[No. 103] Re ASM International Inquiry Proceeding [Updated III]

So, the Enterprise Chamber granted the request for an inquiry by investment funds (and ASM International shareholders) Hermes and Fursa into the policy and affairs of ASM International last Wednesday, in what already seems like a classic Enterprise Chamber decision when it comes to shaping the contours and discussion of what contemporary principles of corporate governance require. Although the fact patterns differ, when scanning this ruling I was immediately reminded of cases like HBG (see, e.g., here and here) and Rodamco North America (see, e.g., here, here and here). By the way, the request for a preliminary injunction was denied in the ruling, that seemingly was one of the - if not the - last of Huub Willems as chairman of the Enterprise Chamber.

This case shows again that there continues to be a tension between the authority of the directors to conduct - and supervise - the corporation's business on the one hand, and their duty to respect the position of the general meeting/shareholders on the other; a tension that is not always easy to solve in practice, especially when it comes to enterprise issues. I have no doubt that the case will play a role in the ongoing debate about the position of 'activist' shareholders under the current Dutch corporate governance model, also in view of recent legislative initiatives. Anyway.

The background of the dispute is, in short, that:

• certain shareholders have been pressing for a change in strategy (splitting the back-end from the front-end activities in order to increase the value of the former and review the survival rate of the latter) and regime;
• the company disagreed;
• these shareholders put on the agenda of the May 2008 general meeting the proposal to replace the CEO and a large block of the supervisory board by persons supported by the shareholders; and
• the foundation, that is formally independent but related to the company (see here), prevented approval of these proposals by exercising its call-option (as granted by the corporation) and thereby obtaining a controlling vote prior to the general meeting; eventually, the general meeting did not vote on these issues.

The discussion between the parties continued - led by the foundation - but was also put on hold mid 2008 by a third party offer on the front-end activities, that eventually went nowhere. Questions by the shareholders about the negotiations were apparently never really answered by the corporation. The parties continued to talk and almost reached an agreement early 2009, but eventually failed due to a controversy as to the composition of the management board.

The judgment basically consists of two parts: the first focuses on the management board and the supervisory board, the second focuses on the foundation. I will highlight these parts here, with some extra's on the side.

Part I

The Enterprise Chamber is highly critical of the course of events. It concludes that the facts show a listed corporation, that keeps pushing ahead in time its strategic problems c.q. trying to solve them in an inner circle of directors (the CEO and the supervisory directors) and controlling shareholder, and in order to do so uses its outdated governance model to close the ranks and act defensively towards the other shareholders. This, according to the court, is highly undesirable in view of 'principles of corporate governance' as these are understood in this era. It also concludes that external shareholders have hardly any influence on the corporation's (strategic) policy and are unable to effectively hold its organs accountable. It also notes that the high thresholds for appointing and dismissing managing and supervisory directors, in combination with the presence of the controlling shareholder, the disproportional power of the CEO and the non-critical position taken by the (chairman of the) supervisory directors, made things worse. I'll quote one section (3.11).

3.11 De Ondernemingskamer overweegt dat uit de gang van zaken zoals in 3.5 tot en met 3.10 hiervóór is samengevat, niet anders kan worden geconcludeerd dan dat een beeld naar voren komt van een beursvennootschap die haar problemen op het (ondernemings)strategische vlak steeds naar voren heeft geschoven althans steeds heeft gepoogd binnen de besloten kring van de eigen functionarissen (en met name de CEO en de commissarissen) en grootaandeelhouder af te wikkelen en zich daartoe jegens haar (overige) aandeelhouders, met behulp van haar gedateerde governance, defensief en gesloten heeft opgesteld. De Ondernemingskamer acht een dergelijke opstelling met het oog op de beginselen van behoorlijk ondernemingsbestuur zoals die naar thans vigerende opvattingen moeten worden begrepen, bepaald onwenselijk. Zoals Hermes c.s. hebben gesteld, hebben de externe aandeelhouders nauwelijks invloed op het (strategische) beleid van (de onderneming van) ASMI kunnen uitoefenen en haar organen niet effectief ter verantwoording kunnen roepen. De hoge drempels voor de benoeming en het ontslag van bestuurders en commissarissen, in combinatie met het grote minderheidsbelang van Del Prado Sr., de onevenredige macht van de CEO in het bestuur en de weinig kritische houding van (de voorzitter van) de raad van commissarissen zijn daaraan naar het oordeel van de Ondernemingskamer met name debet. Meer in het bijzonder overweegt de Ondernemingskamer als volgt.

But there is more. The court also blames, e.g., the supervisory board:

• for not taking its responsibility as to creating transparency towards the shareholders;
• for not seeing to it that no expectations were raised with the shareholders, as to changes in the appointment and dismissal procedure, that the corporation could not or was not willing to live up to; and
• for not really trying to mediate in the conflict between the management board and the external shareholders.

In view of all this (I even excluded some criticism), the court finds there are well founded reasons to doubt the correctness of ASM International's policy that justify an inquiry.

Part II

But the Enterprise Chamber isn't done yet. It continues with assessing the conduct of the foundation. No compliments here either. The court also finds well founded reasons to doubt the correctness of the corporation's policy as to the granting and exercise in 2008 of the call-option, mainly because the court has heavy doubts that the foundation in fact actually acted independently from the corporation (instead of using its position to secure the position of the directors so that they could solve the problems within that inner circle referred to above). I'll quote the key passage (s. 3.27):

Al met al zijn er naar het oordeel van de Ondernemingskamer zoveel aanwijzingen dat niet kan worden uitgesloten dat Stichting Continuïteit het zittende bestuur en de zittende commissarissen de hand boven het hoofd heeft gehouden teneinde binnen de besloten kring van de eigen functionarissen en grootaandeelhouder een afwikkeling van de problemen die ASMI op (ondernemings)strategisch en corporate governance gebied ondervond te faciliteren, dat ernstig moet worden betwijfeld of zij haar recht tot het nemen van de beschermingspreferente aandelen niet althans niet, minst genomen, in aanmerkelijke mate met het oog op die rol heeft uitgeoefend. Het komt de Ondernemingskamer voor dat de optie - in ieder geval - daarvoor niet was bedoeld. Het uitoefenen van de optie met dat doel zou, naar moet worden aangenomen, onrechtmatig zijn geweest.

The problem that the right of inquiry only focuses on the legal entity and its organs, not on third parties, was solved by the court by reasoning that the foundation acted as co-policy maker of the corporation (s. 3.28).

Voor de doeleinden van het enquêterecht moet naar het oordeel van de Ondernemingskamer een dergelijke "bevriende" stichting, die door de uitoefening van haar optie eenzijdig en zonder dat daarvoor overigens de medewerking van de door haar te "beschermen" vennootschap vereist is, een beschermingsmaatregel in stelling brengt welke haar, beoordeeld naar stemgerechtigdheid, tot belangrijkste aandeelhouder van die vennootschap maakt en met welke maatregel zij ook beoogt diepgaand in de vennootschappelijke verhoudingen van de te "beschermen" vennootschap in te grijpen, onmiddellijk vóór en ten tijde van de uitoefening van haar optie geacht worden zodanig nauw bij (het beleid en de onderneming van) de te beschermen vennootschap te zijn betrokken dat zij ook wat betreft de uitoefening van haar optie als medebeleidsbepaler van die vennootschap heeft te gelden.

This type of approach is not unprecedented, but only applied in special circumstances.

Varia

I mention two additional points.

1. The Enterprise Chamber takes into account facts and circumstances that took place after the date of the filing of the original request. Although the court confirms this is not standard practice (also see its ABN Amro Bank decision of April 17, 2008, s. 3.13), it deems it justified in this case as these additional facts and circumstances all took place in the time-frame of the continued talks between the parties (as ordered by the court), the corporation was aware of these new facts and circumstances and also was in a position to respond to them (s. 3.4).
2. The Enterprise Chamber is obliged to take into account the interests of the parties involved when determining whether an inquiry should be ordered. The court does so, and concludes there are no reasons to deny the request, notwithstanding the well founded reasons to doubt the corporation's policy. One of the arguments by the company was that the inquiry isn't going to help the shareholders, as these events cannot be undone. The court rebuts this argument in part by saying that if the granting of the option was unlawful, this could result in liability of ASM International c.q. the foundation (s. 3.29). This is somewhat remarkable, as the right of inquiry does not deal with liability issues. But then again, the court only mentions this - as it has done in other cases - to rebut the argument by the corporation that the request should be denied because the shareholders lack sufficient interest. The court also finds that transparency is required and that only then the damaged relationships within the corporation can be restored (s. 3.31).

How will this proceed from here? My guess is that chances of Supreme Court litigation in this matter are rather high. And the outcome of such corporate governance related disputes is not always easy to predict, as evidenced by the discrepancy between the approach taken by the Enterprise Chamber and the Supreme Court in the ABN Amro Bank matter.