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[No. 61] Is Delaware Losing Its Cases? [Updated]

In post No. 53 I mentioned a survey of court systems, indicating that Delaware is dominant in the US 'lawsuit climate'. The survey puts:

Delaware’s litigation environment number one in the country for fairness. The survey, Lawsuit Climate 2010: Ranking the States, released today by the U.S. Chamber Institute for Legal Reform (ILR) shows that Delaware has led the other 49 states since the survey was first conducted in 2002.

But wait a minute, there's also other research - conducted by Armour, Black and Cheffins - indicating that over the past decade the proportion of corporate suits involving Delaware public companies filed in Delaware has dropped markedly and that Delaware courts now hear only a - small - minority of the cases involving such firms. Here's the abstract:

Abstract:    
With the state competition for incorporations, Delaware’s courts are seen as an integral part of the Delaware “brand”, which implies most corporate cases involving Delaware companies are litigated in Delaware. In this paper, we show that over the past decade the proportion of corporate suits involving Delaware public companies filed in Delaware has dropped markedly and that Delaware courts now hear only a minority, perhaps a small minority, of the cases involving such firms. Because Delaware is losing its cases, it is in danger of losing its status as the dominant locus for corporate law for U.S. public companies. However, it will be difficult for Delaware courts to execute a successful rearguard action to recapture “market share”.

To document the out-of-Delaware litigation trend we rely on three hand-collected datasets: (i) corporate law cases arising between 1995-2009 where directors of public companies were named as defendants and the case generated one or more judicial opinions on Lexis, Westlaw, or the Delaware Chancery Court website (ii) lawsuits arising under corporate law from leveraged buyouts taking place between 1999-2009 and (iii) lawsuits arising under corporate law from allegations of options backdating. The first dataset encompasses the broadest range of litigation subject matter but fails to cover the large number of lawsuits that fail to generate a publicly available judicial opinion. The latter two focus only on two specific types of corporate law litigation but address the question whether an out-of-Delaware trend extends from judicial opinions to cases filed. All three datasets tell a consistent story: Delaware is losing its own cases.

Keywords: Delaware courts, corporate litigation, forum shopping

JEL Classifications: K22, K41

Which does not only justify the question - also posed by the authors - whether Delaware is losing its cases, but also - and ultimately more importantly - whether Delaware will lose its dominance in the US corporate law realm? Maybe the creeping federalization of corporate law isn't Delaware's biggest threat.

(HT Frans Overkleeft)

UPDATE

The research by Armour, Black and Cheffins has been noticed in the US. Larry Ribstein has some insightful comments. Francis Pileggi also weighs in (well, a bit, but with a comment added so hey).

[No. 60] Will Lower Dutch Courts Be Enabled to Ask the Dutch Supreme Court Prejudicial Questions?

It seems we're heading in that direction.

[No. 59] The SCOTUS Reverses in Jones v. Harris [Updated]

In post No. 178/09 (with links to earlier posts) I highlighted the SCOTUS' hearing of the case. Today the court handed down its unanimous ruling, authored by Justice Alito (with a short concurring opinion from Justice Thomas), reversing the Seventh Circuit opinion authored by Chief Judge Easterbrook.

For those of you interested in the (defining) tension between board discretion and judicial review of board conduct, the SCOTUS opinion - that contains many nuggets - is a must read. Here's a nice teaser.

It is also important to note that the standard for fiduciary breach under §36(b) does not call for judicial second guessing of informed board decisions. See Daily Income Fund, supra, at 538; see also Burks, 441 U. S., at 483 (“Congress consciously chose to address the conflict-of interest problem through the Act’s independent-directors section, rather than through more drastic remedies”).“[P]otential conflicts [of interests] may justify some restraints upon the unfettered discretion of even disinterested mutual fund directors, particularly in their transactions with the investment adviser,” but they do not suggest that a court may supplant the judgment of disinterested directors apprised of all relevant information, without additional evidence that the fee exceeds the arm’s length range. Id., at 481. In reviewing compensation under §36(b), the Act does not require courts to engage in a precise calculation of fees representative of arm’s-length bargaining. See 527 F. 3d, at 633 (“Judicial price-setting does not accompany fiduciary duties”). As recounted above, Congress rejected a “reasonableness” requirement that was criticized as charging the courts with rate-setting responsibilities. See Daily Income Fund, supra, at 538–540. Congress’ approach recognizes that courts are not well suited to make such precise calculations. Cf. General Motors Corp. v. Tracy, 519 U. S. 278, 308 (1997) (“[T]he Court is institutionally unsuited to gather the facts upon which economic predictions can be made, and professionally untrained to make them”); Verizon Communications Inc. v. FCC, 535 U. S. 467, 539 (2002); see also Concord v. Boston Edison Co., 915 F. 2d 17, 25 (CA1 1990) (opinion for the court by Breyer, C. J.) (“[H]ow is a judge or jury to determine a ‘fair price’?”). Gartenberg’s “so disproportionately large” standard, 694 F. 2d, at 928, reflects this congressional choice to “rely largely upon [independent director] ‘watchdogs’ to protect shareholders interests.” Burks, supra, at 485.

As to the bottom line of today's opinion:

By focusing almost entirely on the element of disclosure, the Seventh Circuit panel erred. See 527 F. 3d, at 632 (An investment adviser “must make full disclosure and play no tricks but is not subject to a cap on compensation”). The Gartenberg standard, which the panel rejected, may lack sharp analytical clarity, but we believe that it accurately reflects the compromise that is embodied in §36(b), and it has provided a workable standard for nearly three decades. The debate between the Seventh Circuit panel and the dissent from the denial of rehearing regarding today’s mutual fund market is a matter for Congress, not the courts.

(HT The Glom)

UPDATE

Also see Steve Bainbridge and Larry Ribstein on point.

[No. 58] Heterogenous Shareholder Preferences vs. Heterogenous Creditor Preferences

In Post No. 36 I briefly discussed the Delaware Chancery Court's opinion in the matter of Kurz. v. Holbrook. According to Vice-Chancellor Laster,

"[w]hat 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."

Accordingly, obtaining voting rights for the sole purpose of expressing a view as to whether a particular course of action serves a different goal, such as whether the relevant shareholder's private interests are furthered even at the expense of overall stockholder wealth, may, under certain circumstances, constitute a legal wrong. Under this logic, as I mentioned in my earlier post, empty voters risk being found to engage in illicit vote buying.

Last week, the District Court for the Southern District Court of New York confirmed that essentially the same principles apply in the context of bankruptcy, when shareholders are substituted for creditors when it comes to voting on key issues concerning the firm. Judge Lewis A. Kaplan reaffirmed Judge Robert E. Gerber's opinion, which applied the Allegheny doctrine and found that DISH Network Corporation, a Chapter 11 debtor of satellite communication company DBSD North America,

"[d]id not purchase and vote its claim in order to gain financially by way of a distribution in this case. Rather, as DISH's actions and documents make clear, its purpose was as a strategic investor-and, it may fairly be inferred, to use status as a creditor to provide advantages over proposing a plan as an outsider, or making a traditional bid for the company or its assets"

Accordingly, Judge Gerber held that DISH's votes, cast to reject the restructuring plan, should be designated (disregarded) per section 1126 (e) of the Bankruptcy Code.

Heterogenous creditor preferences also arise when a creditor's primary interest lies not in pursuing a strategic objective but in pursuing a financial objective that is different from creditor wealth maximization. As noted by Henry Hu and Bernie Black, this can be the case when a creditor hedges his financial exposure through credit default swaps. Using the same logic as Judge Gerber does in DSBD, votes cast by such an "empty" creditor risk runing afoul of section 1126 (e) too. This is the point Patrick Fleming makes in his paper aptly entitled Credit Derivatives Can Create a Financial Incentive for Creditors to Destroy a Chapter 11 Debtor: Section 1126(e) and Section 105(a) Provide a Solution.

Funny detail: not too long ago Judge Kaplan found that hedge fund TCI had misbehaved as a shareholder by not disclosing its full economic interests in railroad company CSX, but the securities act offered no legal basis for sterilizing TCI's voting rights as a reprimand. This time, Kaplan got his way.

(HT Wachtell)

[No. 57] Recent Stats on Supervisory Board Members

This post comes from

Harold Koster

The establishment of a supervisory board is widely considered as a means of protecting the interests of shareholders and other stakeholders. Recently, concerning supervisory boards, two interesting Dutch studies were published that are worthwhile to pay attention to.

Both studies were conducted by the Erasmus Instituut of Toezicht & Compliance.

The first one is called National Supervisory Board Members Survey 2009. About 400 members of supervisory boards of listed and non-listed companies and organisations participated in this survey. Here are some of the findings:

1. The percentage of supervisory board members who are also director of another company has gone down from 34% (2008) to 21% (2009).
2. From a diversity perspective: 86% male versus 14% female.
3. On average a member of a supervisory board fulfils her/his role for ten years.
4. The average amount of members of a supervisory board is 5,4 and the average time  spent is 13 days a month.
5. 57% of the supervisory board members got this role through her/his network (2007 69%). Interesting is the 2009 male/female ratio: male 61%, female 36%.
6. Members of supervisory boards of listed companies on average earned 42.000 euro (2008 30.000 euro).

The second study dates from March 2010 and is titled ‘5 Minutes Commissarissen Update maart 2010’. About 100 participants took part in this survey. According to this second study members of supervisory boards prefer self-regulation for topics such as how many posts a member of a supervisory board can hold, remuneration and diversity, whilst legislation was preferred for topics such as transparency, evaluation and knowledge/experience.   

Furthermore, the members of supervisory boards think progress can be made concerning evaluation, remuneration of the members of supervisory board and the male/female ratio, whilst the remuneration of directors, average age, knowledge and experience of the members of supervisory boards were thought to be acceptable.

Bottom line, interesting stuff.

[No. 56] eQuestionnaire

In the context of merger control cases but also in cartel investigations a lot of information is requested from companies by the European Commission. In order to make this information process more efficient the Commission introduced the web-based application "eQuestionnaire" in its merger market investigations. In the future the application will also be used in certain antitrust investigations. Information about the eQuestionnaire and a tutorial can be found here  . 

[No. 55] The Supreme Court on Director Liability in the Unpaid Company Creditor Setting

Last Friday, the Supreme Court rendered another decision on director liability in tort, more specifically in the 'unpaid creditor of the company' context. For earlier analyses of this tort director liability go, e.g., to post No. 71/09 (with links to other posts).

1. What was going on here? The basic setting is that a bank (ING) was entitled to a sum of money (NLG 900k) to be paid by a company (Standard), that in turn was entitled to a sum of money (same) to be paid by a foundation (WNF). Standard - through its sole director (a company), also the 50% shareholder - had agreed with ING that the sum to be received by Standard from WNF would be forwarded to ING when received. Also the claim from Standard on WNF for said amount was pledged to ING. But when Standard received said amount from WNF, Standard failed to pay the earmarked amount to ING but instead channeled that amount from the company to third parties, leaving Standard without the necessary means to honor its payment obligation towards ING. ING then initiated liability proceedings against the person behind Standard's sole director/50% shareholder (I refer to him simply as the director) rooted in tort, to recover its damage caused by Standard's non-payment.

2. Both the court in first instance as the court of appeal held the director liable vis-a-vis ING. In the supreme court proceeding, several complaints were put forward as to the court of appeal's ruling, that all failed: the supreme court upheld the court of appeal's ruling. I will highlight two of them here.

The first complaint is that the court of appeal failed to apply the correct standard of review, by not reviewing whether the director could be seriously blamed for causing Standard's nonperformance towards ING. The complaint put forward that the court of appeal did not take into account that it's normally up to a director of a company, balancing the interests of the parties involved (including the company's interests), to decide which creditors should be paid in view of the circumstances of the case at hand. The complaint also put forward that the director had to take into account the paritas of the creditors involved, that the court of appeal's ruling as to the lack of clarity of the identity of the paid creditors is inexplicable itself, and that the director was not aware of the fact that a large sum (NLG 410k) was paid to the other 50% shareholder. 

The second complaint is that the court of appeal failed to recognize that Standard's nonperformance did not result in any damage to ING, as Standard's claim on WNF was pledged to ING and - as WNF should have paid directly to ING as per the pledge, but did not do so - therefore ING could still recover the pledged amount directly from WNF. 

3. As to the first complaint, the supreme court rules that the court of appeal did not apply the wrong standard of review and did not fail to explain it's decision properly. The reasoning is pretty concise. (a) By reviewing whether the director could be seriously blamed for causing Standard to nonperform towards ING, while he knew that Standard had no other funds and knew/should have known that Standard would not offer any recourse to ING for its payment obligation, the court of appeal applied the correct standard of review as to director liability. (b) In doing so the court of appeal did not fail to recognize that a company director normally is in a position to decide autonomously which company creditors will be paid given the circumstances, as the court basically ruled that this nonperformance by Standard was only the result of unwillingness to pay by the director. As to the NLG 410k payment, the court of appeal could rule as it did that that defence lacked a sufficient factual basis.

4.1.2 De klachten falen. Het oordeel van het hof geeft niet blijk van een onjuiste rechtsopvatting. Dit oordeel is ook niet onbegrijpelijk en het is toereikend gemotiveerd. Daarbij wordt het volgende in aanmerking genomen.
Het hof heeft door te onderzoeken of [eiser] persoonlijk een ernstig verwijt valt te maken doordat hij, terwijl hij wist dat Standard niet over andere inkomstenbronnen beschikte en hem duidelijk was of behoorde te zijn dat Standard geen verhaal zou bieden voor de verplichtingen van de vennootschap jegens ING, heeft bewerkstelligd dat Standard haar contractuele verplichting tegenover ING tot aflossing van de kredieten niet nakwam, de maatstaf voor persoonlijke aansprakelijkheid van een bestuurder niet miskend.
Bij zijn oordeel dat een zodanig ernstig verwijt op zijn plaats was, heeft het hof niet eraan voorbijgezien dat het een bestuurder in beginsel vrijstaat op grond van een eigen afweging te bepalen welke schuldeisers van de vennootschap in de gegeven omstandigheden zullen worden voldaan, maar geoordeeld dat het niet nakomen van de betalingsverplichting uit hoofde van de nadere overeenkomst slechts voortkwam uit betalingsonwil van de kant van [eiser] jegens ING. Weliswaar heeft [eiser] in dit verband aangevoerd dat hij niet heeft ingestemd met de betaling van ƒ 410.000,- aan de andere 50% aandeelhouder van Standard en dat hij daarvan niet op de hoogte was, maar kennelijk heeft het hof die stelling niet opgevat als voldoende onderbouwd. Dat op de aan het hof voorbehouden uitleg van de gedingstukken berustende oordeel is niet onbegrijpelijk.

Although not mentioned by the supreme court, reference is made to its earlier case law on point, especially its December 8, 2006 decision re Ontvanger/Roelofsen (see, e.g., here). The emphasis put by the supreme court on the foreseeability for the director of the damage caused by his conduct to the company creditor in question (ING) seems the right angle to me, as I explained most recently in De Januskop van het ondernemingsrecht - Over faciliëring en regulering van ondernemerschap (oratie), Deventer: Kluwer 2010, no. 5.3.

Noticeable is that the supreme court - although in passing - underscores the director's freedom (in principal, i.e. not unbounded) to decide himself which company creditors will be paid in view of the circumstances. The whole director liability for selective company creditor payment theory is difficult and not clearly outlined, but that starting point is important; it clarifies that selective payment is not 'wrong' in itself, so that more is needed to establish director liability for selective payment. The supreme court here puts aside the whole selective payment issue by pointing out the court of appeal's focus on the fact that the director was unwilling to pay ING in the first place. I'm wondering whether (i) the foreseeability of damage for ING element (present here) and (ii) the lack of different ranking creditors (ditto) don't already result in the director's conduct being rather difficult (if at all) to square with the director's - bounded - freedom to pay company creditors selectively given the circumstances, so that the director's subjective unwillingness to let Standard pay ING (assuming that was the case here, I'm not 100% convinced) was only an additional factor in the mix, not the decisive one. Things could be different if selective payment is necessary in view of the company's dire financial conditions and this tactic could rescue the company (i.e., the foreseeable result of this tactic isn't certain damage for one or more company credtors), but that scenario doesn't seem to apply here, as the ING credit facility was Standard's lifeline and Standard's nonperformance towards ING apparenty wasn't motivated by a feasible 'rescue the company' tactic.

4. As to the second complaint, the supreme court rules that unlike the complaint takes as the basis for its reasoning, the damage suffered by ING due to the director's conduct leading to nonperformance of Standard consists of Standard's assets not providing recourse to ING for the negative effects to ING of Standard's nonperformance (not: ING not being able to take recourse on the pledged amount).

4.2.2 In cassatie moet uitgangspunt zijn dat ING als pandhouder nog WNF kan aanspreken tot betaling van het aan Standard verschuldigde. Dat pandrecht strekt ertoe ING extra zekerheid te bieden ingeval Standard de kredieten niet aflost, maar laat op zichzelf een vordering van ING jegens Standard tot nakoming van haar toezegging om het van WNF te ontvangen bedrag aan ING ten goede te laten komen (dan wel tot vergoeding van schade wegens niet-nakoming van die toezegging) onverlet. Hetzelfde geldt met betrekking tot de vordering van ING jegens [eiser] uit hoofde van onrechtmatige daad.
Daarbij verdient in de eerste plaats opmerking dat de op [eiser] te verhalen schade van ING niet erin bestaat (zoals het onderdeel tot uitgangspunt neemt) 'dat zij geen verhaal heeft kunnen nemen op het verpande bedrag', maar daarin dat het vermogen van Standard geen verhaal bood voor de nadelige gevolgen van de niet-nakoming van haar toezegging het van WNF te ontvangen bedrag aan ING ten goede te laten komen. Voorts beroept het onderdeel zich niet op (miskenning van) een in feitelijke instanties gevoerd betoog dat ING, ter beperking van haar schade, redelijkerwijze eerst WNF uit hoofde van haar pandrecht had moeten aanspreken, zodat het hof ook niet gehouden was daaromtrent een oordeel te geven. Ten slotte verdient opmerking dat in het onderhavige geval - anders dan aan de orde was in het arrest van de Hoge Raad van 1 maart 1957 waarop de toelichting van het onderdeel zich beroept - door het onrechtmatig handelen (van [eiser]) wel schade (voor ING) is ontstaan, zoals hiervoor omschreven.
Op het voorgaande stuiten de klachten van het onderdeel af.

So the focus in the supreme court's approach isn't whether ING is still able to get paid or not (in that scenario ING would not have suffered damage, assuming WNF would still be able to pay the amount again but now directly to ING), but whether in the Standard-ING relationship the director's conduct resulted in ING being worse off than it would have been without the director's conduct; and ING was worse off, as otherwise ING would have received the NLG 900k instead of receiving nothing and being confronted with an assetless debtor (Standard). The Advocate-General took a different tack to tackle the second complaint (that had some appeal), by - pretty creatively - reading it as an argument that ING should have claimed the amount from WNF first, due to ING's obligation to minimize it's damage where possible. As that 'minimizing damage' theory - a general feature of liability law - is rooted in principles of reasonableness of fairness dominated by the circumstances of the case at hand, and the circumstances here did not warrant such an obligation for ING (according to the A-G that is), the A-G concluded the second complaint should fail.

The supreme court's approach is more principled, in that it doesn't look at the final step whether the creditor can still receive the amount he is entitled to, but on the previous step whether certain conduct by a party has resulted in the creditor being worse of in that specific relationship. The upside of this approach - that is also relevant outside the director liability context - is that the outcome (is there liability or not?) doesn't differ from the outcome in case Standard's claim on WNF wasn't pledged to ING. It also recognizes that the pledge only serves as extra security for ING in case Standard would not repay its loan, and doesn't affect ING's right to receive the NLG 900k amount as agreed upon with Standard (or damages in case Standard violates its payment obligation). Not unimportantly, this way the supreme court was also able to distinguish this case from 1957 precedent (relied on in the second complaint), where a different outcome was reached as the debtor there was still able to pay its debt.

5. For the third complaint and the supreme court's ruling, I refer to s. 4.3.1-4.3.2 of the decision.

[No. 54] Application Ex Officio of EU Consumer Law

A large part of Dutch consumer law has an EU law origin. Since most of this EU consumer law is laid down in directives which have been transposed into Dutch law, this EU law origin is not always clear. However, it is important not to forget the EU background as EU law will still influence the 'national' rules after transposition. The most clear example of an EU law obligation in this respect is probably the duty to consistent interpretation. This means that if a court finds that national law is diverging from a directive – with as a result that a consumer lacks a protection that he would have had under the directive – a national court will have to try to interpret the national law in accordance with the directive.

Another important obligation concerns the obligation for a national court to apply certain EU consumer law ex officio. The European Court of Justice (ECJ) introduced this obligation in its Océano Grupo judgment. In this case it was about an assessment of a jurisdiction clause in the context of directive 93/13 EC on Unfair Terms in Consumer Contracts. This judgment raised several questions inter alia relating to the scope of the obligation. In later judgments the ECJ clarified many of these questions. In the Pannon case the ECJ ruled for example that the role of the national court in the area of consumer protection is not limited to a mere power to rule on the possible unfairness of a contractual term, but also consists of the obligation to examine that issue of its own motion. Obviously this obligation only exists where the court has available the legal and factual elements which are necessary to be able to examine the unfairness of the term. The ECJ made also clear that where the national court considers a clause to be unfair, it must not apply it, unless the consumer, after having been informed of it by the court, does not intend to assert its unfairness and non-binding status. The obligation to examine ex officio the unfairness of a consumer term is not limited to the directive on unfair consumer terms but stretches to all consumer directives.

Although many questions are answered by the ECJ there still is some uncertainty, in particular with respect to the practicalities: how will a court in a specific case have to deal with this obligation to apply EU consumer law on its own motion. In an attempt to answer this and other questions a study group of the national civil law courts (LOVCK) drafted a report about the application of EU consumer law ex officio. The report gives an overview of the relevant case law and gives recommendation how to fit in the obligation on a Dutch court to examine the unfairness of a term of its own motion into Dutch law. The report also discusses in more detail the problems with unfair consumer term in the telecom and banking sector – as it turned out that most unfair consumer terms can be found in this sectors (that is: most litigation about consumer terms happens to be in this sectors) – and gives recommendations to courts how to deal with this particular unfair consumer terms.

The report can be found here (in Dutch).

Request for Reader Feedback

We have been running The Defining Tension since the start of 2009. Now that you have gotten to know us (well, on law and related stuff that is), we would like to know more about you; more specifically your likes and dislikes re TDT. We appreciate feedback, so please share your thoughts with us here. Thanks!

This call for feedback remains on top of TDT's frontpage for some time. Right below the posting continues!

[No. 53] Pileggi Plugging the Dominance of Delaware in the US 'Lawsuit Climate'

Right here, based on this.

[No. 52] First Chamber Questions Re Pending Corporate Law Bills

In post No. 20/10 I wrote about the legislative status of several corporate law bills, pending before the First Chamber of Parliament. While things still don't seem to be moving on the private company and alternative entity fronts, there is some development in other parts of the legislation process that is aimed to modernize Dutch corporate law.

Last week, the First Chamber sent four sets of questions to the Minister of Justice regarding several pending corporate law bills, other than the two mentioned above. You can find them in handy PDF format here at TDT, for your reading pleasure.

• On the bill re one-tier, conflict of interests and director liability vis-a-vis the company (March 12, 2010).
• On the bill re the workers council's position in listed companies (March 2, 1020).
• On the bill re implementation of the shareholder rights directive (February 19, 2010).
• On the bill re permanent supervision on legal entities (anti abuse) (March 2, 2010).

Enjoy.

[No. 51] Re Van der Moolen Inquiry Proceeding [Updated]

In post No. 211/09 (with links to post No. 122, 128, 129 and 154) I wrote about the troubling situation at now bankrupt securities trading and brokerage firm Van der Moolen and the VEB's request for an inquiry into the policy and affairs of Van der Moolen (related to the company's downfall). As in some other inquiry proceedings (see, e.g., here), the VEB - that is rather anxious to hear more about the role played by former Van der Moolen CEO Richard den Drijver in the whole saga - is applying the right of inquiry as stepping stone for later liability proceedings. This is an example of an inquisitory inquiry proceeding.

Today the VEB reported about the brief filed in that proceeding by Richard den Drijver. He apparently has embraced the saying that 'sometimes attack is the best defence', by basically accusing former supervisory directors Zwart and Paardekooper of mismanagement. Juicy stuff. From the VEB's report.

Na zijn tijd
In zijn verweerschrift verdeelt Den Drijver de recente geschiedenis bij VDM in vier periodes. Periode twee betreft het tijdvak van mei 2006 tot mei 2009. Dit tijdvak begint op het moment dat Den Drijver aantreedt als bestuursvoorzitter en eindigt op het tijdstip dat Zwart en Paardekooper als commissaris binnen komen bij VDM.

De derde periode loopt van mei 2009 tot aan het faillissement in september. Na het vertrek van Den Drijver in juli hadden commissarissen Zwart en Paardekooper het roer bij Van der Moolen overgenomen.

Den Drijver vraagt het gerechtshof in zijn verweerschrift om zich in een eventueel onderzoek te concentreren op de periode waarin Zwart en Paardekooper een rol speelde bij Van der Moolen, zowel als commissaris als bestuurder. Vanaf hun entree in mei 2009 zou er van wanbeleid sprake kunnen zijn, daarvoor niet, zo meent de gewezen topman.

Tegenslag bij omvorming
Den Drijver beschrijft in zijn verweer hoe hij Van der Moolen heeft willen omvormen van een hoekmansbedrijf naar een modern effectenhuis. Den Drijver kwam bij Van der Moolen terecht toen dit bedrijf ‘zijn' derivatenhuis Curvalue overnam. Na korte tijd werd Den Drijver betsuursvoorzitter bij VDM.

Hij verminderde de belangen van VDM in de Verenigde Staten en verlegde de focus naar elektronische handelsactiviteiten in Europa. Zo wilde hij met een eigen online broker de concurrentie aangaan met gevestigde namen als BinckBank en Alex. Na forse investeringen werd de ontwikkeling van een eigen platform voor particuliere beleggers gestopt.

Ook wilde Den Drijver geld verdienen via dividendarbitrage, waarbij geprofiteerd wordt van verschillen in belastingregimes tussen verschillende landen. Volgens de gewezen topman was "de tijdgeest en het sentiment bij de verschillende Europese overheden ten aanzien van dividendarbitrage niet altijd positief." Van der Moolen boekt onzeker geworden belastingvorderingen af. Daardoor lijdt het bedrijf in heel 2008 verlies.

'Zwart zorgde voor problemen'
Den Drijver verwijt met name Peter Zwart in zijn rol als commissaris solistisch te hebben opgetreden. Vanaf diens aantreden zou dit voor problemen hebben gezorgd. En juist in die periode -voorjaar en zomer 2009- zat Van der Moolen "midden in de voorbereidingen voor een compleze verhuizing vanuit twee locaties naar Schiphol."

Den Drijver schrijft door Zwart onder zware druk te zijn gezet om af te treden als bestuursvoorzitter. Vanaf dat moment zijn veel fouten gemaakt laat de gewezen topman optekenen. Bij zijn vertrek heeft hij met Zwart besproken "welke urgente lopende zaken op korte termijn dienden te worden aangepakt." Op geen van deze punten zou actie zijn ondernomen door bestuurder Zwart en collega Paardekooper.

There is no link to the brief available yet.

The arguments before the Enterprise Chamber will take place this Thursday. Then it's up to the court...

UPDATE

Zwart and Paardekooper strike back.

[No. 50] Links

1. In post No. 33/10 and post No. 41/10 we highlighted some recent developments on the 'Just say no' and 'poison pill' front. In yesterday's post at the HLS Blog additional thoughts are presented on these intertwined topics, viewed from the No Mas to Just Say No? angle and triggered by the ongoing corporate litigation between Airgas and Air Products (covered in detail here and here, with the latest ruling by the Delaware Chancery Court available here). Some nuggets.

We believe that any judicial evaluation of a “just say no” defense will probably turn on the specific facts and circumstances of the relevant situation. A non-exhaustive list of factors that a court would likely take into account in evaluating the board’s defense includes:

• the size of the premium offered, including increases in price from the initial offer
• the identity of the bidder (strategic vs. financial) and the form of consideration offered (cash vs. stock)
• whether the offer is structurally and substantively coercive and/or is being made by an affiliated shareholder
• the level of support for the offer among target shareholders, as reflected in tenders or voting for an acquirer’s slate in a proxy contest
• the ability and timetable for the target shareholders and/or the acquirer to replace the target board (which would facilitate completion of a deal), including if the target board is classified
• whether the structural defenses (e.g., poison pill) existed prior to the offer being made or were enacted as a specific response to the offer
• the duration of the defensive posture (i.e., has sufficient time passed to allow any superior bidder to emerge and/or for the target board to offer a convincing alternative)
• whether the board of the target has engaged in a thoughtful process and assessment, including as to valuation, supported by analysis from management and outside advisors and reflected in the minutes of its meetings
• whether the target board has obtained an “inadequacy” opinion from its financial advisors, including on increased bids.

* * * *

When properly viewed as primarily a tactic rather than an end, it becomes apparent that the vitality of the “just say no” defense is not and will not be the subject of a simple “yes or no” answer from the Delaware courts. Instead, the specific facts and circumstances of each case will likely determine the extent to which (and for how long) a court will countenance a target’s board continuing refusal to negotiate with, or waive structural defenses for the benefit of, a hostile suitor.

This is all interesting stuff, at least from a Dutch point of view; we have our fair share of takeover battles, but the limits to the available options a target's board has for outsmarting a hotile bidder aren't very clear altogether yet, although important contours were painted in the past years by the Supreme Court and the Enterprise Chamber. In any event, the highly contextual approach advocated in the above post matches nicely with the way Dutch courts typically view this type of corporate events: based on the circumstances of the case at hand. Sometimes a bit too much, IMHO.

2. One of the most important 2009 Supreme Court decisions centered around the IPO - at the start of this century - of an ICT company called World Online. We touched on that decision - clarifying liability risks of IPO facilitating financial companies - here. One of the most important actors in the whole play was Mrs. Nina Brink, CEO of World Online at the time. As described by Michael in post No. 203/09, captioned 'I Didn't Sell Any Shares At This Time':

Those familiar with Dutch securities law - and those familiar with losing money in the internet bubble - will instantly attribute this quote to Mrs. Nina Brink, former CEO of internet access provider World Online, which went public in early 2000 at the height of the bubble. The IPO price was EUR 43, the share started trading at over EUR 50 and, well, from there on, it went down, down, down.

One of her best known pictures is the one taken on the day the shares were listed at the stock exchange, with Brink giving two thumbs-up. Anyway, after the IPO took a wrong turn hell broke loose among disgruntle investors and Brink caught the attention of the media. After some relatively silent years, she was back in the spotlights again when her unauthorized biography was published this month by journalist Eric Smit, who Brink already engaged a few times in court. For those of you who would like to take a 'behind the scenes at World Online' peak in the IPO era, this book should make for interesting reading. Brink did try to force Smit to rectify parts of the biography - including the cover picture - by means of an injunction proceeding, but mostly unsuccessful. As to the cover picture claim, the court ruled last Friday that it should be denied, in part because Brink is a 'public figure' and because the picture has already been printed on the frontpage of a national newspaper with 300.000 prints. 

4.17.  Eisers vorderen tot slot een verbod het desbetreffende portret van [eiseres] te gebruiken op de cover van het boek en ten behoeve van promotionele activiteiten rondom het boek. Ter zitting hebben zij hun vordering beperkt (zie 3.2) in die zin dat alleen de foto van [eiseres] die thans op de cover staat dient te worden verboden. Eisers hebben echter nagelaten te onderbouwen waarom nu juist deze foto dient te worden verboden, terwijl niet in debat is dat het gedaagden wel is toegestaan een ander portret van [eiseres] op de cover te plaatsen. Dit staat reeds aan toewijzing van deze vordering in de weg. Overigens kan niet worden gezegd dat [eiseres] een redelijk belang heeft als bedoeld in artikel 21 Auteurswet om zich te verzetten tegen openbaarmaking van het desbetreffende portret. [eiseres] kan als een ‘public figure’ worden aangemerkt. Op een biografie – ook wanneer die ongeautoriseerd is – is een portret van de hoofdpersoon gebruikelijk en functioneel. De desbetreffende foto heeft bovendien in het verleden op de voorpagina gestaan van De Volkskrant en niet weersproken is dat die krant in een oplage van 300.000 stuks is verspreid. Tot slot kan niet worden gezegd dat [eiseres] in dit geval beschikt over “verzilverbare populariteit” op grond waarvan zij zich tegen gebruikmaking van haar portret op het boek zou kunnen verzetten. Met het portret op de cover van het boek wordt in eerste instantie beoogd onmiddellijk aan te geven over wie het boek gaat.

Although most of the litigation action is likely to have ceased as far as the whole IPO + liability thing is concerned (see the above Supreme Court case), it seems that will not be the case for Smit who is still involved in proceedings against Brink. For some entertaining - Dutch - video footage on this whole controversy look below.

[No. 49] Shareholder Focus and Shareholder Involvement

Today, Pieter Jan Bezemer - from the Rotterdam School of Management - defends his PhD thesis at the Erasmus University Rotterdam. The thesis covers the question what influence a heavy 'shareholder interests' (i.e., wealth maximization) focus by the board has had on the company's results, compared to companies with a more stakeholder interests based approach. Bezemer finds that the latter category has shown better financial results in the past 15 years than the former; he speaks of structural underperformance, caused by a strong short term profit focus, leading to weaker ties between the company and society. I highlighted this risk in my inaugural speech, about the Janus head op corporate law (see the Our books section of TDT). Here is a short Q&A with Bezemer (Volkskrant).

Bedrijven die zich de afgelopen vijftien jaar hebben gericht op verhoging van de winst voor hun aandeelhouders, blijken juist slechter te presteren dan bedrijven die zich niet volledig op de aandeelhouders hebben gefocust, constateert Pieter Jan Bezemer (27) in zijn promotieonderzoek dat hij vrijdag verdedigt aan de Erasmus Universiteit Rotterdam. ‘De structurele onderprestatie van deze bedrijven wordt veroorzaakt doordat zij te veel focussen op de korte termijn en daardoor hun binding met de Nederlandse maatschappij deels verliezen.’

Welke bedrijven richten zich op aandeelhouderswaarde?
‘Het type aandeelhouder bepaalt in grote mate of een bedrijf dat concept omarmt. Het zijn niet alleen bedrijven waar Amerikaanse en Britse opkoopfondsen of hedgefondsen zich als aandeelhouder roeren, maar ook bedrijven waar financiële instellingen zoals banken en pensioenfondsen als grootaandeelhouder actief zijn. Deze bedrijven committeren zich aan aandeelhouderswaarde. Door bijvoorbeeld optieregelingen in te voeren of aandelen in het eigen bedrijf te kopen.’

Zijn er veel bedrijven die letten op aandeelhouderswaarde?
‘De Angelsaksische benadering heeft een hoge vlucht genomen. In 1992 stond 13 procent van de honderd grootste beursbedrijven te boek als Angelsaksisch. Dit percentage was in 2006 opgelopen tot 74 procent. Bedrijven met een familieachtergrond of zonder grote financiële investeerders gingen niet mee met de overheersende trend. Zij hielden vast aan het Rijnlandse model, waarbij naar alle belanghebbenden van een bedrijf gekeken wordt.’

Waarom presteren Angelsaksische bedrijven ondermaats?
‘De regels van het Angelsaksische spel zijn anders. Angelsaksische bedrijven kunnen minder samenwerken met toeleveranciers en belangenorganisaties en investeren minder in werknemers. Focus op aandeelhouderswaarde leidt tot winst op de korte termijn, maar er is minder oog voor innovatie en de winstgevendheid op lange termijn. Neem bijvoorbeeld de beloningsplannen die vooral kijken naar de prestaties op de korte termijn.

‘Het omschakelen naar de Angelsaksische benadering vergelijk ik met het invoeren van een nieuw computerprogramma terwijl het huidige programma is gebaseerd op andere normen en waarden, die breed gedragen worden.’

Waarom hebben ook financiële instellingen aangedrongen op de invoering van aandeelhouderswaarde bij bedrijven?
‘Het is lastig daar precies de vinger achter te krijgen. De globalisering van de financiële markten speelt de belangrijkste rol. Bovendien heb ik de indruk dat de bestuurders door hun economische opleiding en achtergrond gevoeliger zijn voor de opvatting dat aandeelhouderswaarde moest worden ingevoerd.’

Moeten de bedrijven de Angelsaksische benadering weer afschaffen?
‘Als de kritiek die na de financiële crisis ontstond, aanhoudt, is het wellicht verstandig de doorgeslagen focus op aandeelhouderswaarde te herzien. Mijn belangrijkste aanbeveling is dat bedrijven bij het invoeren van nieuwe economische principes veel meer rekening moeten houden met alle stakeholders.’

At the same time, the Dutch institution Eumedion - that operates as a representative of the interests of institutional investors in the field of corporate governance - is calling for institutional shareholders to act more involved and long-term oriented qua shareholder.

Institutionele beleggers zouden zich meer als betrokken aandeelhouder moeten gedragen. Zij zouden daartoe (minimaal) het stemrecht verbonden aan de aandelen dienen uit te oefenen en/of een dialoog moeten aangaan met het bestuur en de raad van commissarissen zowel binnen als buiten de aandeelhoudersvergadering, waardoor daadwerkelijk tot uitdrukking komt dat de verschaffer van eigen vermogen zich betrokken toont bij het (financiële) reilen en zeilen van de onderneming. Dit stelt Eumedion in haar vandaag gepubliceerd position paper over betrokken aandeelhouderschap. Het position paper bevat vooral aanbevelingen richting vooral institutionele beleggers om betrokken aandeelhouderschap vorm te geven. Het position paper is opgesteld naar aanleiding van de maatschappelijke en politieke discussie over de wenselijkheid van lange termijnaandeelhouderschap door institutionele beleggers en het vorig jaar gepresenteerde onderzoeksrapport van prof. Angelien Kemna en prof. Erik van de Loo over de relatie tussen institutionele beleggers en het bestuur en de raad van commissarissen. Eumedion stelt in het position paper dat lange termijn aandeelhouderschap bij institutionele beleggers moeilijk kan worden afgedwongen of gestimuleerd. Zij ziet derhalve niets in compensatiemiddelen (zoals loyaliteitsdividend of –stemrecht) voor het lang aanhouden van aandelen door institutionele beleggers. Eumedion spreekt de voorkeur uit voor betrokken aandeelhouderschap, zodat vanuit deze betrokkenheid de risico´s op de beleggingen worden verminderd. Om van betrokken aandeelhouderschap te kunnen spreken is het van belang dat institutionele beleggers de nodige expertise binnen de institutionele belegger op het terrein van goed ondernemingsbestuur en duurzaamheid ontwikkelen dan wel verder uitbreiden en dat corporate governance en duurzaamheidsfactoren meer worden geïntegreerd in het beleggingsproces. Voorts zou de beloning van fondsmanagers sterker moeten worden gekoppeld aan de lange termijn en aan de belangen van de cliënt en de eindbegunstigden en zouden institutionele beleggers bereid moeten zijn om onderling samen te werken, zodat zij sterker staan tegenover de ondernemingsleiding. Randvoorwaarde voor betrokken aandeelhouderschap is wel dat aandeelhouders over voldoende zeggenschapsrechten beschikken en dat het bestuur en de raad van commissarissen een open houding hebben om de dialoog met institutionele beleggers aan te gaan. Eumedion zal de komende maanden met haar deelnemers bespreken op welke wijze de aanbevelingen kunnen worden geïmplementeerd in het bedrijfs- en beleggingsproces.  

This call should be seen against the background of the emerging debate in the Netherlands - well-known to regular readers of TDT - about the role of shareholders in listed companies, whether they were given too much powers during the last 10 years, whether something is broken and - if so - how to fix it. This includes questions like How can dialogues between management and shareholders be improved? and Is there merit in loyalty dividend? Eumedion's position paper is available in Dutch and English.

[No. 48] Bad PR for E&Y These Days

In post No. 45 I wrote about the examiner's report re Lehman Bros. and the role played in that drama by accountant firm E&Y.

Today's Dutch newspaper Het Financieele Dagblad reports that a top accountant from the same firm has been suspended yesterday for 6 months by the accountant's board for professional conduct. The reason: serious mistakes made by him, in the process of approving the 1999 and 2000 annual accounts of former IT firm Landis, that went bankrupt in 2002 (leading to estimated damage of E 600 million and the firing of 3200 employees).

De externe accountant van het omgevallen ICT-beursfonds Landis is maandag hard op zijn vingers getikt. De Raad van Tucht heeft accountant Henk Smits van Ernst & Young voor een half jaar geschorst.

De tuchtraad spreekt zelf van ‘een zware maatregel’. Smits krijgt de straf opgelegd ‘gelet op de aard en de ernst van de begane overtredingen’, aldus het vonnis. Schorsing van de beroepsuitoefening is de zwaarste maatregel die de tuchtraad accountants kan opleggen. Andere mogelijke sancties zoals een waarschuwing en een berisping gaan veel minder ver. Een schorsing voor een half jaar is zeldzaam voor accountants.

De uitspraak is gedaan naar aanleiding van een tuchtklacht die is ingediend door de curatoren van Landis. Dit snelgroeiende Nederlandse beursfonds ging in 2002 failliet. De daardoor veroorzaakte schade ramen de curatoren op € 600 mln. Ruim 3200 werknemers verloren hun baan.

Volgens onderzoek van de curatoren Willem Jan van Andel en Rinke Dulack is bij Landis sprake geweest van ‘stelselmatige misleiding’, onder meer met de door Ernst & Young goedgekeurde jaarrekeningen. Deze mening wordt gedeeld door enquêteurs die in opdracht van de Ondernemingskamer van het Amsterdamse gerechtshof onderzoek hebben gedaan naar wanbeleid bij Landis.

Eindverantwoordelijk voor Landis

Henk Smits is een vooraanstaand accountant. Hij was bij Ernst & Young eindverantwoordelijk voor Landis. Hij keurde de jaarrekeningen van 1999 en 2000 van Landis goed. Ook tekende hij voor het ‘Compliance Certificate’ waarop tien banken, waaronder ABN Amro en ING, vlak voor het omvallen van Landis nog eens € 175 mln aan het bedrijf uitleenden.

De tuchtraad verklaart alle vier klachten van de curatoren tegen accountant Smits gegrond. Hij had de jaarrekeningen 1999 en 2000 niet mogen goedkeuren. Hij heeft de gelduitlenende banken ook ten onrechte een goedkeurende verklaring gegeven. Zijn goedkeuring over de jaarrekening 2000 gaf Smits op een moment dat zijn onderzoek nog niet was afgerond.

Het praktische effect van de schorsing is nihil. Smits is sinds juli 2003 met pensioen. De sanctie is volgens Van Andel wel een steun in de rug bij zijn schadeclaim van € 145 mln tegen Ernst & Young.

Suspension is seen as the harshest of the available penalties, including a warning and a formal slap on the wrists. Whether that's true in this case is a bit doubtful, as the accountant retired in 2003. Nevertheless, the shaming effect won't be de minimis.

The ruling won't do much good to the position of the firm, as the inquiry proceeding into the fall of Landis (ordered in 2003; see the investigation report filed by the investigators early May 2009 here) is likely to come to an end soon by means of a mismanagement judgment by the Enterprise Chamber, no doubt to be followed - especially if mismanagement is established on related grounds, which is far from theoretical - by several liability proceedings. Illustrative are these statements made by the VEB mid 2009, the foundation that represents the interests of shareholders and that is looking into the possibilities of holding E&Y liable.

Chaos
Landis werd door bestuurder Paul Kuiken bestuurd als een ‘vriendenclub'. Beleid en planning werden voortdurend aangepast. Financiële toetsingen bij overnames ontbraken en er werd - geheel achterhaald - vastgehouden aan de zogenaamde ‘gulden balans'-regel (het afboeken van betaalde goodwill van overgenomen ondernemingen op het eigen vermogen van Landis).

De raad van commissarissen van Landis, bestaande uit Cees de la Haye en Adriënne Vrisekoop-Sterk, beschikten niet over de vereiste kennis en expertise voor een beursfonds van deze omvang en hebben nagelaten zich de indringende vragen te stellen of Landis het beoogde groeitempo wel aan kon en of Landis wel bestand zou zijn tegen verslechterende marktomstandigheden.

Wanbeleid
Voor de VEB is het rapport aanleiding om de OK op korte termijn te verzoeken tot vaststelling van wanbeleid bij Landis over te gaan. Die kwalificatie zal de basis vormen voor aansprakelijkstellingen en vergoedingen aan aandeelhouders.

De VEB overweegt nog of zij gelijktijdig met het verzoek aan de OK de civiele rechter zal vragen op basis van het rapport de aansprakelijkheid van de betrokken partijen vast te stellen. De mogelijke aansprakelijkheid van huisaccountant Ernst & Young wordt nog bestudeerd.

Boekhouden Landis-stijl
Dat er ook op de administratie van Landis veel aan te merken was werd al eerder door de curatoren vastgesteld. De creatieve controller Gerrit Bonnema maakte het wel erg bont toen hij zijn medewerkers opdracht gaf de cijfers op de gewenste eindresultaten aan te passen. Ook bij de vastlegging van de besluiten van bestuur en commissarissen was het nodige mis.

Uiteindelijk liep alles spaak met de gebrekkige concernfinanciering. Beleggers werden door bestuur en commissarissen jaar na jaar op het verkeerde been gezet en hebben nagelaten tijdig in te grijpen. Met het faillissement van Landis verdampte maar liefst 440 miljoen euro die beleggers in deze onderneming investeerden.

(emphasis mine)

I guess the words 'Bad PR for E&Y these days' are an understatement.

[No. 47] European Commission Close to Closing Loophole

Especially as a young scholar, it's always encouraging to notice that someone actually read your work. I had this pleasure today as the European Commission published a lengthy report evaluating the European Transparency Directive, which contains issuer disclosure rules as well as major share ownership disclosure rules. With respect to the latter, the report also addresses the issues of empty voting and hidden ownership, and refers to the seminal work of Henry Hu & Bernard Black in this area (of course) and also to my own paper (which is available at SSRN).

On empty voting, the authors of the report write that all in all, they "are inclined to recommend a ban on this practice." (I have not yet had the chance to read how this ban should be effectuated).

On hidden ownership, referring to problematic cases involving cash-settled derivatives, the report concludes that "There seems to be a clear case to close the loophole. We thus suggest the implementation of a notification regime."

The report and annexes can be downloaded here. For the European Securities Markets Expert Group (ESME)'s views on the same issues, see post no. 149. 

[No. 46] Corporations, Slaves and Limited Liability

Larry Ribstein connects them here, with a wink to Early Elements of the Corporate Form: Depersonalization of Business in Early Rome.

Here's the abstract.

A crucial step in economic development is the depersonalization of business, which enables an enterprise to operate as a separate entity from its owners and managers. Until the emergence of a de iure depersonalization of business in the 19th century, business activities were eminently personal, with managing partners bearing unlimited liability. Roman law even restricted agency. Yet, the Roman legal system did develop a form of de facto depersonalized business entity, which, although in a radically different way, exhibited all the distinctive features of modern corporations (continuity, direct agency, limited liability, and entity shielding). Business was depersonalized by making the fulcrum of the company a nonperson: the slave. Paradoxically, limited liability was achieved by extending the liability of the master to include assets managed by the slave (the peculium), in contrast with an earlier principle that the slave owner was not responsible for transactions by his slave. On the question why de iure depersonalization emerged only over a thousand years after the Roman experience, we discuss three hypotheses: (i) a cultural hypothesis, (ii) a technological hypothesis and (iii) a biased-evolution-of-remedies hypothesis.

Keywords: depersonalization, limited liability, entity shielding, Roman law, slave

JEL Classifications: D23, G3, K12, K22, N00

[No. 45] Examiner's Report re Lehman Brother's Bankruptcy

It makes for good reading, all 9 volumes.

Noteworthy is that, although serious mistakes were made at the top management levels, the examiner has not found clear indications that Lehman's directors breached their duties, although claims for negligence don't seem theoretical.

Accountant E&Y is also noted in the volumes, and not in a very positive way.

[No. 44] Director Indemnification

Many persons who are asked to join a corporation as director, wonder what such an appointment means in terms of personal liability in case the management of the company turns out poorly and some people - like shareholders - might get upset. Sometimes this question comes up along the way, when trouble arises at the horizon. This is all quite understandable.

Often comfort is found in a director liability insurance (a D&O policy, or raincoat policy, in jargon). Although when push comes to shove the insurer may try to duck compensation obligations under the policy, and other hick-ups may come up (like disagreement between directors, if one wants to settle litigation and the other wants to continue litigation, paid from the policy that is often capped), insurance policies typically take much of the initial discomfort away. Another options is an indemnification agreement between the director and the company, that basically obliges the latter to pay for reasonable litigation costs made by the former and even damages to be paid by the former, in cases where the director acted in the course of his management duties and is held liable by a third party. Think of a company creditor, for example. There are limits to what an indemnification agreement can do (it may not help in case of intentional infliction of damage, for example), and it doesn't help the director much when the company is insolvent, but often this tools works well also.

Insurance and indemnification is all ex ante stuff. There are also ex post solutions to curb potential liability. Informed discharge of the board of directors by the general meeting of shareholders is one; discharge means the company can't go after the directors in terms of liability proceedings anymore, as far as their conduct is covered by the discharge. An important limitation of discharge is that it only affects the company, not any third party. Another ex post solution is the option for a director to argue that, although one of them made a serious mistake resulting in board liability (in principle that is), he/she should not be held liable as he/she made no serious mistake - taking into account the division of tasks between the directors - and also tried to stop the damaging effect of the improper conduct. Such a disculpation defence is possible, but not easily allowed by courts. This is all still a bit murky under Dutch law. Disculpation also only plays a role in the director/company relationship, as in the director/third party relationship no such thing as collective board liability exists (this is all done on a director-by-director basis).

Why am I writing all this? Because this morning Het Financieele Dagblad wrote that Fortis is trying to get rid of the indemnifications it gave to its former board members, who are being attacked in liability proceedings by disgruntled third parties (mostly shareholders who lost quite some money in the 2007-2008 period).

Oud-bestuurders en directieleden van Fortis dreigen persoonlijk op te moeten draaien voor schadeclaims van boze beleggers. Het beursfonds ruziet met voormalige toplieden over de eventuele aansprakelijkheid.

Fortis wil geen toelichting geven op het geschil, dat kort wordt aangestipt in het persbericht over de jaarcijfers. Volgens bronnen wil het bedrijf de eerdere vrijwaringen inperken van alle hoofdrolspelers uit de periode voor het bijna-faillissement van Fortis. Het gaat onder anderen om oud-topmannen Jean-Paul Votron, Filip Dierckx en Herman Verwilst, alsmede om financieel directeur Gilbert Mittler en om voorzitter Maurice Lippens.

Het nieuws kwam naar buiten op de dag dat toezichthouder AFM boetes uitdeelde aan Fortis wegens het verspreiden van te positieve berichten in het eerste halfjaar van 2008. Dat was marktmanipulatie, oordeelt de AFM.

Boetes voor AFM-begrippen hoog

De boetes zijn voor AFM-begrippen hoog (totaal euro 576.000), maar voor Fortis zijn de indirecte gevolgen mogelijk nog omvangrijker.

Advocaten van boze beleggers kondigden meteen aan dat ze het boetebesluit gebruiken in hun claims richting Fortis. 'Dit is voor ons reden voor een feestje', zegt advocaat Hendrik Jan Bos, die zeven rijke particuliere beleggers bijstaat. Hij richt zijn claim in eerste instantie op de topmannen van destijds en pas daarna op het beursfonds. Dat is voor zijn cliënten, allen oud-ondernemer, een 'principezaak'. 'Het gaat hun erom dat deze bestuurders voor veel geld zijn ingehuurd en toen het mis ging met een premie zijn vertrokken. Zij moeten weten dat ze niet zomaar wegkomen', zegt Bos. Hij mag binnenkort enkele oud-toplieden van Fortis, onder wie Votron, als getuigen horen.

Ontmanteling Fortis

De zaak van Bos is een van de vele processen die zijn aangespannen of aangekondigd rond de ontmanteling van Fortis. De schade voor beleggers is groot: de beurswaarde ging van euro 40 mrd begin 2008 naar euro 7 mrd nu.

Het huidige Fortis, dat binnenkort verder gaat onder de naam Ageas, wil daarom dat de verantwoordelijken van destijds niet zomaar wegkomen. Een reeks van bestuurders en directieleden heeft in de loop van 2008 het bedrijf verlaten. Daarbij kregen ze vrijwaring voor de financiële gevolgen van rechtszaken. Fortis vecht die vrijwaring nu aan. Niet in alle gevallen zouden bestuurders de rekening door moeten kunnen sturen naar hun oude werkgever. Vooral als er opzet in het spel was en de aansprakelijkheidsverzekering van het bestuur, die een maximum heeft van euro 250 mln, niet uitkeert, moeten de oud-bestuurders ook zelf in de buidel tasten. Sommige betrokkenen verzetten zich daartegen, zeggen bronnen.

Vertrekpremie oud-topmannen

De meeste oud-topmannen kregen een vertrekpremie mee, ondanks het feit dat Fortis door de overheden van Nederland en België moest worden gered. Fortis keerde in 2008 voor bijna euro 10 mln aan vertrekregelingen uit.

Although I'm not familiar with the details of the case, it seems to me it will be quite an uphill battle for Fortis to actually get rid of - or at least limit - these indemnifications, and the obligations for Fortis following from them. The whole idea is that, when the weather turns from sun into rain for directors, they can rely on these arrangements that are designed to limit their personal liability in certain cases. Of course there are situations imaginable where reliance on the indemnification would be in conflict with principles of reasonablenes and fairness or public policy, but this requires extraordinary circumstances. It would be a bit funny if the company could simply retreat when things turn ugly. I'm quite curious to see how this turns out.

[No. 43] On Shareholders and Ownership

In the Dutch corporate law realm, the argument that shareholders basically "own" the corporation is made sporadically, but not often. Perhaps this has to do with the legal realities:

• that as per section 2:5 DCC, and from a property law point of view, legal entities are considered to be equal to natural persons (unless the statute provides otherwise): legal entities have rights and obligations, just like people made out of flesh and blood have;
• that a corporation is generally conceptualized as an institution, as a thing separate and apart from the shareholder base and not founded on some - implied - contractual relationship between shareholders (the latter view was abandoned during the early 1900s); and
• that we don't apply the shareholder wealth maximization norm, but instead approach matters from the stakeholder perspective (see, e.g., here).

In view of all this, it doesn't make much sense to make the argument.

Things are different, or so it seems, in the United States. Go and read this discussion between Josh Fershee (who makes the argument) and Steve Bainbridge (who thinks otherwise).

[No. 42] Re Océ Inquiry Proceeding

This week the Enterprise Chamber was asked by minority shareholders Hermes and USS (appr. 5%) to see whether one or more preliminary measures (s. 2:349a(2) DCC) should be taken, including the appointment of special supervisory directors, whose task would be to watch over the minority shareholders' interests. This in view of the takeover of Océ by the Japanese company Canon and the changes in corporate governance contemplated by Océ in that respect, including the six person supervisory board being composed of four Canon representatives. Hermes and USS think the € 8,60 per share bid is too low and for that reason do (did) not plan to offer their shares under the bid, but at the same time fear that once the takeover is completed they will be trapped in a corner as minority shareholders (by Canon that is).

In a decision following only a few hours after the hearing, where the situation was discussed by the parties, the court denied the requests. As - in its preliminary view - there are no well founded reasons to doubt the correctness of the policy and course of events at Océ, there is no ground to take one or more preliminary measures. Apparently one of the pillars of the decision is that, as the supervisory board post-takeover will still consist of two original Océ supervisory board members (including the chairman) who seem to be independent from Canon, there is no reason to assume that the supervisory board - which is under the duty to act in the best interests of the company, not Canon - will not be able to function properly. In an entirely different case, the court reached a different outcome (upheld by the Supreme Court).

The court also looked at other factors, but why and how exactly has not been made public yet. Here is the information provided by the court so far.

Uitspraak Ondernemingskamer inzake Océ NV

Amsterdam, 4 maart 2010 - De Ondernemingskamer van het Gerechtshof te Amsterdam heeft gisteren, 3 maart 2010, de zaak behandeld die twee aandeelhouders van Océ NV (Océ), Hermes en USS (Britse pensioenfondsen) hebben aangespannen in het kader van de overname van Océ door het Japanse Canon. Deze aandeelhouders houden nu tezamen ruim 5% van de aandelen in Océ. Zij vinden het bod dat Canon heeft uitgebracht van € 8,60 per aandeel te laag. Hermes en USS wilden hun aandelen dan ook voorlopig niet onder het bod aanmelden, maar vrezen ná de overname als minderheidsaandeelhouders ‘bekneld’ te raken.

Het ging gisteren om het verzoek tot het treffen van onmiddellijke voorzieningen. Hermes en USS vroegen de Ondernemingskamer onder meer om speciale commissarissen bij Océ te benoemen die zouden moeten waken over de belangen van de minderheidsaandeelhouders.

De Ondernemingskamer heeft een paar uur na de behandeling (het was strikt genomen geen schorsing) gisterenavond mondeling uitspraak gedaan. Zij oordeelde - voorlopig - dat niet kan worden gezegd dat de gekozen samenstelling van de raad van commissarissen (RvC) van Océ, ná de overname door Canon, bij voorbaat als strijdig met een goede corporate governance moet worden geacht of dat deze meebrengt dat de belangen van de minderheidsaandeelhouders tekort zal worden gedaan. De omstandigheid dat vier van de zes leden van de RvC aan Canon zijn gelieerd doet niet af aan hun verplichting te handelen naar het vennootschappelijk belang, terwijl daarnaast twee leden, onder wie de voorzitter, uit de ‘oude’ RvC van Océ aanblijven van wie niet het vermoeden is gerechtvaardigd dat zij niet voldoende onafhankelijk zullen zijn. Voorts oordeelde de Ondernemingskamer - voorlopig - dat ook de informatievoorziening, de aanbeveling van het bod door de RvC en het bestuur van Océ, alsmede de gang van zaken omtrent het (gebruik van het) stemrecht van de financieringspreferente aandelen van Océ geen omstandigheden opleveren die gegronde redenen meebrengen om te twijfelen aan een juist beleid van Océ. Om al deze redenen is het verzoek tot het treffen van onmiddellijke voorzieningen afgewezen.

De schriftelijke uitspraak zal te zijner tijd worden gepubliceerd op www.rechtspraak.nl.

A written opinion will published at some time.

[No. 41] Long Live the Poison Pill

Steve Davidoff has a great post on the Delaware Chancery Court's long awaited opinion in the Selectica case. According to Steve,

The real significance of this decision is that Delaware courts will deferentially review N.O.L. [net-operating-loss] poison pill adoptions. But this will not be the “careful” review that the Moran decision promised back in 1985, but the more deferential posture that has evolved over the years under Unocal.

The full post can be read here. Not surprisingly, Wachtell has already published a memo celebrating the case: "The decision confirms that rights plans remain an important bulwark, notwithstanding continued attacks from academic and other quarters."

[No. 40] CESR Proposes Transparency of Short Selling in Europe

The Committee of European Securities Regulators (CESR) has just issued a report containing detailed proposals for short selling disclosure requirements. From the abstract:

This report contains CESR‟s proposal to the European Institutions for a pan-European short selling disclosure regime. It is based on a two-tier model for disclosure of significant individual net short positions in all shares that are admitted to trading on an EEA regulated market and/or an EEA MTF. However, the regime would not apply to shares admitted to trading on an EEA regulated market or an EEA MTF if their primary market is located outside the EEA. At the lower threshold of 0.2%, positions would be disclosed to the relevant regulator, at the higher threshold of 0.5% positions would be disclosed, in addition to the regulator, also to the market as a whole. All changes of position would be reported at increments of 0.1%, first to the regulator (from 0.3% until 0.4%) and then to the regulator and the market.

The proposals are driven by concerns that short selling "can be used in an abusive fashion to drive down the price of financial instruments to a distorted level, can contribute to disorderly markets and, especially in extreme market conditions, can otherwise have an adverse impact on financial stability."

What strikes me is that while the report does acknowledge that disclosure does not only generate benefits but also a range of costs, the report cites no evidence whatsoever that sheds more light on the magnitude of these costs and benefits, which would appear to be a prerequisite for a thorough cost/benefit analysis. Accordingly, we are left with the mere observation that "CESR considers that improving the transparency of short selling would have distinct benefits which would outweigh the associated costs."

The report is available here.

[No. 39] The 'Quality of Shareholders' Requirement Revisited

For details check today's ruling by the Arnhem Court of Appeal (in litigation highlighted in post No. 80/09), that should make interesting reading for you (Dutch) corporate law practitioners out there. For some first media coverage go here.

[No. 38] Links [Updated]

New month, new stuff going on. Here are two links, related to two issues discussed previously at TDT.

1. In post No. 213/09 I highlighted the Jeff Skilling case that is now pending before the US federal Supreme Court (post No. 210/09 touched upon the Conrad Black case). Now that oral argument is almost here, it's time for an update on Skilling's Day in Court.
2. In post No. 28/10 I said a few things about the ongoing investigations by DNB and AFM into the bankruptcy of DSB Bank last year and the role played in that respect by former 'political heavy weights turned corporate fiduciaries'. The first report, that was reviewed by Prof. M. Scheltema and that covers Gerrit Zalm (current CEO of ABN Amro), has been made public. The verdict? In early Roman terms: a thumbs-up, although DNB and AFM don't seem to have been fully 'n sync in reaching this outcome. From the cover letter by the current Minister of Finance to the chairman of the second chamber of parliament.

Op 26 februari jl. heb ik het rapport van professor Scheltema ontvangen met zijn bevindingen over het eerste bestuurdersonderzoek zoals dat door de Nederlandsche Bank (DNB) en de Autoriteit Financiële Markten is verricht naar aanleiding van het faillissement van DSB Bank.

Het eerste bestuurdersonderzoek heeft betrekking op de heer Zalm. De uitkomst van de herbeoordeling van DNB, de vergunningverlenende en daarmee leidende toezichthouder in deze, is positief, mede in achtnemend dat de AFM tot een ander oordeel komt. Gelet op dit positieve eindresultaat is de toezichthouder niet overgegaan tot het treffen van maatregelen.

De conclusie van de heer Scheltema is dat de toezichthouder zorgvuldig te werk is gegaan en dat zij in redelijkheid tot haar eindoordeel heeft kunnen komen. Op basis hiervan heb ik geen aanleiding om tot een ander oordeel te komen.

Zoals eerder is toegezegd, betracht ik maximale transparantie bij het informeren van uw Kamer bij de DSB-onderzoeken. Het behoeft geen toelichting dat het nastreven van dit publieke belang op gespannen voet kan komen te staan met de bescherming van belangen van de bij het bestuurdersonderzoek betrokken personen. Uiteindelijk heb ik alles overwegende besloten het volledige rapport van de heer Scheltema aan uw Kamer te doen toekomen.

Uit het rapport blijkt dat de toezichthouders onderling niet telkens eenzelfde beoordelingslijn hebben gehanteerd. Daarover plaatst prof. Scheltema een aantal kritische kanttekeningen. Ik zal mij dan ook op korte termijn hierover met zowel de voorzitter van de raad van bestuur van de AFM als met de president van de Nederlandsche Bank verstaan.

'The others', especially those who were longer involved with DSB Bank than Zalm was, will no doubt look with envy to this outcome. This whole 'time spent' factor may prove pretty crucial in the outcome of the individual files, also looking at the role this factor played in the assessment of Zalm's conduct. We'll see, but don't say I didn't say so!

UPDATE

The first comments on the Skilling hearing - and the questions asked by the SCOTUS - are in.