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[No. 177] On Pyramids, Corporate Finance and Premium Beer

Whenever there's talk about Dutch brewer Heineken making a major acquisition, the same question arises: how can the deal be financed while securing the Heineken family's controlling stake? The family holds its stake through a majority stake in Heineken Holding, which in turn holds a majority stake in Heineken.

These days, there's talk of Heineken acquiring Femsa, the giant Mexican brewer. BreakingViews has some interesting ideas on how Heineken could raise EUR 3bn in equity while avoiding too much dilution of the Heineken family's stake:

Here’s how. First, Heineken would kick off a rights issue to current shareholders for the extra money it needs. Translating into euros, that’s about 2.1 billion euros. At a 10 percent discount to the current market price, that would require Heineken to issue about 76 million new shares.

To maintain its controlling stake in the brewer, Heineken Holding would need to find just over 1 billion euros to exercise its rights to buy stock. To raise the cash, Heineken Holding, which is also publicly traded, could kick off its own rights issue.

And here’s the bonus for the Heineken family. Even if it did not want to stump up for more Heineken Holding stock, it would still cling to control. Again assuming a rights issue at a 10 percent discount, its ownership of Heineken Holding would drop to 50.1 percent.

That might not send a reassuring message to shareholders, so the Heinekens might feel compelled to buy more shares in Heineken Holding as a show of faith in Heineken’s prospects.

Then over time they could divert some of Heineken Holding’s dividend payouts toward stock buybacks, which would allow the family to rebuild its stake over time without having to dip further into its deep pockets.

An obvious solution perhaps, but clever nonetheless.

[No. 176] DSB Bank Hitting South Park

In posts No. 164 and No. 174, Michael discussed the recent bankruptcy of Dutch bank DSB Bank.

Here's some non-serious but nevertheless funny footage, that may clarify for non-Dutch viewers of TDT the sentiments in some circles about the bank and its owner (Dirk Scheringa, featured in the clip). It's hilarious.

[No. 175] The Right of Inquiry 4.0

1. The right of inquiry, explained in more detail at TDT in post No. 82 and in several other posts discussing inquiry proceedings (see, e.g., here, here, here, here and here), has become the most popular avenue for corporate litigation in the Netherlands since the turn of the century. That popularity can be attributed in part to the Enterprise Court's former president Huub Willems. After many decades of service, the right of inquiry is still in full swing.

2. In fact, in the first decades after this statutory avenue was constructed in the '20s of the last century, the right of inquiry was a dead letter. The main reason was that the court could order an inquiry in a prima facie case of mismanagement, but could not take any measures whatsoever. All that could be achieved was transparency. Not very surprisingly, until the '70s there was not even a handful of reported inquiry proceedings (literally, not even five). This was the Right of Inquiry 1.0. Then, in 1971, the system was updated; now the court was allowed to take measures - like dismissal of directors, nullification of board decisions and even dissolution of the company - in case of established mismanagement based on the investigation report. Many more cases hit the cour's docket, for example involving conflict of interests situations, deadlocks and violations of statutory requirements (like annual meetings and the like). This was the Right of Inquiry 2.0, which proved to be pretty succesfull.

3. Then came 1994, when the legislator opened up the possibility for the court to take preliminary measures for the course of the inquiry proceeding, measures - like suspension of directors or a court ordered stand-still in a takeover battle - that were not laid down in the statute (let alone laid down in a limited fashion). This is when the court's "equity" like capacity came to full use and the caseload increased quite heavily; increasingly, litigants only came to the court for a preliminary measure and no longer for an inquiry, although in the system - as confirmed by the Supreme Court in the 2000 Gucci Group decision - the inquiry lies at its heart of the whole system. In this period the Enterprise Chamber proved to be a creative court, looking to expand the boundaries of the right of inquiry and taking bold decisions  - like establishing mismanagement without having ordered an inquiry or allowing the company to request for an inquiry (both contra legem) - that didn't always withstand scrutiny of the Supreme Court. This was and is the Right of Inquiry 3.0. For some impressing stats see post No. 15, with all the nuggets only a few clicks away.

4. But something changed in the last years. While the shareholders population of large corporations often proved to be a passive and pretty much voiceless mass (the typical collection of shareholders showing rational apathy), caused in part by the heavy defences that Dutch corporations used to protect themselves with ("Dutch Discount" anybody?), at the end of the last century shareholders' powers were strengthened and activist/institutional/hedge-fund type shareholders started to emerge, questioning the policy shaped by the company's board. In some cases, the discussion ended up at the desk of the judges forming the Enterprise Chamber; cases like HBG, Rodamco North America, Unilever, Stork, ABN Amro and - still ongoing - ASM International, that generated lots of attention in the financial media. Increased shareholder activism at the start of the century, the battle for ABN Amro and Stork in 2006-2007, combined with the Enterprise Chamber's tendency to be somewhat of an activist in its own way (sometimes making flat-out controversial decisions), created an atmophere in which sentiment for a reform of the right of inquiry grew. Early 2008, the Social-Economic Council - that often advises the Dutch cabinet on important issues - published a report that was critical of the Enterprise Chamber and was clearly trying to make things more difficult for shareholders who were planning to take strategic discussions with the company to the court (or: to limit the powers of the Enterprise Chamber). The report, that was not unanimous and was received quite critically in some (shareholder-)quarters, proposed among other things:

• to increase the threshold for shareholders in large corporations having the power to ask for an inquiry (and provisional measures);
• to introduce a first instance court and an appeal court in the right of inquiry, with the Supreme Court as the third possible court at the apex of the system (in the current system, the Enterprise Chamber is the only court - apart from the Supreme Court at the apex - that handles inquiry proceedings); and
• to introduce the business judgment rule (yes!), albeit also in a somewhat weird setting (no!), i.e., also in the provisional measure setting.

I commented on this stuff in Ondernemingsrecht 2008-6, p. 230-236. Nonetheless, the legislator announced that it would come with a proposal to reform the Right of Inquiry 3.0, creating a Right of Inquiry 4.0. And it did so, today.

5. What are the most important features of the proposal? There are - at least - seven.

1. Allowing the corporation to ask for an inquiry (and provisional measures). This is a good thing.
2. Heightening the threshold for shareholders in large corporations (€ 22.5 million or more issued capital; (i) at least 1% of the issued stock or (ii) stock with at least € 20 million market value) to ask for an inquiry (and provisional measures), but not for shareholders in small corporations (like typical closed corporations). Also makes sense.
3. Adding to section 2:349a(2) DCC that when the court is considering to take a provisional measure (upon request of course), it should take into account the interests of all those institutionally involved with the company. This is merely a clarification, as this basically already followed from Supreme Court case law like its SkyGate, Versatel and DSM cases.
4. Adding to that section that when the court takes a provisional measure without ordering an inquiry, it should decide on the question whether or not an inquiry will be ordered within a reasonable period thereafter.
5. Implementing measures that should properly limit the liability risk of investigators and directors appointed by the court.
6. Implementing measures that should allow persons who are interviewed by investigators to comment of their draft report of that interview. 
7. Addressing the Delaware business judgment rule in the explanatory papers, quoting some case law from the Delaware Supreme Court (perhaps not the best ones, but hey) and relying quite heavily on my 2007 dissertation (thank you very much), basically concluding (p. 21) that the gist of the Delaware framework could be of use for the Dutch right of inquiry case law by the Enterprise Chamber. Although the papers aren't flawless in this respect, the outcome is a good one in my book.

6. All in all, the proposal looks pretty balanced. Of course, the proposal and the explanatory papers are available for inspection, to check out all the details. As this is merely a proposal, that will no doubt lead to further discussion and possibly changes after consultation rounds (with statutory amendments planned for mid 2010), this post can only be the beginning of a series on this interesting subject. To be continued therefore.

[No. 174] Private Benefit Extraction at DSB Bank?

In post No. 164, I discussed the bankruptcy of Dutch bank DSB, and mentioned some of the issues that the case raises. One of these is the issue of how the dual role of Dirk Scheringa, owner and CEO, impacted the bank's governance. Newspaper NRC addressed this issue in an interesting article that was published last Saturday:  

Het grote probleem van DSB Bank is de verwevenheid met DSB Beheer, waar alle andere ondernemingen van Dirk Scheringa onder vallen. Via DSB Beheer lopen geldstromen tussen de bank, de verzekeringsmaatschappijen, de vastgoedinvesteringen, AZ, het stadion, de schaats- en wielerploeg en het museum.

De centrale bank heeft problemen met de geldstromen tussen DSB Bank en DSB Beheer, vooral omdat er liquiditeitsproblemen zijn bij Beheer. De geldnood komt mede doordat de dividendbetalingen van Bank aan Beheer op aanraden van De Graves voorganger Zalm zijn stopgezet om de solvabiliteitspositie van de bank te verbeteren. Na Zalms vertrek, eind 2008, wordt er nog een interim-dividend overgemaakt, maar dat is onvoldoende voor alle uitgaven van Beheer.

Meest nijpend is een lening van 75 miljoen euro. Die is verstrekt toen DSB Bank op aandringen van de centrale bank enkele internetbedrijfjes afstootte naar Beheer. Het gevolg is dat als Beheer niet meer aan zijn verplichtingen voldoet, de bank een probleem heeft.

This is classic stuff. Dirk Scheringa had DSB bank pay dividends and loan money to his holding company, which used the funds in part to finance Scheringa's hobbies, such as soccer and art. These transactions will undoubtedly receive close scrutiny in the next couple of months. While there are no minority shareholders as in the case of, for example, Parmalat (Scheringa owned 100% of the shares), there are many stakeholders who may have been harmed, including the numerous consumers who won't see their savings deposits refunded entirely by the deposit insurance or the bankrupt estate. To be continued.

[No. 173] Scripting Deals

Post No. 145 covered some aspects of controlling shareholders and fiduciary styled responsibilities under Delaware and Dutch corporate law, triggered by Steve Davidoff's discussion of the recently initiated litigation re Affiliated Computer Services, Inc. before the Delaware Chancery Court (or more to the point, Steve Bainbridge's quarrel with some of the things Davidoff wrote).

Anyway, the Deal Professor just provided an update on that matter, analyzing the essentials of the deal that is subject of discussion - and the way it was "scripted" to comport with Delaware law - based on a recently filed 178 page registration statement by one of the parties involved (Xerox). Interesting stuff with the usual legal technicalities, so if you have a minute or so to spare, digg in.

[No. 172] Bonus Hassle in the UK

Posts No. 142, No. 107 and No. 87 covered corporate governance and exec comp related developments in the UK banking scene. While the consultation period for Sir David Walker's final set of recommendations (for UK banks and other financial institutions) has expired on October 1 but the final document isn't due until November 2009 (for the July 16, 2009 draft go here), the discussion in the UK now focuses on whether or not banks should be allowed to pay the coming bonuses without ex ante disclosure as to amounts and structure.

According to Lord Adair Turner, the current chairman of the UK Financial Services Authority and drafter of the 2009 Turner Review, the answer is no. In an interview to the Sunday Times, Turner clarified that unless the banks disclose the planned bonus payments before the end of the week, no bonuses can be paid and the corresponding funds should be added to the reserves.

Lord Turner, chairman of the Financial Services Authority (FSA), has given Britain’s banks until the end of the week to justify bumper bonus payouts. Banks must provide a detailed breakdown of how bonuses will be split between cash, shares and other forms of payment. Any bank that does not comply could be barred from paying bonuses, and told to use the money to build up reserves, Turner said. “The major trading banks we know are making large profits for exceptional post-crisis reasons . . . we believe we are in a position to achieve capital enhancement without adverse consequences,” Turner said. “The priority use of these large trading profits must be to build up capital levels.”

Some serious muscle-flexing going on here, perhaps triggered by a statement of The Centre of Economics and Business Research that bonuses over 2009 so far rose with 50% compared to 2008 in the British financial sector (go here for the press release and some stats). We saw similar developments - on the muscle-flexing front that is - recently in the Netherlands; check posts No. 143 and No. 138.

For a sceptic take on things, see this background article on how the foolish bonus rage will kill our Goldman Sachs goose.

[No. 171] But Wait a Minute, is That a Crack in the Glass Ceiling?

In posts No. 143 and No. 168, I wrote about attempts by some in the Netherlands to push more women towards the apex of the corporate structure (i.e., upper management or even the board) and concluded - based on recent reserach - that the whole 'cracking' thing did not seem to be going anywhere really.

But wait a minute. The future may be less grim than some predicted. The CEO of Dutch telecom giant KPN has announced today in an interview that as to certain high-end positions in the company, it will only open job interviews for women. Why? Because, according to the CEO, when women start to walk away in part for not feeling fully appreciated, the company - its toplevel is made up of 17% women - should act and create a different atmosphere.

KPN neemt de maatregel omdat het aantal topvrouwen in het bedrijf achterblijft. Allerlei maatregelen om vrouwen privé te ontlasten of te stimuleren in hun carrière, hebben tijdens zijn achtjarige bewind te weinig opgeleverd, zegt Scheepbouwer. ‘We raken vrouwen ten dele kwijt omdat ze zich onvoldoende gewaardeerd voelen in deze omgeving. Als je dat constateert moet je wat anders doen om echt stappen vooruit te maken om je doelen te halen. Ik wil niet nog acht jaar wachten.’

Although the details of this plan have not been disclosed yet, this seems like a new step towards cracking that glass ceiling. KPN now has the first-mover advantage but perhaps more companies will follow, which seems even more likely when Congress decides to introduce a fixed minimum number of women at top management levels (either as a mandatory number or as an aspirational matter) after next Monday's discussion about this topic.  

[No. 170] Shareholders Agreement and Forced Shareholder Exit

There isn't much Supreme Court case law today that is of interest to TDT, but there is this decision about the interpretation of a shareholders agreement, in a case where two shareholders forced the third one to exit the company.

The court rejected the complaints against the court of appeal's ruling without any motivation (a so-called section 81 RO decision), but Advocate-General Vino Timmerman took a dive into the depths of 'contract interpretation' and wrote some noteworthy things in his opinion.

Recommended reading, but maybe not for the weekend.

[No. 169] Links

• Steve Bainbridge discusses the Obama administration's plan to "Slash Exec Pay at Bailout Firms" and offers a bunch of links to other commentators, including Larry Ribstein (who puts things in perspective in seven steps). Steve's main problem is that:

many (most?) of the compensation deals the Obama administration is shredding were set in employment contracts. Granted, some of those employment contracts were signed after the law setting up pay "czar" Kenneth Feinberg's position and empowering him to review pay packages at TARP firms. But a lot of them are pre-existing contracts and it's those contracts that are the main concern. (...) The bottom line thus is that Obama is having his minion coerce TARP executives and employees into ripping up contracts Obama doesn't like so as to assuage the populist public. In doing so, Obama and his appropriately entitled "czar" are exhibiting a basic lack of respect for the rule of law.

• A free link - via Francis Pileggi - to a 2 minute video registration of last week's hearing before the Delaware Chancery Court (VC Strine), in the ongoing litigation involving the Bank of America and Merrill Lynch merger. The accompanying introduction runs as follows:

Hearing on defendant's motion to dismiss. Shareholders asserted breach of fiduciary duty and waste claims against Bank of America for consummating a merger with Merrill Lynch and for failing to disclose material financial information before shareholders voted on the merger.

The defendants asserted that the plaintiffs could not prevail without alleging bad faith because Merrill Lynch's accelerating deterioration, and the directors' considering invoking the Material Adverse Change (MAC) clause to void the deal, did not occur until after the shareholder vote, at which time disclosure would have had no effect. The defendant also asserted that the undisclosed $5.8B in negotiated bonuses was in line with reasonable shareholder expectations. According to the defendant, there was no credible allegation that the directors acted in their own self interest, and instead had credible, sound reasons for not exercising the MAC, even if the directors were also threatened with job loss if they declared a MAC.

The plaintiff alleged that the board had set up an information system that would have kept it informed of the $9B loss before the vote, and did in fact resolve to declare a MAC three weeks after the vote. Director knowledge of the $5.8B bonus provision could be inferred, according to the plaintiff, because 12% of the total deal, although only noted in a schedule, was so significant that it must have been considered by the Board.

The Court denied the motion. The plaintiff alleged that at the time the board recommended that shareholders approve the deal, there were senior people at the corporation discussing with outside counsel whether they should consider getting out of the deal. Further, the job threat to the board followed by the decision not to declare the MAC constituted facts pled from which an inference could reasonably be drawn that the directors and CEO put personal interests ahead of the interests of the shareholders, even though other inferences favorable to the defendants could also be drawn.

[No. 168] Women and Corporate Boards: Shattering the Glass Ceiling

Catchy title, but in the Netherlands the whole 'shattering' thing still doesn't seem to be going anywhere really.

[No. 167] The Value of 'Say on Pay'

In post No. 161 I mentioned the recent 'say on pay' initiative at the US mammoth company Microsoft. Say on pay is still hotly debated, especially in the US. Here's a link to research by Jie Cai and Ralph Walkling into whether allowing shareholder votes on executive compensation increases shareholder wealth.

From the abstract:

Congress and activists recently proposed giving shareholders a say (vote) on executive pay. We find that when the House passed the Say-on-Pay Bill, the market reaction was significantly positive for firms with high abnormal CEO compensation, with low pay-for-performance sensitivity, and responsive to shareholder pressure. However, activist sponsored say-on-pay proposals target large firms, not those with excessive CEO pay, poor governance, or poor performance. The market reacts negatively to labor sponsored proposal announcements and positively when these proposals are defeated. Our findings suggest that say-on-pay creates value for companies with inefficient compensation, but can destroy value for others.

For a summary, go here. 

[No. 166] Equal Treatment of Minority Shareholders

1. The Delaware Chancery Court rendered an interesting judgment the other day, concerning a situation in which a third party acquired a company with a controlling shareholder. The case, that I find a bit difficult to fully grasp from a doctrinal perspective (I'm not sure I fully understand why the case came out the way it did, as it's not a 'Kahn v. Lynch' situation), touches upon standard of review related issues (business judgment v. entire fairness), but also involves minority shareholder related issues. Interesting developments on the other side of the Atlantic therefore. For a summary of the case go here or here (with a link to the Delaware Supreme Court's Kahn v. Lynch decision).

2. How about the continent, anything worth mentioning to report here as to minority protection? Well, yes actually. First some background.

3. Minority shareholder protection is a subject that is increasingly generating attention on this side of the Atlantic, also in the Netherlands. There's for example an important and still growing body of inquiry proceeding case law from the Enterprise Chamber in line with Supreme Court case law from 2002 (the well-known case of Zwagerman Beheer that pops-up in several Supreme Court decisions post 2002, see, e.g., here), which suggests a special duty of care rests on - the board of - the company when minority shareholders are part of the equasion, that aims to protect all shareholders of the company (especially in cases where a conflict of interests is present). This is a creature of case law, based on the fundamental standards of reasonableness and fairness that cover almost every aspect of Dutch corporate law and corporate governance.

4. What about statutory provisions; are there any in the Dutch corporate code that cover minority protection? Not specifically minority protection as such, but the Dutch civil code does have section 2:92/201(2) DCC, stipulating that the corporation is under an obligation to treat shareholders - as well as holders of depository receipts for that matter - whose circumstances are equal in the same manner: the so-called principle of equality. This could involved minority protection, for example in situations where the company provides shareholders with information. What is the background of this provision and what is its scope? This was explained eloquently by Prof. Timmerman and Alexander Doorman in a 2001 publication.

The relevant section of Dutch company law with regard to the principle of equality (section 2:201(92) subsection 2) (...) is a direct result of the EC's [EC standing for European Communities, BFA] second company law directive. This directive is limited to subjects related to capital protection and is also only applicable to public companies. This means that the Dutch legislator is under no obligation to extend the range of the principle of equality beyond the subject of capital protection. Examing the Dutch text however, it gives no indication that its scope is limited to capital protection issues. The conclusion that section 2:201(92) subsection 2 is not limited to capital protection becomes even stronger when we examine the Memorandum of Reply [legislative history, BFA]. It states explicitly that the principle of equality extends beyon issues of capital protection.

(footnotes omitted)

5. So the origins of this principle are European and the scope of this principle is broad. Is it also carved in stone? No. I again refer to Timmerman and Doorman.

The principle of equality is of the utmost importance for the protection of minority shareholders. The Dutch Supreme Court does not regards section 2:201(92) subsection 2 as a provision from which no departure is allowed. It interprets the rule of section 2:201(92) flexibly. First of all, it is important to realise that (...) the equality defined in subsection 2 is not an absolute equality but rather a relative one; equality in proportion to the amount of capital the shareholders in question provides.

However, the exact content of the principle of equality is in our opinion dependent on the nature of the subject in question. With regard to certain rights, for example, the right to vote in a general meeting of shareholders and the right to receive a dividend, equality is indeed relative; there it is proportional to the number of shares the shareholder holds. With regard to certain other rights however, mainly information related rights, the equality has a different nature; there it is absolute, for under Dutch company law a company is not generally permitted to provide certain (important) information to large shareholders but not to smaller shareholders.

Second, departure from the principle of equality is permitted when shareholders are not in equal circumstances. Finally, departure is also permitted when there is a reasonable and objective justification for the unequal treatment [HR December 31, 1993, NJ 1994, 436, BFA].

(footnotes omitted)

6. We're talking here about Dutch corporate law. As seen above, section 2:92/201(2) DCC's principle of equality has European roots. Does this mean there is something like a general European principle of equal treatment of shareholders? This is where we go from background (see no. 2) to new developments in the legal realm, more specifically to a ruling by the Court of Justice of the European Communities of October 15, 2009 (re Audiolux, No. C 101/08) in which this fundamental question has been answered (well, more or less, also in view of the court's remarks leading up to the outcome quoted below). The case also involved an acquisition by a third party of a company with minority shareholders, somewhat similar to the Delaware case I started this post with. The outcome? Let me quote the last section of the court's - quite technical and detailled - decision, that is self-explanatory.

Community law does not include any general principle of law under which minority shareholders are protected by an obligation on the dominant shareholder, when acquiring or exercising control of a company, to offer to buy their shares under the same conditions as those agreed when a shareholding conferring or strengthening the control of the dominant shareholder was acquired.

(for a link to the Dutch text go here)

So minority shareholders who are in a squeeze, at least in a takeover situation like the one before the court, will not find any solace in somekind of general, overarching, principle of equality. In view of this ruling, it could be said that on a European level, such a general principle is non-existent. They will have to find other legal ropes to hang on to, specifically from national law fabric.

7. Is this of relevance to the Dutch corporate law realm? It might well be. It seems to me that, as there is no general principle of equality on the high European level (at least not as specified by the EC court in its Audiolux decision), it may be somewhat less difficult to justify unequal treatment of shareholders in equal circumstances than it might otherwise have been under section 2:92/201(2) DCC (i.e., to prove the existence of a reasonable and objective justification for unequal treatment). But in the end, that's for the Dutch Supreme Court to decide. Important stuff nonetheless, also on this side of the Atlantic.

[No. 165] The State's '08 Rescue of Fortis Bank and the Liability Aftermath

In October 2008, when the financial crisis really started to kick in worldwide, the Dutch State (the Ministry of Finance, more specifically Finance Minister Wouter Bos) was forced to rescue Fortis - that was still dealing with its acquisition of ABN Amro - from bankruptcy. It did so during the first tumultuous days of that month; first by providing the bank with massive financing (we're talking multi-billion numbers here), then - when this didn't help - by basically nationalising the bank's assets. A phenomenon that, as we now know, has occurred elsewhere also.

Of course, that was not the end of things. Events like these (I guess this would qualify as a black swan event) are typically followed by, what I would call, a 'liability aftermath': disgruntled investors, who bought their stock during these tumultuous days and aren't too happy about the way things turned out (i.e., their stock isn't 'in the money'), file claims and try to recover - at least some of - their losses. Several stockholders initiated legal proceedings, and today the first final judgment by a court of first instance - the Court of The Hague - was rendered and published. The verdict? A loss for the stockholder plaintiff, and therefore no liability for the State, at least not at this stage of the proceedings; the likelihood of an appeal - which would normally come before the The Hague Court of Appeals - isn't zero.

This stockholder plaintiff essentially argued that the State committed a tort vis-a-vis him, because:

1. in the period just prior to the day the plaintiff bought his Fortis stock, the State raised the wrong impression (misled the market) that the capital injection had solved the problems at the bank; and
2. during that period, the State was already heading towards nationalisation of the bank but failed to disclose that intention to the market.

But...not convincingly enough.

As to 1, the court simply concluded that the State did not mislead plaintiff; the statements made by Wouter Bos were obviously neither intended as encouragement to investors to buy Fortis stock, nor as a guarantee that all lights had gone from red to green and things were 'safe' (and also could not reasonably be interpreted that way).

4.9. Gegeven de onder 4.6 en 4.7 vermelde uitgangspunten ontwaart de rechtbank in al die uitingen (interviews, persberichten e.d.) van de zijde van gedaagde geen grondslag voor de stelling dat gedaagde ter zake van de aanvankelijk aangekondigde kapitaalinjectie eiser (welbewust) op het verkeerde been heeft gezet of heeft misleid. De onder 2.4 aangehaalde uitspraken van de minister van Financiën voor het NOS-journaal op 28 september 2008 passen in het uitgangspunt dat onder 4.6 is beschreven en zijn overigens kennelijk niet bedoeld als - en evenmin in redelijkheid op te vatten als - een tot beleggers gerichte aansporing om aandelen Fortis te kopen, laat staan als een garantie dat een dergelijke aankoop veilig is. Ditzelfde geldt voor de onder 2.8 genoemde brief aan de Kamer, al aangenomen dat de inhoud daarvan niet valt onder de grondwettelijke onschendbaarheid van de minister (als orgaan van gedaagde) ook in zijn civielrechtelijke aansprakelijkheid.

As to 2, the court simply concluded that the State was under no obligation to disclose its intentions to nationalise the bank, also in view of the interests involved (Fortis Bank was a system relevant bank), and was under no obligation to take a different course of action (again in view of the interests involved). Some nuggets from the court's reasoning, that is pretty straightforward:

4.13. Op gedaagde rustte niet de plicht om, in de loop van de week of uiterlijk aan het begin van de beurshandel op 3 oktober 2008, bekend te maken dat hij zich genoopt zag alternatieve scenario's te ontwikkelen en uiteindelijk voor een van die scenario's - te weten nationalisatie - definitief te kiezen. Gedaagde was in onderhandelingen verwikkeld en hij mocht die vertrouwelijk houden. Dit geldt voor commerciële partijen bij overnames, maar ook voor overheden, indien deze bij de vervulling van hun publieke taak betrokken zijn bij dergelijke transacties. Bekendmaking van (de richting van) onderhandelingen kan niet beoogde of zelfs schadelijke gevolgen hebben en zou dus contraproductief zijn.

4.14. De betrokkenheid van gedaagde had een andere en grotere reikwijdte dan die van een commerciële marktpartij die onderhandelt over een deelneming of een overname. De kapitaalinjecties waartoe gedaagde heeft besloten zijn geschied in (overeenstemming met zijn opvattingen over) het algemeen belang. Hiertoe behoort het behoud van een zogeheten systeembank, mede ter wille van de belangen van spaarders en kredietnemers én het bancaire verkeer in het algemeen. Bekendmaking van het feit dat de aanvankelijk aangekondigde kapitaalinjectie van, wat gedaagde betreft, € 4 miljard mogelijk - en later: zeker - niet het beoogde effect had, zou onoverzienbare gevolgen kunnen hebben gehad. Hiertoe behoort de bepaald niet denkbeeldige mogelijkheid dat spaarders en anderen elk vertrouwen in de bank zouden verliezen en hun gelden bij de bank zouden weghalen; en dit in nog veel sterker mate dan in de bewuste week al het geval bleek te zijn. Dit zou ertoe hebben kunnen leiden dat de bank zou zijn omgevallen. Verdere onderhandelingen over mogelijkheden om dit te verhinderen zouden dan zinloos zijn geweest. Naar het oordeel van de rechtbank heeft gedaagde in deze situatie in redelijkheid kunnen besluiten tot het geheim houden van de inmiddels ontstane situatie en zich daartoe zelfs verplicht kunnen voelen. De mogelijkheid dat beleggers, onwetend van deze ontwikkelingen en afgaande op de bemoedigende en geruststellende uitingen van gedaagde over en naar aanleiding van de aanvankelijk aangekondigde kapitaalinjectie, alsnog aandelen Fortis zouden kopen, legt hiertegenover bepaald onvoldoende gewicht in de schaal. Te minder is dit het geval, nu het aanvaarden van risico's - goede én kwade kansen - inherent is aan beleggen en gedaagde nooit garanties aan beleggers heeft gegeven en zich ook niet in het bijzonder de belangen van deze groep behoorde aan te trekken, met voorbijzien aan de genoemde andere belangen.

4.15. Eiser heeft gesteld dat gedaagde voor een minder ver gaande - maar ten opzichte van hem niet minder effectieve - wijze van handelen had kunnen kiezen, namelijk te bewerkstelligen of ten minste te bevorderen dat de beurshandel uiterlijk met ingang van 3 oktober 2008 zou worden stilgelegd. Aangenomen dat deze mogelijkheid voor gedaagde heeft bestaan, geldt hiervoor in de kern hetzelfde als voor het bekendmaken van (de richting van) de verdere onderhandelingen die in de bewuste week hebben plaatsgevonden. Ook de stillegging van de handel in aandelen Fortis zou verregaande onbeoogde gevolgen kunnen hebben gehad. Gedaagde heeft ook in dit opzicht in redelijkheid, en op toereikende gronden, kunnen besluiten dit niet te doen. Voor een nadere toetsing van zijn optreden door de rechter bestaat in deze zaak geen grond.

4.16. De door eiser gestelde mogelijkheid dat gedaagde al op 30 september 2008 wist dat de aanvankelijk aangekondigde kapitaalinjectie niet voldoende was en dat reeds op die datum (en dus niet pas in de nacht van 2 op 3 oktober 2008) besloten was om de Nederlandse onderdelen van Fortis volledig te nationaliseren, leidt niet tot een ander oordeel. Ook dan immers zouden de beschreven gevolgen, die gedaagde op grond van zijn visie op de hier aan de orde zijnde algemene belangen niet wenste te accepteren, hebben kunnen intreden. Een nader onderzoek op dit punt kan dus achterwege blijven.

No doubt, even aside from the legal merits of the case, the 'precedent' factor will have played a significant role in the proceedings and in the court's perception of things.

Is this it? No. This wasn't the sole proceeding that was decided, there were fifteen more decided today, with claims ranging from € 300 to € 30.000. The outcome? The same (not a shocker really). The reasoning of the court? The same, as the arguments advanced by the plaintiffs were similar to the ones above.

In sum, and so far, disgruntled investors v. State: 0-16. That's a nice head start.

[No. 164] No More Mr. Nice Guy - How DSB Bank Was Allowed to Fail

The Dutch financial scene has been shaken over the past two weeks by what can be characterized as a classic bank run. Events at privately held DSB Bank, with assets of about EUR 8bn, began to unfold some two weeks ago as commentators and politicians expressed dismay at its predatory lending practices. Next, lone ranger Pieter Lakeman, who is notorious for initiating proceedings against Dutch listed companies whom he believes have incorrectly stated financial results, publicly called for consumers to withdraw their savings deposits from the bank - which they did en masse. Lakeman, acting on behalf of consumers who feel robbed by DSB's predatory lending practices, argued that this would offer consumers the best chance at redress - a highly dubious proposition that will be tested over the next couple of months as DSB is liquidated.

The Dutch Central Bank then tried to persuade a judge to take the bank into administration. While the judge refrained from granting the request in light of DSB's showing that it was still solvent, the filing of the request was leaked, and while the news spread (through Twitter!), consumers hurried to withdraw even more funds - some EUR 600m in 12 days. Within 12 hours, the judge was obliged to grant the request to put DSB into receivership.

Over the past week, Dirk Scheringa, the bank's founder and sole owner, made desparate efforts to strike a deal with the major Dutch banks (ING, ABN AMRO, Fortis, Rabobank) to save DSB. These decined to step in, as did Texas private equity player Lone Star Capital. All candidates where presumably put off by the uncertain magnitude of the claims to be filed in connection with DSB's predatory lending practices (French bank Dexia learned this lesson in the past) and the Dutch government's refusal to provide a guarantee of some sort. Exit DSB, which clearly wasn't considered too big to fail.

The episode is likely to have ramifications in the following areas, and over here at TDT we'll be monitoring events closely:

• Supervision: where were the Dutch Central Bank and the Financial Markets Supervisor (AFM)?
• Governance: how did the dual role of Dirk Scheringa, owner and CEO, impact the bank's governance?
• Regulation: what will be the impact on calls to introduce a Dutch equivalent of the US special resolution regime?
• Politics: who knew what and when, and what did they do about it?
• Lakeman's position: will he face the consequences for nearly single-handedly causing a bank run?

 Read more here and here.

[No. 163] Big Names Talking Big Delaware Corporate Law Cases

Time for some video footage.

Go here if you have some minutes to spare. Great stuff, moderated by VC Strine, covering classics like Time and QVC.

(HT HLSF)

[No. 162] Do Shareholder Loans Require Special Treatment?

In post 149 I concluded that under Dutch law the treatment of shareholder loans in insolvency is uncertain, whilst the legislature and the courts are waiting for one another to further comment on this topic. I noted that the variety of approaches by national legislatures begs the question whether there is a case for the subordination of shareholder loans. In this post I intend to provide you with a brief overview of some possible arguments.

When a private company files for insolvency, the judicial autopsy that follows often reveals that its shareholders were far more than just shareholders. Especially in closely held company’s, that are characterised by a controlling shareholder (for instance in a parent-subsidiary framework) or a small group of shareholders, one or more shareholders often grant loans to the company. One of the reasons for them to do so is for instance because of tax-savings. Or when a company is in desperate straits and needs additional financing, shareholders will grant loans as part of a rescue attempt. The question rises how these loans should be treated in case the company fails and ends up in liquidation. Should the shareholders claim be validated as an ordinary claim in insolvency? Several arguments have been made for a special treatment of such claims.

The first argument that has been made, is of a fundamental nature: as the shareholders are considered the residual claimants of the company, they receive the gains if the company prospers, and therefore they should also bear the risk in case of a downside scenario. In a search for the fundamentals of contemporary company law, professor Timmerman recently stated that the reason why shareholders have the ‘ultimate control’ over the company, is because they are entitled to reap the benefits if the company prospers and are the first to suffer if it does not. When shareholders finance the company with loans instead of capital, one can no longer argue that the shareholder is ‘the first to suffer’. The risk of the shareholder is the same as that of an ordinary creditor. Since the proposed law for the Dutch private company (flex-BV) no longer requires a certain amount of minimum capital, the shareholders residual risk can be limited to one euro. If the shareholder received collateral for the loan he granted to the company, he has managed to shift all risks of the business to the company’s (unsecured) creditors. 

A second argument is based on the first one: unlike creditors, shareholders are entitled to participate in corporate decision-making. The widely accepted notion put forward by Easterbrook and Fischel is that “as the residual claimants, shareholders have the appropriate incentives to make discretionary decisions”. However, if the company is in financial duress and the equity-stake of shareholders has been eliminated, their incentives change. Under certain conditions, shareholders have an incentive to grant a loan to the company to pursue an opportunity with a negative present value. (For many troubled businesses, continuing the business for another month or year, rather than shutting down today is, in effect, a net negative present value project, using up assets whose value might otherwise have benefited the creditors.) If shareholders continue to exercise their influence under these conditions, there seems to be a case for re-establishing their position as residual claimant by subordinating their claims.  

A third argument for special treatment of shareholder loans, is the fact that shareholders of closely held company’s are often privy to information not available to outside lenders. There is a considerable risk that they will use this advantage to shift risks to the creditors, for instance by recalling their loans, if they know the company is about to fail.

Legal scholars have put forward another risk: as the shareholder ‘stands on both sides of the transaction’, there is a risk he will bargain for conditions that are not in the interest of the company and its creditors. For instance, by demanding high interest rates, shareholders are able to withdraw money from the company without having to comply with the requirements for dividend-payments.

The main argument that has been made against the subordination of shareholder loans, is that it prevents shareholders from granting wealth-creating loans. Sometimes a shareholder loan will benefit both shareholders and creditors. Some scholars have argued that although shareholder loans pose some difficult questions, subordination is not the appropriate answer. They argue – in short – that subordination will sometimes prevent efficient rescue attempts and sometimes will not prevent inefficient rescue attempts. However, there seems to be a general feeling that shareholders should never be allowed to obtain collateral for the loans they granted.

Although both German and US law provide possibilities to subordinate shareholder loans, the rationale behind their rules seems to differ fundamentally. Initially, the German rules did not apply to all loans granted by shareholders. Only the loans that were granted during a crisis of the company were subordinated to all other debts in insolvency. “Crisis” was defined as a situation in which the company is either insolvent, has assets that are insufficient for the payment of its debts and other liabilities or for some other reason is unable to obtain credit from outside lenders at fair market values. A loan granted by a shareholder in such a situation of crisis was recharacterized as ‘equity’ and treated as regular capital. This implied that the relevant provisions of the GmbH-act were applicable and therefore the loan was subordinated in insolvency. German Law also provided that payments on these loans during the year prior to insolvency could be contested by the trustee. The rationale behind these rules was that if a company is in financial distress, and the shareholders choose to continue its business, they should carry the risk by providing equity instead of loans. A bill that modified the German law on private companies (MoMIG) moved the rules that were developed under case law and the GmbH Act to the German Insolvency code. Now all loans granted by shareholders (owning at least 10% of the company’s stock) will be subordinated to the claims of debt holders in insolvency. The trustee can reclaim all payments in relation to these loans within one year before the date of insolvency. A situation of crisis at the time the loan was granted, is therefore no longer required.

In the US, section 510(c) of the Bankruptcy Code (BC) authorises the bankruptcy judge to rank claims in bankruptcy, fully or in part, lower than either all other claims or specific claims, if this subordination complies with the principle of “equitable subordination”. Contrary to German Law, the BC assumes faulty behaviour of the shareholder and puts particular emphasis on the guiding influence of the shareholder. Some kind of ‘wrong-doing’ is therefore necessary.

Taking into account the above-mentioned arguments, the reluctance of the Dutch courts and legislature seems hardly surprising. The hybrid position of shareholders that have granted loans to the company, poses some difficult questions. By financing the company with loans instead of capital, shareholders can limit their exposure to entrepreneurial risks. It also allows them to easily withdraw assets from the company by negotiating high interest payments and reclaiming the loan before insolvency. This way, they are able to severely limit the downside potential of their undertakings, while still reaping all the upside potential. This constitutes a risk of opportunistic behaviour that should be addressed. There seems to be a case for subordination, however it should be noted that this remedy does not solve all the problems and comes at a cost.

[No. 161] Say on Pay

Apparently, the whole 'say on pay' discussion among scholars and politicians in the US - with a bill pending before Senate also covering this subject (also see here) - is trickling through in the real world. Microsoft's board of directors has approved, I understand as the first board of a US company, a 'say on pay' policy that will enable the Microsoft shareholders to cast:

• a non-binding, advisory vote;
• every three years;
• on compensation programs for the company’s senior executive officers.

The first vote is scheduled to occur at Microsoft's annual shareholders’ meeting, to be held on November 19, 2009. From the press release:

REDMOND, Wash. — Sept. 18, 2009 — Microsoft Corp. today announced that its board of directors has approved a shareholder advisory vote on executive compensation at this year’s shareholder meeting on Nov. 19, as part of a “say-on-pay” plan to allow shareholders to provide input on the company’s compensation of senior executive officers.

Under the plan, Microsoft shareholders will be able to cast a nonbinding advisory vote on the company’s executive compensation plan every three years.

“Given the interest in executive pay, we think it makes sense to encourage more dialogue with our shareholders on our compensation approach,” said Brad Smith, Microsoft general counsel and board secretary. “Our executive compensation program is designed to maximize shareholder value by attracting and retaining world-class leaders and aligning their financial rewards with the growth and success of the company.”

Microsoft worked with a number of shareholders to develop its say-on-pay shareholder vote approach. In particular, the company met with representatives of Walden Asset Management, Calvert Investments and the United Brotherhood of Carpenters, which had submitted shareholder proposals asking the board to implement say-on-pay votes.

“By stepping forward to implement an advisory vote this year, Microsoft builds on its leadership in corporate governance,” said Aditi Mohapatra, sustainability analyst, Calvert Group. “We believe that establishing an advisory vote on compensation is a significant step in providing shareholders a voice on this important issue.”

The company also sought input from a number of its largest institutional shareholders, governance advocates and peer companies.

What shareholders of public corporations under the Dutch system can do, is set the renumeration policy and the actual renumeration of managing directors (s. 2:135 DCC). They can also set the renumeration of supervisory directors, if any (s. 2:145 DCC). If the power to set the actual renumeration has been shifted to another party, typically the board of supervisory directors, the general meeting of shareholders still has the power to approve renumeration made up of shares or options. But we're still talking about the management board level here; all executives, but still directors. This doesn't cover the level of senior executives below the management board. Renumeration of those employees is up to the management board; this typically doesn't include any shareholder involvement. Actually, the current movement in relevant Dutch circles - including the political - is basically to curb shareholder influence, not expand it by adding further powers.

Although the policy approved by Microsoft's board only covers a 'once in every three year' advisory vote by its shareholders, this still implies that shareholders have something to add to the discussion in this field. Sceptics think 'say on pay'  is a bad idea, but some may feel that at least here it's limited to a three year cycle. See for example recent input from the Wachtell law firm, with a reasoning that runs along this line.

The United Brotherhood of Carpenters, which had previously submitted a similar triennial shareholder proposal to Microsoft, has since withdrawn its proposal. Many will closely watch this development to see if other companies will follow suit or if Microsoft’s actions will reinvigorate the triennial “say on pay” movement in Congress. The House of Representatives considered but ultimately rejected the triennial approach in the “say on pay” bill it passed in August.

We continue to believe that “say on pay” votes constrain the ability of compensation committees to exercise their business judgment with respect to nuanced personnel and compensation decisions that are often driven by sensitive information. We also believe that such advisory votes represent a transfer of basic responsibility of corporate management from directors to shareholders and would subject compensation decisions to the whims of shareholders no matter how inconsistent their views may be with long-term corporate performance.

If, as some have suggested, “say on pay” is inevitable, Microsoft’s triennial policy may nonetheless be a preferable alternative to the annual shareholder advisory vote. A triennial vote would help align “say on pay” with the goal of avoiding short-termism in corporate governance and executive pay arrangements. Most fundamentally, a triennial approach would permit shareholders, directors and managers to evaluate the effects of a company’s pay program on long-term performance and would be less likely to subject a company’s compensation plans to the whims of hedge funds and other constituencies seeking to apply pressures unrelated to long-term corporate performance. In addition, the triennial approach would allow shareholders to engage in more thoughtful analysis and voting by providing more time between votes and by causing fewer votes among public companies in any given year. Further, the three-year period between each vote would correlate more closely to the business cycle of many companies, and would provide management with the time necessary to implement improvements and changes to address concerns reflected by a negative vote.

With the Senate set to consider a “say on pay” bill in the coming months, Microsoft’s adoption of the triennial approach may provide momentum towards a more moderate stance in the “say on pay” debate.

[No. 160] Dubious

Here's a list of "100 Best Professors Who Blog".

Online students have a lot to learn online, and you can find great knowledge from professors’ blogs. Whether they’re about science or political science, you’ll find something interesting on each of these blogs. Read on to check out our collection of the 100 best professor blogs online.

Ok, right. Let's check out the list then, being a law professor and all. Hmm, as to law profs, the list is pretty short.

47. ImmigrationProf Blog: These bloggers offer a law professor’s view on immigration.
48. TaxProf Blog: Paul Caron is a professor of tax law at the University of Cincinnati.
49. Patently-O: This blog offers a look into patent law.
50. Instapundit: Glenn Reynolds is a law professor, author, and more.
51. ProfessorBainbridge: Check out this blog to read about the life and work of a corporate law professor.
52. The Volokh Conspiracy: The Volokh Conspiracy offers a look into the US legal system and courts.
53. Concurring Opinions: Concurring Opinions discusses the law, universe, and more.
54. PoliBlog: Read about the master science of politics on PoliBlog.
55. The Faculty Lounge: On this blog, you’ll find conversations about law, culture, and academia.
56. Discourse: Discourse writes from the fringes of the public sphere.
57. The Hugh Hewitt Show: Hugh Hewitt discusses politics and current events.
58. Indisputably: On this blog, you’ll learn about negotiation, mediation, arbitration, and dispute resolution.

That's it.

ProfessorBainbridge.com is there at 51. Congrats to Steve for being noticed. But where are the people from The Conglomerate and Ideoblog, just to name a few? More troublesome, where's The Defining Tension? Huh?

[No. 159] Merger Springloading

Remember post No. 113 about options backdating being back on the radar screen? There's a new kid on the block called merger springloading. Larry Ribstein isn't happy about this one neither.

[No. 158] The New 'BJR' Bible

Over here at TDT, we have a special interest in everything related to the business judgment rule; that wonderfully complex case law creature born somewhere long ago in the US, now a bedrock of everything considered holy in corporate governance. Anyway, type in those three magic words in the search engine and go crazy.

In view of all this, it will come as no suprise to regular readers that I'm happy to highlight the birth of the sixth edition of the 'BJR' bible The Business Judgment Rule: Fiduciary Duties of Corporate Directors, authored by Stephen Radin. I used the 1998 hardcover version for my dissertation and was impressed with the richness of its content. To give an impression:

• duty of care issues
• duty of loyalty issues
• disinterestedness and independence issues
• the emerging good faith doctrine
• oversight and the Caremark doctrine
• compensation
• stock option backdating
• controlling shareholder transactions
• special committees
• disclosure obligations
• appraisal
• financially troubled companies and the zone of insolvency
• defensive measures
• deal protection measures
• shareholder derivative litigation
• the pre-litigation demand requirement
• Section 220 demands
• indemnification of directors and officers

Ok, that's enough free publicity for one post (oh, and don't let the list price of $ 565 scare you away).

Disclaimer: I have no relationship whatsoever to the book, the author or the publisher. Just a fan.

[No. 157] What a Difference a Year Makes II

In post No. 153, I wrote about last Wednesday's ruling by the Amsterdam court denying the claim of a former director of ABN Amro to pay the full exit payment of roughly E 6.2 million, although in itself the former director was entitled to that sum based on representations made by the bank. What made things different, according to the court (and in a nutshell), was essentially:

1. the credit crunch (affecting the bank's position); and
2. social/political outrage about large sums being paid to departing bank directors in economically rough times.

Yesterday, the Utrecht court ruled in several similar cases concerning (former) top managers of the same bank. The outcome? The opposite, basically. The bank must pay the amount as agreed between the parties back in the day, despite the credit crunch and despite the aforementioned social/political outrage. In short: pacta servanda sunt. Here's the money quote from one of the judgments.

4.8. De kantonrechters zijn evenwel van oordeel dat, ook al zijn derhalve onvoorziene omstandigheden aanwezig, deze niet van dien aard zijn dat [X] naar maatstaven van redelijkheid en billijkheid ongewijzigde instandhouding van de overeenkomst niet mag verwachten. Voor de invulling van het begrip(penpaar) ‘redelijkheid en billijkheid’ vallen de kantonrechters terug op artikel 3:12 BW, dat bepaalt dat bij de vaststelling van wat redelijkheid en billijkheid eisen, rekening moet worden gehouden met algemeen erkende rechtsbeginselen, met de in Nederland levende rechtsovertuigingen en met de maatschappelijke en persoonlijke belangen die bij het gegeven geval zijn betrokken. De kantonrechters gaan er vanuit dat er geen rangorde bestaat tussen deze drie gezichtspunten. Derhalve dient in dit concrete geval te worden beoordeeld of de redelijkheid en billijkheid rechtvaardigen dat de overeenkomst wordt gewijzigd. Voorts stellen de kantonrechters voorop dat het hier niet gaat om de beperkende redelijkheid en billijkheid ex artikel 6:248 lid 2 BW, maar om de (buitengrens van de) aanvullende redelijkheid en billijkheid.

4.9. In dit verband heeft ABN AMRO naar voren gebracht dat de onvoorziene omstandigheden die zich hebben voorgedaan niet behoren tot de normale bedrijfsrisico's of zelfs tot abnormale bedrijfsrisico's, omdat er sprake is van een uitzonderlijke situatie waarin samenkomende conjuncturele en maatschappelijke ontwikkelingen maken dat voortzetting van vroegere afspraken naar redelijkheid en billijkheid niet door [X] mag worden verwacht. De kantonrechters oordelen dat, ook al mogen de onvoorziene omstandigheden van algemene aard zijn, deze zogenoemde samenkomende conjuncturele en maatschappelijke ontwikkelingen onvoldoende reden vormen om ABN AMRO niet langer jegens [X] tot nakoming van de in de retentiebrief omschreven verplichtingen gehouden te achten. Hierbij nemen de kantonrechters in aanmerking dat ABN AMRO weliswaar ernstige gevolgen van de kredietcrisis ondervindt, doch dat de crisis niet een zodanig effect op de bedrijfseconomische of -financiële positie van de bank heeft gehad dat voor de instandhouding van haar onderneming moet worden gevreesd. ABN AMRO heeft zich in het bijzonder beroepen op de gevolgen die de door de kredietcrisis verscherpte publieke en politieke opinie voor haar beleid omtrent ontslagvergoedingen en bonusverlening heeft. De in een vrij hoog tempo gegroeide consensus over de aanpak van hoge ontslagvergoedingen en bonussen kan naar het oordeel van de kantonrechters zeker leiden tot ingrepen waarbij de hoogte van toekomstige ontslagvergoedingen (en bonussen) wordt beperkt. ABN AMRO heeft haar beleid in die zin inmiddels gewijzigd. In het onderhavige geval dient evenwel rekening gehouden te worden met de bedoeling van de in het verleden toegezegde ontslagvergoeding (en bonus), te weten het gedurende een bepaalde periode door middel van financiële prikkels vasthouden van een voor de bank belangrijke groep van werknemers, onder wie [X]. Nu hij de bank in de retentieperiode niet heeft verlaten, mag onder de gegeven omstandigheden van ABN AMRO worden verwacht dat zij de retentiebrief gestand doet. Tegenover het persoonlijke belang dat [X] bij nakoming van de retentiebrief heeft, is het belang van de bank minder zwaarwegend. Zij heeft met name haar vrees voor het verlies van cliënten onvoldoende onderbouwd, terwijl evenmin is komen vast te staan dat zij op verdere overheidssteun niet behoeft te rekenen, indien zij aan [X] - en de andere senior-managers die in een vergelijkbare situatie verkeren - niet de eerder toegezegde ontslagvergoeding onthoudt. In een dergelijke zin heeft de Minister van Financiën zich niet uitgelaten. Onder deze omstandigheden geeft dan ook de doorslag het algemeen erkende rechtsbeginsel dat het gegeven woord bindt, op welke beginsel het rechtsverkeer, waarvan ook ABN AMRO afhankelijk is, berust. De door ABN AMRO bepleite wijziging van de overeengekomen ontslagvergoeding kan derhalve geen doorgang vinden.

4.10. Nu door ABN AMRO geen andere omstandigheden aan haar beroep op artikel 6:248 lid 2 BW ten grondslag zijn gelegd dan aan haar beroep op onvoorziene omstandigheden en gelet op hetgeen hiervoor is overwogen omtrent de aanwezigheid van onvoorziene omstandigheden en de ongewijzigde instandhouding naar maatstaven van redelijkheid en billijkheid, is er geen sprake van dat het naar maatstaven van redelijkheid en billijkheid in de zin van artikel 6:248 lid 2 BW onaanvaardbaar is dat [X] vasthoudt aan betaling van de ontslagvergoeding.

The Amsterdam and Utrecht judgments, although covering the same subject, don't seem 'in sync' as to the reasoning applied; remarkable. The Utrecht court does add a few things about payment of bonuses. I will leave that up to the interested reader to explore.

[No. 156] Interview with Newly Sworn In Vice Chancellor J. Travis Laster (Delaware Chancery Court)

Via Francis Pileggi.

[No. 155] The Supreme Court and Conflict of Interests - New Developments

Today, the Supreme Court rendered two judgments covering the notoriously difficult area of conflict of interests. For the general mechanism under Dutch law (section 2:146/256 DCC), see posts No. 2 and No. 32.

1. In the first judgment, the Supreme Court clarifies that when a conflict of interests is present and the central issue is whether the person who represented the company was properly appointed by the general meeting (which requires an explicit appointment decision by the general meeting, based on prior case law from 2004), a formal decision is not necessarily required. In special circumstances, like the ones in the case at hand where:

• the sole shareholder of the company has explicitly agreed with the agreement to be reached between the company and a third party,
• it was also clear that the person who eventually represented the company was going to represent the company; and
• the sole shareholders had the power to make decisions outside the framework of the general meeting;

it will do that (i) the sole shareholder (and thereby the general meeting) (ii) was acutely aware of the possible conflict of interests between the person representing the company and the company and (iii) unequivocally agreed with this person as the person who would represent the company in the transaction. According to the Supreme Court, it is not contrary to the rationale of the general mechanism (that aims to protect the company against self-dealing) to accept that in circumstance like these, the lack of a formal appointment decision by the general meeting does not result in the conflicted person who represented the company lacking the power thereto.

4.3.2 Het onderhavige geval wordt blijkens de vaststellingen van het hof hierdoor gekenmerkt dat [betrokkene 1] (als bestuurder van Holding, op haar beurt handelend) als (indirect) enig aandeelhouder van Beheer, uitdrukkelijk heeft ingestemd met de raamovereenkomst, terwijl op dat moment duidelijk was dat [betrokkene 2] (handelend als bestuurder van Beheer) bij de uitvoering van de raamovereenkomst Beheer zou vertegenwoordigen en dat [betrokkene 1] bevoegd was als (indirect) enig aandeelhouder buiten vergadering te besluiten. Daaruit heeft het hof kunnen afleiden dat [betrokkene 1] zich voldoende bewust moet zijn geweest van een mogelijk tegenstrijdig belang van [betrokkene 2] en ondubbelzinnig heeft ingestemd met [betrokkene 2] als (indirect) bijzondere vertegenwoordiger van Beheer bij het aangaan van de geldlening en het vestigen van de hypotheek.
Het is niet in strijd met de beschermingsgedachte die aan art. 2:256 BW ten grondslag ligt dat onder de geschetste bijzondere omstandigheden aan het enkele ontbreken van een formeel aanwijzingsbesluit niet het gevolg wordt verbonden dat de betrokken bestuurder onbevoegd is de vennootschap bij tegenstrijdig belang te vertegenwoordigen.
Het oordeel van het hof dat Beheer bevoegd door [betrokkene 2] is vertegenwoordigd, geeft dus niet blijk van een onjuiste rechtsopvatting en is toereikend gemotiveerd. Daarop stuiten de klachten van de onderdelen 1.2 en 1.3 af.

This makes sense and takes some off of the sharp edges of the 2004 ruling, that was quite heavily criticized by scholars and practitioners.

2. In the second judgment, the Supreme Court sanctions the ruling by the court of appeals about the presence of a conflict of interests, thereby clarifying somewhat the contours of its 2007 ruling in which the concept of 'conflict of interests' (tegenstrijdig belang) was redefined (for the way that case was decided after remand, go here). The reasoning by the Supreme Court is quite long and fact-intensive. It suffices to say here that the Supreme Court basically rules in line with its 2007 decision, and decides that the court of appeals used the correct standard - albeit implicitly - and did not motivate its decision insufficiently. Some nuggets from the decision, to clarify things further:

3.4.2 Onderdeel 1.1 neemt terecht tot uitgangspunt dat de maatstaf voor het bestaan van tegenstrijdig belang als bedoeld in art. 2:256 BW is of de betrokken bestuurder te maken heeft met zodanig onverenigbare belangen dat in redelijkheid kan worden betwijfeld of hij zich bij zijn handelen uitsluitend heeft laten leiden door het belang van de vennootschap en de aan haar verbonden onderneming, welke vraag slechts kan worden beantwoord met inachtneming van alle relevante omstandigheden van het concrete geval (vgl. HR 29 juni 2007, nr. C06/041, LJN BA0033, NJ 2007, 420).
Het onderdeel klaagt dat het hof in rov. 4.4 niet kenbaar deze maatstaf heeft toegepast en niet heeft vastgesteld dat de daarin genoemde omstandigheden van zodanige invloed kunnen zijn geweest dat [betrokkene 2] zich niet in staat had mogen achten het belang van [A] B.V. en haar onderneming met de vereiste integriteit en objectiviteit te behartigen en zich daarom van het sluiten van de overeenkomst van geldlening en het verschaffen van zekerheidsrechten had moeten onthouden.
Dit onderdeel slaagt niet. Hoewel het hof de bedoelde maatstaf niet uitdrukkelijk heeft genoemd, voldoet hetgeen het hof heeft overwogen aan deze maatstaf. Het hof heeft immers vastgesteld dat [betrokkene 2] (indirect) optrad als zowel de financier van de in financiële problemen verkerende vennootschap [A] B.V. alsook namens die vennootschap, terwijl het door Bovast aan [A] B.V. uitgeleende bedrag een pensioenvoorziening vormde voor [betrokkene 2] privé. Aldus heeft het hof acht geslagen op de omstandigheden van het concrete geval en deze kennelijk en niet onbegrijpelijk van dien aard geacht dat [betrokkene 2] te maken had met zodanig onverenigbare belangen dat in redelijkheid kan worden betwijfeld of hij zich bij zijn handelen uitsluitend heeft laten leiden door het belang van [A] B.V. en de aan haar verbonden onderneming.

3.4.3 Anders dan onderdeel 1.2 aanvoert, heeft het hof dus niet enkel de omstandigheid dat [betrokkene 2] optrad voor de financierende en de gefinancierde vennootschap in zijn beoordeling betrokken, maar tevens de bijzondere omstandigheid dat een pensioenvoorziening van [betrokkene 2] als financieringsbron gold.

3.4.4 Onderdeel 1.3 klaagt dat het hof bij zijn oordeel dat sprake is van een tegenstrijdig belang is voorbijgegaan aan de volgende door Bovast aangevoerde omstandigheden:
- nadat het krediet van [A] B.V. was verlaagd was sprake van een onvoorziene acute noodsituatie voor de vennootschap en was het niet mogelijk (op korte termijn) alternatieve financiering te vinden;
- [betrokkene 2], die als interim-bestuurder was aangetrokken, heeft een door hem beheerste vennootschap, alsmede een derde (niet aan hem gelieerde) vennootschap (Maatbouw) bereid gevonden om een overbruggingskrediet te verschaffen tegen zakelijke zekerheden in een situatie van onmiddellijke faillissementsdreiging;
- de geldleningovereenkomst en de pandovereenkomst werden aangegaan onder marktconforme voorwaarden in een situatie waarin [A] B.V. sowieso geen alternatieve financiering zou hebben verkregen, terwijl een bank persoonlijke garanties van [betrokkene 1] zou hebben verlangd die hij niet kon geven;
- de ter leen verstrekte gelden zijn gebruikt als aflossing door [A] B.V. van de Rabobank, alsmede voor de betaling van de fiscus, handelscrediteuren en reorganisatiekosten; en
- [betrokkene 2] en de door hem beheerste vennootschappen, waaronder Bovast, hadden geen eigen belang om de betrokken vennootschappen te financieren tegen de in dat kader (ook) door [A] B.V. gestelde zekerheden.
Volgens het onderdeel duiden deze omstandigheden onmiskenbaar erop dat [betrokkene 2] als (indirecte) bestuurder bij het aangaan van de overeenkomsten louter het vennootschappelijk belang van [A] B.V. diende.

3.4.5 De in het onderdeel genoemde omstandigheden heeft het hof kennelijk niet voldoende relevant geacht. Dat oordeel is niet onbegrijpelijk, gelet op het door het hof vastgestelde optreden van [betrokkene 2] als de financier van de in financiële problemen verkerende vennootschap en diens optreden namens die vennootschap, met de pensioenvoorziening van [betrokkene 2] privé als financieringsbron, en de in een zodanig geval in het oog springende tegengestelde belangen. Daarbij wordt in aanmerking genomen dat art. 2:256 ertoe strekt te voorkomen dat de bestuurder bij zijn handelen zich (met name) laat leiden door zijn persoonlijk belang in plaats van (uitsluitend) het belang van de vennootschap dat hij heeft te dienen en dat het dus erom gaat te beoordelen of in redelijkheid kan worden betwijfeld of de betrokken bestuurder zich bij zijn besluitvorming uitsluitend heeft laten leiden door het belang van die vennootschap. Hetgeen is aangevoerd - dat erop neerkomt dat [betrokkene 2], achteraf gezien, de belangen van [A] B.V. behoorlijk heeft behartigd - behoefde het hof niet ervan te weerhouden te oordelen dat in de gegeven omstandigheden voldoende redelijke twijfel bestond of [betrokkene 2] zich destijds uitsluitend heeft laten leiden door het belang van [A] B.V.

3.4.6 In onderdeel 1.4 wordt betoogd dat het hof heeft miskend dat voor het antwoord op de vraag of sprake is van een tegenstrijdig belang mede betekenis toekomt aan de omstandigheden dat [betrokkene 1] aan [betrokkene 2] de volledige vrije hand had gegeven, dat aan de notaris opdracht was gegeven om de statuten te wijzigen, dat de Rabobank vervolgens de kredietlimiet verlaagde, dat [betrokkene 1] aanwezig was bij de ondertekening van de zekerheidsdocumentatie en dat de statuten van Beheer en Holding op 24 juni 2004 zodanig zijn gewijzigd dat de bestuurders ook bij tegenstrijdig belang vertegenwoordigingsbevoegd zouden zijn.
Het onderdeel faalt. Deze omstandigheden mogen duidelijk maken dat [betrokkene 1] als (indirect) enig aandeelhouder van [A] B.V. voortdurend betrokken is geweest bij de financiering tegen zekerheidstelling en de afspraak om (indirect) [betrokkene 2] ook bij tegenstrijdig belang vertegenwoordigingsbevoegd te maken, maar zijn niet van dien aard dat het hof daaraan betekenis had moeten toekennen voor de beantwoording van de vraag of, kort gezegd, het belang van [betrokkene 2] tegenstrijdig was met dat van [A] B.V.

The Supreme Court also elaborated a bit on the requirement of an explicit appointment decision by the general meeting, already discussed above under 1. Here, the Supreme Court affirms (i) that generally a formal decision is required, also when the sole director and the sole shareholder are one and the same, and (ii) that under special circumstances a formal appointment decision by the general meeting is not a condicio sine qua non. As to (ii), the reasoning is basically the same as mentioned under 1 above; here's the money quote.

3.5.2 Onderdeel 2.1 berust op de opvatting dat bij het bestaan van een tegenstrijdig belang een uitdrukkelijk aandeelhoudersbesluit niet is vereist in het geval sprake is van één aandeelhouder die tevens enig bestuurder is. Daargelaten dat in het onderhavige geval (indirect) bestuurder (Slifosco) en aandeelhouder ([betrokkene 1]) van [A] B.V. niet in een persoon zijn verenigd, kan deze opvatting in haar algemeenheid niet worden aanvaard. Uit de aan art. 2:256 ten grondslag liggende beschermingsgedachte volgt dat bij het bestaan van een tegenstrijdig belang een uitdrukkelijk besluit van de aandeelhouders nodig is om een bijzondere vertegenwoordiger aan te wijzen.

3.5.3 Het voorgaande neemt niet weg dat onder bijzondere omstandigheden met deze beschermingsgedachte niet in strijd behoeft te zijn dat aan het enkele ontbreken van een formeel aanwijzingsbesluit van de aandeelhouders niet het gevolg wordt verbonden dat de vertegenwoordigingsbevoegdheid van de betrokken bestuurder ontbreekt. Daarvan zal sprake kunnen zijn als onmiskenbaar duidelijk is dat de aandeelhouders de mogelijkheid van het bestaan van een tegenstrijdig belang onder ogen hebben gezien en tevoren ondubbelzinnig hebben ingestemd met het optreden van de betrokken bestuurder als (bijzondere) vertegenwoordiger van de vennootschap.

I would think the same pretty much goes when the director and the shareholder are one and the same person (legal entity): if the person was acutely aware of the possibility of a conflict of interests and clearly decided to go ahead with the transaction anyway, thereby representing the company himself, I don't see a fundamental difference between the two scenario's, other than that in this scenario there's only one person involved. But the same applies in the scenario where that person does take a formal decision as sole shareholder to appoint himself as the person to represent the company, which according to the Supreme Court in a 2006 ruling is perfectly allowable. In situations like these, it seems to come down to whether the sole shareholder was clearly aware of all the relevant special circumstances, especially the conflict of interests.

[No. 154] Update re Van der Moolen

In posts No. 122, No. 128 and No. 129 I wrote about the troubling situation at now bankrupt securities trading and brokerage firm Van der Moolen. Time for an update.

At today's general meeting, the situation looked even more grim than previously known to the public. Supervisory director Zwart, who currently is also acting as managing director, explained that things really went down hill when former CEO Richard den Drijver entered the stage. As reported in one of today's newspapers:

Commissaris en bestuurder Peter Zwart stelde tijdens de bijeenkomst dat het beleid van de onderneming de afgelopen jaren zwalkend is geweest. „Er zijn tientallen initiatieven gestart die alleen geld hebben gekost.” Hij zei verder dat de ondergang te wijten is aan de binnenkomst van bestuursvoorzitter Richard den Drijver in 2005.

In juli werd de topman door de commissarissen gedwongen om terug te treden. Kort daarna bleek dat Van der Moolen aan de rand van de afgrond stond. Uiteindelijk mislukte een reddingspoging van de commissarissen en werd het bedrijf in september faillissement verleend.

Den Drijver, still named as "Advisor to the board" on the company's website, is said to have filed a claim of E 400k in that capacity with the trustees in bankruptcy without actually having advised (a seemingly bold move) and apparently also sold Van der Moolen stock in violation of a clear lock-up arrangement in August 2009 when the share price was tanking in view of the company's dire financial situation (an even bolder move). If true, that's tricky stuff to pull off in (t)his situation.

This is not where the story ends, however, in view of the announcement by the VEB that it will initiate an inquiry proceeding against Van der Moolen before the Enterprise Chamber. That move was already anticipated. The big questionmark now is what the trustees in bankruptcy will do. As to liability proceedings, they're in the driving seat. Time will tell.

[No. 153] What a Difference a Year Makes

Last Wednesday, the Amsterdam court ruled that although a former ABN Amro director was in itself entitled to an exit payment of E 6.2 million (based on representations made to him by the company), the director is acting contrary to the standards of reasonableness and fairness by demanding payment of that amount (instead of the amount of E 2.5 million, as offered to him by the bank), resulting in denial of his claim.

Why? Well basically because, according to the court:

• ABN Amro is suffering from the credit crunch; and
• society - including the political landscape - is becoming increasingly concerned about and critical towards these kind of exit payments.

Let me quote some elements of the reasoning by the court, that is quite fact intensive and covers more than is highlighted here.

A.
Anders dan eiser betoogt kan niet worden aangenomen dat de Staat na de ontvlechting eigenaar wordt van een goed draaiende bank. De huidige situatie is dat de kredietcrisis het bankenconsortium ertoe heeft genoopt af te zien van het voornemen om de onderscheiden bedrijfsonderdelen van ABN AMRO te doen opgaan in RBS en Fortis. Volgens verwachting zal ABN AMRO als zelfstandige bank blijven voortbestaan, maar de omstandigheden waaronder dat zal gebeuren zijn nog ongewis. In 2008 maakte ABN AMRO alleen door de verkoop van bedrijfsactiviteiten nog een winst na belastingen van € 3,6 miljard. In het eerste kwartaal van 2009 bedroeg het verlies na belastingen € 886 miljoen. In het tweede kwartaal van dit jaar is het verlies verder opgelopen, tot bijna € 2,8 miljard. Over nieuwe overheidssteun wordt onderhandeld.

B.

Er is verscherpte maatschappelijke en politieke kritiek ontstaan op bonussen van topfunctionarissen en de hoogte van hun ontslagvergoedingen. Gewezen wordt op de inhoud van de brief van de Nederlandse minister van Financiën van 23 maart 2009 aan de Tweede Kamer van de Staten-Generaal, alsmede op de algemene maatschappelijke en politieke ontwikkelingen ten aanzien van de bezoldiging en afvloeiingsregelingen. Die vinden onder meer hun neerslag in het najaarsakkoord 2008 van de sociale partners dat geleid heeft tot het zogenoemde wetsvoorstel limitering ontbindingsvergoeding (Wetsvoorstel wijziging van boek 7, titel 10, van het Burgerlijk Wetboek in verband met het limiteren van de hoogte van de vergoeding bij ontbinding van de arbeidsovereenkomst op grond van artikel 7:685 van het Burgerlijk Wetboek voor personen met een jaarsalaris van € 75.000,-- of hoger, wetsontwerp 31 862), in de code [F], in de Wet Excessieve Beloningen, in aanbeveling 2009/385/EG van de Europese Commissie alsmede in de aanbevelingen van het European Corporate Governance Forum, in de motie [W], in het herenakkoord van de financiële sector, in het rapport van de commissie [M], in de richtlijnen van de Nederlandsche Bank en de Autoriteit Financiële Markten en in het rapport van de commissie [D] uit mei 2009.

In view of this, the former director should have stated more specifically - again: according to the court - why payment of the higher amount (E 6.2 million) instead of the lower amount (E 2.5 million) was justified in the circumstances.

Kort samengevat: ABN AMRO is in zwaar weer terecht gekomen. Aan de aanzienlijke staatssteun zijn voorwaarden gebonden in de vorm van invloed op de beloningen van (hogere) werknemers. De maatschappelijke opvattingen over de hoogte van bonussen en afvloeiingsregelingen zijn kritischer geworden. In het licht van die omstandigheden zou het aan eiser zijn om een concrete relatie te leggen tussen de vergoeding en zijn nadeel. Dat heeft hij nagelaten: eiser baseert zich alleen of in hoofdzaak op een toezegging die specifiek aan hem is gedaan toen de financiële en maatschappelijke omstandigheden van de bank al veranderde. Het bovenstaande afwegende acht de kantonrechter in de omstandigheden van dit geval ongewijzigde nakoming van de toezegging naar normen van redelijkheid en billijkheid onaanvaardbaar.

Ouch. Did it not help this director that late 2008 another former director of the bank was succesful in litigation initiated by the same bank before the same court, also concerning exit payments that amounted to a whopping E 8 million (see post No. 62)? Well no, because that director - in view of the abovementioned circumstances - chose to drop 50% of his contractual claims (in that case, the court was quite reluctant to tinker with the contractual arrangement between the parties). This director was still going for the jackpot, which made the two cases distinguishable.

De in rov. 12 genoemde uitspraak inzake ABN AMRO/[persoon 7] heeft hier onvoldoende relevantie. Anders dan eiser heeft [persoon 7] zich in zijn vordering niet meer gebaseerd op de oude severance policy. Blijkens het vonnis heeft hij in de nieuwe eigendomsverhoudingen bij ABN AMRO, de financiële crisis en de gewijzigde maatschappelijke opvattingen aanleiding gezien om meer dan de helft van zijn contractuele aanspraken te laten vallen. De kantonrechter zag geen gronden voor een verdergaande matiging. Eiser heeft een andere positie ingenomen, hetgeen de casus onvoldoende vergelijkbaar maakt.

Honestly, after reading both rulings I doubt whether the two cases are really all that different. So what a difference a year makes, with more financial crisis and more discussion in the public arena about bonuses and exit payments. Not surprisingly, this outcome is generating quite some media attention (also see here and here). Apparently appeal will be lodged.