In his column by this title (The State of Our Corporate Law) in Ondernemingsrecht 2011-14, Jaap Winter argues that the statutory rules of Dutch corporate law as laid down in Book 2 of the Dutch Civil Code are not doing well. The gist of his critique is that we don't know what and how to regulate for which types of companies (NV's and BV's). What does and does not make it to Book 2 DCC is increasingly incident driven, a development that will make our corporate law less sustainable; all this aside from the fact - still according to Jaap - that our corporate law is getting messier and less consistent/predictable, making it - in turn - less user friendly.
In his words: 'Het gaat niet goed met de wettelijke regeling van ons vennootschapsrecht in Boek 2 BW. We weten niet goed meer wat we moeten regelen, voor welke vennootschappen we dat moeten regelen en hoe we dat moeten regelen. Wat in Boek 2 terechtkomt en wat niet, wordt steeds meer bepaald door de waan van de dag. Ons vennootschapsrecht wordt zo minder duurzaam. Een visie op wat we met ons vennootschapsrecht willen, ontbreekt. Het vennootschapsrecht wordt rommeliger, slordiger en minder consistent en voorspelbaar. Het wordt minder goed bruikbaar in de praktijk. De problemen doen zich op een aantal vlakken voor, nog afgezien van het punt dat Hélène Vletter-van Dort in een recente column terecht maakte dat de regering doof lijkt voor de kritiek van de Raad van State en andere adviesorganen waardoor slecht uitvoerbare en problematische wetgeving tot stand komt.'
Jaap illustrates his critique with 5 points.
- There is a tendency to turn principles/best practices as laid down in the Dutch corporate governance code into statutory rules laid down in Book 2 DCC. This supposedly weakens the status of the code and its 'vulnerable' comply or explain mechanism.
- Depending on the type of company (NV of BV), Book 2 DCC applies different thresholds for the applicability of different statutory rules. This supposedly results in chaos and a malfunctioning system.
- The distinction between NV and BV should be abandoned and exchanged for the distinction between listed and non-listed companies, with a rather tight regulatory regime for listed companies and a rather flexible regulatory regime for non-listed companies (that include non-listed NV's).
- There is no policy view as to the future of listed companies, especially in light of the position of activist shareholders with a short investment horizon. Pending regulation supposedly only counters symptoms, not the underlying question of how to deal with these types of shareholders; should activism be curbed or facilitated (in order to discipline management)?
- The termination of the pending bill on alternative entities - Titel 7.13 - is a bizarre step.
Jaap then pleads for a 'fundamental reassessment of corporate law' (as such?), like the English company law review that took place at the turn of the century and resulted in the Companies Act 2006. Jaap asks the minister to set-up a committee, like the committee Verdam in the 60s, that is going to direct the development of our corporate law in the 21st century with a critical eye out for quality, consistency, predictability and usability. He ends with a call for support.
What to think of this? Although I find this column inspiring, I doubt very much whether the picture of the state of Dutch corporate law as laid down in Book 2 DCC is really as grimm as pictured by Jaap. Just look at the progress we have made since 1990, when Vino Timmerman gave his first inaugural speech with the very title of this post and Jaap's column. Is there no vision of the legislator at all? Come on people, of course there is. In the early 2000s, the minister of Justice underscored repeatedly that Dutch corporate law should go through a phase of modernization, also aimed at making the Netherlands more competitive as a corporate law jurisdiction. That this is not some empty rhetoric is for example evidenced by legislative initiatives:
- to get rid of preventive anti-legal entity abuse rules (already in place);
- to make the law on BV's more simple and flexible (a fundamental overhaul that is almost in place);
- to tweak the statutory squeeze-out or step-out regime, that aims to end conflict between shareholders in close relationships (almost in place);
- to facilitate the option of a one-tier board as an alternative for the two-tier board (almost in place); and
- to re-new the statutory regime on director conflict of interests (almost in place).
In addition a bill on amending the right of inquiry is pending, as is a bill on redefining the rights of shareholders in listed companies, while a fundamental overhaul of the law on NV's has been scheduled in the near future. In 2004, the structure regime for large NV's and BV's was already amended, combined with increased statutory powers for the general meeting and certain shareholders.
Having said that, the question is whether fiddling with Book 2 DCC - the focus of the column - would take away the 5 points of critique provided by Jaap.
- As to 1, the position of the code - and thus the legal status of the principles/best practices laid down therein - is inherently ambigue; it is essentially a form of private regulation, without a firm democratic base (unlike statutory regulation). Is it a means, or an end in itself that is almost holy and cannot be touched? I would think it is only a means to achieve a better quality of corporate governance throughout the population of listed companies; if legislation that is inspired by the code is expected to lead to a better result, what is wrong with that? But even if there would be no more statutory rules designed by the legislator that are inspired by the code, case law could still - and is likely to, in view of, e.g., NJ 2007/434 (ABN Amro) and NJ 2010, 544 (ASMI) - establish new legal rules that are inspired by the code; for example based on open norms embodied in section 2:8 or 2:9 DCC. It is also a reality in the political process, that once a bill has been presented to parliament, amendments can be proposed and accepted by parliament that will change the original draft of the bill as introduced to parliament.
- As to 2, it is hardly imagineable that Book 2 DCC will ever be made up out of perfectly alligned and logical thresholds, without regard for the type of legal entity or legal rule involved. Furthermore, does a system of different thresholds really result in chaos and malfunction? Really? I find that hard to fathom, as long as the applicability of the different thresholds follows clearly from the statute, which I believe is the case right now (granted, one could quibble with the sometimes arbitrary nature of some thresholds, but that is something different). In sum: so what if different thresholds are applied, aside from matters of aesthetics? So far bar, bench and companies seem to be able to work with the system quite accurately, so why try to fix something that does not seem broke in the first place?
- As to 3, the thing is that listed companies - compared to non-listed companies - are primarily affected by regulation outside Book 2 DCC, especially through the 'Wet financieel toezicht' (Wft). This obviously cannot be dealt with by changes in Book 2 DCC. Something different is that NV's are not a monolithic group, but indeed can be separated into very open NV's (listed companies) and not so open NV's (non-listed NV's) that have quite some similarities with BV's. It would make sense for the legislator to keep this distinction in mind when drafting the bill that aims to overhaul the law on NV's, as scheduled for the near future, with the caveat that we should watch out for becoming that one silly jurisdiction that makes too much out of this distinction. I will get back to this later on.
- As to 4, a bill is pending that addresses the position of certain shareholders in listed companies. One can agree or disagree with elements in the bill, fact is that the bill originates from recommendations made in 2007 by the Dutch monitoring committee on corporate governance - responsible for the 2008 upgrade of the 2003 code - in view of shareholder activism occurring in that era. The bill deals mainly with technical issues re listed companies, like the threshold for minority shareholders to be able to put items on the agenda of the general meeting, the thresholds that warrant a filing by shareholders of their increase or decrease in shareholding, and a system that is aimed to allow management to identify and communicate with shareholders. Only the first issue is dealt with in Book 2 DCC, the others in securities related regulation. Furthermore, as to the conduct of activist shareholders, the main legal principle regulating their conduct is to be found in the open norm of section 2:8 DCC (reasonableness and fairness). An additional legal principles is to be found in the architecture of Dutch corporate governance of NV's and BV's, as designed by the Supreme Court in several decisions (including NJ 2007/434 (ABN Amro) and NJ 2010, 544 (ASMI)). In short: it is up to the management board to act as entrepreneur and set strategy, under supervision of the supervisory board (if the company has one). The board in principle has the power to - at least temporarily - block a hostile takeover, so long as there are reasonable grounds to do so (especially: the interest of the company and the related enterprise) and the defensive measure is adequate and proportionate (NJ 2003/286 (RNA)). The general meeting can weigh in on policy issues to the extent Book 2 DCC or the articles of association provide it with the power to do so, of course curbed by section 2:8 DCC. It seems to me that these principles, that follow from case law and not from Book 2 DCC directly, already provide the framework in which activist shareholder have to act (and know their place).
- As to 5, I fully agree with Jaap: this is an irrational move. But this cannot be fixed by fiddling with Book 2 DCC.
In view of the above, I don't think the structure and substance of Book 2 DCC 'as is' and 'as soon will be' is so sub-optimal, that we are in dire need of the mammoth 'fundamental reassessment of Dutch corporate law' as apparently advocated by Jaap. I also don't buy that the legislator lacks a vision, is clueless as to what to do next and primarily acts on an incident driven basis, although I do agree that legislative processes can be long, frustrating and sometimes even outright sloppy (but this is something different). As to predictability of corporate law, I remain convinced that the real challenge lies in case law and not in statutory law, as the real threat to predictability is the application of vague statutory norms - like improper management (serious reproach), reasonableness and fairness, mismanagement, tort, conflict of interest, best interest of the company and its related enterprise - in fact-specific situations by courts; for example in inquiry proceedings, liability proceedings, injunction proceedings, proceedings concerning the voidability of decisions by the company and proceedings concerning the representation of the company vis-a-vis third parties. The challenge here is to design legal frameworks that are clear to its users (bench, bar and companies), are functional for its users and are open for always changing circumstances (i.e., not rigid). Just read my 2010 book, linked at the bottom of the right side-bar.
All this is not to say that an evaluation of where we are and should be heading, corporate law (Book 2 DCC) wise, is by definition a bad thing. It's just that there must be sound reasons to do so and that, should we choose to go down the 'road of evaluation', the key questions must be kept firmly in mind: (i) what is the objective of the evaluation and (ii) how will the evaluating process be designed?
- As to the objective, I would argue - best case - for a modest and thought-through approach: let's not rush into a fundamental reassessment of corporate law as such that is unmanageable and takes years and years (repeat after me: no mammoths, no mammoths, no mammoths), but focus on certain key areas in the statutory realm - not: hobby horses of individuals - that will become subject of discussion in the near future and have not already been addressed and/or resulted in pending bills, for otherwise we keep repeating things like a perpetuum mobile. Think of the scheduled overhaul of the law on NV's in Book 2 DCC, where the dichotomy between listed companies (less flexibility?) and non-listed companies (more flexibility?) comes into play; one of the usual suspects. I could also imagine that - finally - thorough attention will be paid to the pro's and con's of introduction of a derivative suit (for example as a new section 2:9a DCC), to name one other possible subject of discussion addressed several times at TDT before. Perhaps the deceased bill on alternative entities could be reanimated, although this does only affect NV's (and BV's) in the margin. I would, however, not be inclined to fiddle with section 2:359a-b DCC, that provide non-default rules to regulate defensive measures of listed companies: the current regime seems to work fine, while hostile takeover activity re listed companies seems to have become extinct in the Netherlands. But in any event, please let's stay focussed and not get overly ambitious: the old adage that 'perfect' should not stand in the way of 'good' also applies here.
- As to the modus operandi, I would be in favor of a committee - should we get there - that has a continued existence (not a one-off committee, like the committee Verdam), which is able to initiate this evaluation and aside from that to periodically monitor and assess - together with the ministry of Justice - whether corporate law as laid down in Book 2 DCC is on the whole still balanced or needs tweaking. This comes closer to the Delaware model, where a DGCL revision committee plays a sortlike role in combination with the Delaware legislature, as part of the annual process of evaluating and updating the Delaware General Corporation Law. Perhaps the Dutch Commissie Vennootschapsrecht could be set-up to take a more pro-active role, besides advising on draft bills when requested to do so. This would in itself require evaluation of the role of this committee. In any event, setting up a more structurally embedded committee - instead of a one-off committee, without a follow-up - seems like the smarter thing to do. A propos, let's not forget that things were quite different when the committee Verdam was put into place in the 60s, when many needed and material changes in Dutch statutory corporate law became visible on the horizon; this simply is not the case nowadays. And let's also not forget that the English have a stronger tradition of benchmarking their Companies Act from time to time, with the 2006 upgrade being the last step in that ongoing process (completed in 2009). Aside from the 1928 and 1971 renewal of the Dutch corporate law statute, tweaking typically took place on an ad hoc basis.
In sum. If Jaap's call should be read in line with these - not immaterial - nuances, I'm happy to think about endorsing it and joining in asking the minister of Justice for a follow-up. Jaap, you know where to reach me!
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