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[No. 142] Some Words on the Crisis (and What To Do About It) from London...

Lord Adair Turner, the current chairman of the UK Financial Services Authority and drafter of the 2009 Turner Review (we shared some perspectives on the review here), held an entertaining and provoking speech last week at London's City Banquet on 'maintaining momentum for reform' in the financial sector. Here's a teaser. He stated, among many other things, that

[t]o regain trust, banks need to refocus their energies not on those over-complex products of no real use to humanity (...), but on their core functions of providing savings and credit and payment products to customers, whether individuals, companies or institutions.

But focusing on the socially valuable is not straightforward.  Because (...) it is in the nature of markets that there are some things which are indirectly socially useful, but which in the short-term will look to the external world like pure speculation.  Market making does have an important social function – but that benefit is achieved indirectly and market making requires some position taking.  And a vibrant global economy probably does require an important role for securitised credit a recovery indeed of securitised credit markets, but securitised credit extension needs to be underpinned by at least some trading activity.

So rebuilding trust in the necessary and socially useful functions of banks cannot mean an end to all trading activities nor, much as some might like it, an end to well-remunerated traders.

But it does mean that the top management of banks, and in particular of any banks which are involved both in complex trading activities and in retail banking activities – need to operate within limits.  They need to be willing, like the regulator, to recognise that there are some profitable activities so unlikely to have a social benefit, direct or indirect, that they should voluntarily walk away from them.  They need to ask searching questions about whether the complex structured products they sold to corporate and institutional customers, truly did deliver real hedging value or simply encouraged those institutions into speculative and risky exposures which they did not understand: and, if the latter, they should not sell them even if they are profitable.  They need to be willing to accept the capital and other requirements which will be imposed on activities of little value and considerable risk, rather than deploy lobbying power to argue against such constraints on the basis of a simplistic assertion that all innovation is always valuable.

Interested in the whole story? The transcript is handily available here.

(HT HLSF)

[No. 141] Symposium: 50 Years European Corporate Law

Next Wednesday, September 30, the Dutch Institute for Corporate Law organizes a symposium about 50 years of European corporate law. The "50 years" part refers to the fact that Prof. P. Sanders, an important dean of the Erasmus University Rotterdam back in the day, formally accepted his position as professor at the university by delivering a speech about the European public corporation. Since then, there have been numerous developments in corporate law at the European level and "indirectly" at the national level in the European Union. As of 2004, for example, it is possible to establish a European public corporation.

The symposium takes place in the M-Building (Tokyo Wing) at the campus of the Erasmus University Rotterdam. Further information about registration can be found here. The program runs as follows.

PROGRAMMA

12:45 – 13.30	Ontvangst met koffie/thee
13.30 – 13.35	Opening door dagvoorzitter mw. Prof. mr. H.M. Vletter - van Dort, Hoogleraar Bank- en Effectenrecht, Faculteit der Rechtsgeleerdheid, Erasmus Universiteit Rotterdam en Hoogleraar Effectenrecht, Faculteit der Rechtsgeleerdheid, Rijksuniversiteit Groningen
13.35 – 13.50	Inleiding: Sanders’ Europese N.V. in perspectief Prof. mr. M.J. Kroeze, Decaan van de Faculteit der Rechtsgeleerdheid, Erasmus Universiteit Rotterdam
13.50 – 14.30	De Europese vennootschap als sluis voor in- en uitvoer van ondernemingsrecht Prof. mr. J.W. Winter, Partner De Brauw Blackstone Westbroek en hoogleraar Internationaal Ondernemingsrecht, Faculteit der Rechtsgeleerdheid, Universiteit van Amsterdam.
14.30 – 14.45	Discussieronde
14.45 – 15.15	Thee/koffiepauze
15.15 – 15.55	Bestuurdersaansprakelijkheid in Europees perspectief Prof. mr. J.B. Wezeman, Hoogleraar Handelsrecht en Ondernemingsrecht, Faculteit der Rechtsgeleerdheid, Rijksuniversiteit Groningen
16.55 – 16.35	Piet Sanders en de modernisering van de kunst, het recht en het (Europees) ondernemingsrecht Prof. mr. L. Timmerman, Hoogleraar grondslagen van het ondernemingsrecht, Faculteit der Rechtsgeleerdheid, Erasmus Universiteit Rotterdam
16.35 – 16.50	Discussieronde
16.50	Afsluiting door dagvoorzitter en Borrel

[No. 140] Politicians and Curbing Potential Corporate Misbehavior: a Dangerous Combination

The Dutch Socialist Party is proposing to add financial mismanagement to the Dutch Criminal Code (apparently with a maximum prison penalty of six years) and to increase personal liability for bankers when their business judgments don't pan out.

De SP wil meer mogelijkheden om bankiers die financieel wanbeleid hebben gevoerd, strafrechtelijk te vervolgen. SP-Kamerlid Ewout Irrgang zal dat dinsdag voorstellen bij de Algemene Financiële Beschouwingen. Irrgang: “Als je de hele samenleving dupeert, dan ligt er een taak voor het openbaar ministerie. Het is onverteerbaar dat bankiers die hun banken naar de afgrond hebben geleid, zich terugtrekken in een huisje bij de Vecht terwijl werknemers, aandeelhouders, en belastingbetalers berooid achter blijven.” SP-Kamerlid Jan de Wit diende begin dit jaar al een motie in om te onderzoeken of de mogelijkheden voor strafrechtelijke vervolging bij financieel wanbeleid konden worden uitgebreid. Minister Hirsch Ballin stuurde naar aanleiding daarvan echter slechts een brief met een opsomming van de bestaande mogelijkheden en onmogelijkheden. Irrgang: "Daaruit bleek dat er vooral heel veel niet kon. Het voeren van financieel wanbeleid is wat de SP betreft zo ernstig dat dit een plaats in het wetboek van strafrecht verdient." Financieel wanbeleid maakt niet alleen directe slachtoffers, zoals de mensen die geld kwijt zijn of financiële schade voor de staat, maar door bepaalde handelingen wordt het vertrouwen in het hele financiële stelsel aangetast. De hele samenleving wordt gedupeerd. Irrgang: "Ook ziet de SP mogelijkheden om de persoonlijke aansprakelijkheid van bestuurders uit te breiden zodat bankiers die er een potje van maken ook in die zin niet buiten schot blijven. Zo'n aansprakelijkheid zorgt niet enkel voor gerechtigheid, maar laat bestuurders wel drie keer nadenken voordat zij weer waardeloze financiële producten kopen zonder er iets vanaf te weten. (SP)

Sound suggestions? Very, very doubtful.

As to the criminal approach, just look at the US for serious downsides. Shortly after the enactment of the Sarbanes Oxley Act, several directors were prosecuted and convicted; but from day 1 this criminal approach was under fire, in large part because it's basically a kind of lottery. Some directors are chased by public prosecutors, some aren't. Why would things be radically different in the Netherlands, also given the heavy case load of public prosecutors in general? Go and check Larry Ribstein's observations on this issue, who remarks that "[i]f we don't have a clear idea of why these cases should be coming out the way they are, we should junk the lottery and the clear sense of injustice it creates." Before we take a sortlike approach under Dutch law, we should be damn sure that we know what we're doing. I don't have the impression - okay, I'm understating here - the Socialist Party is.

As to the personal liability approach, huh? First of all, it's not as if it's impossible for directors to be held liable for serious mismanagement under Dutch corporate law as it is; see, e.g., here and here. Second of all, it's unclear what exactly this increased liability would entail; the remarks by the politicans are foggy at best. Third of all, I don't see any sound reason to lower the current liability bar in the business judgment realm, and these politicians don't offer any; we don't want timid directors who are afraid to take any entrepreneurial risks in a responsible fashion, also taking into account the nature of the enterprise and the risks generally involved; neither do we want the Netherlands to become less attractive as place of incorporation. In fact what we should do is introduce a Dutch business judgment rule, something I discussed elsewhere in detail.

If the Socialist Party would like to enable shareholders of banks to take action against directors of that bank on behalf of the bank (i.e., in a derivative fashion), it should propose to introduce a derivative suit mechanism, something that Dutch corporate law does not know. But that's a different ball game, not discussed in the Socialist Party's press release.

In sum: nice try, but no sigar.

[No. 139] What Do Empty Voting and Mortgage Securitization Have in Common?

For some time, commentators have wondered what to do about empty voting - voting by shareholders who lack a corresponding financial interest, for example because they have hedged their exposure (which essentially means they have transferred the risk to a third party). Empty voting is problematic because in the absence of a corresponding financial interest, shareholders lack an incentive to exercise their voting right in a way that they believe maximizes the value of the share, to the detriment of the firm and its other shareholders.

Sound familiar? It may to those who are keeping track of European and US regulators' initiatives to reform the financial regulatory framework. Both regulators are facing the question how to deal with the fact that originators of mortgage securitizations transfer credit risk to third parties. As a result of this transfer, originators lack the incentive to verify that borrowers will be able to repay their loans, to the detriment of investors in asset backed securities and, as the crisis has demonstrated, the financial system as a whole.

Here, both regulators propose the same solution: require originators or sponsors to retain an economic interest in a material portion of the credit risk of securitized credit exposures (see here and here). The US Treasury has added to this that

"the regulations should prohibit the originator from directly or indirectly hedging or otherwise transferring the risk it is required to retain under these regulations";

the European Parliament has called for a similar prohibition to be included in the proposed European regulations.

To be sure, there's a lot of differences between the two problems. Nevertheless, there remain striking similarities between the nature of the two problems. Sufficient, at least, to consider whether the proposed solutions for either problem could, one way or another, perhaps also work for the other. Thoughts, anyone?

[No. 138] Downforce on the Thumbscrew [Updated]

So, the game is on.

At least, if it's up to the Dutch National Bank's president, Nout Wellink, who flexed his muscles today.

This morning he informed a committee of Congress - on personal title - that all topbankers are expected to 'just say no' to their bonuses over 2009; as long as the credit crunch continues, directors of financial institutions should not receive variable pay (as opposed to fixed pay). Not just directors of banks that were saved by the government during the crisis, no no no; the directors of all banks.

Sounds a bit like the Pay Czar phenomenon introduced some time ago in the US. Other recent developments in the US include an initiative by the American Federal Bank to start regulating salaries of bank employees well beyond board level. Some serious eyebrow raising has been going on since among academics on the other side of the Atlantic.

Anyway, Wellink also announced that possibly the same will apply to the second management echelon, depending on the outcome of research that is in process; no end in sight there yet. All directors can look forward to a 'value enhancing' talk with the gatekeeper of financial institutions. These talks basically carry the weight of informal but clear instructions.

'Ze moeten uiterst voorzichtig zijn met hun beloningen', waarschuwt Wellink, 'om de doodeenvoudige reden dat we midden in een crisis zitten. En daar zijn we voorlopig nog niet uit. (...) Als wij met mensen gaan praten, zullen we onze opvattingen opleggen, niet ergens in het midden uitkomen.' (FD)

So he's talking business here, which is illustrated by terms like 'pay in shares soon looks like a lottery' and 'moral breakdown'. This choice of words may have been caused by the outcome of an investigation by the Dutch National Bank, indicating that the banking directors' pay in the big shots region (say between € 1.5 and 2.5 million) mostly consisted of bonus payments. An outcome that apparently came as a shock.

Remarkably, this new modus operandi has far broader implications than the Dutch Banking Code 2009 that was only introduced some two weeks ago, and that merely stimulates the persons involved to act prudently and cautiously when entering the bonus area (no prohibition there); see section 6.4 on "Variable Renumeration". The straws in the wind seem to be taking a different angle, at least behind the Dutch dikes; although the committee meeting was sort of a stepping stone to the coming G20 meeting in Pittsburgh, that will no doubt be heavily dominated by the credit crunch and banking bonuses (there are also other important issues on the agenda you know), it seems doubtful whether sortlike measures will be taken elsewhere also after this weekend; the UK for example, not the smallest player on the block, doesn't seem all to eager to take the same route.

We'll see. For now, clouds do seem to be blocking the sun from where directors of Dutch financial institutions are standing. Downforce on the thumbscrews is increasing...

UPDATED

The G20 summit actually produced results as to the bonus discussion, although no agreement was reached on 'capping' bonuses (as introduced, for examle, in the Dutch Banking Code 2009). In sum:

• No more multi-year guaranteed bonuses, but a linkage to long-term corporate wealth creation.
• The financial position of the bank can have a negative impact on the bonuses: when the ship is sinking, the bonuses will not be unaffected.
• Supervisory directors can 'claw-back' unjustly paid-out bonuses.

Not too groundbreaking from a Dutch perspective, but still. (FD)

[No. 137] J. Travis Laster...

... was confirmed yesterday by the Delaware Senate as New Vice Chancellor in Chancery Court.

The nomination of Laster, who has practiced corporate law in Chancery Court for 13 years, had been closely watched in legal circles both in Delaware and nationally. Chancery Court is a venue for court decisions involving major companies that are incorporated here, and its decisions often are used by courts in other states for guidance. The Senate vote, which came in a one-day special session called by Gov. Jack Markell, was unanimous. Laster told the Senate Executive Committee that he was more than willing to forgo the money that can be made in private practice for a chance to serve on the court -- where judges are paid $174,950. "We've tried to spend below our means because we always knew that someday I might take a public service job," Laster said. "I think at the end of the day, it's not about the money." Laster said he will do his best to see that Chancery Court continues to enjoy the respect it has long been accorded. But much of that reputation depends on the lawyers who practice in Chancery -- and those lawyers do much to enhance the court's reputation, Laster said. "I think there is one unique element of Delaware that no one else has been able to match ... the human capital that Delaware has," Laster said. (Delaware Online)

[No. 136] Bonus-Frenzy in the Public Sector?

Worldwide, discussions about renumeration and bonuses typically focus on public corporations, specifically financial institutions. See recent Dutch, English and American initiatives, just to name a few. Maybe not surprising in this day and age, but there seems more to it.

In the Netherlands, for example, the public sector hasn't been excluded from analysis, although the empirical data was not abundant. There have been heated debates in congress about compensation levels, and lawmakers are now drafting new legislation that will actually cap 'exec-comp in the public sector' to € 181.773 (the same annual salary of our prime-minister, which benchmark hasn't gone uncriticized) and limit golden handshakes to a maximum of 1 annual salary.

But now we have a nice chunk of recent data covering bonus payments in the (semi-)public sector, brought together by a Dutch national newspaper. It's a list of the 25 biggest bonuses paid, based on information from annual accounts of organizations that are either funded through tax related funds or are supposed to pursue societal goals. Think of hospitals, health treatment facilities, schools, public housing institutions and the like. The list? Ok, here we go.

Top 25 hoogste bonussen in de (semi)publieke sector

1. Jachtvlieger defensie*, bindingspremie (gedeeltelijk), €79.865
2. Frank Bijdendijk, bestuur woningcorporatie Stadgenoot, €68.881
3. Peter van der Meer, voorzitter M.C. Haaglanden**, €62.652
4. Willem Geerlings, bestuur M.C. Haaglanden**, €61.329
5. Eelco Damen, voorzitter Cordaan (thuiszorg), €50.000
6. Haijo Pietersma, ex-voorzitter A. Schweitzer Ziekenhuis, €44.097
7. Leen Pijpers, ex-bestuurder A. Schweitzer Ziekenhuis, €41.576
8. Secretaris-generaal op een ministerie*, bindingspremie, €39.697
9. Douwe Hemrika, voorzitter OVLG Ziekenhuis, €38.715
10. Roel Steenbeek, voorzitter woningcorporatie Ymere, €37.120
11. Ber Bosveld, bestuur woningcorporatie Ymere, €37.120
12. Lex Pouw, ex-voorzitter woningcorporatie Ymere, €35.324
13. Geert Dales, ex-voorzitter Hogeschool INHolland, €34.040
14. Huib Pols, bestuur Erasmus Medisch Centrum, €33.000
15. Bert Huis in ’t Veld, ex-voorzitter TNO, €32.540
16. Birgitte van Hoesel, bestuur woningcorporatie Portaal, €32.000
17. Hans Büller, voorzitter Erasmus Medisch Centrum, €32.000
18. Lein Labruyère, bestuur Hogeschool INHolland, €30.636
19. Joke Snippe, bestuur Hogeschool INHolland, €30.043
20. Yvonne Wilders, bestuur Spaarneziekenhuis, €29.597
21. Jan Mengelers, bestuur TNO, €29.208
22. Tini Colijn-Hooymans, bestuur TNO, €29.208
23. Harry Koopman, ex-voorzitter Avans Hogeschool, €27.241
24. Jim Schuyt, voorzitter woningcorporatie De Alliantie, €26.284
25. Charlotte Insinger, bestuur Erasmus Medisch Centrum, €26.250

* Naam onbekend
** M.C. = Medisch Centrum

Bron: jaarverslagen 2008 (NRC)

The largest amount was paid to an anonymous army fighterplane pilot, as a retention bonus: almost €80k. Apparently there's an international market for those people (I mean, how many competing airforces does one country have?). Some noteworthy findings of the inquiry are:

1. that hospitals and public housing institutions are among the big players in this bonus game;
2. that while many bonuses are ex ante linked to meeting pretty clear goals, the ex post level of accountability as to the ultimate payment is mixed (sounds familiar eh); and
3. that quite some bonus payments are merger related -- hey, we're not talking private sector M&A dynamics here, but covering these supposedly boring public sector vehicles.

These amounts may not be shocking to some, which isn't difficult if eyebrows are only raised when we start to reach the multi-multi-multi-million Dollar range (which in turn surely isn't the Dutch attitude). But they're still considerable from a non-private sector perspective.

Interesting subject, ditto outcomes. Keep it coming.

[No. 135] The Supreme Court on Director Liability and Set-off

Last Friday (September 18, 2009) the Dutch Supreme Court rendered an interesting judgement in a director liability case. The court of first instance decided that the director of an insolvent company was liable for (a part of) the deficit in insolvency on the basis of article 2:248 DCC. This article provides that on the insolvency of a company, each director shall be jointly and severally liable to the estate for the amount of the liabilities to the extent that these cannot be satisfied out of the liquidation of the other assets, if the management has manifestly performed its duties improperly and if it is plausible that this is an important cause of the insolvency. The judgment was upheld on appeal. The Court of Appeal dismissed the directors argument that he should be allowed to set-off the 248-claim against a claim he allegedly has on the company. The director appealed to the Court of Cassation and argued − in short − that the 248-claim is owed to the company (resp. the estate) and not to the company’s creditors, and therefore can be set-off.

“Het [middel] betoogt dat een vordering als bedoeld in art. 2:248 toekomt aan de vennootschap (respectievelijk de failliete boedel) en niet aan de schuldeisers, zodat de ingeroepen verrekening niet kan worden uitgesloten wegens het ontbreken van de vereiste wederkerigheid.”

The Supreme Court, however, ruled that the 248-claim is owed to the estate and not to the company, and therefore cannot be set-off against a claim on the company:

“Deze klachten falen, aangezien 's hofs oordeel dat de door [eiseres] gepretendeerde vordering op de gefailleerde vennootschappen door haar niet in verrekening gebracht kan worden met de door de curator tegen haar ingestelde vordering, juist is. De aansprakelijkheid van bestuurders ingevolge de art. 2:138 en 2:248 BW is geen aansprakelijkheid jegens de gefailleerde vennootschap maar een aansprakelijkheid jegens de boedel. De aansprakelijke bestuurder is geen schuldenaar van de gefaillieerde [...].”

In his conclusion, Advocate-General Timmerman provides an overview of the different scholarly opinions regarding the question whether the 248-liability should be considered as internal (owed to the company) or external (owed to the creditors/estate). I notice that the Supreme Court seems to have a different opinion on this matter than the working-group that has presented a proposal to reform Dutch Insolvency Law (Commissie Kortmann). In its memorandum of explanation (p. 179) the group argues that the 248-claim is primarily owed to the company:

“Aldus wordt tot uitdrukking gebracht dat de aansprakelijkheid van artikel 8.2 [thans 1:138/2:248] op de eerste plaats een aansprakelijkheid tegenover de rechtspersoon is. Dat verklaart ook waarom de vordering […] in de boedel valt en niet tot het vermogen van de schuldeisers behoort. Vergelijk artikel 2:9 BW, waarin wordt bepaald dat elke bestuurder tegenover de rechtspersoon tot een behoorlijke vervulling van de hem opgedragen taak gehouden is.”  

[No. 134] EU Leaders Agree on Limiting Bankers' Bonuses

According to this report, referring to yesterday's meeting in Brussels between the EU members state's top politicans:

• the bonuses will depend on the company's results and be linked to the fixed part of the banker's salary; and
• payment of a big part of the bonus (in cash or shares) will be stretched over time; but
• no cap, in terms of a maximum related to the annual salary of the banker (as proposed by the Dutch delegation); at least for now, this subject will be discussed again at the next G20 meeting in Pittsburgh.

For prior acts in this play see, e.g., here and here. For the Dutch Banking Code 2009, issued only last week, go here (with a French version available here).

[No. 133] Rethinking the Legal Entity Concept

In post No. 77, I wrote about "forbidden corporations"; when a legal entity's activities are contrary to public order, the legal entity can be declared forbidden and dissolved by the Court of First Instance at the request of the public prosecutor's office. But this is the back-end of a legal entity's existence. The front-end is that the law, through the legislator, provides a legal entity with the same rights and obligations as flesh-and-blood people have. As section 2:5 DCC puts it:

As to private law, a legal person stands on the same footing as a natural person, unless the statute provides otherwise. (Een rechtspersoon staat wat het vermogensrecht betreft, met een natuurlijk persoon gelijk, tenzij uit de wet het tegendeel voortvloeit)

This concept, of course, is a foundation of corporate law - pervading, for example, personal liability doctrines (see, e.g., here) - recognized for a very long time; nobody in the Netherlands that I know of questions its utility. This is not to say that there aren't though questions around; think of the issue whether corporations are entitled to the same human rights and protection thereof as natural persons are.

Interestingly, new US Supreme Court Justice Sonia Sotomayor questioned the correctness of this foundation under US law, saying that judges "created corporations as persons, gave birth to corporations as persons" and "[t]here could be an argument made that that was the court's error to start with (...) [imbuing] a creature of state law with human characteristics."

During arguments in a campaign-finance case, the court's majority conservatives seemed persuaded that corporations have broad First Amendment rights and that recent precedents upholding limits on corporate political spending should be overruled.

But Justice Sotomayor suggested the majority might have it all wrong -- and that instead the court should reconsider the 19th century rulings that first afforded corporations the same rights flesh-and-blood people have.

Judges "created corporations as persons, gave birth to corporations as persons," she said. "There could be an argument made that that was the court's error to start with...[imbuing] a creature of state law with human characteristics." (WSJ)

Not surprisingly, this remark created quite a stur in legal/academic circles, also because many SCOTUS watchers (see, e.g., here) are anxious to find out Sotomayor's view on key issues. Go and check Steve Bainbridge, who countered by remarking that "[i]f she keeps up with this line of thinking, the one sure thing is that she'll be making a fundamental error (or, more precisely, two fundamental errors)" and has more on the substantive side of things. Ditto Larry Ribstein.

[No. 132] Private Company Law Reform in Europe: ‘Think Small First’

Recent media coverage has primarily focused on the reform of the rules concerning listed companies under the headline of ‘corporate governance’. Nevertheless the laws on private limited liability companies have been undergoing far-reaching modifications as well. For instance, a bill that dramatically amends the current Dutch law on private companies (Besloten Vennootschap or BV) is on this months agenda of the Dutch Parliament. The bill and explanatory memorandum can be found here (Dutch only). The Dutch proposal fits well in a broader European trend to simplify the law on private companies. This trend is the result of European case law that made cross-border incorporation and migration easier, and therefore led to a competition between the different national equivalents of the private company. National legislatures aim to ensure that their private company law is as attractive as possible, by promoting its efficiency and flexibility, while bearing in mind the interests of the company’s creditors. The system of legal capital has been one of the most important subjects of discussion in this search for better regulation. The new (or proposed) laws of Germany, the UK and The Netherlands alter the rules on raising and maintaining the capital of the private company. Although all three countries have made their private company form more flexible, they choose different regimes of capital or creditor protection, which all more-or-less depart from the classical legal capital doctrine (as imposed on public companies by the Second Directive).

Germany and the United Kingdom have already modified the laws on their private companies (in Germany: Gesellschaft mit beschränkter Haftung or GmbH and in the UK: Private Company limited by shares or limited).  A recent German bill (Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen or MoMiG) introduced a new and slim version of the German private company (Unternehmergesellschaft (haftungsbeschränkt) or UG), offering limited liability without any minimum capital requirement. It also altered the rules on the subordination of loans granted by shareholders. The bill was approved on June 27, 2008 and is considered to be the most comprehensive reform of the GmbH Act since its introduction in 1892.

The UK Companies Act 2006 is the largest Act of Parliament ever enacted. It is very comprehensive, as its provisions have almost entirely absorbed the Companies Act of 1985 while also codifying certain aspects of case law. The Act received Royal Assent on November 8, 2006 and has to be fully implemented by October 1, 2009. UK law never required a minimum amount of capital to establish a limited (hence its popularity through-out Europe). The Companies Act 2006 made the limited even more attractive for entrepreneurs by removing the requirement to state an amount of authorised shared capital (maatschappelijk kapitaal), abolishing the prohibition to provide financial assistance for the purchase of the company’s own shares and clarifying the rules on distributable profits.

Private Company Law is also on the agenda of the European Commission; June 25, 2008 it presented a proposal for a Council Regulation on the Statute for a European Private Company (Societas Privata Europaea or SPE). (For a critical analysis of the draft Statute, see here.) The proposal introduces a private company on a European supranational level, primarily governed by supranational European laws. It doesn’t require a cross border element, so entrepreneurs are allowed to establish a SPE that will operate in just one Member State. The SPE will therefore offer a direct alternative to the different national company forms. As the European Commission proposes a minimum capital requirement of 1 euro and very flexible rules regarding dividends, capital reduction and financial assistance, the SPE could develop into serious competition for its national equivalents. However, whether the SPE will ever become reality remains to be seen. The European Parliament proposed to alter a fair number of the proposed provisions and the draft statute has met a considerable amount of criticism of legal scholars.

Back to the Netherlands: the pending Dutch bill has been criticised by legal scholars and market participants as well. Especially the proposed rules on distributions to shareholders are under academic fire. Because the bill basically abolishes the system of legal capital, creditor protection largely depends on the rules concerning withdrawals by shareholders and the liability of directors and shareholders. The Dutch legislature recently surprised legal scholars by radically changing the proposed rules on dividends in its second amendment of the proposal (Tweede Nota van Wijziging). Opinions seem to differ on this important topic. It will therefore be interesting to see how the legislative process will further develop. My guess is that it wont be a typical case of ‘signed, sealed and delivered’…

The significance of the different national and European initiatives should not be underestimated: the 23 million small and medium sized enterprises (SMEs) account for 99% of all companies in the European Union and provide around 70% of private sector employment. The Dutch and European legislatures are clearly still searching for a regulation that on one hand offers the flexibility and simplification longed for and on the other hand provides the company’s creditors and other stakeholders with the appropriate protection. Especially the rules on capital formation and maintenance, shareholder loans and liability of shareholders and directors, will play an important part in striking the right balance. I intend to provide you with some more in-depth posts on these topics in the next few weeks.

[No. 131] New Guest Author: Jaap Barneveld

We're happy to introduce Jaap Barneveld as new guest author for the coming month or so.

Jaap currently works at the University of Amsterdam as a Junior Lecturer and Researcher. He is interested in private law; principally corporate law and insolvency law. The subject of his PhD-thesis is finance of the private company. He will no doubt post heavily on that subject.

[No. 130] Piercing the Corporate Veil

1. Last Friday, the supreme court added a new chapter to the doctrine of piercing the corporate veil. For the prior chapter, see here.

2. In the ComSystems/Van den End q.q. case, the supreme court pretty much "saved" the court of appeals' ruling (holding liable the shareholder/director (Holding) of both a healthy sub (Comsys) and a sub gone bankrupt (Services) vis-a-vis the latter company's creditors), whereas Advocate-General Vino Timmerman had concluded that the ruling should be reversed and remanded because the court of appeals' reasoning was too muddy on key points. A seldom difference of opinion between the court and this A-G in corporate cases.

3. The core of the matter is the corporate structure, in which as of 1999:

• Comsys and Services more or less acted as one enterprise,
• all costs were mostly allocated to Services (whose assets were pledged to certain banks),
• Services booked losses as of 1999 and was only able to fully pay its creditors through funding by Comsys and Holding,
• Holding never warned potential creditors of Services for the risks inherent to this structure,
• Services fully paid its creditors until late 2001, and
• Holding (with Comsys) decided in 2001 not to terminate Services' activities (despite the serious losses), but to proceed on a 'going concern' basis. 

The court of appeals ruled that Holding was under a special duty of care towards Services' creditors, in view of their risks inherent to the above structure in connection with Holding's choice in 2001 to proceed with Services on a 'going concern' basis while knowing that Services' creditors would suffer damage if the funding by Holding and Comsys funding was terminated. Under these circumstances, Holding had to show appropriate care to the interests of - existing and future - creditors of Services. However, Holding - that did not continue to fully fund Services after 2001 - took no measure whatsoever until May 2003, when she requested for Services' bankruptcy. This combination of circumstances justified a finding of liability of Holding. The court of appeals apparently also ruled that the liability amounted to the full amount of debt not covered in Services' bankruptcy.

4. The supreme court simply ruled that this analysis found support in the record and did not violate any rule of law, without any reference to prior case law. The supreme court implicitly added some new contours to the serious mistake standard in tort liability proceedings in s. 5.3.2-5.3.3 (for that standard, see, e.g., here, here, and here), explaining that the above qualifies as a sufficiently serious mistake of Holding as director of Services. I'm not so sure this is a sound way to shape this standard further; more on that in the near future. For some other elements of the analysis, I quote the decision:

5.3.4 Anders dan in de onderdelen 3.1 en 3.4 wordt betoogd, heeft het hof niet blijk gegeven van een onjuiste rechtsopvatting, noch zijn beslissing onvoldoende gemotiveerd, door voorbij te gaan aan de stelling van Holding dat zij ook na ultimo 2001 nog verliezen van Services heeft gefinancierd. Het aldus op incidentele basis financieren van de verliezen van Services heeft slechts tot gevolg dat in zoverre geen aansprakelijkheid van Holding kan worden aangenomen jegens de crediteuren wier vordering dientengevolge werd voldaan, maar kan niet afdoen aan haar aansprakelijkheid jegens de overige crediteuren.

5.3.5 Onderdeel 3.3 mist feitelijke grondslag. Voorzover het hof aansprakelijkheid van Holding heeft aangenomen voor onvoldane schulden van Services die voortvloeiden uit langlopende verplichtingen die reeds voor ultimo 2001 waren aangegaan, heeft het hof deze aansprakelijkheid niet gebaseerd op het enkele feit dat Holding die langlopende verplichtingen na ultimo 2001 niet heeft beëindigd, maar mede op de omstandigheid dat Holding reeds in 1999 een concernstructuur met inherente risico's heeft opgezet als hiervoor in 5.2.1 bedoeld en in dat kader Services verplichtingen heeft laten aangaan die, toen de concernfinanciering in rekening-courant werd stopgezet en het faillissement van Services werd aangevraagd, niet langer konden worden nagekomen. Dat (tevens) sprake zou zijn van onvoldane schulden uit langlopende verplichtingen die reeds voor het opzetten van de nieuwe structuur in 1999 zijn aangegaan en na ultimo 2001 niet konden worden beëindigd of overgenomen door Holding of Comsys, heeft het hof niet uit de stellingen van Holding behoeven af te leiden (vgl. ook het hiervoor in 5.2.3 overwogene).

5.3.6 Onderdeel 3.5 klaagt dat het hof geen peildatum heeft vastgesteld vanaf welke Holding onrechtmatig heeft gehandeld, welke vaststelling volgens het onderdeel beslissend is voor de bepaling van de omvang van de schade in de schadestaatprocedure. Het onderdeel faalt wegens gebrek aan belang, aangezien het hof Holding op basis van de sedert 1999 gevolgde wijze van handelen binnen de Comsys Groep aansprakelijk heeft geoordeeld voor het gehele tekort in het faillissement van Services, met uitzondering van de faillissementskosten, zodat de omvang van de schade voldoende bepaalbaar is om in de schadestaatprocedure vastgesteld te kunnen worden.

5.4 Onderdeel 3.7 klaagt, voorzover hier van belang, dat het hof in het dictum Holding heeft veroordeeld tot betaling van "de schade bestaande uit het tekort", alhoewel het in rov. 4.3B heeft geoordeeld dat de hiertoe strekkende vordering (slechts) "kan worden toegewezen met uitzondering van de aan de afwikkeling van het faillissement verbonden kosten, nu deze kosten geen rechtstreeks gevolg zijn van het onrechtmatig handelen van Holding".
Deze klacht is gegrond. Zij kan echter niet tot cassatie leiden, omdat er geen twijfel over kan bestaan dat zij een vergissing van het hof betreft, die eenvoudig hersteld kan worden door in het dictum "de schade bestaande uit het tekort" te verbeteren in "de schade bestaande in het tekort in het faillissement met uitzondering van de aan de afwikkeling van het faillissement verbonden kosten".

The last part covers the position of Comsys. The court explains that liability of Comsys towards Services' creditors requires more than mere participation in the allocation of tasks, activities and sources of revenues (which in itself is not unlawful), namely an act by Comsys or an omission by Comsys where acting was warranted in view of the interests of Services' creditors. In this respect, nothing more was produced by the claimant than the aforementioned allocation, which was overseen by the court of appeals. The single fact that Holding was also director of Comsys doesn't change things, as acts by Holding not in the capacity of director of Comsys cannot be attributed to Comsys.

5. It's a complex case. My impression is that the supreme court tried to "save" the court of appeals ruling on the major points where possible without producing a precedent that is too heavy on the doctrinal side of things. I also get the impression that the composition of the court (the supreme court consists of 10 judges; serious cases are typically decided by 5 judges, without a standard composition) is not an insignificant factor in the outcome of cases like these; some decisions tend to be more director friendly - or: less inclined to accept liability - than others, my guess is that this case belongs in the second category. Scholars will have a field day putting the case in perspective, including me.

[No. 129] Mismanagement at Van der Moolen? The Plot Thickens...

At least, if we listen carefully to what the trustees in bankruptcy of Van der Moolen are saying, who seriously consider launching an in-depth forensic investigation into the affairs prior to bankruptcy. Coming via The Dutch Financial Times, that reports about some shady developments at the company when it was already financially distressed:

De curatoren van de gisteren gefailleerde effectenhandelaar Van der Moolen hebben ernstige twijfels of het gevoerde beleid door de beugel kan. Zij overwegen een extern forensisch onderzoek in te stellen. Zo'n onderzoek gaat verder dan het standaard curatorenonderzoek. (...) Curator Paul Schaink van advocatenkantoor Van Doorne vindt het 'onbegrijpelijk' dat Van der Moolen vorig jaar voor euro 30 mln eigen aandelen inkocht, terwijl het bedrijf toen al in zwaar weer verkeerde. De positie van Hans Kroon, vriend en adviseur van oud-topman Richard den Drijver, noemt Schaink 'schimmig'. 'Zijn adviezen zijn mij niet bekend, ik geloof niet dat ze op schrift staan', aldus Schaink. Kroon ontving voor zijn diensten euro 25.000 per maand van Van der Moolen. Schaink plaatst ook vraagtekens bij een lening van euro 6 mln die Van der Moolen vorig jaar verstrekte aan entertainmentbedrijf Avalon, temeer omdat de familie van Kroon banden heeft met dit bedrijf. Verder is onduidelijk waarom de handelssoftware voor euro 4,2 mln in de boeken stond, terwijl de broncode, de digitale sleutel tot de software, in handen is van een bedrijf in de Oekraïne.

As to former CEO Den Drijver, who stepped from that position some time ago: he was apparently not granted any discharge by the company when his legal relationship with the company was terminated. So section 2:9 DCC liability is not out of the window.

On to the next episode of the saga.

[No. 128] Updates Re Van der Moolen and the Banking Bonus Bonanza

In post No. 122 I wrote about excessive spending and liability risks at the international securities trading and brokerage firm Van der Moolen, that slipped into a provisional moratorium on payments mid-August. There was this kerfuffle about luxurious trips and outrageous living expenditures, while it was unclear whether these transactions had to be and actually were approved by the supervisory board directors. I concluded that

[i]f the former management board was not allowed to enter into these transactions without supervisory board approval but did it anyway, it could face serious liability risks if it comes to a bankruptcy of the company and a trustee in bankruptcy is appointed (the chances now seem remote, in view of the position taken by the current supervisory board). As I've explained elsewhere, violation of rules that aim to protect the company - like the rule mandating supervisory board approval for certain transactions - in principle qualifies as a serious mistake and thus results in liability of the management director vis-a-vis the company, unless the director is able to show that the norm violation was not that fatal after all.

Today the company went formallly bankrupt and is now heading towards liquidation.

De déconfiture van VDM is toe te schrijven aan een combinatie van factoren opgetreden in een periode van enige jaren: grote verliezen in de Verenigde Staten, mislukte nieuwe initiatieven zoals Online Trader, dalende omzetten in verband met de financiële crisis en een kostenpatroon dat structureel de baten is gaan overstijgen. Tenslotte hebben twee factoren de liquiditeitspositie van VDM versneld uitgehold: de inkoop van eigen aandelen en vertraging in de incassering van grote (belasting)vorderingen van VDM.

Gevolg van het faillissement zal zijn dat VDM wordt geliquideerd. De activa en activiteiten in de groepsmaatschappijen zullen zo goed mogelijk te gelde worden gemaakt. Van der Moolen Financial Services B.V. (“Aespen”) is tegen intrinsieke waarde verkocht. Onderzoek naar mogelijkheden tot het elders onderbrengen van handelsposities aan Euronext en andere Europese beurzen bevindt zich in een vergevorderde fase. Ook de toekomst van de Amerikaanse activiteiten van VDM is nog in onderzoek.  

So now that trustees and bankruptcy have been appointed, we will have a chance to see whether these liability risks really exist. In the meantime (and as predicted), the Vereniging voor Effectenbezitters (an organization representing shreholders' interests) has made clear it is seriously thinking about initiating inquiry proceedings, in view of the spending culture and alleged failures in setting the strategic course for the company.

In several earlier posts (see, e.g., here), I wrote about the international banking bonus discussions; everybody seems eager to do something about it, as nicely explained here. Dutch bankers have now chosen for a forward move, by agreeing on a new code that also regulates bonus practices, at least to some extent. The Dutch Banking Association today issued a press statement, exlaining that the recommendations by the Commissie Maas will now be implemented into a code for sound banking practices that is to be applied per January 1, 2010 on a 'comply or explain' basis. 

Veel principes in de Code Banken hebben betrekking op het functioneren van de rol van de raad van commissarissen en de raad van bestuur in de specifiek bancaire context, waarbij risicobeheer bijzondere aandacht krijgt. De Code Banken bevat een moreel-ethische verklaring zoals voorgesteld door de Commissie Maas. Ook bevat de code principes inzake deskundigheid en permanente educatie (bankiersexamen). Banken dienen het beleid ten aanzien van dit punt actief toe te lichten in hun jaarverslag. De zorgplicht voor de klant vormt een belangrijk onderdeel van de deskundigheidsvereisten. De Code bevatten voorts principes voor een zorgvuldig, beheerst en duurzaam beloningsbeleid - in lijn met het Herenakkoord - met aandacht voor niet-financiële prestatiecriteria. De regels voor het beloningsbeleid hebben betrekking op de lange termijn en het voorkomen van ongewenste effecten als het gaat om risico’s. Voor leden van de raad van bestuur geldt dat de variabele beloning niet meer mag bedragen dan maximaal 100% van het vaste inkomen. Met deze maximering van de variabele beloning lopen Nederlandse banken voorop in de internationale discussie over beloningen in de financiële sector en de aankomende besprekingen over dit onderwerp tijdens de G20 in Pittsburgh. De Code bevat ook een bepaling die het mogelijk maakt ten onrechte uitgekeerde variabele beloning terug te vorderen. De Code wordt wettelijk verankerd. Banken leggen over de naleving van de Code verantwoording af in hun jaarverslag. De Code sluit aan op de Code Corporate Governance en bestaande wet- en regelgeving. Daarbij is ook gekeken naar de samenhang met Europese en internationale ontwikkelingen. De naleving van de Code wordt gevolgd door een dit najaar in te richten Monitoringscommissie. De code wordt van kracht per 1 januari 2010. Banken rapporteren in hun jaarverslag over 2009 over de wijze waarop zij zich hebben voorbereid op de invoering van de code.

The full text of the code can be found here. As to bonusses, the code - that only applies to banks - mandates that a bonus cannot exceed the annual fixed part of the director's renumeration and enables supervisory directors to readjust the variable part in certain circumstances. As to non-management directors (like traders), no cap applies. Is this sufficient to de-escalate the bonus discussion in the Netherlands? Not very likely, in view of the negative reactions by politicans, who believe the cap is still way too high. To be continued.

[No. 127] Rumble at Royal Wessanen: The Sequel

In post No. 109 I wrote about CEO mishaps at Dutch listed company Royal Wessanen, involving former CEO Ad Veenhof (pictured).

At today's general meeting, the shareholder agreed to terminate the legal relationship between Veenhof and the company and bring the golden handshake issue before the court, as proposed by the company.

Veenhof - not surprisingly - still vigorously contests all the allegations and had his lawyer present a 3 page personal statement, explaining his personal views. Despite this, the chairman of the supervisory board Durk Jager stuck to these allegations and explained that in view of those, Veenhof should not receive the full exit amount laid down in his labor agreement with the company, that exceeds a one year salary. The latter amount would be in line with best practice II.2.8 of the Dutch corporate governance code, which states that

[t]he renumeration in the event of dismissal may not exceed one year's salary (the 'fixed' renumeration component). If the maximum of one year's salary would be manifestly unreasonable for a management board member who is dismissed during his first term of office, such board member shall be eligible for severance pay not exceeding twice the annual salary.

So the dispute will evolve into a court battle. It will be interesting to see how the court is going to appreciate the company's allegations and the gist of the Dutch corporate governance code as to caps on exit payments. Not much precedent there.

[No. 126] Views From a Former CEO and G20 Discussions

Rijkman Groenink, the former CEO of ABN Amro Bank who was heavily criticized for leaving the bank with € 26 million ($ 37 million) in severance pay mid 2007, weighs in on the discussion about high-risk/high-reward bonusses. Bottom line?

"I fully appreciate the views of many, many people about excessive compensation but in this case it's not linked to high-risk, high-reward bonuses at all," he says, before going on to comment on the "unique opportunity" that has arisen to forge a global consensus on linking risk and reward. "At ABN Amro we were moving towards a situation in which we would more and more try to link short-term bonuses to the bottom line of the performance," Mr Groenink says, easily slipping back into his old role as figurehead for the bank, despite the two-year interval.

He is hopeful that regulators and governments around the world can agree on banning bonuses on speculative trades that might later lead to huge losses. But the wider issue of limiting absolute pay would probably prove too difficult, he said.

Last weekend, ministers of finance of the most important industrial countries (the G20) agreed:

• that bonusses of bankers should be stretched over a multi-year period;
• that a guaranteed bonus cannot have a life-span of over a year; and
• that banks should be able to 'claw back' paid bonusses if - with hindsight - the bonus was unjustly paid.

Details to be designed at a later stage. A bonus cap, as urged by France, Germany and the Netherlands, was not installed due to objections by - no surprise here - the UK and the US. Not all that impressive, but it's a start.

[No. 125] Bonus Bonanza

In earlier posts (see here and here) I said a few things about director compensation in recent times, and that is has been tanking.

A nice update on a related subject (bonusses) can be found here: the data and stats suggest that not only the higher echelons of the financial sector were pretty savvy in the bonus game throughout the years. Or just check out the below video.

By the way, at EU/G20 level initiatives are being taken to prevent the banking sector from engaging in excessive bonus arrangements again. See for more details here, and for some background on recent French and UK steps here and here.

[No. 124] Shining Light on Derivatives

In posts no. 58 and 64 I wrote about calls for expansion of the scope of the Dutch ownership disclosure rules, in response to the use of equity derivatives to influence voting behavior and to silently build up large stakes in listed companies. Now, the Dutch Ministry of Finance has published a proposal to change the rules (specifically, section 5:45 Wft) such that holders of equity derivatives will be deemed to hold the underlying shares and thus become subject to disclosure obligations:

Iemand wordt geacht te beschikken over aandelen en de daaraan verbonden stemmen, indien hij een financieel instrument houdt waarvan de waarde afhankelijk is van de waardestijging van die aandelen of daaraan verbonden dividendrechten en dat wordt afgewikkeld anders dan in die aandelen.

I will be scrutinizing the proposal as part of a forthcoming article in Dutch legal periodical Ondernemingrecht, and share some initial thoughts on this blog shortly. For now, suffice it note that the proposed approach is basically that of the UK's Financial Services Authority, which recently amended the UK rules such that not only holders of 'qualifying financial instruments' are subject to disclosure obligations, but also holders of financial instruments that

(i) are referenced to the shares of an issuer, other than a non-UK issuer; and
(ii) have similar economic effects to (but which are not) qualifying financial instruments within DTR 5.3.2R.

The Ministry of Finance also envisages that the Dutch takeover rules will be amended such that transactions by the bidder in equity derivatives will have to be disclosed, as the UK Takeover Code has already required for quite some time.

Finally, the Ministry of Finance asks market participants whether they believe there is a case for requiring investors who disclose major share positions (5%, soon 3%) to simultaneously disclose their short positions. This would clarify what the investor's net economic position is, and expose potential for empty voting - more on this soon.

The proposal can be found here. 

[No. 123] Extra Voting Rights for Long Term Shareholders

This post comes from

J. Matthijs de Jongh
Law clerk at the Dutch Supreme Court

The British treasury minister Lord Myners recently suggested that banks should give more voting rights to loyal shareholders who stay on as engaged owners rather than sell up. Lord Myners told the BBC that shareholders who do not hold shares for the long term should have inferior rights as owners, arguing that "companies are too important" for big shareholders to trade in and out of them "willy nilly". He added:

We've lost sight of the fact that a share certificate - in fact we don't have them now, it's all recorded electronically - but a share certificate is a right and entitlement of ownership which carries with it certain responsibilities.

In the Netherlands, the 'Maas Committee' recently published its report Restoring Trust that tries to draw lessons from the credit crunch for Dutch banks. The Maas Committee proposed in its Code for Sound Banking Practices that stable bank shareholders should receive extra rewards, such as a loyalty dividend distribution or increased voting rights.

The Maas Report stimulated me to explore the pros and cons of extra voting rights for long term shareholders. In France, many companies grant double voting rights to shareholders who register their shares for at least two years. In an article in Ondernemingsrecht, I argued that extra voting rights for long term shareholders in controlled companies would probably serve the interests of the controlling shareholders and could therefore harm the interests of minority shareholders. I argued that protests by minority shareholders of French companies opposing double voting rights are often justified as most French companies that have a droit de vote double are controlled by a single shareholder or by a family. However, extra voting rights for long term shareholders might strengthen a long term strategy of companies that have a dispersed share ownership. I argued that corporate governance might be improved if outside blockholders could be subsidized to hold larger blocks. Leveraging voting power is avantageous if ownership of large equity stakes entails opportunity costs. I proposed that extra voting rights should be limited in order to prevent that a large shareholder becomes a controlling shareholder, solely by using the extra voting rights.

Although it is possible to grant extra voting rights for long term shareholders, this is very complicated under Dutch law: as voting rights depend on the par value of a share, extra voting rights require a share to be converted into another share, having a higher par value. I therefore suggested that special legislation is needed if the interested parties agree that it could be desirable to reward long term shareholders.

Dutch Parliament has been discussing this topic today. Last week, the Dutch minister of Justice announced that it is preparing legislation that will facilitate extra dividend or voting rights for long term shareholders.

Er wordt momenteel gewerkt aan een voorontwerp van een wetsvoorstel dat ertoe strekt om loyaliteitsdividend en extra stemrecht te faciliteren. Het kabinet verwacht dit najaar hierover een openbare consultatie te kunnen aanvangen.

In Frankrijk bepaalt de Code de Commerce dat naamloze vennootschappen aandeelhouders die minstens twee jaar aandelen in een vennootschap houden hen via een statutaire regeling kunnen belonen met dubbel stemrecht of extra dividend. Op grond van de huidige regeling in het Nederlandse Burgerlijk Wetboek kan statutair worden bepaald dat aan aandelen van een bepaalde soort meer stemrecht is verbonden dan aan andere aandelen, mits dit niet in strijd is met het gelijkheidsbeginsel. Dit maakt het in beginsel voor een vennootschap mogelijk om statutair te regelen dat aandelen nadat de aandeelhouder deze gedurende een bepaalde periode in bezit heeft, worden “omgezet” in loyaliteitsaandelen. Echter dan kunnen aan eenzelfde aandeelhouder niet meer dan zes stemmen worden toegekend.

Although I am glad the minister is seriously considering special legislation on this point, I was a bit confused when I read the second paragraph. Unless I’m mistaken, it looks like the minister is misinterpreting the Dutch Civil Code here. In principle, voting rights depend on the par value of a share. However, clause 2:118(5) of the Civil Code allows companies to deviate from this principle, “provided that no more than six votes may be rewarded to a single shareholder if the authorized share capital is divided into one hundred shares or more.” This clause - which is a kind of a dead letter and is never used in practice - allows that the number of voting rights of a shareholder be limited. It doesn’t grant extra voting rights attached to a single share. Some more study might be needed before the minister can launch its consultation document…

[No. 122] Excessive Spending and Liability Risks [Updated]

On August 10, 2009, the international securities trading and brokerage firm Van der Moolen slipped into a provisional moratorium on payments. As there is no management board in place, the supervisory board is filling that void.

Today, juicy information became public that the company's former CEO Richard den Drijver - now advisor to the board - apparently wasn't that keen on saving funds, in view of the financial distress the company was in. There are reports about luxurious trips in May to a Spanish soccer match (Real Madrid-Barcelona, which is a nice game) and to the Monaco Grand-Prix Formula 1 race, amounting to over € 100k. There is also upheaval about expenditures on living space in New York. Anyway, the Dutch Financial Times has all the dirt.

I'm not so much triggered by al this excessive spending quibble, as I am by the apparent statement from the former chairman of the supervisory board that the board never approved the trips (contrary to the suggestion of the current chairman that the supervisory board back then did approve these trips, labelled "marketing trips" by him).

Formule 1-Grand Prix

Zo vloog hij op 2 mei samen met enkele werknemers, bevriende relaties, zijn persoonlijk raadgever en oud VDM-topman Hans Kroon en nog ten minste tien andere mensen naar Madrid om de voetbalklassieker Real Madrid - Barcelona bij te wonen. Later die maand reisde Den Drijver met een groep adviseurs en Kroon naar Monaco voor de Formule 1-Grand Prix. Volgens ingewijden hebben de uitjes meer dan een ton gekost. Den Drijver was de afgelopen dagen niet bereikbaar voor commentaar.

Bestuursvoorzitter Peter Zwart, die vorige maand het roer overnam van Den Drijver, bevestigt dat de reizen hebben plaatsgevonden. Hij noemt de timing 'ongelukkig', maar zegt dat het om 'marketingreizen' ging, die al een jaar eerder waren goedgekeurd door de toenmalige raad van commissarissen. 'Wel had de directie ervoor kunnen kiezen de trips alsnog af te blazen', zegt Zwart met een verwijzing naar het zware weer waar VDM op dat moment in zat.

Goedkeuring uitjes

Gerrit de Marez Oyens, die van mei 2008 tot mei 2009 voorzitter was van de raad van commissarissen, ontkent dat hij de uitjes heeft goedgekeurd. 'Die reis naar Monaco is mij volstrekt onbekend. Over de voetbalreis vernam ik pas na mijn voorzitterschap, toen ik een uitnodiging kreeg. Ik ben niet meegegaan omdat ik het niet kies vond gezien de slechte resultaten.'

If the former management board was not allowed to enter into these transactions without supervisory board approval but did it anyway, it could face serious liability risks if it comes to a bankruptcy of the company and a trustee in bankruptcy is appointed (the chances now seem remote, in view of the position taken by the current supervisory board). As I've explained elsewhere, violation of rules that aim to protect the company - like the rule mandating supervisory board approval for certain transactions - in principle qualifies as a serious mistake and thus results in liability of the management director vis-a-vis the company, unless the director is able to show that the norm violation was not that fatal after all.

It will be far easier for a court to establish liability on this doctrine, than based on discussions about whether the expenditures were excessive, unnecessary, unwise in view of the company's financial condition, etc. But that's something the story doesn't cover.

UPDATED

So, the blame game has begun. The additional dirt - including public "confessions" from a former supervisory board member - can be found here and here. I include one quote, in which the former CEO is labelled as Emperor Nero.

De vraag dient zich aan waarom de commissarissen geen tegenwicht boden aan Den Drijver. Twee ex-werknemers wijzen op de leiderschapsstijl van Den Drijver. ‘Hij gedraagt zich als keizer Nero’, zegt er een. ‘Hij verzamelt louter ja-knikkers om zich heen en duldt geen tegenspraak’, zegt iemand die lange tijd met hem samenwerkte. Ze wijzen in dat kader ook op het feit dat in achttien maanden tijd vier mensen op sleutelposten (drie  bestuursleden en een commissaris) bij het bedrijf opstapten ‘om persoonlijke redenen’.

It's rather a-typical for this type of inside information to get outside the boardroom. This could well end up in litigation, before the Enterprise Chamber perhaps.