctness of the policy of Allstar Consulting Holding (s. 3.5-3.6), in view of the fact that due to a controversy between the shareholders the general meeting is deadlocked, resulting in the inability of the company to set its annual accounts and the lack of a sound formal management structure, which in turn has resulted in the company terminating its activities and reaching the zone of factual liquidation.

2. In addition, the court looks at other complaints brought forward by the plaintiff, including complaints about certain entrepreneurial choices made by the company. And that's where the key reasoning pops-up, that runs as follows (in Dutch):

De Ondernemingskamer is van oordeel dat de (...) klachten van AS Holding omtrent omtrent cijfers - omzet, kosten en resultaat - dienen te worden verworpen en niet kunnen bijdragen aan de conclusie dat aan het beleid van Allstar moet worden getwijfeld. Immers, dat de omzet in het jaar dat één van de twee feitelijke "voortrekkers" van de onderneming van de Star Groep zijn werkzaamheden voor die groep heeft gestaakt, terugloopt, kan niet anders dan als voor de hand en in de lijn der verwachtingen liggend worden geacht. Het betoog van Mipe, dat de terugval in omzet een negatief effect had op de relatie met de kosten (...) omdat gezien de structuur van de organisatie niet alle kosten - zonder meer - navenant konden worden verminderd, komt de Ondernemingskamer niet bij voorbaat onaannemelijk voor. Dat in de gegeven situatie de voorrang werd gegeven aan het in stand houden van de (contractuele) relatie met de subcontractors, die deels ook ondersteunende diensten verrichten, is vooral een kwestie van ondernemersbeleid, in de beoordeling waarvan de Ondernemingskamer in beginsel en in casu niet zal treden nu zij noch in de gedingstukken noch in hetgeen ter terechtzitting is verhandeld enige aanwijzing heeft gevonden dat de (feitelijke) bestuurder van Allstar zijn taak in dit opzicht heeft verontachtzaamd of miskend dan wel die taak overigens zodanig heeft vervuld dat geen redelijk handelend bestuurder de gevolgde handelwijze had kunnen verkiezen met het oog op de belangen van de bij de (onderneming van de) Star Groep betrokkenen. (emphasis by me BFA)

I'm spotting a trend here...The most noteworthy difference is that the Enterprise Chamber doesn't limit this approach to business judgments by members of the management board, but includes de facto directors. This makes sense. Although I'm sticking to my scepticism expressed in the earlier posts as to the way the court frames the actual standard (that's still pretty vague), I'm - on a more general level - also optimistic about the course the court is taking here where it comes to judicial review of director conduct in the business judgment realm. It seems to me that, compared to case law from earlier this decade, the court seems less willing to apply objective reasonableness scrutiny when there is no sound justification to do so. And that makes me a happy man, in view of the gist of my doctoral thesis, covering the way scrutiny by the Enterpise Chamber in inquiry proceeding case law of corporate director conduct in the business judgment setting should look like.

3. Two last remarks about this decision.

1. The court notes once more (s. 3.4) that the right of inquiry does not cover non-Dutch corporations, as laid down in section 2:344 DCC. The request - for some reason - also covered the company's subsidiaries, all foreign corporations. This, however, does not mean:
   • that the inquiry by the investigators cannot cover the policy followed by Allstar Consulting Holding as to its shareholding in the subsidiaries; or
   • that, as to the inquiry by the court whether there are well founded reasons to doubt the correctness of the company's policy, things that happened at subsidiary level cannot be taken into account.
2. The court notes (s. 3.13) that, as to certain intra-group transactions entered into by the company, due to a lack of transparency in the nature, volume and other circumstances of those transactions it is impossible to check whether the price and related aspects of the transactions were at arm's length, for which reason the possibility of unfairness cannot be excluded and the inquiry should also cover this subject. Apparently the - management board of the - company did not provide the necessary information during the litigation to enable the court to verify that no funny things happened to the detriment of the company; it seems likely that if the company had done so, the court would have ruled otherwise (assuming, of course, that the information was satisfactory).

4. A few words about a second decision by the Enterprise Chamber that was rendered quite recently. Section 2:350(2) DCC provides that if a request for an inquiry is denied and this request was made on unreasonable grounds, the company that was subject of the request can file a claim for damage with the Enterprise Chamber. It is a true rarity that the court rules that a request for an inquiry lacked reasonable grounds. In its inquiry proceeding decision re La Casserole of May 4, 2009 (ARO 2009, 68), the court did so. As the plaintiff had no reason whatsoever to initiate this inquiry proceeding, as this proceeding could by definition not help him to obtain the relief he was looking for, the court ruled that the plaintiff acted without the necessary amount of care towards the company, and therefore that the request for an inquiry lacked reasonable grounds. Somewhat surprisingly, the company only requested the court to rule that reasonable grounds were lacking; apparently no section 2:350(2) DCC claim for damage was filed.

5. I will touch upon other recent inquiry proceedings case law when I'm back in early June from my hiatus to Italy. Blogging on my part will be quite light until then.

[No. 46] US Shareholder Bill of Rights Act 2009 [Updated]

Next week, US senator Schumer will apparently submit the draft legislation Shareholder Bill of Rights Act 2009 (how does that sound?). A copy of the draft is now available online (HT Race to the Bottom). The gist of this draft 11 page bill is:

[t]o provide shareholders with enhanced authority over the nomination, election, and compensation of public company executives.

The introductory paragraphs read as follows:

Congress finds that among the central causes of the financial and economic crises that the United States faces today have been a widespread failure of corporate governance; within too many of the Nation's most important businesses and financial institutions, both executive management and boards of directors have failed in their most basic duties, including to enact compensation policies that are linked to the long term profitability of their institutions, to appropriately analyze and oversee enterprise risk, and most importantly, to prioritize the long-term health of their firms and their shareholders; such failure has led to the loss of trillions of dollars in shareholder value, losses that have been borne by millions of Americans who are shareholders through their pension plans, 401(k) plans, and direct investments; a key contributing factor to such failure was the lack of accountability of boards to their ultimate owners, the shareholders; policies that serve to limit the ability of shareholders to nominate and elect board members has served to minimize the accountability of boards and management to shareholders; it has always been the intent of Congress that the Securities and Exchange Commission should have full authority to determine the use of the issuer proxy with regards to the nomination and election of directors by shareholders; and providing a greater voice to shareholders while not impinging on management prerogatives is in the best interests of the shareholders, public corporations, and the economy as a whole.

Now what does the draft entail? It contains proposals to:

• introduce annual shareholder approval - in short: 'say on pay' - as to executive compensation, which vote however - in view of the proposed section 14.A.(b) - is not binding on the board;
• introduce shareholder approval of 'golden parachute' compensation, which vote however - see the proposed section 14.A.(c)(2) - is not binding on the board;
• introduce the right of a shareholder, or several shareholders acting by agreement, who beneficially own(s) an aggregate of not less than 1% of the outstanding voting shares of the company - directly or indirectly - for at least the 2-year period preceding the date of the next scheduled annual meeting of the issuer, to use proxy sollicitation materials supplied by the issuer for the purpose of nominating individuals to membership of the board of directors of the issuer (so basically: shareholder access to proxies for board nominations);
• impose the 'corporate governance' standards discussed here through listing requirements (with the possibility (i) for non-complying listed companies to cure any defects and (ii) of exemption of certain companies, depending on issues like size, market capitalization and public float), which basically means unlisted companies are not covered anyway and private enforcement is limited (at best);
• introduce the separation between CEO and chairman of the board of directors (an 'independent director'), which is not customary for the US - as explained by a rather skeptical Steve Bainbridge here - but quite typical for UK corporate law: check the Combined Code here;
• introduce prohibition of staggered boards, in which system typically only a third of the directors is up for re-election every year (compare section 141(d) DGCL);
• introduce a majority voting requirement as to director elections; and
• introduce a mandatory 'risk commitee' comprised entirely of 'independent directors', which shall be responsible for the establishment and evaluation of the risk management practices of the company.

Jay Brown has some criticism (see here). Steve Bainbridge doesn't like the proposal, to put it mildly (see here and here).

From a continental - or at least: Dutch - perspective, many aspects of the bill don't appear that outrageous. Under Dutch corporate law, that is generally based on a stakeholder approach to corporate law (see here), the basic idea is that shareholders have say on director pay. In a large company the supervisory directors make the final decision as to managing director compensation, but within the bounds of the compensation policy set by the shareholders. We also have a 'comply or explain' based corporate governance code aimed at listed companies, that:

• contains principles and pretty detailled best practices since 2003 (updated recently, see here);
• is based to a large extent on the UK Combined Code; and
• was drafted in 2003 - by persons coming from all corners of the business realm; see here - because of several financial scandals in the Dutch and international corporate arena.

We don't know staggered boards, which may also be caused by the fact that in our system directors aren't up for annual re-election. The Dutch corporate governance code makes clear that in a one-tier board (traditionally Dutch law has used the two-tier system; see here), the chairman should not be an executive.

It seems that, leaving aside both the emphasis on shareholder wealth maximization/shareholder 'ownership' of the company and the rethoric of the draft bill, this Shareholder Bill of Rights Act 2009 does not enlarge the existing differences between Dutch corporate law/governance and American corporate law/governance. But the devil is in the detail, and the big question is whether this draft bill is going anywhere in the near future. Then we're talking about the federalization of American corporate law and the position of the states - especially Delaware - in that system (see about that issue, e.g., here).

UPDATE

For some additional insights on the recent say on pay discussion in the US see here and here.

[No. 45] Re Landis Group Inquiry Proceeding

On May 8, 2009, the two investigators appointed by the Enterprise Chamber in the Landis Group inquiry proceeding - that started by the court's decision of October 30, 2003(!) - filed their report.

In these whopping 210 pages, the investigators are quite critical of the course of events at the company prior to its bankruptcy in 2002. The report can be found here.

One of the claimants has already indicated it will ask the court to find that the company was mismanaged ('obvious incorrect course of action' as referred to in section 2:355(1) DCC), and that it will initiate separate personal liability proceedings against certain actors involved at the time.

[No. 44] Faith/Morality and Corporate Law [Updated]

Those who are interested in both faith/morality and corporate law, should take a look at the discussion that is still taking place over at The Conglomerate. Recent contributions touch upon:

• faith/morality in the boardroom (here), including the importance of these considerations in the corporate decision-making process (see my view on what the directors' policy focus point should be here);
• the influence of faith in corporate life on a more general level (here); and
• the potential risk for directors - in terms of liability - who draw on personal faith in the corporate decision-making process (here).

This dimension of the concept of faith/morality seems especially relevant for issues related to the corporate directors' and officers' duty of loyalty (see about a recent article explaining the gist of this duty here).

At least from a Dutch perspective, this faith/morality angle to analyse corporate law is quite new. This may be caused by the fact that the influence of religion on everyday life in general seems to be in stark decline, compared to some decades ago, on this side of the Atlantic.

UPDATE

Steve Bainbridge offers more on 'theology of the firm' here, referring to a leading work by Michael Novak:

Novak observes that most theologians share a deep suspicion of capitalism. Novak attributes their opposition to capitalism to two main sources: ignorance and antique world views. Church leaders and theologians tend to be poorly trained in economics and inexperienced with the world of economic reality. Many also "are likely to inherit either a pre-capitalist or a frankly socialist set of ideals about political economy." As a result, "Church leaders are more likely to err in this territory [i.e., economic justice] than in most others." (p. 59.) In any event, it seems to me that no discussion of a theology of the firm can get very far without engaging Novak's work.

[No. 43] Re ASM International Inquiry Proceeding [Updated]

1. Today, the Enterprise Chamber rendered another judgment in the ASM International inquiry proceeding. This is a continuing saga, in which the court has already rendered several decisions (see, e.g., here and here).

2. A central aspect of this decision is whether or not the application of the defensive measure that was put in place here, in which - in short - an independent but company-friendly foundation has a call- option to receive preferred shares in the company and is thereby in the position to obtain controlling voting power in certain emergency situations related to the interests of the company (one could say a Dutch version of the 'poison pill'), was inequitable in view of the circumstances of the case at hand. The court made some important decisions, that have broader implications than this case alone, but that don't lend themselves for detailled discussion here due to the complexity of the case. I will stick to the essentials and make a remark or two (for now).

3. One of the issues  touched upon by the court was whether or not it is generally impermissible that - in this scenario - it's basically up to the foundation, that had already triggered the call-option in 2008 and thereby obtained a de facto controlling vote in the general meeting, to decide whether the call-option will be renewed and the defensive measure - i.e., this Dutch 'poison pill' - will at least potentially stay in place (to be triggered at its discretion, within the bounds of the call-option). The court answers this question with a pretty firm 'yes', also in view of the broad scope of the proposed call-option, the fact that this way the general meeting would be deprived of elementary rights and powers - including the power to fire (members of) the managing board and the supervisory board - and of the fact that the legitimacy of the original call-option is subject of debate in this very inquiry proceeding. Because of this, the court forbids the foundation to exercise its voting rights in the general meeting, as to the agenda item 'renewal of the call-option'. The key reasoning of the court - s. 3.3-3.4 - reads as follows (in Dutch):

3.3 De Ondernemingskamer (...) stelt (...) voorop dat in het algemeen onaanvaardbaar moet worden geacht dat het - in beginsel: latente - bestaan van een beschermingsmaatregel als de onderhavige (een "bevriende" stichting die voorshands enkel de optie houdt om, ingeval van een tevoren omschreven "noodsituatie", tot een aanzienlijk deel van het totale nominaal geplaatste aandelenkapitaal van de te beschermen vennootschap aan preferente aandelen te nemen) mede afhankelijk is dan wel wordt gemaakt van de wil van degene die onderdeel uitmaakt van de beschermingsmaatregel en die de beschermingsmaatregel te gelegener tijd, door het inroepen van de optie, feitelijk in stelling kan brengen. Ten eerste - en dat klemt in het onderhavige geval te meer gelet op de welhaast onbegrensde reikwijdte van de onderhavige voorgestelde "nieuwe" optie - omdat zulks tot in lengte van dagen zodanig zou afdoen aan de (zeggenschaps)rechten en bevoegdheden van de algemene vergadering van aandeelhouders dat deze haar opvattingen omtrent het beleid en de gang van zaken van ASMI niet langer althans niet op normale wijze tot uitdrukking kan brengen door uitoefening van de haar in wet en statuten toegekende rechten, waaronder - in casu in het bijzonder - het recht (leden van) het bestuur en de raad van commissarissen te benoemen en te ontslaan. De Ondernemingskamer acht een dergelijke min of meer permanente beknotting van de primaire rechten en bevoegdheden van aandeelhouders, althans in deze vorm en op deze wijze tot stand gebracht, ontoelaatbaar. Voorts moet de hier voorgestelde constructie onaanvaardbaar worden geacht omdat aldus moeilijk kan worden volgehouden dat de in het leven geroepen beschermingsstichting onafhankelijk en zonder noemenswaardig eigen belang de belangen van ASMI, de met haar verbonden onderneming en de overige bij haar (onderneming) betrokken belangen zal (kunnen) behartigen. Het in punt 11(a) van de agenda voor de algemene vergadering van aandeelhouders van 14 mei 2009 opgenomen voorstel tot het verlenen van een (hernieuwde) optie moet naar het oordeel van de Ondernemingskamer in deze hiervoor gaande zin worden opgevat, omdat de verlening van een dergelijke optie voor Stichting Continuïteit een noodzakelijke voorwaarde is om haar doelstelling te verwezenlijken en aldus de uitsluitende legitimatie vormt voor haar bestaan. Daar komt nog bij dat in casu de rechtsgeldigheid van de eerder, in 1997, aan Stichting Continuïteit verleende optie door Hermes c.s. wordt betwist en dat, zo die optie al rechtsgeldig is verleend, door haar eveneens wordt betwist dat deze op 14 mei 2008 rechtsgeldig door Stichting Continuïteit kon worden ingeroepen, zulks gelet op zowel het tijdstip als het doel van die inroeping, althans dat op dat moment nog rechtsgeldig preferente aandelen aan Stichting Continuïteit konden worden uitgegeven. De hier bedoelde vragen naar de rechtsgeldigheid van (de uitoefening van) de "oude" optie zijn door Hermes c.s. uitdrukkelijk mede onderwerp van deze procedure gemaakt en daarop is door de Ondernemingskamer nog niet beslist. Het gaat in die omstandigheden niet aan dat de beantwoording van die vragen thans de facto grotendeels overbodig zou (kunnen) worden gemaakt doordat die eerdere optie, doordat Stichting Continuïteit gebruik maakt van de aan haar preferente aandelen verbonden stemrechten, thans zou (kunnen) worden vervangen door een nieuwe en, gelet op de bewoordingen van - uitsluitend - de Engelstalige toelichting op het agendapunt 11(a), aanmerkelijk verdergaande optie. De Ondernemingskamer acht een dergelijk gebruik van haar stemrechten door Stichting Continuïteit ontoelaatbaar althans in strijd met maatstaven van redelijkheid en billijkheid als bedoeld in artikel 2:8 BW en met de heersende opvattingen omtrent corporate governance. De Ondernemingskamer merkt op deze plaats tot slot nog op dat het haar in dit verband heeft bevreemd dat de Nederlandse tekst van de toelichting op agendapunt 11(a) - ook - in dit opzicht zozeer afwijkt van de kennelijk doorslaggevende Engelse tekst daarvan.
 
3.4 Om de voorgaande redenen zal de Ondernemingskamer dan ook in de eerste plaats bepalen dat het Stichting Continuïteit verboden is om in de algemene vergadering van aandeelhouders van ASMI van 14 mei 2009 deel te nemen aan de besluitvorming ter zake van het als punt 11(a) in de agenda van die vergadering opgenomen voorstel tot het verlenen van een optie aan Stichting Continuïteit. De Ondernemingskamer ziet, mede gelet op hetgeen hierna ter zake van de in 3.1 sub (i) geformuleerde vraag zal worden overwogen, vooralsnog geen aanleiding Stichting Continuïteit tevens te verbieden aan de besluitvorming omtrent het als punt 11(b) geagendeerde onderwerp deel te nemen en evenmin, om de aan dit laatste voorstel verbonden (opschortende) voorwaarde te doen vervallen. Het treffen van andere onmiddellijke voorzieningen in verband met de algemene vergadering van aandeelhouders van 14 mei 2009 acht de Ondernemingskamer met het oog op de toestand van (de onderneming van) ASMI niet geboden, met name niet nu Stichting Continuïteit op voorhand bekend heeft gemaakt omtrent de overige voor die vergadering geagendeerde voorstellen niet te zullen stemmen.

4. In the remainder of the judgment, the Enterprise Chamber assumes for now that the original call-option was granted in accordance with the law and that the exercise of the option by the foundation in 2008 in itself - or: technically - was not unlawful. Invoking the key reasoning of the Supreme Court in its well-known April 18, 2003 judgment re Rodamco North America (explaining the standard of review to be applied when scrutinizing defensive measures), the court concludes that at this stage it cannot be said that the foundation violated the applicable standard of conduct - in terms of reasonableness and proportionality (i.e., equity) - when triggering the call-option. I discussed this framework more in detail in Judicial Review of Director Conduct - Under Dutch and Delaware Corporate Law, Deventer: Kluwer 2007, no. 39. The key reasoning of the court - s. 3.7-3.8 - runs as follows (again: in Dutch):

3.7 (...) Uit deze beschikking volgt dat onder bepaalde omstandigheden het gebruik van een beschermingsmaatregel als de onderhavige gerechtvaardigd kan zijn als deze maatregel noodzakelijk is onder meer met het oog op de continuïteit van (het beleid van) de vennootschap en de belangen van degenen die daarbij betrokken zijn. Voorts moet uitgangspunt zijn dat de vraag of een dergelijke maatregel gerechtvaardigd is, moet worden beantwoord aan de hand van de omstandigheden van het geval. Toegespitst op het onderhavige geval zal daarbij met name moeten worden afgewogen of Stichting Continuïteit in redelijkheid heeft kunnen oordelen dat het nemen van de beschermingsmaatregel noodzakelijk was teneinde in afwachting van de uitkomst van verder overleg met Hermes c.s. en met andere betrokkenen de status quo te handhaven en aldus te voorkomen dat - zonder voldoende overleg - wijzigingen worden gebracht in de samenstelling van het bestuur onderscheidenlijk de raad van commissarissen of in het tot dan toe gevoerde beleid van (de onderneming van) ASMI, welke wijzigingen naar het oordeel van Stichting Continuïteit niet in het belang zouden zijn van (de onderneming van) ASMI of van degenen die bij (de onderneming van) ASMI betrokken zijn. Verder dient - mede gelet op de opvattingen die leven in de praktijk en op de stand van de wetgeving terzake - als uitgangspunt te worden genomen dat het gedurende een onbepaalde tijd handhaven van een beschermingsmaatregel in het algemeen niet gerechtvaardigd zal zijn. Voor de beantwoording van de vraag of het nemen en vooralsnog handhaven van de beschermingsmaatregel gerechtvaardigd is, zal als maatstaf moeten gelden of deze maatregel in de gegeven omstandigheden bij een redelijke afweging van de in het geding zijnde belangen (nog) valt binnen de marges van een adequate en proportionele reactie op het dreigende gevaar van een ongewenste overname van de zeggenschap. Of dit het geval is, kan pas na verloop van enige tijd worden beoordeeld, omdat het niet alleen aankomt op de eerste reactie van - in casu - Stichting Continuïteit op de poging tot overname van de zeggenschap door Hermes c.s., maar vooral ook op het beleid dat het bestuur in verband met, en in vervolg op, het creëren van een status quo heeft gevoerd en op de zorgvuldige afweging van de betrokken belangen op grond van een beoordeling van feiten en omstandigheden die aan snelle veranderingen onderhevig kunnen zijn. Tot het zo-even bedoelde beleid behoort in het bijzonder dat het bestuur van ASMI er zorg voor draagt dat zowel Hermes c.s. (de minderheidsaandeelhouders die de zeggenschap in (de onderneming van) ASMI trachten te verkrijgen) als de overige aandeelhouders voldoende geïnformeerd worden over de wederzijdse standpunten.

3.8 Binnen dit toetsingskader is de Ondernemingskamer vooralsnog van oordeel dat in casu niet kan worden gezegd dat Stichting Continuïteit zich niet in redelijkheid op het standpunt heeft kunnen stellen dat het uitoefenen van de - als bescherming van de continuïteit van (de onderneming van) ASMI in het leven geroepen - optie tot uitgifte van preferente aandelen noodzakelijk was teneinde vooralsnog de status quo binnen ASMI te handhaven en aldus te voorkomen dat zonder voldoende overleg ingrijpende wijzigingen in de samenstelling van de organen van ASMI of in het door haar gevoerde beleid zouden worden aangebracht, en evenmin, dat zij door die uitoefening overigens zodanig in strijd met de in 3.7 hiervoor gegeven maatstaven heeft gehandeld - dan wel anderszins zodanig in strijd is gekomen met de redelijkheid en billijkheid die ingevolge artikel 2:8 BW door een rechtspersoon en degenen die krachtens de wet en de statuten bij zijn organisatie zijn betrokken (onder wie onderscheidenlijk waaronder in het onderhavige geval Stichting Continuïteit moet worden begrepen) in acht moeten worden genomen, onderscheidenlijk met hetgeen dienaangaande is neergelegd in de Nederlandse corporate governance code van 9 december 2003 - dat reeds uit dien hoofde het stemrecht op de beschermingspreferente aandelen moet worden geschorst of aanleiding bestaat tot het treffen van (een van) de overige door Hermes c.s. verzochte onmiddellijke voorzieningen. De Ondernemingskamer heeft hierbij in aanmerking genomen dat (de onderneming van) ASMI in beginsel dient te worden bezien naar de toestand waarin zij zich in mei 2008 bevond en dat, beoordeeld naar dat tijdstip, Stichting Continuïteit in redelijkheid heeft kunnen menen dat het in stelling brengen van de litigieuze beschermingsmaatregel met name aangewezen was omdat Hermes c.s. enerzijds en het bestuur en de commissarissen van ASMI anderzijds "bepaald niet met elkaar uitgesproken waren" en Hermes c.s. "te vroeg tot het standpunt zijn gekomen dat de leiding van ASMI opzij zou moeten worden geschoven en zou moeten worden vervangen door zelf aangezochte kandidaten".

5. The parties will have to inform the court no later than June 5, 2009 whether they have been able to settle the dispute - also involving the question who the CEO of the company should be, in view of the future strategic course of the company - amicably. If not, the case will proceed. To be continued, no doubt.

UPDATE

During yesterday's general meeting, the shareholders agreed to renew the foundation's call-option. Furthermore, the existing defensive measure (the preferred shares currently issued to the foundation) will be terminated in the near future.

[No. 42] Peeters q.q./Gatzen-Claim Can Be Assigned, But Only With Prior Consent of the Joint Creditors - In re Dekker q.q./Lutece

1. On 14 January 1983 the Supreme Court of the Netherlands rendered judgment in re Peeters q.q./Gatzen (NJ 1983, 597). In short, it decided that in case the creditors have been prejudiced by the debtor, the bankruptcy trustee is authorized to enforce a claim for damages against a third party that was unlawfully involved with the prejudice to the creditors, even though such claim could obviously not be instituted by the debtor itself. In a series of judgments the Supreme Court has further coloured this claim, which in legal literature generally is referred to as the Peeters q.q./Gatzen-claim.

2. In re Nimox/Van den End q.q. (HR 8 November 1991, NJ 1992, 174) the Supreme Court decided that the bankruptcy trustee is authorized to bring a Peeters q.q./Gatzen-claim even when all debts that existed at the time the prejudicial act was performed, have been payed before the opening of the bankruptcy. Subsequently, it ruled that the collective nature of the Peeters q.q./Gatzen-claim implied that the third party called upon to pay the damages, is not allowed to make use of all defences available against certain individual creditors (HR 23 December 1994, NJ 1996, 628). In two heavily critized judgments of 21 December 2001 the Supreme Court held that the bankruptcy trustee's power to institute a Peeters q.q./Gatzen-claim does not prevent creditors from individually enforcing their rights against the third party in question (NJ 2005, 96), although an adequate liquidation can require that the court first decides on the claim brought by the bankruptcy trustee (NJ 2005, 95). A recent example of how this rule is generally applied by the courts can be found here. Finally, in re De Bont/Bannenberg q.q. (HR 16 September 2005, NJ 2006, 311) the Supreme Court ruled that the proceeds from a succesfully instituted Peeters q.q./Gatzen-claim need to be distributed to the creditors through the estate.   

3. A matter that remained unclear was whether or not the bankruptcy trustee could assign the Peeters q.q./Gatzen-claim to a third party. In legal literature, opinions (as always) vary. Professor Bob Wessels, for example, has taken the position that the specific nature of the Peeters q.q./Gatzen-claim precludes assignment, just as - pursuant to HR 7 september 1990, NJ 1991, 52 - is the case with respect to the bankruptcy trustee's claim on the basis of section 2:138/248 DCC (see Wessels Insolventierecht IV, par. 4193). Professor Sebastiaan Kortmann and Professor Dennis Faber have also taken the position that assignment is not possible, but for a different reason (see AA 1998/4, p. 273). They state that it is necessary to distuingish between (i) the material claim and (ii) the right to enforce this claim (the ius agendi). According to Kortmann and Faber the Peeters q.q./Gatzen-claim only covers the latter, which right cannot be assigned seperately (see section 3:304 DCC). In AA 1998/6, p. 586, professor Reinout Vriesendorp replied that in his view both the material claim and the right to enforce the claim have been granted to the bankruptcy trustee. He further states to see no reason why the bankruptcy trustee would not be entitled to assign the Peeters q.q./Gatzen-claim. 

4.In its judgment of 24 April 2009 re Dekker q.q./Lutece, the Supreme Court ended this controversy. It ruled (in Dutch):

Uit een en ander volgt dat een vordering als de onderhavige toekomt aan de gezamenlijke faillissementsschuldeisers, omdat zij is gegrond op de benadeling in hun verhaalsmogelijkheden als gevolg van het handelen van de gefailleerde (en de derde). Daarom valt deze vordering niet in de boedel. Nu zij strekt tot herstel van de verhaalsmogelijkheden van de faillissementsschuldeisers, dat wil zeggen hun verhaalsmogelijkheden binnen het kader van het faillissement, valt de opbrengst van de vordering echter wel in de boedel teneinde via de uitdelingslijst tot verdeling te komen. Daarom brengt de wettelijke opdracht aan de curator tot beheer en vereffening van de failliete boedel mee dat hij ten behoeve van de gezamenlijke schuldeisers deze vordering kan innen en dus ook voldoening daarvan in rechte kan vorderen. Aangezien, als gezegd, de vordering zelf niet in de boedel valt, omvat deze bevoegdheid tot inning niet de bevoegdheid over de vordering zelf te beschikken door haar aan een derde over te dragen. Daartoe behoeft de curator last, toestemming of volmacht van de gezamenlijke schuldeisers.

In other words: the Peeters q.q./Gatzen-claim can be assigned by the bankruptcy trustee, but only after having obtained - in short - approval by the joint creditors.

5. Although the wordings used by the Supreme Court are not entirely proper, by ruling that the bankruptcy trustee is allowed to collect the Peeters q.q./Gatzen-claim (and thus to request payment in court), but the claim itself is not part of the estate and therefore the bankruptcy trustee's power to collect does not comprise the authority to dispose of the claim itself by assigning it to a third party, the Supreme Court appears to endorse the position taken by Kortmann and Faber. After close reading this also seems to be in accordance with (i) the wordings used by the Supreme Court in re Peeters q.q./Gatzen, where it does not state that the bankruptcy trustee has a claim for damages against a third party, but only that he has the power to enforce this claim and (ii) with both judgments of December 2001, in which the Supreme Court explicitely states that the claim in question concerned a claim of the prejudiced creditors (see s. 5.1.3 and 3.3.4 respectively).   

6. Another aspect of the Peeters q.q./Gatzen-claim that is the subject of long-term debate, is the question whether the bankruptcy trustee can reach a settlement with the third party called upon to pay the damages, to the extent that it is also binding on the individual creditors. Was there still room for doubt after the judgments of December 2001 (see professor Kortmann's commentary under NJ 2005, 96), in my view it stands to reason that the decision by the Supreme Court in re Dekker q.q./Lutece implies that the bankruptcy trustee does not have the authority to reach such settlement. When he wishes to settle the Peeters q.q/Gatzen-claim, the bankruptcy trustee does not only need to obtain the advice of the creditors' committee (if established) and the authorization from the supervisory judge (see section 104 DBC), but also the approval of the joint creditors. 

7. The fact that the bankruptcy trustee can neither assign the Peeters q.q./Gatzen-claim, nor reach a settlement on the claim that is binding on the prejudiced creditors, without the prior consent of the joint creditors, makes the Peeters q.q./Gatzen-claim little flexible and therefore an unattractive instrument to reduce the shortfall of assets. Let's hope that in future legislation these - and other - shortcomings of the Peeters q.q./Gatzen-claim will be rectified. In this respect the preliminary draft for a new Insolvency Code (Voorontwerp insolventiewet), in which the Peeters q.q./Gatzen-claim is codified (section 3.2.8) and - more important - the bankruptcy trustee is granted exclusivity in instituting this claim (section 3.2.9), is promising.

[No. 41] Look & Feel

As you may have noticed, we have been tinkering with the look & feel of TDT the last days, to further improve the 'readability' of the blog. After hours of deliberation, a decision was made. The result is not a shocker, but we're quite happy with it and hope so are you (if not, please let us know). As from this post, the body of the posts also looks a bit different, in line with the template of TDT. Hardest thing we ever did. Seriously.

[No. 40] What Should the Policy Focus Point of Corporate Directors Be? [Updated]

1. Traditionally, American scholars and practitioners tend to view a corporation's primary goal in terms of 'shareholder wealth maximization'. It is therefore refreshing to read Professor Lyman Johnson's recent post about this subject, in the broader context of the relationship - if any - between corporate law and faith. (see, e.g., here). The post includes the following.

Shareholder primacy, in other words, is one goal of many. Companies could, to varying degrees, and consistent with raising capital (shareholders have choice too and can stay away from companies they think are "too" socially responsible), pursue profits but not only profits. Thus, rather than the current organizational dichotomy of profit/nonprofit, we would have a continuum of companies on the profit side (hedge funds being maximizers of wealth and others more diverse). That would give investors choice along with managers and employees and customers, etc. I think the decided turn toward "green" companies and the local food movement are examples of this growing diversity. (Alternatively, maybe there are more such companies out there than we know about--here we need some empirical work-- and it is we law and business teachers who parody this by our reductionism).

2. Professor Stephen Bainbridge weighs in on the discussion here, and quite vigorously dissents from the position taken by Johnson. Let me quote Bainbridge as well.

I must respectfully--but strenuously--dissent. Obviously, there are many situations in which a corporation can make a Pareto optimal move (a win-win decision) that makes everybody--shareholders and nonshareholder corporate stakeholders--better off. In some cases, however, boards of directors must make Kaldor-Hicks (or, if you prefer, zero sum) decisions. In the latter cases, the law requires that directors maximize shareholder wealth. To be sure, the business judgment rule frequently precludes judicial review of board decisions that appear to have made trade offs between shareholder wealth maximization and nonshareholder interests. (Shlensky v. Wrigley being the canonical example.) The fact that judges choose to abstain from reviewing board decisions in such cases, however, does not mean that the underlying legal norm has changed. I've addressed this issue in several articles, but most directly in The Bishops and the Corporate Stakeholder Debate (April 2002). Villanova Journal of Law and Investment Management.

3. This is all interesting stuff, going to the core of what corporate law is/should be about, as Johnson also notes in what seems to be a response to the position taken by Bainbridge.

(...) descriptively, many on this blog may agree that shareholder primacy is not mandated by law, but that remains a contested point, rather remarkably. I doubt Steve Bainbridge, to cite one respected commentator, would yield readily to my assertion on the corporate goal issue but I think the authority he would rely on is thin and largely a matter of custom and other factors, as I noted before.  Many corporate law professors/casebooks seem to assume shareholder primacy and I can't tell you the number of business people and economists, among others, who I have encountered who think such a goal is the 11th commandment, apparently based on the gospel according to Milton Friedman, vintage 1970.  Yes, markets constrain as Elizabeth notes, but markets work at a pretty crude level and shareholders themselves are not always the narrow, stereotyped money-maximizers we sometimes portray them as being, as Einer Elhauge argued in his 2005 NYU piece. Thus, corporate law as taught, written about, and practiced, requires candid attention to the question of what does the law really does require/permit. This is true both in law schools and in B schools.

4. My impression is that, at least in Delaware, courts seem to be focused on shareholders' interests as the interests that should be taken into account primarily by corporate directors, when charting the course for the company to take. See for example the Delaware Supreme Court's 2006 - unanimous en banc - opinion re NACEPF, Inc. v. Gheewalla, where the court  explained that whether a corporation is solvent or "navigating in the zone of insolvency", the focus for Delaware directors does not change: directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners. This emphasis on shareholders' interests is no longer the expected way to go from the moment the company is actually insolvent, as from that moment on - at least that's how I read the opinion - the directors have the "duty to maximize the value of the insolvent corporation for the benefit of all those having an interest in it." Also see, e.g., Katz v. Oak Industries, Inc., 508 A.2d 873 (Del. Ch. 1986), where the court noted that:

[i]t is the obligation for directors to attempt, wihtin the law, to maximize the long-run interests of the corporation's stockholders; that they may sometimes do so 'at the expense' of others (...) does not for that reason contitute a breach of duty.

and Production Resources Group, LLC v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004), where the court noted that:

directors - as fiduciaries in equity - are primarily focused on generating economic returns that will exceed what is required to pay bills in order to deliver a return to the company's stockholders who provided equity capital and agreed to bear the residual risk associated with the firm's operations.

To me this case law seems more in line with the analysis of Bainbridge than that of Johnson, which is not to say Johnson's analysis has no merit; on the contrary, but that's more on an aspirational level. But see for a more nuanced take, in an important recent essay, Delaware's VC Strine (here).

5. American doctrine and case law seem less concerned with the way corporate directors deal with - competing - interests of the company's stakeholders, including those of the shareholders, than say continental doctrine and case law. England, for example, has codified in 2006 a new Companies Act, that contains the following section (172 Duty to promote the succes of the company):

(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.

This system has been called the 'enlightened shareholder primacy' approach. Dutch doctrine and case law is another nice example. One of the Dutch core legal concepts is that a corporate board is expected to take into account in the decision making process the interests of all those involved with the company and its enterprise, which includes - not: equates to - the interests of the shareholders. One could call this - a bit bluntly - the 'stakeholder' approach, as there is no default emphasis on shareholders' interests, at least not distinguishable in doctrine and case law. See, e.g., the Supreme Court's decision of July 13, 2007 re ABN AMRO.

6. In my view, the whole discussion about whether some stakeholder interests are fundamentally more important than others in this setting seems a bit distracting. Of course, it matters whether one is talking about a large listed company or about a small privately organized entity, and there are special situations (think of insolvency and sale of the company), but doesn't it make more sense to generally expect from corporate directors of commercial corporations - that typologically operate for gain - 'simply' the following?

1. That they continuously pursue a legally permitted course of action aimed at maintaining and where possible increasing the financial health of, and wealth generated by, the corporation and its enterprise in the long run (say the 5-10 coming years). The focus is then basically on making the company's enterprise a commercial succes, on responsible entrepreneurship hopefully resulting in a profitable and booming business. That , I believe, is essentially what the phrase 'best interests of the company' is - or at least: should be - about; that should be the directors' main goal, their principal focus. This is not dramatically different from for example the English framework, but arguably also not the same, as the starting point is not whose interests are - to a greater (Delaware) or somewhat lesser (England) extent - paramount, but what is required to maintain and where possible increase the financial health of, and wealth generated by, the corporation and its enterprise in the long run. A profitable business is not only beneficial for the company itself (think of financial health), but also for employees (think of possible pay increase and jobs), creditors (think of the company's creditworthiness) and at the end of the day the shareholders (think of more dividend to divide and increased share value), which may in turn be beneficial for the company (necessary labor, credit and/or capital to generate further wealth), etc. etc.. In this view, the corporation is a vehicle that can be used to generate wealth in a broader sense than shareholder wealth alone, although shareholders - who do bear the residual risk associated with the firm's operations - have the upside of potential and theoretically unlimited return on investment (unlike, for example, employees).
2. That in making the necessary decisions required under 1., they must take into account the interests of those involved with the company and its enterprise that may be affected, including of course the shareholders' interests (that, however, are not by default paramount compared to other stakeholder interests in all situations). This means (a) that directors, in the entrepreneurial realm, must be aware of the expected consequences of alternatives for certain interest groups and (b) that when business decisions require choices between competing interests, or - more precisely - 'sacrifices' from certain interest groups (think of lay-offs), directors don't make choices that clearly disproportionately subordinate the interests of a certain group (not more than is reasonably necessary to obtain the goal). If certain requirements are met (in terms of neutrality and bona fides), their conduct in the business judgment realm is normally to be reviewed by a court under business judgment type of review, while disproportionality review - if any - is grounded in terms of 'no obvious unreasonable subordination'. As long as directors don't violate a standard of conduct, it's up to them what course is charted.

I touched upon this more in detail in Judicial Review of Director Conduct - Under Dutch and Delaware Law, Deventer: Kluwer 2007, no. 7.

My guess is that, in reality, this provides directors with more guidance than some vague notion of 'shareholder wealth maximization' (also as there is no such thing as 'the' shareholder). Things are obviously different if the legal entity does not operate for gain, but that's a different story for another day.

UPDATE

For Professor Johnson's response to this post see the comment section and his interesting additional post here, that starts with the following.

I strongly urge readers to read the Defining Tension comment to my second post, Why It Matters. The link noted in that comment takes you to a very thoughtful, balanced, and helpful essay. It is must reading for those interested in the debate over corporate goals. It convinces me that this debate over corporate purpose is critically important both here and abroad as it touches on a fundamental matter that cannot be dismissed.

[No. 39] Some Perspectives on the Financial Crisis From This Side of the Atlantic

On the other side of the Atlantic, blogs like The Conglomerate have provided quite some insight in developments related to the financial crisis, although mainly from an American perspective.

Over at the Dutch site Amsterdam Law Forum, interested readers can find some European - or at least: Dutch - perspectives on the same subject. In its third issue (A.L.F., Volume 1, Nr. 3, 2009), not surprisingly called "The Financial Crisis", the forum published the views of scholars and researchers on the causes of, and even solutions to, the economic downturn.

From the Editorial:

The financial crisis brought the world economy its deepest recession since the Second World War. One may wonder how it is possible that the crisis has been able to exert such huge influence on a global scale. In Europe, first-time home-buyers are finding it increasingly difficult to obtain a mortgage. Businesses are finding it increasingly difficult to see profits as a result of reduced business activity. The automobile industry may be cited as one example. Unemployment has increased, consumer demand has fallen, and deflation may well set in. The question weighing upon everyone’s mind is how this could have happened. One may also question whether we can bring the recession to a halt and prevent it from recurring. If so, what measurements should be taken? In this, the third edition of Amsterdam Law Forum, we present valuable insights in these matters.

(...)

The discussion on the financial crisis created by the diversity in backgrounds of authors has created an interesting issue which provides a platform for legal, political and philosophical perspectives on the financial crisis. We hope this issue will contribute to the intellectual discussion on the crisis and perhaps even inspire policy-makers to create legal reform and new laws.

[No. 38] Re Pine Digital Security Inquiry Proceeding

1. In post No. 28, I highlighted a recent judgment by the Enterprise Chamber in an inquiry proceeding (Re Butôt O.G. Holding). In the judgment, the court referred among other things to a special duty of care owed by the - management board of the - company vis-a-vis certain interested parties. This special duty of care, that has been framed by the Enterprise Chamber in many cases, is based on section 2:8 DCC: the general requirement of reasonableness and fairness, to be observed by the company and all those involved within the organization of the company - based on statute or articles of association - towards each other. In its case law on point throughout the years, the court seems to be inspired especially by the Supreme Court's well-known right of inquiry judgment of March 1, 2002 re Zwagerman Beheer, in which it explained that the company must exercise care towards the interests of all its shareholders and that this care standard is to be applied within the circumstances of the case at hand (including whether the interests involved are those of minority shareholders). The court mentioned:

(...) de in art. 2:8 BW neergelegde regel dat de vennootschap en degenen die krachtens de wet en statuten bij haar organisatie zijn betrokken, zich zodanig jegens elkander moeten gedragen naar hetgeen door de redelijkheid en billijkheid wordt gevorderd. Uit de regel vloeit onder meer voort dat de vennootschap zorgvuldigheid moet betrachten met betrekking tot de belangen van al haar aandeelhouders. De uitwerking van de zorgvuldigheidsplicht zal mede afhankelijk zijn van de omstandigheden van het geval, waarbij zoals de Ondernemingskamer heeft gedaan, in aanmerking mag worden genomen dat het gaat om minderheidsaandeelhouders en om familierechtelijke verhoudingen tussen de bij de vennootschap betrokken personen.

2. Due to the dominant influence of the circumstances of the case at hand, this special duty of care is a bit of a 'shape shifter': there is no single, robust definition used in case law. The perspective of the company, as chosen here by the Supreme Court, is understandeable as the primary subject of an inquiry proceeding - at least from a doctrinal point of view - is the company's policy and affairs, although the discussion will often focus on what directors (either managing or supervisory) and/or shareholders have actually done. I discussed this in Judicial Review of Director Conduct - Under Dutch and Delaware Corporate Law, Deventer: Kluwer 2007, no. 24 and 26.c. 

3. In another recent judgment by the Enterprise Chamber, this doctrine pops-up again. I am talking about the court's judgment of March 27, 2009 re Pine Digital Security (published in ARO 2009/58). The factual setting is a-typical, as:

- there are six shareholders, including the minority shareholder/plaintiff (SMA Beheer);
- one of the other shareholders is also the sole director; and
- four out of five of the other shareholders are also employees of the company (SMA Beheer is not).

4. SMA Beheer argues there are well founded reasons to doubt the correctness of the company, justifying an inquiry into the company's policy and affairs. The gist of SMA Beheer's complaints relates to the renumeration policy followed by the company as to the director and the employees of the company:

- the renumeration of the sole director was not set by the general meeting, as required by the company's articles of association;
- the management board of the company refused to provide adequate information as to the renumeration structure and criteria and as to the question what persons received the employee benefits as known from the 2005, 2006 and 2007 annual accounts (that show a sharp increase in payment regarding employee benefits); and
- in relation to sub 1. and 2., there is reason to suspect that the shareholders who are also employed by the company received benefits - to the detriment of SMA Beheer as minority shareholder - through additional payments without involvement of the general meeting.

5. The company argues that it's up to its management board to decide with regard to employee renumeration/benefits, that payments by the company to its director and its employees were not excessive and that the general meeting was informed adequately. So basically: no big deal.

6. Now what did the Enterprise decide? It granted the plaintiff's request. First, the court mentioned the duty of care that follows from section 2:8 DCC, resting on "(majority)shareholder"(s)" and "managing director(s)" and requiring that they take into account the interests of the minority shareholder. Second, the court explained that a special characteristic of this case is the fact that most of the shareholders are also employees and that payments received by the shareholders in their capacity as employee (not including SMA Beheer) negatively influence the amount of payable dividend to all shareholders (including SMA Beheer).

De uit het bepaalde in art. 2:8 BW voortvloeiende zorgvuldigheidseis brengt mee, dat (meerderheids)aandeelhouder(s) en bestuurder(s) rekening moeten houden met de belangen van de minderheidsaandeelhouder. Deze norm wordt in het onderhavige mede bepaald door de omstandigheid dat - met uitzondering van SMA Beheer - nagenoeg alle aandeelhouders tevens werknemers zijn van Pine Digital. De (extra) beloningen die de aandeelhouders/tevens werknemers - onder wie niet SMA Beheer - ontvangen zijn immers van invloed op de - aan alle aandeelhouders, onder wie ook SMA Beheer - uitkeerbare winst.

The focus of the Enterprise Chamber in this 'reasonableness and fairness' analysis on "(majority)shareholder"(s)" and "managing director(s)", and not also on employees, is correct. Although Dutch corporate law is based on the stakeholder system, which requires directors to take into account the interests of all those involved with the company and its enterprise - including employees - in the decision making process, the scope of section 2:8 DCC - not the same concept - is limited to the company and all those involved within the organization of company, based on statute or articles of association: and that does typically not include employees (they're normally covered by reference to the company's enterprise). By the way, this general reasonableness and fairness approach as to individual shareholders seems to differ from the Delaware system, in which only a controlling stockholder - i.e., a shareholder that (i) has 50+% of the voting power or (ii) has less but in fact actually controls the company - owe fiduciary duties to the minority. See in detail my book at no. 7.e.

The Enterprise Chamber then decides it has not become sufficiently clear - i.e., it is questionable - that sufficient care was indeed exercised as to the interests of SMA Beheer, as required by section 2:8 DCC. The reason for this is, apparently, that:

1) the company was unable to explain the pretty sharp increase in payments regarding employee renumeration from 2004 (€ 251.382) through 2007 (€ 1.647.997); while
2) the paid shareholder dividend amounted to € 261.502 in 2005, € 138.087 in 2006 and € 239.811 in 2007;
3) the 2006 and 2007 accounts did not make contain a 'special payments' section (unlike the 2005 accounts), which did not help in making things transparent;
4) the increase in director renumeration was not set by the general meeting, as required by the company's articles of association, but the general meeting was only informed of this increase afterwards; and
5) this course of events raised questions, that have not been answered in the general meetings of 2006, 2007 and 2008.

According to the court, this taken together justifies the conclusion that there are well founded reasons to doubt the correctness of the company's policy, so that an inquiry is warranted. In all fairness, I see no reason to doubt this conclusion.