1. In the past months, I have reported regularly about developments related to the right of inquiry. The right of inquiry is a very popular and important avenue for corporate litigation in the Netherlands; the framework as such does not exist in other countries. On June 26, 2009 the Supreme Court rendered an important decision that touches upon the foundation of this legal doctrine. I highlight the gist of it here.
2. What is the essence of the right of inquiry? The right of inquiry entitles shareholders - and trade unions, as well as some others, including holders of depository receipts - who own either 10% of the outstanding stock or shares with a nominal value of at least Euro 225.000 (or less if provided by the corporation's articles of association), to request the Enterprise Chamber of the Amsterdam Court of Appeal to review the course of action followed by/the affairs of certain legal entities, including corporations. In general, the subject matter of such a judicially ordered inquiry is the conduct of the corporation's organs, i.e.: the management board, the supervisory board (provided the corporation has one) and/or the general meeting of shareholders. Their conduct is attributed to the corporation, as the corporation is ultimately the subject of inquiry proceedings.
- In the so-called 'first phase' of inquiry proceedings, one of the central questions is whether there are 'well founded reasons to doubt the correctness of the course of action followed by the corporation' (section 2:350(1) DCC). If the answer is yes, the court may order an inquiry - after having balanced all the interests involved, including that of the corporation - and appoint one or more investigators. Other important questions are (a) whether the plaintiff is authorized to make the request (typically: does he meet the shareholding threshold?) and (b) whether the plaintiff (i) has informed the management board and supervisory board in writing of his complaints first and (ii) has given the corporation a reasonable period to investigate the complaints and take the necessary measures. The first phase ends when the investigators file their report with the court. This first phase is an independent proceeding: if the plaintiff wants to proceed with the inquiry proceeding, he will have to file a new request, which starts the so-called 'second phase'.
- In the second phase of inquiry proceedings, the court determines upon request, based on the investigators' report, whether the corporation has followed an 'obvious incorrect course of action' (section 2:355 DCC). This can be framed as clear mismanagement. Upon request, and if such mismanagement is established, the court can take one or more measures to put an end to this mismanagement. The court can for example nullify decisions taken by organs of the corporation, fire directors, or even order the dissolution of the corporation. The list of possible measures is limited.
- Throughout the proceeding, the plaintiff can also ask for one or more preliminary measures, i.e., injunctive measures (section 2:349a(2) DCC). This typically comes up in the first phase, when the plaintiffs asks for an inquiry and for one or more preliminary measures. The court can take such - often far-reaching - measures if this is in the interest of the corporation or the investigation. Although the court should not take such measures too easily (especially if it has not yet decided whether there are well founded reasons to doubt the correctness of the corporation's course of action), these measures must have a temporary/provisional character and the court must balance all interests involved in order to reach a proportionate outcome, it has great discretion as to the way a measure is framed. There is no list of possible measures, and these measures do not necessarily have to be in line with mandatory law. The court can, for example, order parties to refrain from certain conduct in order to preserve a status quo, suspend directors and freeze voting rights. The popularity of the right of inquiry can be explained in large part by the introduction in 1994 of the possibility for the court to take preliminary measures.
The costs of the inquiry are typically paid by the corporation. However, if the court establishes 'improper conduct' (which is a lower threshold than the abovementioned mismanagement), it can order those responsible for this conduct to pay the costs upon request of the corporation: this is essentially a question of liability. The court is on average not eager to do so, but it has happened more than once.
3. In a well-known judgment from 1990 (NJ 1990, 466 re Ogem Holding), the Dutch Supreme Court clarified the purpose of the right of inquiry. It stated, based on the legislative history, that the purpose of the right of inquiry is basically three-fold:
- end controversies in the corporation through measures;
- create transparency; and
- establish who is responsible for possible mismanagement.
It also clarified that the possibility of an inquiry may work to prevent misconduct from actually taking place, and that an inquiry can also be ordered when the corporation has already gone bankrupt. The Ogem Holding decision is widely recognized as a foundation of inquiry proceeding case law. The Supreme Court has repeated this scope of inquiry proceedings several times thoughout the years, and added in 2005 that when the complaints of the plaintiff do not relate at all to these objectives, for example because the conflict is essentially a contract dispute (and not a corporate dispute), the court does not have to look further into the request as the request is not suitable for inquiry proceedings. The same goes if the plaintiff has no power to make the request or has failed to inform the corporation of his complaints first. All of this also shows that the right of inquiry does not center around liability related questions, as it is not a proceeding primarily designed to establish liability of actors in the corporation for damage suffered by the corporation. If litigants want to initiate liability proceedings, they will have to address a different court in different proceedings. Sometimes inquiry proceedings are used as a stepping stone for liability proceedings, as it may be easier for a plaintiff to make his case in liability proceedings with the investigators' report in hand. Although a determination of mismanagement in inquiry proceedings does not automatically result in director liability, such a determination will generally give a plaintiff in liability proceedings a head-start, as the conduct reviewed by the Enterprise Chamber will typically be more or less the same as the conduct complained of in liability proceedings and the Enterprise Chamber is generally seen as a court specialized in business matters.
4. In the inquiry proceedings re KPNQwest, an ICT company that has gone bankrupt, the Enterprise Chamber ordered an inquiry on December 28, 2006. The court held that it could not be ruled out (a) that banks and investors were misled or inadequately informed by the corporation and (b) that the 2001 annual accounts as published by the corporation were misleading. The court was also critical of the conduct by the supervisory board. In view of all this, the court held that there were well founded reasons to doubt the correctness of the corporation's course of action sufficient to justify an inquiry. The court has taken a couple of interesting decisions in this proceeding so far, in part relating to the lack of funding to proceed with the investigation; some of them were brought before the Supreme Court. The most important matters brought before the Supreme Court concern three principal issues, that basically ask the Supreme Court to overrule its Ogem Holding holding and its progeny:
- it is impossible to order an inquiry with the - sole - purpose to create transparency or to establish who is responsible for possible mismanagement and/or an inquiry cannot be ordered when the corporation has already gone bankrupt;
- an inquiry cannot be in the interest of the corporation when the corporation has gone bankrupt; and
- if the investigation cannot take place due to lack of funding, the court has to deny the request on this ground without any further investigation into the merits of the request.
The third issue relates to a different decision by the Enterprise Chamber, that of January 9, 2006.
5. In a pretty detailed decision, the Supreme Court fully rejected the argument advanced by the plaintiffs. I address the decision below the fold.
6. As to the first issue, the Supreme Court notes that what the plaintiffs essentially want is the court to overrule its Ogem Holding decision. In tackling this issue, the court relies heavily on the conclusion in this case by Advocate General Vino Timmerman. The court emphasizes in section 3.2.2 that although before 1971 - under the old right of inquiry framework, when the Enterprise Chamber could not take any measures - the legislator saw creating transparency as the right of inquiry's purpose, after 1971 it stressed the importance of ending controversies in the corporation through taking measures; in addition, the possibility of an inquiry and the determination of responsibility for possible mismanagement may work to prevent misconduct from happening. The court also repeats in section 3.2.3:
- that disputes not relating to this purpose of the right of inquiry as described in section 3.2.2 do not fall under the scope of the right of inquiry;
- that in such a case the request cannot be granted; and
- that the single circumstance that in case of a moratorium of payment or bankruptcy of the corporation there is no possibility of ending controversy through measures is in itself insufficient ground to deny the request.
It then repeats in section 3.2.4 what the gist of the right of inquiry framework is:
- the Enterprise Chamber's power to order an inquiry is discretionary;
- it has to balance the interests involved, bearing in mind that it can only order an inquiry if there are well founded reasons to doubt the correctness of the corporation's course of action, based on the actual request before the court and the facts/circumstances as they apply in the case before the court;
- in balancing these interests, the court must also take into account the purpose of the right of inquiry, as well as downsides of broad application of the right of inquiry and the nature of the conflict actually before the court; and
- the court does not have to make explicit that it has taken into account these downsides, as it is generally difficult to balance general aspects related to the - downsides of - broad application of the right of inquiry against more concrete interests that are relevant in the case actually before the court; things are different when there a clear facts for or against ordering an inquiry, and the court reached a different outcome.
The court then concludes in section 3.2.5 that the argument advanced by the plaintiff is based on a more limited approach as to the granting of a request and fails for that reason; it sees no reason to overrule its Ogem Holding decision. In Dutch the reasoning runs as follows.
3.2.2 De wetgever heeft blijkens de ontstaansgeschiedenis van de wettelijke regeling van het enquêterecht, zoals deze is weergegeven in de conclusie van de Advocaat-Generaal onder 4.2 tot en met 4.14, aanvankelijk vooral het verkrijgen van openheid van zaken als belangrijk doel daarvan aangemerkt en later de sanering en het herstel van gezonde verhoudingen door maatregelen van reorganisatorische aard binnen de onderneming van de betrokken rechtspersoon vooropgesteld. Van de mogelijk-heid van een onderzoek en de vaststelling bij wie de verantwoordelijkheid berust voor eventueel blijkend wanbeleid, zou bovendien een preventieve werking kunnen uitgaan.
3.2.3 Tot de doeleinden van het enquêterecht zoals deze de wetgever voor ogen stonden, behoort niet de beslechting van geschillen van vermogensrechtelijke aard noch het doen van onderzoek naar de feitelijke achtergrond van dergelijke geschillen. Is sprake van een geschil van louter vermogensrechtelijke aard, waarbij de doeleinden van van een enquête niet verwezenlijkt kunnen worden, dan is een enquêteverzoek niet toewijsbaar. Indien niet blijkt dat de beoogde enquête een doel (als vermeld in 3.2.2) heeft, zal het desbetreffende verzoek niet toewijsbaar zijn. De omstandigheid dat bij surseance van betaling of faillissement sanering of herstel van gezonde verhoudingen niet meer tot de mogelijkheden behoort, is op zichzelf onvoldoende grond voor afwijzing.
3.2.4 De aan de ondernemingskamer gegeven bevoegdheid een enquête te bevelen is een discretionaire: bij de uitoefening van die bevoegdheid dient een afweging van de betrokken belangen plaats te vinden, met dien verstande dat ingevolge art. 2:350 lid 1 BW voor toewijzing van een verzoek slechts plaats is wanneer blijkt van gegronde redenen om aan een juist beleid te twijfelen. De ondernemingskamer kan de bevoegdheid om een enquête te bevelen slechts uitoefenen ten aanzien van het aan haar voorgelegde concrete verzoek. Dit brengt mee dat een door haar te maken belangenafweging moet steunen op feiten en omstandigheden, zoals die zich voordoen in het haar voorgelegde geval. De ondernemingskamer zal bij deze belangenafweging, hoezeer die ook plaats heeft in een concreet geval, naast de doeleinden van het enquêterecht mede de bezwaren tegen een ruime toepassing van het middel van enquête moeten betrekken, en de aard van het tussen de verzoeker en de rechtspersoon bestaande geschil in aanmerking moeten nemen. Zij behoeft evenwel niet telkens in de motivering van haar beslissing tot uitdrukking te brengen dat zij de bedoelde bezwaren in de beoordeling heeft betrokken. Daarbij is van belang dat de afweging van de bij die bezwaren betrokken meer algemene belangen tegen de in het concrete geval bestaande belangen zich veelal niet voor een gedetailleerde motivering leent (HR 18 november 2005, nr. R05/042, NJ 2006, 173, Unilever). Een dergelijke motivering mag wel worden verlangd in geval van feiten of omstandigheden die (duidelijk) voor dan wel tegen toewijzing van het enquêteverzoek pleiten, en de ondernemingskamer desalniettemin tot een andersluidende beslissing komt.
3.2.5 Het onderdeel gaat uit van een andere, beperktere opvatting over de toewijsbaarheid van een enquêteverzoek dan hiervoor is uiteengezet en faalt om die reden. Voor terugkomen van HR 10 januari 1990, nr. 21, NJ 1990, 466, bestaat geen grond.
7. I believe this ruling does not come as a surprise, as it's in line with what the Supreme Court has been saying for almost twenty years now. The Supreme Court clearly was not willing to revisit its earlier judgments. Although it's true that the emphasis in the legislative history as to the post-1971 right of inquiry is on ending controversy in the corporation through measures, fairly read/interpreted this is not the single focus. I do believe that the wording of section 3.2.2 is a bit weird, as it suggests that creating transparency and establishing responsibility for possible mismanagement are merely subsidiary purposes of the right of inquiry; but then section 3.2.3 suggests all elements are seen as purposes and no hierarchy is intended, which is in line with the way the court framed the complaint and has thrown it out. It's also a bit strange to refer to 'not granting the request' in section 3.2.3, as this suggests a substantive analysis; as the court is expected not to look further into the request - as the request is not suitable for inquiry proceedings - when the request does not relate at all to the purpose of the right of inquiry, the phase of granting or denying the request is not reached in that situation.
8. As to the second issue, the Supreme Court is rather short. According to the court the second issue is without merit, as (a) it relies on the first issue (thrown out by the court) and (b) the reasoning of the Enterprise Chamber to order an inquiry is based on the purpose of the right of inquiry/the interests involved and is not inexplicable. This outcome is also not surprising. Key is here as well that the Supreme Court can only scrutinize whether the law was applied properly and whether the reasoning of the Enterprise Chamber was not insufficient (inexplicable).
9. As to the third issue, the Supreme Court clarifies that the Enterprise Chamber is free, if it sees reason to do so:
- to investigate first if, and to what extent, an inquiry if ordered can actually take place in view of the funding; and
- if it concludes there is no real expectation in this respect, to deny the request on that ground.
As to the stage of the proceeding in which such a 'lack of funding' defence is dealt with by the court and to the question whether it sticks, the analysis to be made by the Enterprise Chamber is a factual one reserved for the Enterprise Chamber and not to be scrutinized for 'correctness' by the Supreme Court. The Supreme Court further adds that normally a request for an inquiry must be reviewed on the merits; the Enterprise Chamber does not have to precondition the possibility of an inquiry - aside from the aforementioned a-typical case in which there will obviously be no funding available - on its practical execution because otherwise funds may be wasted by defendants on other issues. Finally, the argument advanced by plaintiffs that if the Enterprise Chamber after substantive analysis still cannot be sure that the investigation will take place and be conducted adequately must refrain from a judgment on the merits fails, as this does not take into account that the Enterprise Chamber has a wide margin of appreciation when ruling whether in the given circumstances an inquiry is useful and justified. This analysis also fits nicely into the rest of the Supreme Court's decision.
10. In sum: surprises: not really, helpful clarifications: yes. Two related decisions by the Supreme Court can be found here and here.
Comments