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[No. 43] In re Inter Access Group Inquiry Proceeding - An Unexpected Afterburner

The Supreme Court case seemed settled with the opinion of February 25, 2011, but actually wasn't. Last Friday the Supreme Court issued a short additional opinion, fixing two slip-ups in his first opinion. Here's the key part.

De Hoge Raad heeft in deze zaak op 25 februari 2011 een beschikking uitgesproken. Deze beschikking bevat een kennelijke vergissing in de aanduiding van de partij die op de conclusie heeft gereageerd, die zich voor eenvoudig herstel leent. De vijfde zin van rov. 2 moet als volgt worden gelezen:
"De advocaat van Marigot c.s. heeft bij brief van 22 december 2010 op die conclusie gereageerd."
Daarnaast is in de beschikking onder 3.12 abusievelijk een passage weggevallen. Ook deze fout leent zich voor eenvoudig herstel. De onder 3.12 vermelde tekst wordt vervangen door:
"De onderdelen kunnen niet tot cassatie leiden. Een betoog van de zojuist weergegeven strekking is bij de Ondernemingskamer niet gevoerd. De onderdelen noemen ook geen vindplaatsen waar een voldoende uitgewerkt betoog van deze strekking naar voren is gebracht, en zij houden niet de klacht in dat de ondernemingskamer in dit opzicht stellingen over het hoofd heeft gezien of op onbegrijpelijke wijze heeft misverstaan. Het betoog kan niet voor het eerst in cassatie aan de orde komen, aangezien het mede een onderzoek van feitelijke aard vergt, waarvoor in cassatie geen plaats is."
Bij brief van 11 april 2011 heeft de Hoge Raad de advocaten van partijen op de hoogte gebracht van deze verschrijvingen en hen in de gelegenheid gesteld zich over de verbetering daarvan uit te laten. De advocaten van Marigot c.s. en IA Groep hebben van die gelegenheid gebruik gemaakt.

In Ondernemingsrecht 2011-5, no. 40 I analyzed the first opinion more in-depth. As I wrote on p. 204 and 207, the wording of the opinion already suggested - to me at least - that the Supreme Court had not taken hours to draft the ruling. I guess my haunch was correct: in addition not only the wrong lawyer was mentioned in the opinion (rov. 2), even a whole sentence  was deleted by mistake from the court's substantive reasoning (rov. 3.12).

Now that things have been fixed, one question keeps lingering in the back of my mind; well, it was actually put there by my colleague Arnoud Pijls (HT!) post-publication, who was kind enough to bring this question to my attention. Perhaps an EHRM watcher - which I'm not - reading this blog can share some useful insights on point.

To recap: the Supreme Court ducked the whole 'violation of section 1 First Protocol' complaint solely based on rules of Dutch civil procedure law:

• the claimant did not make this argument before the Enterprise Chamber;
• the complaint does not mention anywhere where such an argument can be found in the briefs;
• the complaint does not state that the Enterprise Chamber - inexplicably - missed such an argument; and
• the argument is too fact-intensive for the Supreme Court to handle (remember, the Supreme Court does not review de novo).

We therefore don't know whether the share dilution facilitated by the Enterprise Chamber's section 2:349a(2) DCC immediate measures as taken and motivated in its December 31, 2009 ruling can be reconciled or not with section 1 FP, as both the Enterprise Chamber and the Supreme Court remain 100% silent on this issue. Even if Marigot and Willemse indeed failed to invoke section 1 FP before the Enterprise Chamber, they did invoke section 1 FP before the Supreme Court; there's no question about that.

Here comes the lingering part: can this 'form over substance' course taken by the Supreme Court (too little too late, so I don't have to address it), that is solely based on rules of Dutch procedural law, be squared with the effective application of the EHRM treaty as mandated by that treaty to which the Netherlands is a party? In other words: can the Supreme Court refuse to address a substantive ' violation of section 1 FP'  claim altogether, simply because that claim was not presented properly to the Enterprise Chamber, although this is just a Dutch rule of procedural law?

The Supreme Court in this case does not seem to have been bothered by this question, that turns on the relationship between treaty law and national law. Honestly, neither was I when I wrote my comment. Perhaps the answer is yes, if EHRM case law from the EHRM court in Strasbourg should be read to require that a party who wants to file a 'violation of the EHRM treaty' claim with the EHRM court must have filed the same complaint with the appropriate domestic courts - that's plural - at least in substance first (i.e., not just with the highest domestic court), in order to be able to ultimately bring such a claim before the EHRM court.

See for example EHRM 15 november 1996, req. no. 64756/01 (Sadik t. Griekenland) §30: '(…) it recognised that Article 26 (art. 26) must be applied with some degree of flexibility and without excessive formalism and that it does not require merely that applications should be made to the appropriate domestic courts and that use should be made of remedies designed to challenge decisions already given. It normally requires also that the complaints intended to be made subsequently at Strasbourg should have been made to those same courts, at least in substance and in compliance with the formal requirements and time-limits laid down in domestic law (…).' [emphasis by me]

Also notice the reference to 'in compliance with the formal requirements and time-limits laid down in domestic law.'

In that case: if a party would not be entitled to have his EHRM related claim reviewed by the EHRM court, because that claim was not previously brought - in a proper way - before all appropriate Dutch courts (here: including the Enterprise Chamber), then why should it be entitled to have his EHRM related claim reviewed by the Dutch Supreme Court, if the claim was not properly brought before the Enterprise Chamber? In that case, wouldn't the Dutch procedural rule applied by the Supreme Court be in sync with EHRM case law on point?

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[No. 42] Dutch Government in re Abuse of Limiteds

This week the Dutch Government replied (Download 634424404857231498ah-tk-20102011-2396) to questions by members of parliament concerning the abuse of British Limiteds in the Netherlands (See the post of Matthijs de Jongh on this topic). The Dutch Government does not seem to be very concerned:

"Wij zouden willen benadrukken dat naar onze mening niet kan worden gesteld dat sprake is van een wildgroei aan limiteds. Het aantal bij de Kamer van Koophandel geregistreerde limiteds was in het afgelopen jaar immers het laagste in de laatste 7 jaren. [...] [Er is] geen specifieke kwantitatieve informatie bekend waaruit volgt dat limiteds in Nederland of in andere landen van de Europese Unie in hogere mate bij faillissementsfraude zijn betrokken dan nationale rechtsvormen."

[No. 41] Is Soccer Too Big to Fail?

Until recently I thought that the ‘too big to fail problem’ merely applies to systemically important financial institutions (Sifi’s). Recent developments in the Netherlands proved me wrong; there is another branch of big business with an implicit government guarantee: soccer. This week the local government of the Dutch city Eindhoven announced that it would provide financial support to the premier league soccer club PSV Eindhoven. Too much spending has pushed the club to the brink of financial ruin and now the local government has to chip in. PSV is one of the many Dutch soccer clubs in financial distress. However, this is not a Dutch problem. Many European soccer clubs have recently experienced, or are still experiencing serious financial troubles.

According to Simon Chadwick, a professor of sports business strategy and marketing at Coventry University in England, the clubs are locked into short-term thinking. The clubs are saddled with too much debt because they have overpaid for players in the transfer market. Economist Bernd Frick of the University of Paderborn believes that in much the same way that America's financial institutions are deemed too big to fail, Europe's biggest soccer clubs have become economically unsinkable:

"Irrespective of the liabilities that have been accumulated by many clubs across Europe, there is hardly any bankruptcy risk similar to what is faced by regular companies. […] Clubs will always find help from politicians either in their local community, in the federal, state or even in the national government. […] Attention from the media acts like a life insurance for soccer clubs. If the ceiling in your local kindergarten comes down and hurts some of the kids, even then it's pretty difficult to mobilize more than just 20 parents to march to the city hall. But if your local soccer club is threatened, everybody gets up to help the club."

 This all sounds like a serious moral hazard to me…

[No. 40] Will the European Private Company See Daylight After All?

Just when many of us started to believe that the European Private Company (SPE) would never become a reality (see my previous post on this matter), there seems to be some movement in Brussels. Today the Competitiveness Council will discuss the SPE, as addressed by the (recently revised) Presidency compromise package (available here).

It has been nearly three years since the European Commission published its proposal for a European Private Company form.  Upon consultation, the European Parliament adopted its opinion on the proposal on 10 March 2009. On 4 December 2009, the Competitiveness Council discussed the outstanding issues on the basis of a Presidency compromise text. However, as delegations' views as to those issues remained divergent, the Council could not reach political agreement and thus, requested its preparatory bodies to continue examining the proposal. Accordingly the Permanent Representatives Committee discussed on 30 March and 18 May 2011 the outstanding issues on the basis of Presidency compromise texts. While broad agreement has been reached on most parts of the revised Presidency compromise text, delegations' views remain divergent as regards in particular the following, closely inter-linked, issues:

- The seat of an SPE; the Commission's proposal allowed the SPE to have its registered office and central administration in different Member States. Although, this proposal was supported by several delegations, a number of delegations are in favor of prohibiting such separation of the registered office and the central administration. Other delegations would have preferred the matter to be governed entirely by national law.

- Minimum capital requirement; the latest Presidency compromise suggestion, which  sets out that the capital of the SPE should be at least EUR 1, while allowing Member States to set a higher minimum capital requirement of a maximum of EUR 8,000 for SPEs registered in their territory could be acceptable to all but one delegation. 

- Employee participation; some delegations expressed worries about the possible loss of rights acquired under national law and that the use of SPE could undermine national employee participation requirements. 

I find it a bit surprising that the minimal capital requirement turns out to be one of the biggest hurdles on the road to the SPE. As I discussed elsewhere, almost all European countries nowadays provide for a corporate form with limited liability without a (substantial) minimal capital requirement. Even Germany, probably the biggest proponent of the system of legal capital, introduced limited liability without minimum capital in 2008. Employee participation is a more difficult matter however, as Member States have very different traditions and arrangements in their national laws. To be continued…

UPDATE: I guess the question in the title of this post will remain unanswered. A Dutch newspaper reports that our Government rejected the current proposal because it fears the interests of employees are not sufficiently taken care of...

http://www.volkskrant.nl/vk/nl/2680/Economie/article/detail/2439253/2011/05/30/Nederland-niet-akkoord-met-voorstel-Europese-bv.dhtml

[No. 39] Does Legal Scholarship Matter?

Well, I'm biased and all, but yes. And here's one reason why.

Think about some of the concepts one learns in law school: duty, negligence, causation, intent, reasonableness, damages, due process, jurisdiction, etc. If you have legal training, you may think that you learned about them from judicial opinions, but I would suggest that the way all of us think about those judicial opinions (indeed, the way that the judges who write these opinions think about those concepts) is deeply affected by legal scholarship.

(HT Gordon Smith)

[No. 38] The Short Long

This post comes from
J. Matthijs de Jongh

The myopia or short-termism debate is not new. It is also a phenomenon that parents having small children see every day: “Daddy, I want it and I want it now.” Most often, you don’t get them quiet if you tell them that their wish will be fulfilled – tomorrow.  Executives sometimes think like children: in an important recent paper, Haldane and Davies (Bank of England) refer to a PWC survey among 250 FTSE-100 executives who were asked what they prefer: £250,000 tomorrow or £450,000 in 3 years. The majority chose the low return option sooner.

Short-termism is a serious economic problem. If future cash flows are valued at an irrational discount, companies will fail to invest in value creating long term investments. Haldane and Davies:

“An efficient capital market transfers savings today into investment tomorrow and growth the day after. In that way, it boosts welfare. Short-termism in capital markets could interrupt this transfer. If promised returns the day after tomorrow fail to induce saving today, there will be no investment tomorrow. If so, long-term growth and welfare would be the casualty.”

Over the last ten years, the myopia debate has focused on the management level. Since the dot-com and banking crises, it is generally acknowledged that remuneration schemes should strike a balance between the short and long term, rather than overvaluing short term-results.

Although it has been stated for years that also capital markets may overvalue short term, evidence was thin and possible governance consequences were barely discussed. Things have changed over the last few years. In 2010, the UK Department for Business, Innovation & Skills has conducted a started a market review into corporate governance and economic short-termism. Overall, respondents believed that short-termism exists in UK equity markets but provided little evidence to demonstrate the scale of the consequences for companies and investors. In their paper, however, Haldane and Davies provide statistical evidence for short-termism in both the UK and USA between 1985 and 2004 across all industrial sectors. Moreover, they provide evidence of short-termism having increased over the recent past.

The issue has also arrived in Brussels. In its recent Green Paper on corporate governance, the European Commission states that

“the way asset managers’ performance is evaluated and the incentive structure of fees and commissions encourage asset managers to seek short-term benefits. There is evidence (confirmed in the Commission’s dialogue with institutional investors) that many asset managers are selected, evaluated and compensated based on short-term, relative performance. Performance evaluation on a relative basis, i.e. the extent to which they outperform or underperform a market index, can encourage herd behaviour and a short-term focus, particularly if short interval is used to measure performance.”

And even more recently, the Reflection Group on the Future of EU Company Law also touches upon the issue – see Jaap Barneveld’s interesting post on this site). The reflection group argues that companies’ articles should be allowed to provide for long term shareholders preferential treatment.

The problem with a preferential treatment for long term shareholders is that it could have adverse consequences for the liquidity of the market. As marked liquidity is sacrosanct to many large investors – would some of them suffer from a short-term-bias themselves? – it is understandable that there is little interest in this issue among investors. Consequently, it is fully understandable that this issue not on the priority list for executives. Against theoretical and empirical evidence of mounting myopia, however, the lack of interest among market players is part of the problem as well.

And so seems the Dutch government. On April, 28, it responded on a request by a large majority of the Dutch Parliament to enhance long term investment. The response basically contains a list of technical issues for the legislator that are presented as roadblocks for any government initiative. I do not deny that some of the issues deserve serious attention. I also acknowledge that enhanced voting of dividend rights for long term investors could have adverse side effects that, at least in some situations, prevail. My problem with this government letter is that it lacks any economic analysis. Myopia on capital markets is not considered as a serious issue that deserves further attention or research. Technical legal issues are presented in such a manner that they hide the underlying economic problem. The government response does not consider any alternative measures that might be better than enhanced voting or dividend rights. In short, the issue is not taken seriously other than as a technical legal issue.

There is one positive side of this letter. The Minister of Justice announces a further round table discussion with company lawyers, auditors and economists to further discuss this matter. I have one suggestion for this round table discussion: invite Andrew Haldane, Executive Director Financial Stability of the Bank of England and Richard Davies to present their paper on “The Short Long.”

[No. 37] European Company Law: the way forward

This week I attended the Conference "European Company Law: the way forward" in Brussels. At the conference a Reflection group of company law experts presented its report on the future of EU company law (available here), in which it addresses current problems in EU company law, provides analysis and suggests initiatives where considered appropriate. The report covers a wide range of (noteworthy) topics, like cross-border mobility of corporate entities, taxation, cross-border mergers, EU law as a 28^th company law regime, risk management and groups of companies. I believe the report (and its recommendations) will be of interest to every lawyer interested in the future direction of EU company law.

Two elements struck me as particularly interesting:

• The Reflection Group notes that the historical distinction in (national and EU) company law between private companies and public companies is becoming less significant and should be replaced by a more apt distinction which differentiates between companies whose shares are listed and companies that do not have their shares listed.

• The report states that over the last decades the focus of listed companies has moved to some extent from a long term orientation to also taking account of the short term perspective, more specifically on creating shareholder value in the short term.

“The focus on the short-term has also led to additional pressure in certain companies and by certain categories of shareholders on the distribution of cash not finding an immediate use to be distributed, be it by way of dividends, share buy backs, or other techniques. This may have a negative effect on the ability to execute a long term strategy. More generally over the last years there has been substantial pressure to incur more debt. The tax deductibility of interest payments also constitutes an extra incentive for debt financing, often short term (commercial paper), rather than by equity which may affect the balance between the short term and long term objectives of management.”

Although the Reflection Group believes that there is no basis for a mandatory rule providing that all EU listed companies should focus on the long term development of their business (even at the cost of short term shareholder welfare), the Group acknowledges that listed companies in all EU jurisdictions should be able to make a deliberate choice for a stakeholder-oriented view of their own purpose and goals, via amendments to their articles of association. The Reflection group believes that in all EU jurisdictions the law should make this approach available to companies (the application should require an affirmative vote by the shareholders meeting, according to the report).

The Conference has been recorded on video; the streams are available here.

[No. 36] Responsible Shareholdership

On September 16, the Center for European Company Law will host a conference on responsible shareholdership. The conference - that will take place in Leiden - features interesting speakers, including scholars and practitioners from the States (Robert Monks), Belgium (Koen Geens), Germany (Holger Fleischer), England (Iris Chiu), Greece (Pavlos Masouros) and the Netherlands (Matthijs de Jongh, Steef Bartman and Jaap Winter). Lawyers attending the event can even add 4 educational points to their list. Looks like a pretty promising ticket to me.

[No. 35] Bainbridge on Corporate Governance After the Crisis

Having just returned from some days off with the family to beautiful southern France, I noticed Steve's notification that he has finished his  book on corporate governance post crisis, with a little teaser here. Congrats to him for pulling this off in such a challenging timeframe. I'm looking forward to reading the printed version.

For me, I'm still wrestling with the full rewrite of the 'Compendium van het ondernemingsrecht'. The manuscript is pretty much finished, but the thing is that crucial pending legislation doesn't seem to reach the final stages; things were and continue to be in a state of flux, which makes it a tad bit difficult to finish the book at this time. I'm even hearing that some First Chamber politicians are thinking about sabotaging the pending bill on alternative entities ('Titel 7.13') for some marginal reason; talking about full-blown political madness here,  really.

Hopefully things have changed for the better after the summer. The upside is that deadlines have loosened (and the time-slot allocated to sleep has increased somewhat), which gives me time to refocus on TDT. I've been on mute for too long here.