www.TheDefiningTension.com

[No. 37] Nerve Center

Last Tuesday, the US Supreme Court ruled in the case of Hertz Corp. v. Friend - for the purpose of diversity jurisdiction - what the words "principal place of business" mean. The Circuit Courts were split on this issue. The answer? See page 13-14 of the slip opinion.

In an effort to find a single, more uniform interpretationof the statutory phrase, we have reviewed the Courts of Appeals’ divergent and increasingly complex interpretations. Having done so, we now return to, and expand, Judge Weinfeld’s approach, as applied in the SeventhCircuit. See, e.g., Scot Typewriter Co., 170 F. Supp., at 865; Wisconsin Knife Works, 781 F. 2d, at 1282. We conclude that “principal place of business” is best read asreferring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. It is the place that Courts of Appeals have called the corporation’s “nerve center.” And in practice it should normallybe the place where the corporation maintains its headquarters—provided that the headquarters is the actualcenter of direction, control, and coordination, i.e., the “nerve center,” and not simply an office where the corporation holds its board meetings (for example, attended by directors and officers who have traveled there for the occasion). (emphasis added BFA)

This principal place of business should be distinguished from the place where the corporation is formally incorporated (although both can be the same).

This made me think of the European situation, where two approaches exist: the place of incorporation and the real seat of the corporation (siege reele). The European Court of Justice acknowledges both, but does not state what the latter term means, as this is a matter for the individual member states to decide. Consequently, no single definition of the 'real seat' approach exists. Maybe the regulation of the European Corporation (SE) (No. 2157/2001) may help the court to clarify things one day. Section 7 of that regulation, that is subject to interpretation by the court (as it is an EU regulation), states in part that the registered office of an SE shall be located within the Community, in the same Member State as its head office. At that intersection, a sortlike question arises as the one addressed by the SCOTUS last Tuesday.

[No. 36] Delaware Chancery Court Addresses the New Vote Buying

Vice-Chancellor Laster of the Delaware Chancery Court has made some interesting remarks on vote buying in a recent decision regarding a proxy contest. Kurtz v. Holbrook., C.A. No. 5019-VCL (February 9, 2010). A couple of highlights:

Recent scholarship has cast light on shadowy aspects of the voting process and techniques by which voting rights can be manipulated. I regard the concept of vote buying as broad enough to encompass these practices. When they prove deleterious to stockholder voting, this Court can and should provide a remedy. (...)

As recognized by Schreiber, third-party vote buying should merit review only if it is disenfranchising, in the sense of actually affecting the outcome of the vote. 447 A.2d at 25-26. Vote buying is disenfranchising when it delivers the swing votes. (...)

What legitimizes the stockholder vote as a decision-making mechanism is the premise that stockholders with economic ownership are expressing their collective view as to whether a particular course of action serves the corporate goal of stockholder wealth maximization. Policing third-party vote buying [flows] from the legitimating conditions necessary for meaningful stockholder voting, which also include the absence of coercion and the presence of full information about the material facts. (...)

Because transactions in which economic interests are fully aligned with voting rights do not raise concern, Delaware law does not restrict a soliciting party from buying shares and getting a proxy to bolster the solicitation’s chance of success. (...)

Kurz does not have any competing economic or personal interests that might create an overall negative economic ownership in EMAK. (...)

I do not believe that Kurz has any reason to vote other than in the manner he thinks would best maximize the value of EMAK as a corporation. I therefore conclude that the voting of the Boutros shares is not a legal wrong. I agree with the defendants that Kurz primarily wanted the voting rights carried by the shares, not the shares themselves. Unlike the defendants, I do not perceive anything illicit in that fact given the nature of the transaction as a whole.

The conclusion seems to be that in principle, vote buying is OK as long as a corresponding economic interest is acquired, which is generally the case if shares are purchased. If votes are bought but no corresponding economic interest is acquired, for example because it is hedged away, and the votes are used to swing the vote, this may, depending the circumstances, constitute a legal wrong. Following the New York district court's decision in CSX, the Chancery Court's decision therefore constitutes another powerful reminder that investors contemplating to use derivatives to swiftly or cheaply acquire corporate control should think twice.

[No. 35] Nijmegen University appoints Danny Busch as Professor of Financial Law

My friend and colleague Danny Busch has just been appointed as professor of Financial Law at Nijmegen University. Among his impressive achievements over the last years is editing the Handbook on Investment Firms (Handboek Beleggingsondernemingen), published in 2007 and already a classic among Dutch legal scholars and practitioners. From the press release:

Dr. D. (Danny) Busch (35) has been appointed Professor of Financial Law at Nijmegen University from 1 February 2010.

Danny Busch was born in Heidelberg, Germany. In 1997 he graduated cum laude in Dutch law at Utrecht University in the Netherlands. In the following year he obtained a Magister Juris degree in European and Comparative Law at Oxford University (St. John’s College). From 1998 to 2001 he worked as a lecturer and researcher at the Molengraaff Institute of Private Law in Utrecht and conducted research for his dissertation in Oxford and Hamburg. In 2002 he defended his dissertation Indirect Representation in European Contract Law at Utrecht University.

Dr. Busch will continue to practice law at De Brauw Blackstone Westbroek NV in Amsterdam, with a focus on banking and securities law and patrimonial law.

Dr. Busch has been a senior research fellow at Nijmegen University since 2008. He has also been a lecturer and course organiser for several post-academic courses. He is a member of the editorial board of Kluwer’s Law and Practice - Financial Law series and chief editor of a loose-leaf commentary on the Dutch Financial Supervision Act. He has also advised the Court of Audit on financial supervision issues.

In Nijmegen, Professor Busch will continue to teach and do research on financial law, also seen from a European and comparative law perspective.

Congratulations! 

[No. 34] The Supreme Court on Temporary Directors of Foundations

Last Friday, the Supreme Court rendered an interesting decision on the position of temporary - court appointed, see section 2:298(2) DCC - directors of foundations. 

Key factors of the decision are the following.

• As to the interpretation of section 2:298(2) DCC, allowing the court to appoint a temporary director of a foundation, sections 2:349a, 2:356 and 2:357 (2-3) DCC - dealing with (preliminary) measures in the right of inquiry - are of relevance (as is section 2:22 DCC).
• Unless the court rules otherwise, the appointment of a temporary director means that director has all powers that the statute and the articles of association of that foundation confer upon directors of that foundation. Decisions taken also by that temporary director are not null and void as per section 2:14 DCC, due to lack of power of the temporary director.
• Such a temporary director normally is expected to use his powers with restraint, insofar he doesn't do more than is  suitable for the temporary tasks appointed to him and is necessary under the circumstances for proper management of the foundation. This could mean the director must limit himself to decisions that cannot be delayed, but in general it cannot be said that a temporary director - leaving aside special circumstances - should always limit himself to this.
• If a temporary director has taken decisions that fall within the powers granted to him, but exceed the role of a temporary director, these decisions are not null and void as per section 2:14 DCC. This does not mean, I would add, that those decisions cannot be attacked based on section 2:15 DCC (covering grounds for nullification of decisions by corporate organs).

There are some others (see s. 3.7-3.8), but I will leave them to the interested reader to explore in the text of the ruling right below (s. 3.3-3.8).

3.3 De overwegingen die het hof tot zijn beslissing hebben geleid, kunnen als volgt worden samengevat:
a) De rechtbank Almelo heeft in haar beschikking van 24 november 2004 bepaald dat [betrokkene 1] als voorlopig bestuurder van de Stichting de bevoegdheden heeft die volgen uit de wet en de statuten. Op grond van art. 4 van de statuten was [betrokkene 1] bevoegd de andere drie bestuurders als nieuwe bestuursleden te benoemen en op grond van art. 8 in verbinding met art. 5 van de statuten was [betrokkene 1] tezamen met de andere bestuurders op 28 november 2005 bevoegd [eiseres] als bestuurder te ontslaan. (rov. 5.11)
b) Aan de rechtsgeldigheid van beide onder a) bedoelde besluiten staat niet in de weg dat door de beschikking van de Hoge Raad van 8 juni 2007 de afwijzing van het verzoek tot benoeming van [betrokkene 1] tot (definitief) bestuurder van de Stichting onaantastbaar is geworden. Het aan [eiseres] op 28 november 2005 verleende ontslag berustte, anders dan haar ontslag op verzoek van het OM, op een statutaire grond. (rov. 5.12)
c) [Eiseres] heeft geen andere feiten en omstandigheden gesteld op grond waarvan zou moeten worden aangenomen dat het ontslagbesluit in strijd is met de wet en aldus nietig op grond van art. 2:14 BW. (rov. 5.13)
d) De Stichting heeft onbetwist gesteld dat [eiseres] heeft nagelaten binnen de in art. 2:15 lid 5 BW vermelde vervaltermijn van één jaar, die is ingegaan rond 7 december 2005, de vernietigbaarheid van dit besluit in te roepen. (rov. 5.14)
e) [Eiseres] heeft geen feiten en omstandigheden gesteld op grond waarvan het hof ingevolge art. 2:8 BW anders zou moeten oordelen. (rov. 5.15)

3.4 Onderdeel 1 van het middel keert zich met rechts- en motiveringsklachten tegen het hiervoor in 3.3 onder a) weergegeven oordeel van het hof. Het onderdeel betoogt allereerst dat het hof heeft miskend dat [betrokkene 1] als op de voet van art. 2:298 lid 2 benoemde voorlopige bestuurder niet de bevoegdheid had aangelegenheden, waaronder besluitvorming en de uitvoering daarvan, aan zich te trekken die uitstel konden verdragen, althans dat de door de rechtbank aan [betrokkene 1] verleende bevoegdheden die de wet en de statuten aan het bestuur van de Stichting toekenden, slechts mochten worden aangewend voor die aangelegenheden die geen uitstel konden verdragen. De overige klachten van onderdeel 1 komen in de kern erop neer dat de beide hier aan de orde zijnde besluiten uitstel konden verdragen en daarom niet hadden mogen worden genomen.

3.5.1 Bij de beoordeling van onderdeel 1 is, in cassatie onbestreden, uitgangspunt dat een op de voet van art. 2:298 lid 2 BW door de rechter te treffen voorlopige voorziening kan inhouden dat een tijdelijke bestuurder van de stichting wordt benoemd. Bij de uitleg van deze bepaling kan aansluiting worden gezocht bij het bepaalde in art. 2:22 BW en de regeling van een onmiddellijke voorziening als bedoeld in art. 2:349a BW dan wel die van de voorzieningen van art. 2:356 BW in verbinding met art. 2:357 lid 2 en 3 BW.

3.5.2 De benoeming van een tijdelijke bestuurder zal, tenzij de rechter anders heeft bepaald, tot gevolg hebben dat deze bestuurder voor de duur van zijn benoeming alle bevoegdheden heeft die de wet en de statuten aan de bestuurder(s) van de desbetreffende stichting toekennen. In het onderhavige geval heeft de rechtbank dit nog eens uitdrukkelijk in haar beschikking bepaald. Bestuursbesluiten waaraan de tijdelijke bestuurder heeft deelgenomen, zijn niet op grond van art. 2:14 lid 1 BW wegens onbevoegdheid van die bestuurder nietig.

3.5.3 Het hiervoor in 3.3 onder a) bedoelde oordeel van het hof is dus juist.

3.6.1 Een op de voet van art. 2:298 lid 2 benoemde bestuurder behoort van zijn bevoegdheden in zoverre een terughoudend gebruik te maken dat hij in beginsel niet meer doet dan past bij de hem als tijdelijke bestuurder opgedragen taak en in de gegeven omstandigheden noodzakelijk is voor een behoorlijk bestuur van de stichting. Dit kan betekenen dat de tijdelijke bestuurder zich moet beperken tot besluiten die geen uitstel kunnen verdragen, maar de in het onderdeel bepleite opvatting dat een tijdelijke bestuurder zich - behoudens bijzondere omstandigheden - steeds daartoe dient te beperken, kan in haar algemeenheid niet als juist worden aanvaard.

3.6.2 Als een tijdelijke bestuurder besluiten heeft genomen waartoe hij weliswaar bevoegd is, doch die verder gaan dan past bij de rol van tijdelijke bestuurder als hiervoor bedoeld, zijn deze besluiten niet op de voet van art. 2:14 BW nietig. Het hof heeft vastgesteld dat ook niet binnen de in art. 2:15 lid 5 BW bepaalde termijn tegen de gewraakte besluiten is opgekomen.

3.6.3 Nu de klachten van onderdeel 1 uitgaan van een andere, blijkens het vorenstaande: onjuiste, rechtsopvatting, kunnen zij niet tot cassatie leiden.

3.7 Onderdeel 2 strekt ten betoge dat het hof heeft miskend dat het benoemen van nieuwe bestuurders door een tijdelijke bestuurder in strijd is met (de strekking en systematiek van) art. 2:298 BW en art. 2:8 BW, met welke strekking niet verenigbaar is dat een tijdelijke bestuurder besluiten neemt waardoor de door de rechter getroffen voorlopige voorziening wordt doorkruist of kan worden doorkruist, dan wel waardoor het (eind)oordeel over het ontslag van de desbetreffende bestuurder niet meer aan de rechter is. Ook dit onderdeel gaat uit van de onjuiste rechtsopvatting dat een tijdelijke bestuurder in beginsel niet bevoegd is een of meer nieuwe bestuurders te benoemen. Als de rechter, zoals in dit geval, aan de tijdelijke bestuurder alle wettelijke en statutaire bevoegdheden heeft gegeven, behoort daartoe mede de bevoegdheid tot de benoeming en het ontslag van bestuurders overeenkomstig de daaromtrent volgens de wet en de statuten geldende regels. Blijkens de hiervoor in 3.3 onder a) en e) vermelde, in cassatie niet bestreden oordelen van het hof voldoen de besluiten aan voormelde regels en moet worden aangenomen dat [betrokkene 1] ook overigens niet heeft gehandeld in strijd met art. 2:8 BW.
De motiveringsklachten van het onderdeel gaan uit van dezelfde onjuist bevonden rechtsopvatting en kunnen dus evenmin slagen.

3.8 Onderdeel 3 bevat de rechtsklacht dat het hof de strekking van de tijdelijke benoeming van [betrokkene 1] heeft miskend. Deze strekking hield in, aldus het onderdeel, dat tijdelijk in het bestuur van de Stichting werd voorzien, en verzette zich zodoende tegen het treffen van een definitieve voorziening in het bestuur door het benoemen van nieuwe bestuursleden en het ontslaan van een geschorste bestuurder.
Het onderdeel faalt, omdat het feit dat een bestuurder slechts tijdelijk (in de zin van: voorlopig) is benoemd niet eraan in de weg staat dat deze besluiten neemt met definitieve of onomkeerbare gevolgen, behalve voorzover zijn bevoegdheid in dit opzicht door de rechter is beperkt of nader is afgebakend.

[No. 33] Just Say No!?

In post No. 117/09 and post No. 202/09 I highlighted the takeover dispute between Dutch telecom giant KPN and iBasis, Inc. before the Delaware Chancery Court, that was ultimately settled. The dispute had interesting characteristics, as it touched on the viability under Delaware corporate law of the well-known 'just say no' defence by the target's board, that it still questioned in case law and doctrine.

For some background on the case and this issue, here's a post by one of the lawyers representing iBasis, Inc.'s special committee during its dispute with KPN. His bottom line:

The recent litigation between Koninklijke KPN N.V. and iBasis, Inc. brought the tension between shareholder choice and board control in Unocal analysis to the forefront. iBasis’ majority shareholder KPN made a tender offer of $1.55 per share for all outstanding shares on July 13, 2009. This price represented a 19.2% premium over iBasis’ previous business day’s closing price. In response, the iBasis board convened a special committee to evaluate the tender offer. Concluding that the offer price was grossly inadequate, the special committee recommended, and the iBasis board implemented, a shareholder rights plan to block KPN’s tender offer. Litigation between the parties, involving several issues, including whether the shareholder rights plan should be struck down, quickly ensued.

The litigation between KPN and iBasis highlighted the murkiness of Delaware law concerning shareholder rights plans, and placed squarely at issue whether Time-Warner should be read as an endorsement of “just say no.” iBasis argued that, while Time-Warner did not overrule Unocal, it clarified that a board could implement a plain-vanilla shareholder rights plan in response to a non-structurally coercive all cash, all shares, tender offer, particularly in cases where the target, within a reasonable period of time, could acquire control of the target board through a proxy contest and redeem the plan. iBasis effectively adopted a view favoring tempered corporate control of a company with appropriate checks (the proxy process) that would allow shareholders to overrule a board’s decision. iBasis also argued that the iBasis special committee justifiably relied on its advisors, the special committee reasonably concluded that the KPN offer was inadequate and posed a threat to shareholders (both because the price was too low and because KPN’s disclosure was lacking), the shareholder rights plan was not a disproportionate response to KPN’s offer and the iBasis board was not seeking to entrench itself by adopting the shareholder rights plan, all of which justified the implementation of the plan. During the pendency of KPN’s offer, the special committee also indicated to KPN that there would be a price at which it would be willing to give a favorable recommendation of the offer.

KPN took a different view of Time-Warner, arguing that the current law in Delaware required the redemption of a shareholder rights plan (that should never have been implemented in the first place) when a company is facing a non-structurally coercive tender offer. KPN emphasized the importance of giving shareholders the option to tender their shares after the target board and the acquirer have had the time to make their cases for and against the offer before the shareholders.

The dispute between iBasis and KPN was settled before the Delaware Chancery Court issued a ruling. Following trial, post-trial briefing, oral argument and post-argument letter briefing, KPN agreed to increase its offer to $3.00 per share (representing a premium of 130.8% over the closing price of iBasis shares the last trading day prior to the announcement of KPN’s tender offer), in exchange for the iBasis special committee agreeing to terminate the rights plan and recommend that shareholders tender. Due to the settlement, the conflict between shareholder choice and board control that arises when a company faces a non-coercive tender offer remains an open issue. However, it might not be long before the Delaware courts provide additional guidance given the increase in hostile M&A activity and the signaling by Delaware jurists and commentators that the time is right to bring further clarity to this subject.

[No. 32] Three Times Lucky? [Updated]

In the latest Ondernemingsrecht (2010-2, nr. 14), Steef Bartman (and here) and Marnix Holtzer have published an article ("Enquêterecht voorzichtig onder het mes") on the current draft proposal - not a bill yet - to reform the right of inquiry, that was discussed at TDT in post No. 175/09.

The article touches on some interesting issues, including the remarks made in the explanatory notes to the draft proposal about the relevance of the business judgment rule phenomenon, as articulated and applied throughout the years in the US (especially in Delaware). As to the business judgment rule remarks, Bartman and Holtzer are sceptical. They aren't the first ones, as they were preceded by Gerard van Solinge (whose remarks were discussed and rebutted here and here) and Fons Leijten (ditto here). So it's a third attempt really.

As to this issue, Bartman and Holtzer don't bring new arguments to the fore. A pity, but nothing new on that front really (see the above links). They do include this passage in their writings.

Eind oktober vorig jaar stuurde de Minister van Justitie een voorontwerp van wet tot aanpassing van het enquêterecht (hierna: ‘het Voorontwerp’) aan verscheidene instanties ter consultatie. Het Voorontwerp volgt op een aantal onderdelen de aanbevelingen van de SER, zoals neergelegd in zijn advies van 15 februari 2008 over Evenwichtig Ondernemingsbestuur (hierna: ‘het SER-advies’).2 Het meest ingrijpende voorstel van de SER, namelijk de introductie van een enquêteprocedure in twee feitelijke instanties met schorsende werking van het hoger beroep, wordt door de minister echter nadrukkelijk verworpen omwille van (behoud van) de snelheid van het geding.3 Ook het andere unaniem gedragen SER-voorstel, namelijk de introductie van de Amerikaanse business judgment rule in het enquêterecht, wijst de minister af.4 Wel meent hij dat in de motivering tot het treffen van voorlopige voorzieningen ‘de aandachtspunten die uit de Amerikaanse jurisprudentie naar voren komen, daarbij ook in het Nederlandse kader behulpzaam (kunnen) zijn.’5 Dit lijkt ons echter eerder een aardige persoonlijke geste te zijn naar Assink, die de introductie van de business judgment rule in het Nederlandse recht met vuur bepleit,6 dan een reële en dwingende verschuiving in het toetsingskader van de Ondernemingskamer. 7 Het siert de Nederlandse rechter immers altijd om oog te hebben voor de ontwikkelingen in het buitenland. Het is de vraag of een dergelijke persoonlijke geste (van drie pagina’s!) wel zou passen in de toelichting bij het officiële wetsvoorstel. Onze bezwaren tegen de twee genoemde SER-voorstellen hebben wij eerder uiteengezet.8 Wij volstaan daarom met de opmerking dat wij ons goed kunnen vinden in de opvattingen van de minister in dit opzicht.

--------

2. SER-advies Evenwichtig Ondernemingsbestuur, nr. 08/01. Zie hierover ons artikel ‘Evenwichtig ondernemingsbestuur in de polder’, TvOB 2008-3, p. 57-65, alsmede het themanummer Ondernemingsrecht 2008, 64 (afl. 6), met bijdragen van P.A.M. Witteveen, S.J.H.M. Berendsen, W.A. Westenbroek en Bastiaan F. Assink.
3. Toelichting Voorontwerp, p. 23.
4. De raadgevende leden van de voorbereidende SER-commissie, Eumedion en de VEB, verklaarden zich overigens geen voorstander van introductie van de business judgment rule in het Nederlandse vennootschapsrecht.
5. Toelichting Voorontwerp, p. 21.
6. Zie laatstelijk zijn preadvies voor de Vereeniging ‘Handelsrecht’ 2009, p. 131. Hierover ook Daniella A.M.H.W. Strik in haar preadvies op p. 263. Zie ook L. Timmerman, ‘Grondslagen van geldend ondernemingsrecht’, Ondernemingsrecht 2009, 2 (afl. 1), p. 4 (p. 11, voetnoot 69).
7. Idem G. van Solinge, ‘Naar een evenwichtig enquêterecht’, WPNR 2010/6825.
8. TvOB 2008-3, p. 63.

Hmm, what to think of this? Some thoughts.

• Read fairly, the explanatory notes basically suggest that, when the Enterprise Chamber is asked to rule whether 'well founded reasons to doubt the correctness of the company's policy' (gegronde redenen om aan een juist beleid te twijfelen) or 'obvious mismanagement' (wanbeleid) exist as to matters that fall in the business judgment realm, the focus points applied in US case law could be helpful in this respect in the Dutch setting (thereby referring to the Delaware business judgment rule). This suggestion was inspired by a 2008 report from the Dutch Social-Economic Council, arguing for introduction of a Dutch business judgment rule in inquiry proceedings. Although the explanatory notes do not embrace the business judgment doctrine as such with so many words, I find it hard to fathom - in view of what the notes do say - how they could be interpreted in a realistic way to mean that the Enterprise Chamber is barred from finding inspiration for finetuning its review model in Delaware corporate case law (i.e., the business judgment rule). In addition, the explanatory notes lay-out the groundwork for a Dutch business judgment rule in the section covering the proper scope of review by the Enterprise Chamber, with a proper heavy emphasis on the key factor of conflict of interests. This is all meaningful stuff, not just some page-filling scribblings without substance written to say at least something on the subject and get on with other more important things as soon as possible. It is also clear that the explanatory notes do not embrace the SER's suggestion to introduce a Dutch business judgment rule in the context of provisional measures (section 2:349a(2) DCC). That approach is the right one, as I explained in Ondernemingsrecht 2008-6, no. 66, p. 234-235.
• In view of this, Bartman and Holtzer are flat-out wrong where they write that the minister is of the opinion that the aforementioned focus points could be helpful in the provisional measure context. They are also wrong where they imply that, besides that, the minister doesn't really want to do anything with elements of the business judgment rule phenomenon in the right of inquiry (the scribbling scenario, so to speak). On the contrary, I would think: the gist of the explanatory notes is the opposite of what they are implying (that the whole business judgment rule suggestion by the SER has gone nowhere in the explanatory notes). Bartman and Holtzer conclude by saying that, in their reading of the explanatory notes, the three pages spent by the minister on the business judgment rule - culminating in the part on focus points - are basically nothing more than a personal gesture to me, an outspoken proponent of a Dutch business judgment rule (in inquiry proceedings and in director liability proceedings). How flattering this may seem (at least to some), this suggestion is just plain silly, or in terms of the business judgment rule: irrational. The minister isn't in the business of spending pages in legislation documents just to keep some dude with an opinion on point happy. I guess Bartman and Holtzer don't think this is a serious topic that deserves serious attention in the legislation process; wrongly, if only because the SER has argued so forcefully to do something with the business judgment rule phenomenon in inquiry proceedings.

So, another missed opportunity for meaningful discussion I'm afraid. Three times isn't always lucky.

UPDATE

For an instructive summary review of how the business judgment rule was applied in recent Delaware case law (also highlighted here), go here. Money quote:

Reaffirmation of the BJR

Dow is most significant for its reiteration of the long-held principle of Delaware law that the business judgment rule protects the business decisions of boards, so long as those decisions are taken in good faith by disinterested directors. Neither the stakes of a decision nor its appearance in hindsight has any bearing on the protections of the business judgment rule. That said, directors should be sure that they are acting on a fully informed basis before they proceed with any decision.

In the volatile conditions of the current economic environment, directors facing difficult decisions and uncertain risks can act with confidence that their business judgment cannot be challenged simply because of the failure of a venture or the subsequent consequences of such failure to the company. The business judgment rule long has been a bulwark against shareholder attempts to micromanage or second-guess the oversight of the board of directors in business decisions, and in Dow it has been fortified once again.

[No. 31] Substantial Increase in Dutch Bankruptcies in 2009

According to a report that was published by Statistics Netherlands (CBS) there has been a record number of bankruptcies in the Netherlands in 2009 (businesses and natural persons). Over 10.5 thousand bankruptcies have been filed in 2009; that is the highest number ever recorded. Until now, this record was owned by the year 2005 (10 thousand bankruptcies). The bankruptcy rate was 54 percent higher than in 2008, when 6.8 thousand bankruptcies were registered. These numbers get even more depressing if one focuses on the bankruptcies of businesses only: the number of businesses and institutions declared bankrupt (excluding oneman businesses) amounted 7.0 thousand in 2009, an increase by 82 percent relative to twelve months previously (3.8 thousand bankruptcies). In the financial sector the bankruptcy rate increased by 84 percent.

Although these numbers are not cheerful, there seems to be some reason for moderate optimism. The bankruptcy rate was particularly high in the first six months of 2009. Could this mean that we are on our way up?

The English summary of the report can be found here.

[No. 30] Troubles in The Mansion / Karma

The VEB's website offers some interesting reading material these days. Two suggestions, if you have a minute to spare.

1. The VEB highlights some of the recent adventures of Mr. Playboy Hugh Hefner, who is being haunted by disgruntled shareholders claiming "the company is falling apart and Hugh has intentionally sabotaged two potential deals in the last 6 months to sell the company at a decent price." Troubles at the Mansion. I guess nothing is holy anymore.

2. The VEB highlights the recent adventures of former VEB boss and the posterboy for shareholder activism Peter Paul de Vries, the man who used to be the nightmare of every corporate director in discussions with the VEB in or outside general meetings of shareholders, but who now is the CEO of listed company Value8 (talking about a career change). His former posse complains that De Vries is, well, rather reluctant to inform his shareholders, where he used to shred corporate directors pulling these kinds of stunts. Here are some nuggets.

Aandeelhouders Value8 hebben ingestemd met een grote investering in Ceradis, een jong bedrijf voor gewasbestrijdingsmiddelen. Essentiële informatie over balans, omzet, rendement en dergelijke ontbrak echter. Bovendien bleven vele vragen onbeantwoord. Wel werd duidelijk dat Value8 nu al een positieve operationele kasstroom heeft. Met een gloedvol betoog van topman Peter Paul de Vries over de goede mogelijkheden van Ceradis moesten de aandeelhouders het tijdens de aandeelhoudersvergadering maar doen.

Schaarse informatie

De aandeelhouderscirculaire ontbrak en vele vragen van beleggers bleven onbeantwoord. In zijn vorige leven zou ceo Peter Paul de Vries daar korte metten mee hebben gemaakt, maar in zijn nieuwe rol vond hij de schaarse informatie kennelijk voldoende.

(...)

Value8 staat bedrijven bij om naar de beurs te gaan en adviseert daarbij over transparantie, investor relations gerelateerde zaken, publiciteit en dergelijke. Dat het niet altijd even gemakkelijk is om aan alle eisen te voldoen, blijkt ook bij de onderneming zelf: Het gebrek aan een sluitende onderbouwing van een majeure investering, bekendmaking dat de onderneming operationeel positief draait in een laat stadium en binnen 12 maanden terugdraaien van een complexe aandeelhoudersstructuur, tonen aan dat dit niet vanzelf gaat. Hopelijk leert Value8 al doende.

Karma?

[No. 29] The Only Way Is Up (Or So It Seems)

In posts No. 26/09 and No. 62/09 I wrote about reports by the Dutch newspaper De Volkskrant, concluding that (i) while director compensation in 2008 tanked with 21% to an average of € 3 million, mainly due to dropping bonuses (32% to an average of € 813.000) and share/option related profits (29% to € 969.000), (ii) the amount of exit bonuses went up. Now there's new data, that may tweak things a little bit.  

I'm referring to brand new research by The Netherlands Bureau for Economic Policy Analisys into renumeration of the top-directors in large non-financial companies (Hoge Bomen in de Polder. Globalisering en topbeloningen in Nederland). The Bureau has found that as of the late 90s the renumeration numbers in this part of the economy have grown more than average. Whereas the rise of director pay in non-listed companies seems to be caused by the growing size of the company, the rise of director pay in listed companies seems to be linked less to the size of the business (and more to, quite simply, bigger US$ or € numbers in the monthly pay-slip).

Sinds eind jaren negentig is het loonaandeel van de 0,1% van de Nederlanders met het hoogste arbeidsinkomen toegenomen van 1,3% naar 2,0%. Deze ontwikkeling is in andere West-Europese landen eerder begonnen dan in Nederland. Het inkomensaandeel van de 0,1% met het hoogste inkomen ligt in Nederland verhoudingsgewijs op een laag niveau.

Dit CPB Document analyseert de oorzaken van de groei van topbeloningen in Nederland. De beloningen van topbestuurders bij ongeveer 600 grote ondernemingen in Nederland groeiden met gemiddeld 5,8% nominaal per jaar tussen 1999 en 2005. Na aftrek van 2,9%-punten inflatie, kan 2,6%-punten verklaard worden uit schaalvergroting van ondernemingen en 0,2%-punten uit vergrijzing onder bestuurders. Ter vergelijking: de mediaan van de beloning groeide in deze periode met gemiddeld 3,1% nominaal per jaar.

De beloningsgroei bij beursgenoteerde ondernemingen is met 8,9% per jaar bovengemiddeld. 4,8%-punten van deze groei kan worden verklaard door inflatie, schaalvergroting en vergrijzing. Voor 3,9%-punten is geen verklaring gevonden. Gemiddeld ligt de beloning van een bestuurder van een beursgenoteerde onderneming 25% tot 52% hoger dan bij vergelijkbare onderneming zonder beursnotering.

Het beloningsverschil tussen ondernemingen met en zonder een Angelsaksische eigenaar wordt kleiner. Bij ondernemingen met een Angelsaksische eigenaar ligt de beloning van topbestuurders 20% hoger dan bij vergelijkbare ondernemingen met een eigenaar uit een niet-Angelsaksisch land. De loongroei bij bedrijven met een Angelsaksische eigenaar is met 4% per jaar lager dan gemiddeld. Het aandeel van buitenlandse bestuurders blijft gemiddeld genomen constant, maar neemt af bij bedrijven met een Angelsaksische eigenaar.

Good stuff. Here are some key findings.

(a) Until 1998, the 0.1% of the working people with the highest pay earned 1.3% of the total income earned by all the working folks. As of 1998, the income share of these big earners has increased to 2.0% in 2006; in that year, the top 0.1% earned 20 times the average pay. The Bureau concludes that this 20x factor is still pretty small compared to for example Germany (40x) or the US (almost 80x), finding that the increase found in the Netherlands isn't a unique development. Apparently, the numbers - related to this lucky 0.1% - have been growing in the US and the UK since 1980 and in Sweden since 1990.

(b) Between 1999 and 2005, the nominal growth of the top-director renumeration in the Netherlands has been 6% per year on average, while the average increase in pay in the Netherlands was 3%. This rise seems to be caused by growth of business, which in turn is linked to globalisation (allowing the most productive enterprises to realize more output on bigger product markets).

(c) Between 1999 and 2005, director pay in listed companies was a whopping 52% higher than director pay in similar but non-listed companies. This dichotomy seems to be growing, as the nominal growth in pay in listed companies is 9% per year, higher than the average growth of 6% in all large companies. Which is remarkable, as the growth in company results at listed companies is lower. Apparently, about half of the growth in director pay at listed companies can be explained by inflation and growth of business; for the remaining half, no market based explanation could be found. Which suggests, according to the Bureau, that the market for top-directors functions less well at the level of listed companies than at the level of non-listed companies.

(d) In the public sector (covered by me here and here), pay of the top-segment doesn't keep up with the average pay, let alone with the pay of the top-segment in the private sector (see above).

(e) Companies with a US or UK based shareholder constituency (I guess the Bureau simply refers to US or UK based companies), director pay is 20% higher compared to similar companies with a non-Anglo American shareholder base. But as the growth in pay at Anglo-American companies is below average, the distance between US/UK based on non-US/UK based companies in this respect is decreasing.

(f) Despite this decreasing distance (see (e)), the number of foreign directors in the larger Dutch companies has not increased. Between 1999 and 2005 the numbers have roughly remained the same. On the flip-side: the number of Dutch directors at foreign companies is decreasing. The Bureau has also found that the average length of the director stay at companies hasn't changed either. All of this leads the Bureau to finding this data inconsistent with the image that the market for top-directors is becoming more and more international: the influence of globalisation on director pay is channeled through cross-border competition on product markets, not through internationalization of labor markets.

For those readers who like number crunching and want to take a real dive into the nitty gritty of the numerical details, go here and eat your heart out (Dutch only).

[No. 28] Uh Oh ...

When DSB Bank went bankrupt last year, immediately discussions started about the performance by the supervisory board, that consisted of some former political heavy weights like Ed Nijpels and Robin Linschoten. Slowly, the dirt - like a fierce letter from De Nederlandsche Bank to DSB directors dated June 19, 2009 - is reaching the surface.

DNB verwijt de raad van commissarissen in de brief dat hij passief blijft, terwijl DSB Bank al sinds eind 2007 onder verscherpt toezicht staat. Bij de raad ontbreekt elk gevoel van urgentie om de situatie bij de bank te verbeteren, aldus DNB. De toezichthouder is evenmin te spreken over de wijze waarop de commissarissen zijn omgegaan met het ontslag van financieel directeur De Grave.

Uit notulen van een bestuursvergadering van 15 mei 2009, ook in het bezit van RTL Z, rijst het beeld op dat de raad van commissarissen Scheringa bij het ontslag van De Grave geen strobreed in de weg legde. Volgens DNB hadden de commissarissen alleen na zorgvuldig hoor en wederhoor mogen instemmen met het ontslag van een bestuurslid. De commissarissen waren volgens DNB ook al te weinig betrokken geweest bij de selectie van De Grave voor de functie van financieel directeur.

And it doesn't look too good for the supervisors. Some exceptions aside, supervisory director liability is a rarity under Dutch corporate law. I'm sure these former supervisors don't want to be part of a development in case law that is making this a less rare event, but if I were them - reading the available material so far - I wouldn't be too sure about a happy ending in case their performance is questioned before a court. We'll know more when the investigative report by DNB and AFM is published, sometime this year.

[No. 27] CESR Proposes Transparency of Equity Derivatives

The Consultation Document, entitled CESR proposal to extend major shareholding notifications to instruments of similar economic effect to holding shares and entitlements to acquire shares, can be downloaded here.

(HT Gaëtane Schaeken)

[No. 26] Stakeholder Value Theory v. Shareholder Value Theory

I just read Moving Towards Stakeholderism? Constituency Statutes, Enlightened Shareholder Value and All That: Much Ado About Little?, an interesting paper by Prof. Andrew R. Keay (HT PB.com). The title pretty much covers what the paper deals with, but here's the abstract.

Abstract: 
    
While Anglo-American jurisdictions have seen shareholder primacy dominate as the theory which provides what the objective of the large public company is to be, there are indications in the past 20 years that the stakeholder theory, the other leading theory that addresses the objective of the company, has become increasingly popular in many Anglo-American jurisdictions, and there is some suggestion that this approach is developing support in academic and practitioner circles. A number of factors have been identified to support this view and are adverted to in the paper. This paper focuses on legal developments in Anglo-American jurisdictions (and particularly the US and UK) to assess whether there is a movement in these jurisdictions to more of a stakeholder approach as far as its corporate governance is concerned. To this end the paper examines so-called constituency statutes in the US and their impact, and the concept of enlightened shareholder value as it has been developed in the UK (under the Companies Act 2006), as well as referring briefly to developments in Canada and Australia. The paper concludes that the pieces of legislation examined in the paper only appear to provide greater stakeholder focus and they really add, from a strict legal viewpoint, little in a drive towards stakeholderism. This is due to a number of reasons but a major one is the lack of power in stakeholders to challenge directorial actions in the courts or in any other way.

Keywords: corporate governance, enlightened shareholder value, constituency statutues, stakeholder theory, shareholder primacy, corporations

JEL Classifications: G3, K22, L21

Although issues like these have been debated ad nauseam in legal literature worldwide, the paper offers interesting insights as it focuses in part on section 172 of the UK Companies Act 2006, that is said to capture the enlightened shareholder value theory (but hasn't been dealt with to date in UK case law). The exact scope of section 172 CA 2006 isn't clear, as Keay illustrates nicely.

One could read this section to mean that it takes a route in between (i) pure shareholder value theory ("US style") and (ii) pure stakeholder value theory (still firmly rooted in Dutch law), as it puts shareholders' interests at the front, but at the same time requires directors to take into account other factors (like the interests of the company's employees), making it possible under certain circumstances to push shareholders' interests a bit more to the back of the row, to modulate between the interests of certain constituency groups. For a nice reasoning why we should think about embracing such an approach in the Netherlands, go here. Another way of looking at it, is that the shareholders' interests ("the members as a whole") should be the dominant concern of directors, be it that directors - by also taking into account the factors mentioned under sub (a)-(f) - should look primarily at value promoting in the long term. By looking at it this way, section 172 CA 2006 doesn't really embody a third way, in addition to (i) and (ii), but actually hinges rather firmly to (i).

Different takes are feasible, but I'll leave it at that; if you want more, go and read the paper. At a seminar that I attended January 29, 2010 in Amsterdam, Lord Goldsmith - who was involved in the legislation process of this section - explained in passing what the section apparently intends to make clear. What I remembered from that session (DISCLAIMER: I'm not claiming any verbatim report here about what was said then) is that, in short, directors are expected as per section 172 CA 2006 to act in a way that they consider, in good faith, would be most likely to promote shareholder value in the long run. This would imply there is no significant gap between the US (Delaware) and the UK approach as to what the policy focus point of corporate directors generally should be, but that it's more a matter of semantics.

However that may be, in the Netherlands any form of shareholder value theory is certainly not the leading approach, although some argue for some rather drastic measures in this respect. That doesn't mean things are clear over here. After many years - well decades - of discussion between learned commentators, there is still no consensus on what the term 'best interests of the company' (the thing directors are supposed to have in mind when acting on behalf of the company) means. Neither in literature nor in case law, where the term is used regularly but never explained. That's a bit weird: directors are expected to act in the best interests of the company, but nobody really knows what these words actually cover. For my take on things (this is where I reach the pointe of this post...), check out my inaugural speach presented on January 21, 2010 at the Erasmus University Rotterdam and published in De Januskop van het Ondernemingsrecht (in stores very very soon; art work courtesy of my 4-year old son).

[No. 25] Eye of the Tiger

Today, De Nederlandsche Bank (the Dutch national bank) published its supervisory themes of 2010, aspects of the financial sector that will receive special attention.

One rationale of this approach is the need to restore faith in the sector, after the credit crunch, some special discussion topics (like excessive bonuses, irresponsible risk-taking and the sale of dubious financial products) and international discussions at the last G20 summit (also see here).

Another may be - well duh - to restore faith in the supervisory capabilities of DNB itself, as a pre-emptive strike against the pretty predictable outcome of the ongoing research by the investigative Committee De Wit into the financial crisis and the role played by DNB (for some background, go here).

The key issues for 2010, according to DNB that is?

• There will be more focus on integrity and governance, in line with the approach taken in previous years. Besides dealing with actual behavior and culture in talks with financial institutions and through a number of in-depth investigations, DNB also plans to re-review pay policies (checking early this year whether these policies are in line with DNB principles and good practices).
• There will be more focus on those institutions that incline to move to the margins of tax regulation.
• There will be more focus on strategies and business models of institutions subject to DNB supervision, as these are subject of discussion in all sectors in this day and age (in part due to restructuring activities). DNB aims to prevent moves by institutions, geared towards unhealthy risk-taking in response to pressure for profit maximization by certain players (like investors and credit rating agency's). Coined as "a new search for yield" by DNB.

In addition, DNB highlights changes in applicable regulation, including capital/liquidity demands by the Bazel II framework for banks and the Solvency II framework that applies to insurance companies (operational as from 2012).

Sounds promising, but there's a difference between saying and doing. We'll see in the course of this year whether it's mostly muscle-flexing, or actually involves some punching also by DNB. As the supervisor has some lost ground to make up for, I wouldn't be surprised to even see the gloves go off at some point. In the meantime, imagine Eye of the Tiger steadily getting louder in the background...

[No. 24] Brothers in Arms

The life of a PhD-candidate can be solitary. I was reminded of this last evening (Saturday), when I was doing some late night writing and backed up my work by e-mailing the file to my own account. At an hour that most people would probably find themselves either in a bar or in their beds, I went on to do some more thinking and made some half-hearted attempts at putting it all on paper. I may have felt slightly sorry for myself, I can't remember exactly and if I could I would probably deny it. In any case, suddenly I heard that joyful (or annoying, depending on whether you're focusing or looking for distraction) 'ping' sound of my Apple Mail program, announcing that I had received a message. I kind of got excited that someone would e-mail me at this hour, meaning I was not alone. I quickly switched screens, only to find out that the person crazy enough to send an e-mail at this hour was me.

At times like that, there is one place I can go for some consolation without having to leave my desk. It's the fine folks at PhD-Comics. They got it right so often it makes one laugh about one's life. And you can subscribe to their daily delivery service, meaning that at least someone will e-mail you during those solitary early morning hours...     

[No. 23] Re De Boer Makelaardij en Assurantiën Flevoland and AHAM Inquiry Proceedings

During January 2010, the Enterprise Chamber produced some interesting rulings in inquiry proceedings. I highlight two of them here.

1. Re De Boer Makelaardij en Assurantiën Flevoland B.V. (published in ARO 2010, 21)

In this case, decided on January 14, 2010, the requesting shareholder had asked for an inquiry into the policy and state of affairs at De Boer Makelaardij en Assurantiën Flevoland B.V. (not for any provisional measures referred to in section 2:349a (2) DCC).

This seems to be a case in which the lawyer representing the requesting shareholder is not very familiar with the mechanism of inquiry proceedings. Leaving aside the fact that the Enterprise Chamber had to help the shareholder by interpreting his briefs favorably in search for grounds to the complaints (see 3.1), the court ruled:

(i) that the grounds advanced could not result in a finding of 'well founded reasons to doubt the correctness of the company's policy and state of affairs' (see 3.7);

(ii) that as to two of those grounds, the shareholder had not provided a sufficient factual basis (see 3.3-3.6);

(iii) that as to the other two grounds, being (a) disagreement between shareholders on the price to be paid for the shares of one of them and (b) the prospect of one shareholder filing a section 2:343 DCC claim (a claim aimed at obtaining a court ruling that the other shareholders must buy-out the litigating shareholder), those grounds in itself cannot result in a finding of those 'well founded reasons' (see 3.2); and

(iv) that in any event, the shareholder had failed to present to management board of the company with his complaints before filing the request for an inquiry at the Enterprise Chamber, as required by section 2:349 (1) DCC (one of those rare situations in which the court decides that a claim must fail due to a violation of section 2:349 (1) DCC); in view of this, the court doesn't reach the stage of denial of the claim, as the shareholder isn't even allowed up to bat (see 3.7-3.9).

Ouch.

The upshot of thise case, aside from the clarification mentioned under (iii), is the court's remark that a raise in director pay - even in times of negative results - is insufficient in itself to raise doubts as to the correctness of the company's policy and state of affairs (see 3.4).

2. Re B.V. Amsterdamsche Huizenhandel en Administratiemaatschappij (published in ARO 2010, 24, available here)

In this procedurally complex case, decided on January 12, 2010, the requesting shareholder had asked the Enterprise Chamber to establish mismanagement (wanbeleid) and take certain measures at AHAM. This is a case to centers around the question whether the general meeting shareholders acted reasonably when trying to fire the management board, in view of the fully deteriorated relationship between the shareholders and the board. I touched on that subject in Facetten van verantwoordelijkheid in hedendaags ondernemingsbestuur, Deventer: Kluwer 2009, no. 3.3.2.

According to the court, the general meeting has acted reasonably as its reasons to get rid of the incompetent board were understandable (although it did not act flawlessly in the process), reason why the court denied to establish mismanagement and denied the request. Here's the money quote.

3.4 Gelet op het voorgaande, de verdere inhoud van het verslag en de stellingen van partijen over en weer is de Ondernemingskamer van oordeel,
- dat Sint Antonius als grootaandeelhouder – en in overwegende mate met haar: de andere aandeelhouders – AHAM naar een hoger niveau van professionalisering heeft willen brengen,
- dat niet gezegd kan worden, dat de wensen van Sint Antonius op dit punt onredelijk waren,
- dat het bestuur niet adequaat op die wensen heeft gereageerd, noch door – tijdig – aan die wensen uitvoering te geven noch door – tijdig – toereikende alternatieven aan te dragen,
- zodat er inderdaad ernstig aan getwijfeld moet worden of het bestuur van AHAM in staat is om AHAM naar voormeld hoger niveau te brengen.

Hoewel moet worden toegegeven dat ook Sint Antonius niet steeds gelukkig heeft geopereerd, moet niettemin geconcludeerd worden dat het niet onbegrijpelijk was, dat Sint Antonius in de gegeven situatie haar koers niet meer met dit bestuur wilde vervolgen, zodat niet gezegd kan worden dat zij in redelijkheid in de gegeven omstandigheden niet kon aansturen op het ontslag van het bestuur. Daarbij heeft de Ondernemingskamer nog in aanmerking genomen dat inmiddels is gebleken dat Sint Antonius ter vervanging van de zittende bestuursleden wel degelijk serieuze kandidaten met voldoende gewicht op het oog had (verslag 15.2 en 4).

3.5 De Ondernemingskamer overweegt ten slotte nog dat de problemen weliswaar niet onmiddellijk voorbij zullen zijn – de onderzoeker spreekt van een 'instabiele situatie' –, indien de algemene vergadering van aandeelhouders inderdaad zal besluiten tot vervanging van het bestuur (verslag 17.1). Ook aan de zijde van de aandeelhouders schort het immers aan professionaliteit (verslag 17.3). Aangenomen mag echter worden dat de intrede van meer professionele bestuurders bij de aandeelhouders op dat punt tot verbetering zal leiden (verslag 17.3), zodat niet bij voorbaat ervan kan worden uitgegaan dat de aandeelhouders niet in staat zullen zijn om – rekening houdend met de omstandigheden zoals zich die thans voordoen – de stabiliteit te doen weerkeren.

3.6 Het voorgaande brengt de Ondernemingskamer tot de slotsom – enerzijds – dat zich bij AHAM een moeizaam op verandering gericht proces heeft voorgedaan, dat gepaard ging met een impasse in de verhoudingen tussen de aandeelhouders en het bestuur, maar – anderzijds – dat de aandeelhouders een koers hebben willen volgen en doorzetten die een uitweg uit de impasse kon bieden, zodat niet gezegd kan worden dat die impasse en de overige omstandigheden de kwalificatie wanbeleid rechtvaardigen.

This type of scenario - the general meeting trying to fire directors - isn't reviewed that often by the court (see for another case here). The analysis applied here makes sense to me.

As an aside

Oh, for those of you interested in section 2:403/404 DCC disputes, check ARO 2010, 28-30 for decisions by the Enterprise Chamber re Hoeveholding B.V. (all three decided on January 12, 2010).

[No. 22] Risk Taking, Hindsight Bias and Delaware Corporate Case Law

Jay Verret, an American Corporate Law Professor and former Court of Chancery clerk (not in 2008, the year in which I had the chance to work at the Chancery and Supreme Court), provides some useful insights here in the way Delaware corporate case law is viewed and discussed in some circles outside the state. The trigger of the discussion here was Chancellor Chandler's opinion In re Citigroup, Inc. Shareholder Derivative Litigation, highlighted at TDT here.

His post is pretty long, but right below are the key parts. Must read stuff for those interested in Delaware corporate law dynamics.

A number of the discussants at the panel focused their attention on Delaware.  This is certainly appropriate, as Delaware is the corporate home of nearly 70% of the Fortune 500 and half of the 14,000 publicly traded companies in the United States.  Most of the academy has a contentious relationship with the Delaware courts and an inordinate number of academics dedicate their time to attacking the Delaware model of corporate law.  (For the Don Quixote of anti-Delaware scholarship, see Jay Brown at U. Denver)  The AALS panel discussion on Business Associations this year mirrored that tendency in the corporate law scholarship.

(...)

The theme of the AALS panel on Business Associations was “The Financial Collapse and Recovery Effort: What Does it Mean for Corporate Governance?”   A summary of Lisa Fairfax’s excellent discussion on clawbacks for executive compensation can be found here.  Erik Gerding has also compiled a great summary of the full discussion here and here.  The portion of the discussion relating to Delaware was focused around the question of: “Can we rely on Delaware to solve the crisis?”  and “Can Delaware serve as a regulator of systemic risk?”  The specifics of that discussion focused on the outcome of the Citigroup case.  I will save my response to the panel’s particular comments on the Citigroup case for a moment, and first take issue with the broader question presented by the panel.  Is Delaware the appropriate forum for regulating systemic risk?  Absolutely, definitively, no.  Delaware is not designed to deal with that question, and it does not assert such jurisdiction.

The confusion is easily explained: the Delaware Courts are designed to deal with large scale business transactions, and rarely does a week go by without a Delaware Court of Chancery case appearing in the Wall Street Journal.  Issues of systemic risk relating to large publicly traded investment banks have also tended to make the front pages of the Wall Street Journal during the crisis.  This is however merely a matter of coincidence.  Delaware adjudicates conflicts between shareholders, companies, their boards of directors, and their executives.  These conflicts are decided on a case-by-case basis.  The Delaware judiciary does not have the constitutional authority, nor does it possess a policy advantage, to serve as a nation-wide regulator of systemic risk.  For that matter, neither does the SEC (which is often described by Delaware critics as Delaware’s antipode).  The SEC has a mandate to protect investors and encourage capital formation under the 33 and 34 Acts, but it possesses neither a mandate nor sufficient expertise to regulate the investment community to police leverage.  This is particularly true in light of the Department of Housing and Urban Development’s superseding authority over the leading source of systemic risk (to the tune of a recent $400 billion dollar backstop from the Treasury Department), namely Fannie Mae and Freddie Mac.

The AALS panel also focused on the Citigroup case as its shining example of Delaware corporate law gone astray.  I feel compelled to respond accordingly.  In that case, the plaintiff sought to evade Section 102(b)7 of the Delaware General Corporation Law, which permits Boards to opt out of liability for good faith violations of the duty of care, by arguing that the Board of Citigroup “failed to act” in its oversight of risk management.  The subject of the Citigroup plaintiff’s challenge was essentially subprime mortgage bets by Citigroup.  Chancellor Chandler noted that the plaintiff’s reading would have eviscerated the Delaware legislature’s intent in enacting 102(b)7 by allowing plaintiffs to allege that, despite an initial good faith and well considered decision to undertake an investment opportunity, a board could be found liable after the fact for its failure to “oversee” the progress of that opportunity.

First, the AALS panel’s view seems to encourage judicial activism on the part of the Delaware Court of Chancery to ignore the Delaware General Corporation Law.  Even more surprisingly, they begin from a clearly hindsight-biased view of Citigroup’s risks.  The tenor of the discussion was in the order of “well, clearly, Citigroup’s board made bad decisions, because they lost lots of money.”  This is precisely the sort of thinking that the DGCL, in particular Section 102(b)7, is designed to avoid.  Hindsight bias built into corporation law would cripple the ability of boards to invest resources in risky propositions, because boards would fear ex ante the potential liability of good faith but uncertain investments that subsequently lost money.

And if you don’t think the AALS panel’s view on Citigroup’s investments is overwhelmingly colored by hindsight bias, consider remarks by Chairman Ben Bernanke, who in 2006 said that the housing market “will most likely experience a gradual cooling rather than a sharp slowdown” and who in 2007 noted that “the impact of subprime loans on the broader economy and financial markets are likely to be contained.”  Readers should certainly not take my quotes of Bernanke as a critique of him.  Though I personally feel the Fed is overly lax in monetary policy these days, that’s another issue.  My point is that one of the smartest, most informed, and least conflicted financial regulators felt in 2006 and 2007, at the height of the events of the Citigroup case, that subprime was a relatively riskless bet.  As such, I take severe issue with the “conventional wisdom” at the AALS that the Citigroup case was a slam dunk against Chancellor Chandler’s decision.

Let’s also not forget that the Delaware Court of Chancery decided to permit the waste claim to survive at that stage in the litigation, and it survives to this day.  I realize that waste claims rarely result in ultimate judgment against the defendants, but then again most all claims in civil court rarely result in ultimate judgment against the defendants.  If Delaware was such a rigged game in favor of defendants, as the AALS panel seemed to suggest, why would Chancellor Chandler have permitted the waste claim to survive, knowing it would give the plaintiffs continued leverage to demand some form of award in settlement negotiations?

I will close with two general critiques of Delaware’s critics that applies both to some of the recent commentators at the AALS panel and also to the anti-Delaware vein of scholarship generally.  Don’t get me wrong… I won’t argue that Delaware is perfect, but I will take issue with a lack of sophistication in much of the criticism.  My first point is that the anti-Delaware crowd lumps the various institutions of Delaware together as though it were a single entity.  This could not be more inaccurate.  In the interest of brevity in this blog post, I will only note 10 relevant institutional players in Delaware, although to respond justly I should dedicate a summer to an article that atomizes the players in more depth.  There are significant conflicts of interest among the Delaware Court of Chancery, the Delaware Supreme Court, the Delaware litigation defendant’s bar, the Delaware litigation plaintiff’s bar, the Delaware deal advisory bar, the out of state (particularly NY) deal advisory bar, the Delaware Committee on Corporate Laws, the Delaware Legislature, the Delaware Governor’s office, and the Delaware Secretary of State (responsible for incorporating entities).

My second broad critique of the anti-Delaware crowd is that they seem to ignore that if Delaware were such an anti-shareholder jurisdiction, we would expect to see a share price discount for Delaware publicly traded entities against shares in other companies.  As such, we should also expect to see new IPOs featuring non-Delaware corporations in the hopes of obtaining a premium.  We see neither.  In fact, 70% of all IPOs in 2005 were Delaware corporations.  Furthermore, the only empirical evidence on point is in precisely the opposite direction… empirical evidence suggests that Delaware firms trade at a substantial premium to other firms (see Roberta Romano’s work here and Robert Daines’ work  here)

(HT Steve Bainbridge, who stresses that Chandler "got Citigroup exactly right")

[No. 21] In Search of the Smoking Gun

This post comes from

Annemetje Koburg

Dutch Minister of Finance Wouter Bos has doubts – as does Nout Wellink – about the information provided by the Belgian CBFA) and British (FSA) financial supervisors as to the ABN Amro takeover, especially the position of Fortis and Royal Bank of Scotland. Apparently the FSA did not inform Wellink about RBS’ liquidity problems and 36,6 billion euro’s of financial support provided by the British government. Wellink also wondered whether the CBFA gave sufficient and timely information about the problems at Fortis.

It seems that appropriate scape goats can also be found abroad. Which makes me wonder whether the CBFA and FSA could face potential liability.

Although the CBFA is granted legal immunity, it nevertheless can be held accountable for fraud or gross negligence (bedrog of grove nalatigheid). Also the FSA is granted immunity concerning supervisory actions or negligence, with two exceptions: (i) acts in bad faith and (ii) violation of ECHR provisions. Thus, no full immunity, which is in line with the Core Principles for Effective Banking Supervision issued by the Basel Committee on Banking Supervision, that recommends protecting supervisors from personal and institutional liability for supervisory actions taken in good faith. The Dutch situation is a bit different, in that we don’t know this whole immunity concept as to financial supervisor liability. Under Dutch law, supervisor liability is basically rooted in tort.

Het Nederlands beleid is dat toezichthouders aansprakelijk kunnen worden gesteld indien zij door een toerekenbare onrechtmatige daad schade veroorzaken. In tegenstelling tot de situatie in enkele andere Europese landen (Verenigd Koninkrijk, Duitsland, België) is er voor financiële toezichthouders geen immuniteit geregeld. DNB loopt zowel de kans om aansprakelijk te worden gesteld door degenen op wie zij toezicht houdt als door derden indien deze schade lijden door inadequaat handhavingstoezicht. De kosten zijn daarbij uiteindelijk voor de Nederlandse Staat. Uit jurisprudentie en onderzoek blijkt dat een redelijk handelend toezichthouder geen groot aansprakelijkheidsrisico loopt.

So, in Belgium and the UK it’s possible in theory to hold financial supervisors liable. But in practice? We’re basically talking about bad faith behavior here, as the exception to the rule of immunity. Aside from the proverbial ‘smoking gun’, that will be an uphill case to make in court, to say the least.

[No. 20] Timing is Everything, Right?

Okay, so in Post No. 221/09 I wrote the following about the bill on private company law reform, an important chunk of legislation practitioners in business and law have  been quite eagerly waiting for for some years now.

We've been discussing the reshaping of Dutch corporate law in the field of private companies several times (see, e.g., here with links). Now that the first tranche of the legislation process in parliament has been completed (the Second Chamber has accepted the proposal with some amendments), the waiting is for the second and last tranche, to be completed by the First Chamber (that chamber can only say yes or no, it cannot amend); if the process is picked-up and completed before April 1, 2010, the expectation is that the new regime for private companies will be operational as of July 1, 2010. So we're actually getting somewhere here, or so it seems.

Uhm, or not.

Apparently, the committee on justice of the First Chamber of parliament seems to be delaying discussions on the bill, because the Ministry of Justice doesn't provide the full text of this bill and of others (especially some tax stuff). By delaying discussions on this bill, the committee is putting pressure on the ministry to come forward with the full text of bills in the future, when requested. The committee now, again: apparently, is aiming at continuing discussions on the bill in April 2010, but this may well also depend on the way the quarrel with the ministry turns out.

Huh? Well, that's a weird twist, I guess timing isn't everything always. To be sure, for you sceptics out there, I'm not making this up. Here's the key part from the notes by the "Vergadering van de vaste commissie voor Justitie" (roughly: the meeting of the regular committee on Justice) of February 2, 2010, confirming this course of events.

Via ambtelijke weg is begrepen dat het ministerie van Justitie geen doorlopende wettekst zal verstrekken met betrekking tot de wetsvoorstellen 28746 Vaststelling van titel 7.13 (vennootschap) van het Burgerlijk Wetboek 31065 Aanpassing van de wetgeving aan en invoering van titel 7.13 (vennootschap) van het Burgerlijk Wetboek (Invoeringswet titel 7.13 Burgerlijk Wetboek) en 31058 Wijziging van Boek 2 van het Burgerlijk Wetboek in verband met de aanpassing van de regeling voor besloten vennootschappen met beperkte aansprakelijkheid (Wet vereenvoudiging en flexibilisering bv-recht). De commissie wil - gelet op het feit dat eerder in andere commissies soortgelijke verzoeken zijn afgewezen - aan het College van Senioren het verzoek voorleggen dat de Voorzitter in overleg treedt met de regering om de toezegging te verkrijgen dat in voorkomende gevallen wel aan zo’n verzoek om een doorlopende wettekst gehoor zal worden gegeven. Vooralsnog wordt het voorbereidend onderzoek met betrekking tot de twee laatstgenoemde wetsvoorstellen opgeschort.

How about them apples?

July 1, 2010 as "D-day" for the bill to become operational seems less and less likely. Maybe, just maybe, 2011 is doable. Aah, the surprises of the legislative process...

[No. 19] The Big Blame Game [Updated II]

Post No. 17/10 had some nice authentic footage of Nout Wellink, giving his personal perspective on the credit crunch to the Committee De Wit.

Yesterday former ABN Amro CEO Rijkman Groenink came by, with a somewhat different appreciation of the course of events, including the hotly debated ABN Amro takeover (c.q. debacle). He, in turn, was followed today by Nout Wellink (who wasn't very impressed by Groenink's story) and Minister of Finance Wouter Bos (ditto). For a reaction by Groenink, go here.

The red thread of the sessions? You guessed it, bickering, bickering, bickering, with one bottom line: nobody is going to say sorry here, despite the attempts by the Committee De Wit in that direction. We're in "blame the other guy" land here. Instructive and entertaining nonetheless. Can't we do this for another week or so?

For live reports of the committee sessions - unfortunately no footage, only written stuff, but on a realtime basis - go here (and check the right side bar, it's self-explanatory).

UPDATE I

Although - well, just maybe - not wholly appropriate to mention in this post, I'm doing it anyway: here's a recent publication by Lucian Bebchuk and Holger Spamann about Regulating Banker's Pay.

UPDATE II

And now even the Committee De Wit itself is target of criticism, labeled by some as incompetent

Kamerleden zonder enige expertise bevragen betrokkenen die hun hele leven al in de financiële sector rondlopen. Die komen dan ook vreselijk makkelijk weg. Terwijl ze net zolang op hun huid gezeten moeten worden, totdat ze zeggen: ‘Hier kan ik niet op antwoorden.’ Alleen Jolande Sap van GroenLinks is in staat vervolgvragen te stellen. Dat zij het kundig doet, komt doordat ze econome is. Maar zo’n Dion Graus van de PVV: beschamend. In het gesprek met oud-Rabo-topman Bert Heemskerk zei Graus letterlijk: ‘Niets is onmogelijk, dat blijkt wel uit de crisis.’ Dat is kennelijk zijn niveau van expertise.’

and by others as way too focused on finishing the prepared Q&A, not on key issues that came up during the sessions but weren't part of the rehearsed Q&A.

De commissie is intens tevreden. Hoofdrolspelers nog eens horen, maar dan onder ede, vinden de commissieleden niet nodig. Alles wat ze wilden horen, hebben ze gehoord, zeggen ze. De vragenlijst is geheel afgewerkt.

We'll see what comes out of the committee's findings, but it won't be a shocker to anyone if its finger points in the direction of De Nederlandsche Bank and its president.

[No. 18] Start-Ups and Breakdowns

The Dutch Chamber of Commerce recently published some stats on start-ups and bankruptcies in the Netherlands.

Categorie	dec-2009	dec-2008	Verschil		Totaal 2009
Starters	9.372	8.225	1.147 (13,95%)		105.592
Nieuwe Inschrijvingen	33.669	18.068	15.601 (86,35%)		316.540
Opheffingen	19.357	16.248	3.109 (19,13%)		118.689
Faillissementen	619	551	68 (12,34%)		7.410
Surseances van betaling	36	5	31 (620%)		404

In December 2009, compared to the situation in December 2008, there was a rise of 13.95% in the number of start-ups (with a total number of 105.592 in 2009), but also a rise of 12.34% in the number of bankruptcies (with a total of 7.410 in 2009).

For a breakdown in various legal entity forms go here. For a breakdown of the annual numbers go here.

(HT Maarten Verbrugh)

[No. 17] And Now It Was the DNB's President Turn - Hindsight Bias, Anyone?

I believe Nout Wellink's answers and explanations were pretty solid actually, despite all the criticism against DNB's supervision activities in the past days. Go here and here for earlier posts at TDT about the Committee De Wit, that is diving into the questions how the credit crunch could happen and how a new one can be prevented (well, more or less). Snippets of the "Wellink session" are available directly below.

[No. 16] Director Disqualification under Dutch Law

Director disqualification was subject of some discussion some time ago, among a few corporate law practitioners and academics. Our corporate law statute doesn't deal with it. This doesn't mean that director disqualification is impossible under Dutch law. The devil is in the detail, as so often: one shouldn't insert the word "corporate" between Dutch and law, but look in another direction. (for the UK, see, e.g., here)

For some time, the law already allows courts - depending on the circumstances of the case at hand - to disqualify persons acting in a certain professional capacity (including corporate directors) who commit financial-economic crimes, like fraud. This disqualification is seen as an optional, additional means of punishment. According to the available numbers, this type of disqualification doesn't happen that often; since 1995 only 130 times (primarily because of sex crimes, fraud or economic offences), although the number of suspects linked to corporations is much higher (around 557 of them as director late 2008, based on a random check).

Ontzetting uit beroep of ambt (beroepsverbod) wordt nu spaarzaam door de rechter opgelegd,  zo blijkt uit een overzicht van het ministerie van Justitie. Sinds 1995 gebeurde dat 130 keer, voornamelijk wegens zeden-, fraude,- en economische delicten. Toch zijn de signalen dat een aantal bestuursleden achter nv’s , bv’s en stichtingen betrokken zijn bij criminele activiteiten, aanzienlijk. Eind 2008 koppelde het Korps Landelijke Politiediensten (KLPD) een bestand van 2.273 geregistreerde criminelen aan die van de Kamers van Koophandel. Die steekproef leverde 1.516 hits op, goed voor 577 verdachten die ongehinderd functioneerden als bestuurder van, op papier, bonafide bedrijven. Van de 331 criminele organisaties waartegen in 2006 opsporingsonderzoek liep, stonden er 246 via hun leden geregistreerd bij de Kamer van Koophandel. (NRC)

Late 2009, the second chamber of parliament rather quietly accepted a bill that intends to increase options for disqualification under criminal law. Here's the rationale of the legal framework, as explained by the Minister of Justice to the first chamber of parliament, where the bill is pending now.

In strafzaken waarin de bijkomende straf van ontzetting uit het beroep aan de orde is, gaat het om personen die zich in hun beroep aan het plegen van strafbare feiten schuldig hebben gemaakt. Het gaat om personen die ernstig tekort zijn geschoten in de beroepsuitoefening en zich volstrekt onbekwaam hebben getoond om bepaalde met het beroep gepaard gaande verantwoordelijkheden te dragen. Veelal gaat het om personen die bewust misbruik hebben gemaakt van de gelegenheid die hun door het beroep werd geboden, bijvoorbeeld de bijzondere hoedanigheid of kwaliteit die aan hun beroep is verbonden. Zo gaat de uitoefening van bepaalde beroepen gepaard met vertrouwen, gezag of een invloedrijke positie. Daarvan kan op grove wijze misbruik worden gemaakt. Het is van belang de samenleving daartegen naar de toekomst toe te kunnen beschermen. Van de overheid mag worden verwacht dat zij voorziet in de beschikbaarheid van een krachtig en effectief instrumentarium. Met de bijkomende straf van ontzetting uit het beroep kan worden voorkomen dat personen na een veroordeling zich wederom in de positie kunnen bevinden hun beroep te misbruiken, met opnieuw slachtoffers of schade tot gevolg. Voorts heeft de sanctie inscherpende en afschrikwekkende werking naar de beroepsgroep als geheel. Het bevestigt de norm dat het plegen van strafbare feiten in het beroep niet wordt getolereerd.

Basically: make clear that Dutch society doesn't tolerate, and needs protection against, serious misconduct by persons in their professional conduct.

Interestingly, the minister also addressed the complaint by the Socialist Party that the bill doesn't deal with the possibilty of criminally punishing corporate for 'financial mismanagement'. As I explained here, their suggestion to introduce the option of actual jail time for financial mismanagement with a maximum of six years (!) doesn't seem the way to go to me, policy wise.

Their complaint is too funny not to cite.

Dit wetsvoorstel bevat een uitbreiding van de mogelijkheid tot ontzetting uit het beroep wanneer een strafbaar feit is gepleegd in de uitoefening van de functie. Het gaat dan om drie categorieën misdrijven:

• Een aantal misdrijven tegen de openbare orde, kort gezegd opruiing, belediging, discriminatie en godslastering;
• Een failliet die geen dan wel onjuiste inlichtingen geeft;
• Hij die iemand voor vreemde krijgsdienst aanwerft.

Deze bepalingen komen bij de leden van de SP-fractie sympathiek over, maar roepen tegelijkertijd een aantal vragen op die verband houden met de kredietcrisis, waarin niet alleen ons land maar heel Europa en de VS zijn gedompeld door toedoen van mensen die in de uitoefening van hun beroep onverantwoorde risico’s hebben genomen met aan hen toevertrouwde gelden van burgers, een wanbeleid hebben gevoerd waarvan zij zelf, naar eigen zeggen van een aantal belangrijke vertegenwoordigers, de consequenties niet meer overzagen. De schade die zij berokkenen is onnoemelijk veel groter dan mogelijkerwijs door de drie andere hier aan de orde zijnde categorieën te berokkenen schade. Daarnaast heeft slechts een zittende bankdirecteur schuld bekend en het fatsoen getoond om zijn excuses aan te bieden aan al degenen die door zijn toedoen in de ellende terecht zijn gekomen en nog zullen komen. Denk aan de pensioenen: erger nog, deze bankdirecteuren blijven allen op hun post alsof er niets was gebeurd, zij blijven inkomsten verwerven waar Jan Modaal een heel leven voor moet sappelen en het bonussensysteem is wel enigszins aangepast, maar bonussen zullen nog steeds uitgekeerd worden boven op veelal exorbitante salarissen. Ook voor toezichthouders geldt, dat zij tot nog toe geen schuld betoonden en zich onthielden van het aanbieden van excuses en op hun post blijven zitten alsof er niets was gebeurd. Een partijgenoot van deze leden in de Tweede Kamer heeft een motie ingediend waarin hij de regering verzoekt te onderzoeken of hier sprake is van strafbare feiten waarvoor gedacht kan worden aan ontzetting uit het beroep en voorts om te onderzoeken of een strafbepaling kan worden gecreëerd die financieel wanbeleid strafbaar stelt. Collega de Wit heeft zijn motie ingetrokken omdat de minster heeft toegezegd de kwestie strafrechtelijk, civielrechtelijk en in Europees verband te bekijken. Hij heeft hierover een brief aan de Tweede Kamer toegezegd. De minister heeft onlangs een brief aan de Tweede Kamer doen toekomen over het enquêterecht. Hierin geen woord over strafwaardigheid van wanbeleid c.q. het nemen van onverantwoorde risico’s met andermans geld. Kan de minister al aangeven hoe hij denkt te werk te zullen gaan? Het zal wellicht niet al te lastig zijn een civiele vordering o.g.v. wanbeheer te construeren. Het aantal gedupeerden is echter dermate groot en onoverzichtelijk dat het civiele recht hier geen soulaas kan bieden. Ten eerste kan je niet van iedereen verwachten dat hij een procedure aanspant, dat kost altijd geld, tijd en is een emotionele belasting, ten tweede zou de rechterlijke macht geheel ontregeld raken – bij de Dexia zaken is dat al bijna gebeurd – en ten derde: de banken zijn al geheel failliet dus hoe kunnen de mensen een toegewezen claim dan innen? Zie de Icesave problematiek. Het strafbaar stellen lost het probleem van de gedupeerden niet op, maar lijkt wel de enige oplossing om een vergelijkbaar drama in de toekomst te helpen voorkomen. Graag enige duidelijkheid over de plannen van de minister en het tijdpad daarvan.

Dare I say: typical SP jargon.

Anyway, the minister seems to have answered this complaint in a negative way, (i) mentioning on page 12-13 that the option of disqualification may also serve a ufesul purpose here (that is, after the director has been convicted on some other ground in criminal law already) and (ii) otherwise referring to his letter to the second chamber of parliament of June 29, 2009, in which he basically clarifies that financial mismanagement:

under private law

• can result in personal liability of managing and supervisory directors, based on section 2:9 DCC (vis-a-vis the corporation for improper management), section 2:138/248 DCC (in bankruptcy for manifest improper management), section 2:139/249 DCC (for misleading financial statements);
• can result in suspension or dismissal by the general meeting of shareholders; and
• can result in inquiry proceedings before the Enterprise Chambers, possibly resulting in a finding of mismanagement and subsequent measures by the court to redress this mismanagement;

and under criminal law and securities law

• can also result in certain sanctions (which I'm not going to elaborate on here).

Bottom line, assuming I'm not missing some fine print here: no word about introducing - or thinking about introducing - the additional jail time punishment on financial mismanagement as such, as proposed by the SP (and also not on expanding liability for corporate directors under private law). So far, so good...