[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.

Comments

[MRomyn]

The Minister's explanatory notes to the proposal claim (on page 6) that in almost all of the cases involving publicly traded corporations shareholders relied on the current low treshold to gain access to the Enterprise Chamber.

That's a gross overstatement. Of the six "attention drawing" cases you mentioned in your post, not less than half involved shareholders owning 10% or more, i.e. ASMI (28,5%), Rodamco (23,9%) and Stork (> 10,4%). Laurus, in which a single shareholder owned 34%, might be added as well.

The Social-Economic Council report that the Minister refers to to justify his proposal to make it more difficult to start an inquiry procedure specifically mentions (on p. 36) ABN Amro and Stork as "infamous cases that had unpredictable consequences for the policies and strategies of the corporations involved". But those corporations would not have been helped one bit, had the Minister's proposal been the law of the land when their cases were decided.

In the case of Stork, Centaurus had standing as it owned 10,4% of shares, not because of the E 225,000 treshold. In the case of ABN Amro, where CEO Rijkman Groenink voluntarily offered his bank's independence after receipt of a simple letter from The Children's Investment Fund, that fund owned sufficient shares to go to Court under the new proposal, i.e. more than 1%. Thus, the proposal does nothing to reduce the disproportionality that the Minister appears to be so concerned about.

Moreover, as shareholder's advocates VEB correctly point out in this morning's FD newspaper, the E 20 million minimum value requirement may make it much more difficult to initiate an inquiry procedure when a corporation goes belly-up and its shares become worthless.

[MRomyn]

FYI: Drs. P.P. de Vries over dit voorstel in het FD:
http://www.fd.nl/artikel/13647315/enqueterecht-niet-inperken