www.TheDefiningTension.com

[No. 3] The New Tool of the Dutch Government in the SNS Crisis: the "Interventiewet"

By Alexander Schild

Good times, bad times, all times are interesting times for lawyers. These days, the crises of SNS Reaal seems to near its Endspiel.  The interesting new fact therein is importance of the Intervention Act (Interventiewet), which became law in June last year.

Although limited information is available as to the possibilities which are considered to rescue SNS, the options seem limited. It is clear that due to the heavy losses in the property division, either some billions of extra capital are needed to shore up the balance sheet of SNS or the property division has to be separated form SNS.

There seems to be no real prospect that a sufficient amount of capital can be raised in the private sector in order for SNS to get within the required ratios. In any case, it cannot be raised by the issuance of new shares, in view of the penny-stock status.
The government will also be highly reluctant to provide the additional funds itself. It has already nationalized ABN Amro. For mr. Dijsselbloem, the prospect of having another bank on its books must be daunting.

Another option would be to separate the property part of SNS to a ‘bad bank’. That solution will probably however not fly without the participation of the other major Dutch banks, so the risk can be spread. However, due to the fact that ING and ABN Amro have received government aid, they are forbidden to participate in the creation of a bad bank, leaving only Rabobank as a possible participant. It is unlikely, however, that Rabobank will be willing to take a stake in a bad bank on its own.

One of the options is that the government shall use its powers under the Intervention Act to force a solution. The Intervention Act was recently hurried through both chambers of parliament in about a year. The Intervention Act grants the government the authority to take a variety of measures when a financial institution shows ‘signs of a dangerous development’ in order to safeguard the stability of the financial system.

There are two marching routes under the Intervention Act. The first is that the Dutch Central Bank steps in and will solve the problem. The second is that the Minster of Finance will nationalize SNS.

It is safe to bet that the Dutch government is currently trying hard to have the Dutch Central Bank solve the problem. The Intervention Act is written against the background of the government having spent billions of public money in order to rescue several Dutch banks during the financial crises. In order to prevent that the momentarily not so deep pockets of the government will be dented further, the Intervention Act has been written with the aim to have the private sector (i.e. other financial institutions) to provide the first line of rescue.

To make that work, the Dutch Central Bank has been granted broad powers to transfer shares and assets to third parties for a price negotiated by the Dutch Central Bank. For instance, the Dutch Central Bank may sell all the shares of SNS listed on the stock exchange to another bank, willing to incorporate SNS, going concern, for a price to be negotiated between the Dutch Central Bank and the buyer. The Dutch Central Bank, however, is not authorized to nationalize SNS. Under de Intervention Act, a nationalization is the – to be avoided – option available to the Mininster of Finance only.

It is questionable however, if in the case of SNS, a nationalization by the Minister of Finance can be avoided. There is a large elephant standing in the room, blocking the other possible exits. The elephant being the fact that, the market for commercial property seems to have collapsed in The Netherlands. With all the buyers on holiday, it is next to impossible to value the property and the collateral for loans on the books of SNS.

Given these uncertainties, it will prove very difficult to make private parties take a stake in a bad bank, for a decent price. Subsequently it is not very likely the Dutch Central Bank will be able to lift the property division with the help of private parties out of SNS and to provide SNS with the required capital in return. That leaves the nationalisation of SNS by the Minister of Finance as a serious option on the table.

If the Minister of Finance will use its authority to nationalize SNS, the shareholders will receive little, if anything, in return. The legal remedies for the shareholders to complain, are limited. They are entitled to file a request at the Ondernemingskamer in Amsterdam, in order to have their shares valued by an independent tribunal. The Ondernemingskamer is then obliged to value the shares, taking into account what the value of the shares would have been, if the government would not have stepped in.

This brings to mind the claim brought by the former shareholders of Nothern Rock, who were left empty handed by the U.K. government. Their legal actions have yielded no result. A complaint filed by the former shareholders of Nothern Rock that their property rights were breached by the expropriation of their shares without compensation, was declared inadmissible by the ECtHR (10 July 2012, appl. no. 34940/10, Grainger v. U.K.).

In case of a nationalization, only the hedgefunds currently in short positions have something to celebrate.

[No. 53] Alexander Schild on Corporate Law and the European Convention on Human Rights

On November 6, 2012, Alexander Schild will defend his PhD-thesis on the influence of the European Convention of Human Rights on Dutch corporate law. Over the past fifteen years, corporate litigators have increasingly referred to provisions in the European Convention on Human Rights (ECHR). Schild has analyzed the corporate cases in which the ECHR played a role. He gives an in-depth analysis of the importance of the ECHR in the enquiry proceedings before the Enterprise Chamber of the Amsterdam Court of Appeal.

Schild investigates, amongst others, whether the so called 'Tang/Irrgang-proposal' violates section 1 of the First Protocol which protects property rights. The Tang/Irrgang-proposal regards board remuneration in a takeover situation. Even if it might be argued that this proposal is an Irrgang, it is unlikely that the European Court will consider this proposal a violation of section 1. Whatever may be the merits of this proposal, section 1 of the First Protocol cannot be used as an argument against.

One of Schild’s other findings is that the recently introduced Intervention Act (Interventiewet), is not ‘ECHR-proof’. Pursuant to the Intervention Act, the Dutch National Bank is allowed to sell assets of a financial institution to a third party if it is in serious difficulties. Under the Intervention Act, the financial institution whose assets are sold does not have an access to a court in order to challenge the price for which the assets are transferred. Schild concludes that this absence of an access to a court violates the European Convention, in particular section 1 of the First Protocol of the ECHR and section 6 ECHR.

Schild also concludes that section 2:20, of the Dutch Civil Code may violate the ECHR. Pursuant to this provision, legal persons that are placed on a European list of terrorist organizations are, by title of law, forbidden and unable to carry out any legal acts. This results, amongst others, in the freezing of bank accounts. Schild argues that the European Union does not offer sufficient remedies for organizations that are placed on the European list of terrorist organizations. He proposes that the European Union should provide for a sufficient remedy in order to enable organizations which have been placed on this list, to challenge their listing.

Alexander Schild will defend his thesis at Leiden University, on November 6, 4.15 PM sharp. Prof. L. Timmerman and Prof. T. Barkhuysen act as PhD-supervisors. More information can be found here.

SAVE THE DATE! --- Symposium 'New Legislation in Director Liability Law'

On Wednesday June 20, 2012, the Institute for Corporate Law will organize a symposium on New Legislation in Director Liability Law at the Erasmus University Rotterdam.

The symposium is the second* in a series of symposia, that will focus in-depth on several issues of director liability law. The aim of the series is to deepen and broaden the discussion between members of academia, the bench and the bar as well as other corporate practitioners.

More information on this second symposium, the program and the registration form are available here. I hope to see you there!

* The first symposium (see here) resulted in a well received book on evolution in director liability law, available here.

[No. 30] Shareholder Wealth Maximizzzzzzzzz...

Ok ok, the 'zzz' part was a lame joke. But it caught your attention right? Here goes.

The fundamental "why are corporations on earth" discussion is still alive and kicking, also in the States where the SWM-norm seems less robust than some over here may expect it to be. Enter this post at the Glom by Haskell Murray (we met during my 2008 stint at the Delaware Chancery Court) that, despite Haskell's caveat's, triggered

1. an interesting discussion in the comments section at the Glom; and
2. a whopping series of posts devoted to the subject by Steve B at his blog (links here).

Does this discussion ring a bell among you TDT readers? I surely hope so; let's travel back in time exactly three years ago, for our two cents...

[No. 29] Update Flex BV Bill Part II

Update Flexible Delayed BV Bill:

Reuters - Dutch Prime Minister Mark Rutte resigned on Monday in a crisis over budget cuts, creating a political vacuum.

[No. 24] Update Bill Amending Corporate Inquiry Law

On 3 April the Second Chamber of the Dutch Parliament further discussed the Bill amending the corporate inquiry procedure before the Enterprise Chamber of the Amsterdam Court of Appeal and some amendments were proposed. Voting will take place on 10 April 2012.

[No. 23] Delaware Court of Chancery re El Paso Corporation Shareholder Litigation

The case Re El Paso Corporation Shareholder Litigation is a must read in my opinion.

 

Here are the facts: On 29th February Chancellor Leo E. Strine Jr. of the Delaware Court of Chancery, who is also the current Anton Philips Professor at Tilburg University, declined to block the 21.1 billion dollar takeover of the El Paso Corporation by Kinder Morgan. In his opinion, the Chancellor wrote that while he had misgivings about the deal process - particularly conflicts of interest - no other bid was on the table. Blocking the deal would ultimately harm El Paso shareholders more than letting the offer go to a vote. However, he did not rule out the possibility of the plaintiff investors pursuing their case and winning monetary damages.

 

 

About the conflict of interests amongst others he said:

The chief executive officer of El Paso, a public company, undertook sole responsibility for negotiating the sale of El Paso to Kinder Morgan in the Merger. Kinder Morgan intended to keep El Paso’s pipeline business and sell off El Paso’s exploration and production, or E&P, business to finance the purchase. The CEO did not disclose to the El Paso board of directors (the Board) his interest in working with other El Paso managers in making a bid to buy the E&P business from Kinder Morgan. He kept that motive secret, negotiated the Merger, and then approached Kinder Morgan’s CEO on two occasions to try to interest him in the idea. In other words, when El Paso’s CEO was supposed to be getting the maximum price from Kinder Morgan, he actually had an interest in not doing that.

 

This undisclosed conflict of interest compounded the reality that the Board and management of El Paso relied in part on advice given by a financial advisor, Goldman, Sachs & Co., which owned 19% of Kinder Morgan (a 4 billion dollar investment) and controlled two Kinder Morgan board seats. Although Goldman’s conflict was known, inadequate efforts to cabin its role were made. When a second investment bank was brought in to address Goldman’s economic incentive for a deal with, and on terms that favored, Kinder Morgan, Goldman continued to intervene and advise El Paso on strategic alternatives, and with its friends in El Paso management, was able to achieve a remarkable feat: giving the new investment bank an incentive to favor the Merger by making sure that this bank only got paid if El Paso adopted the strategic option of selling to Kinder Morgan. In other words, the conflict-cleansing bank only got paid if the option Goldman’s financial incentives gave it a reason to prefer was the one chosen. On top of this, the lead Goldman banker advising El Paso did not disclose that he personally owned approximately $340,000 of stock in Kinder Morgan.

The record is filled with debatable negotiating and tactical choices made by El Paso fiduciaries and advisors. Absent a conflict of interest, these debatable choices could be seen as the sort of reasonable, if arguable, ones that must be made in a world of uncertainty. After discovery, however, these choices now must be viewed more skeptically, as the key negotiator on behalf of the Board and a powerfully influential financial advisor each had financial motives adverse to the best interests of El Paso’s stockholders. In the case of the CEO, he was the one who made most of the important tactical choices, and he never surfaced his own conflict of interest. In the case of Goldman, it claimed to step out of the process while failing to do so completely and while playing a key role in distorting the economic incentives of the bank that came in to ensure that Goldman’s conflict did not taint the Board’s deliberations. This behavior makes it difficult to conclude that the Board’s less than aggressive negotiating strategy and its failure to test Kinder Morgan’s bid actively in the market through even a quiet, soft market check were not compromised by the conflicting financial incentives of these key players.

Earlier in the deal process, Goldman had Lloyd Blankfein, its CEO and Chairman, give Foshee a personal, obsequious phone call to thank him for El Paso’s retention of Goldman over the years and to try to secure a continuing role in working for El Paso during the pendency of the Kinder Morgan bid despite what Goldman deemed an “appearance of conflict.” And despite now claiming that it was not a key strategic advisor in the Kinder Morgan deal, Goldman sought credit as an advisor in the press release announcing the Merger, a move at self-promotion its rival Morgan Stanley called Goldman “at its most shameless.” At this stage, I am unwilling to view Goldman as exemplifying an Emersonian non-foolishly inconsistent approach to greed, one that involves seeking lucre in a conflicted situation while simultaneously putting the chance for greater lucre out of its “collective” mind. At this stage, I cannot readily accept the notion that Goldman would not seek to maximize the value of its multi-billion dollar investment in Kinder Morgan at the expense of El Paso, but, at the same time, be so keen on obtaining an investment banking fee in the tens of millions.

[No. 22] German Inheritance Law and Company Law

Interestingly, last month the German Supreme Court decided that if a limited partner in a German partnership has died, the fact that a last will will be enforced, can be registered at the Camber of Commerce.

[No. 18] A "Dissenting Opinion" on the Concurring Opinions Blog

Early 2009, then Vice-Chancellor Strine of the Delaware Chancery Court issued the - by now well-known - opinion in the AIG derivative suit case, that contains many instructive pages on let's say good corporate law and governance practices. I highlighted the case here.  Over three years passed. Then Lawrence Cunningham wrote this post about the opinion, the other day.

Civil Trial Judge Excesses and Leo Strine’s AIG Slur

posted by Lawrence Cunningham

Should civil trial courts describe the pleadings alleging wrongdoing in criminal terms? In reading large numbers of opinions in corporate cases over the years, I can recall only one judge who did so.  The judge was Leo Strine, an otherwise-obscure figure known among corporate law devotees because of his seat on the Delaware court that hears many business disputes among corporate interests.

In a shareholder lawsuit, Strine was evaluating whether the plaintiffs’ lawyers had alleged a link between their general claim that a corporation lacked adequate internal controls and their further claim that two corporate directors, in particular, knew of this.  Strine acknowledged that making the link between a general failure of internal control and someone’s personal knowledge, and therefore culpability, requires a fair amount of detailed specifics.  The defendants had challenged the plaintiff’s complaint as deficient in this regard.  Strine then wrote the following (the snide style appears in the original, as I am quoting this literally):

“But here? Really? The Complaint fairly supports the assertion that AIG’s Inner Circle led a—and I use this term with knowledge of its strength—criminal organization.”

The prejudicial quality of this calculated and intemperate statement is obvious. It was also gratuitous, because it is beyond the relevant jurisdiction, experience and pleadings.  According to lawyers and participants in the case, the statement crystalized Strine’s biased attitude throughout the case and others he oversaw involving the same people.  All arose out of the corporate power struggle of March 2005 in which the board of American International Group, under pressure from Eliot Spitzter, ousted Hank Greenberg, its chairman and chief executive of forty years (and leader of what Strine maliciously called the “Inner Circle”).

In addition to being substantively inflammatory, Strine’s gratuitous comment was dangerous because of its timing. Strine published that statement in February 2009, in a case that was trivial in terms of the stakes for Greenberg.  It was just four months before a civil trial would begin in New York federal court where Greenberg fought his former company over $20 billion worth of property. 

As it turned out, Greenberg won the $20 billion case, following a three-week jury trial, though the jury deliberated for only half a day and the judge, Jed Rakoff, said the plaintiffs did not come close to making out a case. Even so, Strine’s reckless comments could have biased those jurors too.  Strine should not have written those words.  It would have sufficed to say the pleadings met the required standard.  He should expunge the invective from the record or at least apologize for it.  Strine would also do well generally to abandon the snide, malicious, gratuitous style of writing on display in this opinion, which is injudicious and unbecoming.

The case was In re American International Group Shareholders’ Derivative Litigation, 965 A.2d 673 (Strine, Delaware Chancery, February 10, 2009).

Ehm. Ok. Wow. I'm not sure where all this comes from, but I sympathize with Max Kennerly's comment on this, well, slur?

You’ve grossly misread the meaning of that quote.

The question on a motion to dismiss is if the plaintiff’s alleged facts — assumed to be true — state a viable claim for relief. Strine’s point was that the facts alleged did far more than state a viable claim: they were so strong as to allege criminal activity. Strine was thus lambasting the defense lawyers for wasting the court’s time in filing a motion to dismiss that obviously could not be granted on the facts alleged.

Do you think defense lawyers should be praised for filing frivolous motions? That judges should remain absolutely silent when lawyers file wasteful, unnecessary motions that obviously cannot be granted?

[No. 13] The Janus Head of Corporate Law Revisited

In a very interesing post, the Glom's Gordon Smith writes that he doesn't often "hear law professors talking systematically about the use of law for strategic purposes" (also see Steve B here).

"The laws of economics explain how people make money. But another kind of law -- written by legislatures, bureaucracies, and courts -- often determines who gets what share."

Make the Rules or Your Rivals Will by Richard Shell is a book about law and strategy. Law professors teach and write about topics like public choice, agency capture, rent seeking, etc., but I don't often hear law professors talking systematically about the use of law for strategic purposes.

We tend to organize our thinking around doctrinal areas and around various legal skills. The systematic study of law and strategy seems different. It is not defined by a particular subject matter or set of skills. Even when we talk about law more generally, we generally do not analyze it through the lens of strategy. 

In simplest terms, the study of law and strategy views the world from the perspective of a business and asks: how can we use law to gain a competitive advantage? This question ought to be of interest to lawyers, but does any law school teach a class on law and strategy?

Hmm, perhaps the fact that my 2010 inaugural lecture The Janus Head of Corporate Law (i.e., (i) facilitating and (ii) regulating entrepreneurship) was published in Dutch - and not in English - has explanatory power as to why he missed it. Here's the abstract (in Dutch I'm afraid).

Ondernemerschap is een complexe zaak. De ondernemer moet via innovatieve activiteiten waarde zien te creëren, maar tegelijkertijd tussen vele regels en wetten manoeuvreren in een globaliserende wereld die steeds meer vergt, waarbij bovendien de foutentolerantie van de buitenwacht sterk afneemt. Intussen wordt het ondernemingsrecht in toenemende mate onvoorspelbaar, omdat rechtsvragen steeds vaker aan de hand van de wisselende omstandigheden van het geval beantwoord dienen te worden door de rechter, waarbij deze zich bij voorkeur beperkt tot een zaaksgebonden beslissing. Voor ondernemers is het belangrijk dat het ondernemingsrecht transparant is. Rechters hebben hierin een belangrijke taak: niet zozeer de wetgever, maar zíj moeten vooral het voor de dagelijkse praktijk relevante ondernemingsrecht gestructureerder gaan vormgeven, door de donkere plekken van het recht met dagelijkse relevantie voor de praktijk waar nodig en mogelijk uit te lichten.

I would be happy though to cross the Atlantic and pay a visit, to discuss things law and strategy (in English no less).

[No. 12] Shareholder Exit and Fair Price

Under Dutch corporate law, shareholders of a corporation with a 'closed'  structure - typically so-called ' BV's' - who either (i) want to force another shareholder to exit (combined with a share transfer and payment of a fair share price) or (ii) want to force an exit of themselves (ditto), can make use of a statutory regime enabling him to do so provided certain conditions are met (the "geschillenregeling").

This regime is not very popular, for more than one - good - reason; one of them being that this type of litigation can take years and years before the forced exit has taken place. Because of these hick-ups, the regime has been 'under construction' for some years now as part of the make-over of the statutory provisions on BV's. Hopefully as per July 1, 2012 the new regime will be in place, making things easier (and the regime more popular in use).

Anyway, under the current regime the Supreme Court has rendered only a handful of decisions. Last Friday the court added one, in a rather peculiar case that concerned a no. (ii) scenario: a shareholder who wants to force an exit of himself (combined with a share transfer and payment of a fair share price). Two short comments, limited to the current regime.

1. The Supreme Court basically decides that the lower court, when setting the fair price of the shares to be paid to the shareholder who exits (by choice) as per s. 2:343 DCC when the shareholders have already agreed to transfer the shares and pay a certain share price (anticipating the outcome of the case),  can factor in damage suffered by this shareholder -  due to the difference between (i) the advance payment of the share price (when the shares were transferred) and (ii) the higher share price as finally set by the court - by adding compensation fixed at the rate of statutory interest. The circumstance that the shareholder did not specifically ask for this interest is of no relevance here, as this mechanism - according to the court - is subsumed within s. 2:343 DCC.

Art. 2:340 lid 1 strekt ertoe dat de rechter, met inachtneming van het deskundigenbericht, zelfstandig de vergoeding vaststelt die voor de overgenomen aandelen verschuldigd is. Bij een redelijke toepassing van het in art. 2:343 BW kan de rechter bij de vaststelling van hetgeen in een geval als het onderhavige verschuldigd is rekening houden met het nadeel dat de eiser gedurende de periode tussen de overdracht van de aandelen en de definitieve vaststelling van de waarde daarvan lijdt door het gemis van het verschil tussen de vastgestelde waarde en het hem bij wijze van voorschot betaalde bedrag, en een forfaitaire vergoeding voor dat nadeel opnemen ter hoogte van de wettelijke rente. De omstandigheid dat [verweerder] geen wettelijke rente gevorderd heeft, behoefde de ondernemingskamer dus niet te weerhouden van toekenning van die vergoeding.

2. The Supreme Court also clarifies that, because of the language of s. 2:343(3) DCC, the court's decision as to the price cannot be made enforceable provisionally (i.e., pending a possible appeal).

Uit de tekst van art. 2:343 lid 3 ("nadat hem een afschrift van het onherroepelijk geworden vonnis als bedoeld in artikel 340 lid 1 is betekend") volgt dat een vonnis of arrest waarbij de te betalen prijs wordt vastgesteld niet uitvoerbaar bij voorraad kan worden verklaard. Uit die bewoordingen vloeit immers voort dat de wederzijdse prestaties eerst opeisbaar zijn nadat de uitspraak onherroepelijk is geworden. Uitvoerbaarheid bij voorraad is met deze wettelijke regeling niet verenigbaar.

[No. 10] "Truer Words" According to Prof. B.

Check this, linking to this.

[No. 8] Report of the MCCG

By "MCCG" I mean the Monitoring Commissie Corporate Governance. I also could have framed it as "DMCCG", D standing for Dutch, but that may be one consonant too many. By "Report" I mean the latest monitoring report by the MCCG, available here.* ** Below the fold are the main findings.

* Unfortunately only in Dutch; which is a bit weird, in light of all these fancy English words like ' corporate', 'governance' and 'monitoring'. But that's the way it is. The code (2008) itself is available in English though.

** Additional docs availabe here, including research into board composition (same caveat as *).

[No. 7] Director Remuneration and Allocation of Powers

Last Friday, the Supreme Court decided a case that turned on the question, whether the supervisory board had the power to grant remuneration to a supervisory director who was fulfilling management director tasks for a certain period. The answer is no, as:

1. the supervisory director acting this way does not by doing so 'morph' into a management director, but remains to be a supervisory director (unless that supervisory director is transformed into a management director by a decision to that effect by the organ of the company empowered to decide so); and
2. the supervisory board lacks the power to grant remuneration to one of its members.

Which organ of the company is allocated the power to grant remuneration to either management director or supervisory directors depends, besides statutory rules on point, on the company's articles of association (insofar statutory rules are only default and not mandatory) ; normally the anser is 'the general meeting of shareholders'.

The gist of this decision is the clarification offered under 1. above, as already assumed in doctrine. As to 2: no shocker, to say the least. Anyway; both were effectively not taken into account by the lower court, resulting in its decision being reversed and remanded.

Ow, I really appreciate the opening remarks of the Supreme Court, putting emphasis on the importance of power allocation rules being clear and all, also to avoid situations in which conflicts of interests could arise (for example if the supervisory board could grant remuneration to one of its members). To me, this echos the regulatory side of corporate law, to be distinguished from its facilitating side; I discussed this Janus head nature of corporate law elsewhere in detail.

For our Dutch readers, here is the money quote.

De beloning van bestuurders en commissarissen dient, ongeacht de aard van de door hen verrichte werkzaamheden, in het belang van duidelijke verhoudingen binnen de vennootschap op het punt van de bevoegdhedenverdeling, en om belangenconflicten bij de toekenning van beloningen van bestuurders en commissarissen te voorkomen, te geschieden door de in de wet en de statuten aangewezen organen. Commissarissen kunnen, zoals ook valt af te leiden uit art. 2:151 BW, voor zekere tijd daden van bestuur verrichten, maar zonder een daartoe strekkend benoemingsbesluit van het daartoe bevoegde orgaan - in het geval van Imeko is dat ingevolge art. 18.1 van haar statuten de ava - maken zij geen deel uit van het bestuur. Indien de statuten van een naamloze vennootschap de vaststelling van de bezoldiging van de bestuurders aan de raad van commissarissen overlaten, zoals art. 2:135 BW toelaat en in art. 18.7 van de statuten van Imeko is geregeld, maakt dat die raad van commissarissen niet bevoegd om een bezoldiging aan zijn eigen leden toe te kennen ter vergoeding van door die leden verrichte werkzaamheden op bestuursniveau. De RvC kon derhalve, anders dan het hof oordeelde, aan art. 18.7 van de statuten niet de bevoegdheid ontlenen om een aanvullende managementvergoeding vast te stellen voor bestuurswerkzaamheden die zijn lid [verweerder 2] verrichtte.

[No. 5] Evolution of Director Liability (Case) Law

Actually, October 2010 was a busy month for the Institute for Corporate Law.

In addition to the Cartesio symposium, a symposium was organized later that month on the evolution of director liability law, with an emphasis on case law developments. This symposium kicked off a series of symposia on director liability; the next symposium will take place this summer, covering recent developments in the applicable statutory regime as to conflict of interests, the one-tier board, dividend payments and payment of derivative damages.

The contributions to the 2010 symposium - including the 70+ page center-article covering director liability issues of private law, criminal law and administrative law - were published in a book that was released on December 23, 2011; this offers a state-of-the-art analysis of key issues re director liability from several perspectives .

Here is the abstract (Dutch only):

Bestuurdersaansprakelijkheid bij NV's en BV's is een onderwerp dat met regelmaat terugkeert in wetgeving, rechtspraak, literatuur en media. Dit onderwerp is bij uitstek voor de praktijk van bedrijfsvoering en ondernemerschap van belang; het heeft daardoor maatschappelijke relevantie. Deze bundel vormt de neerslag van een in 2010 gehouden symposium over evolutie van het bestuurdersaansprakelijkheidsrecht, waarin drie thema's centraal stonden:

1. de aansprakelijkheidsmaatstaf 'ernstig verwijt' als adequaat vehikel voor rechtsvinding en -ontwikkeling;
2. a-typische gevallen van bestuurdersaansprakelijkheid; en
3. bestuurdersaansprakelijkheid buiten het ondernemingsrecht (in het bestuursrecht en het strafrecht).

Dit symposium markeert het begin van een symposiareeks die beoogt het wetenschappelijk en maatschappelijk debat over de toekomst van het bestuurdersaansprakelijkheidsrecht te bevorderen.

For details go here.

 

[No. 4] Cartesio Revisited

On October 7, 2010, the Institute for Corporate Law organized a symposium on the Cartesio decision of the European Court of Justice. The contributions to that symposium were published in a book that was released on December 22, 2011; this is the go-to guide for anybody interested in the ins and outs of the Cartesio decision and its impact on cross-border activities of companies.

Here is the abstract (Dutch only): 'Op 7 oktober 2010 vond op de Erasmus Universiteit Rotterdam het symposium 'Europees ondernemingsrecht: grensoverschrijdend ondernemen na Cartesio' plaats. Dit symposium is het tweede in een reeks over Europees ondernemingsrecht. Centraal in dit symposium stond het arrest van het Hof van Justitie van de Europese Unie over Cartesio, de Hongaarse vennootschap die haar bestuurscentrum naar Italië verplaatste. Gedurende het symposium is dit arrest van verschillende zijden belicht. De tijdens het symposium gehouden voordrachten zijn in dit boek gebundeld. Tevens bevat dit boek een aantal belangwekkende publicaties over grensoverschrijdend vestigen en ondernemen.'

For details go here.

[No. 73] A "Dutch Auction" Facebook IPO?

Usha Rodrigues says yes please!

[HT Emmanuel Lokin]

[No. 72] Football and Corporate Law

Sometimes the two come together, just yesterday in this judgment in an injunction proceeding initiated by Johan Cruyff and 1o-odd Ajax trainers/former football players against Ajax - a listed company - and its supervisory board.

Although Cruyff cs claimed victory after the judge had spoken, even moderately close reading of the judgment clarifies that Cruyff cs lost on most grounds; the only upside was that the judge basically created a status quo for the coming period, in order for Ajax' general meeting to decide whether to choose in favor of either the Cruyff scenario (and against the supervisory directors)  or the Van Gaal scenario. I write either/or, as both scenario's as to Ajax' future football-wise seem to be incompatible - or so the experts say.

Anyway, I'm amazed that so far no corporate law enthusiast has penned a column in some fancy magazine about this whole corporate governance drama. It won't be me, as I cheer for - you guessed it - Feyenoord. Crank up the volume!

  

[No. 69] Hear Hear!

It seems TDT also has readers among members of parliament. Hear hear!

Schriftelijke vragen van het lid Schouw (D66) aan de minister van Binnenlandse Zaken en Koninkrijksrelaties over de staat van het vennootschapsrecht. 

1. Heeft u kennisgenomen van het artikel “Ondernemingsrecht, ondernemers paaien” van Martin van Olffen, Gerard van Solinge en Marco Nieuwe Weme (hoogleraar ondernemingsrecht in Nijmegen, tevens notaris, advocaat, resp. raadsheer in de Ondernemingskamer) dat onlangs verscheen in het tijdschrift Ondernemingsrecht (http://ondernemingsrecht.legalworld.nl/or/topic.aspx?id=150)?
2. Heeft u kennisgenomen van het artikel “De staat van ons vennootschapsrecht” geschreven door Jaap Winter (hoogleraar ondernemingsrecht in Amsterdam en advocaat) dat onlangs verscheen in het tijdschrift Ondernemingsrecht? (http://ondernemingsrecht.legalworld.nl/or/topic.aspx?id=151)
3. Heeft u kennisgenomen van het weblogs van Bastiaan Assink (hoogleraar ondernemingsrecht in Rotterdam en advocaat) over de voorgenomen intrekking van de wetsvoorstellen 28 746 en 31 065 over de personenvennootschap? (http://www.thedefiningtension.com/2011/09/no-55-legislative-maneuvering-doe-es-effe-normaal-man.html en http://www.thedefiningtension.com/2011/10/no-60-a-requiem-for-titel-713.html).
4. Deelt u de opvatting van Van Olffen, Van Solinge en Nieuwe Weme dat de huidige wettelijke regeling voor de personenvennootschap, die dateert uit 1838 en die verspreid is over verschillende wetten, ondernemersonvriendelijk is, omdat zij dwingt tot lange en dure overeenkomsten met ingewikkelde bepalingen? Zo nee, waarom niet? Zo ja, hoe gaat u dit probleem aanpakken?
5. Deelt u de opvatting van Van Olffen, Van Solinge en Nieuwe Weme dat de huidige wettelijke regeling voor de personenvennootschap onleesbaar en onbegrijpelijk is en dat zij zonder kennisneming van handboeken en oude rechtspraak niet kenbaar is? Zo nee, waarom niet? Zo ja, hoe gaat u dit probleem aanpakken?
6. Deelt u de opvatting van Van Olffen, Van Solinge en Nieuwe Weme dat ondernemend Nederland als gevolg van de intrekking van de wetsvoorstellen tot modernisering van de personenvennootschap (28 746 en 31 065) de ermee verbonden voordelen moet ontberen, waaronder beperkingen in aansprakelijkheid, vereenvoudiging van wisseling van vennoten, vereenvoudiging van omzetting naar BV of NV en fiscale voordelen in de overdrachtsbelasting? Zo nee, waarom niet? Zo ja, hoe gaat u dit probleem aanpakken?
7. Bent u bereid de intrekking van de wetsvoorstellen 28 746 en 31 065 te heroverwegen?
8. Indien het antwoord op de vorige vraag nee is, bent u dan bereid om op de kortst mogelijke termijn een commissie in het leven te roepen, bestaande uit vertegenwoordigers van VNO-NCW/MKB Nederland, alsmede uit deskundigen afkomstig uit de wetenschap en de notariële, advocatuurlijke en belastingadvies-praktijk teneinde uiterlijk eind 2012 een breed gedragen voorontwerp voor een nieuwe regeling voor personenvennootschappen op te stellen?
9. Indien u niet voornemens bent een dergelijke commissie in het leven te roepen, welke initiatieven gaat u dan ontplooien teneinde de huidige wettelijke regeling voor de personenvennootschap te herzien?
10. Onderschrijft u de analyse van Jaap Winter dat het ondernemingsrecht steeds rommeliger, slordiger, minder consistent en voorspelbaar wordt? Zou u, voor zover u de door Winter gesignaleerde problemen onderkent, kunnen aangeven welke plannen u heeft om daaraan tegemoet te komen?

As to 10., I added my 10 cents here. [HT Matthijs de Jongh]

[No. 68] The State of Our Corporate Law - Thoughts and Suggestions

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.

1. 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.
2. 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.
3. 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).
4. 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)?
5. 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!

[No. 67] Are Lawyers - and Investors - Rationally Ignorant When It Comes To the Proclaimed Dominance of Delaware Corporate Law?

William Carney, George Shepherd and Joanna Shepherd seem to think so.

Here's the abstract.

Why does Delaware continue to dominate the market for incorporations even though recent research has shown that the quality of Delaware corporate law has declined substantially? We focus on the rational ignorance of lawyers and investors. Using the results of our survey of lawyers involved in initial public offerings (IPOs) as well as our analysis of companies involved in IPOs, we conclude that lawyers recommend Delaware because they are ignorant about other states’ law. Because Delaware is so dominant, law schools focus on Delaware corporate law, and a lawyer rationally learns the corporate law only of Delaware and her home state. Regardless of the quality of the law of other states, lawyers will not recommend it because they are unfamiliar with it. Likewise, lawyers recommend only Delaware law because they believe that investors are ignorant of other states’ law.

[No. 66] More Questions re Emergency Funding and EU Law

This post comes from

Floor Eikelboom

 

Since the 2000/2001 Skygate decisions[1] we have seen a steady stream of case law that has become known under the name of emergency funding (in Dutch: noodzaak financiering). According to Doorman the current body of case law gives a reasonably good impression of the circumstances in which the Enterprise Chamber is willing to facilitate emergency funding (see his recent annotation to the Rhodes Holding decision[2], JOR 2011/288). In his view only two underlying questions remain to be answered:

(i) whether or not the Enterprise Chamber can only facilitate emergency funding if it would be unacceptable – considering the circumstances of the case at hand and the principles of reasonableness and fairness – to respect the rights of the shareholder who does not wish to cooperate with the proposed funding arrangement; and

(ii) to what extent the Enterprise Chamber’s room for manoeuvre is boxed in by this shareholder’s entitlement to the peaceful enjoyment of his possessions provided by Article 1 of Protocol No. 1 to the Convention for the Protection of Human Rights and Fundamental Freedoms (“P1”).

I endorse Doorman's appeal to the Enterprise Chamber (and the Dutch Supreme Court) to answer these questions (in a forthcoming article in Ondernemingsrecht I argue on the basis of Article 1 P1 what the answer to question (i) should be in my view). However, I’m afraid that these aren’t the only questions that still need to be answered.

As far as I am aware all emergency funding case law pertains to private limited liability companies (in Dutch: besloten vennootschap met beperkte aansprakelijkheid, "BV/LLC"). One of the questions that still need to be answered is whether this case law can be applied as well to public company limited by shares (in Dutch: naamloze vennootschap, "NV/PLC"). A crucial difference could lay in EU rules with regard to NV/PLCs, such as the First Council Directive 68/151/EEC and the Second Council Directive 77/91/EEC (“Second Directive”). Although I admit that the Dutch legislator has voluntarily applied most of these rules to the BV/LLC as well, it has refrained from the wholesale application thereof. That has led to the situation in which some rules applicable to the BV/LLC closely resemble EU based rules applicable to the NV/PLC, but still differ in some aspects. An interesting question is to what extent these rules should be applied in accordance with the relevant council directive. It would furthermore be interesting to know whether such an obligation would be based on Dutch law and/or EU law (cf. Wissink, Richtlijnconforme interpretatie van burgerlijk recht, Serie Recht en Praktijk, 115, nr. 15).

One relevant example with regard to emergency funding concerns Article 25 of the Second Council Directive, which reads as follows:

1. Any increase in capital must be decided upon by the general meeting. Both this decision and the increase in the subscribed capital shall be published in the manner laid down by the laws of each Member State, in accordance with Article 3 of Directive 68/151/EEC.

2. Nevertheless, the statutes or instrument of incorporation or the general meeting, the decision of which must be published in accordance with the rules referred to in paragraph 1, may authorize an increase in the subscribed capital up to a maximum amount which they shall fix with due regard for any maximum amount provided for by law. Where appropriate, the increase in the subscribed capital shall be decided on within the limits of the amount fixed, by the company body empowered to do so. The power of such body in this respect shall be for a maximum period of five years and may be renewed one or more times by the general meeting, each time for a period not exceeding five years.

3. Where there are several classes of shares, the decision by the general meeting concerning the increase in capital referred to in paragraph 1 or the authorization to increase the capital referred to in paragraph 2, shall be subject to a separate vote at least for each class of shareholder whose rights are affected by the transaction.

4. This Article shall apply to the issue of all securities which are convertible into shares or which carry the right to subscribe for shares, but not to the conversion of such securities, nor to the exercise of the right to subscribe.

Article 25 of the Second Directive was implemented in Article 2:96 of the Dutch Civil Code (“DCC”), which provides as a general rule that share issues by a NV/PLC require a shareholders' resolution. Article 2:96 DCC furthermore allows for the delegation of the authority to issue shares for a period up to five years at a time. The requirement that the general shareholders’ meeting should fix the maximum amount of subscribed capital another corporate body can resolve to issue, is met by Article 2:67 DCC. Article 6:67 DCC requires that the company's articles of association, which can only be changed by the general shareholders' meeting (Article 2:121 DCC), should provide the amount of the authorized capital.

The relevant section with regard to the BV/LLC (Article 2:206 DCC) was modeled on Article 2:96 DCC. Article 2:206 DCC also provides as a general rule that share issues require a shareholders' resolution. However, Article 2:206 DCC does not exactly match Article 2:96 DCC (and hence Article 25 of the Second Directive), since it allows for the permanent attribution of this authority to other corporate bodies such as the board of directors.

As will be explained below these sections are highly relevant with regard to emergency funding case law, although the significance of Article 25 of the Second Directive in this respect is still largely unknown. This case law concerns the situation, in which a company urgently needs new funds, and there is a possibility to obtain these funds, which however (inter alia) requires the company to issue new shares, whilst one or more of the shareholders block the required share issue. The basis on which these shareholders manage to block the required share issue varies, but often their vote is necessary to reach the required majority in the general shareholders’ meeting. The Enterprise Chamber is then applied – for instance by a shareholder in favor of the concerned funding arrangement – to lift this blockade. In case the Enterprise Chamber is willing to do so, it has various instruments at its disposal. To name a few examples from the Cools/Kroeze report: the suspension of the voting rights of the blocking shareholder, a transfer of his shares to a temporary fiduciary owner who has to put the company’s interest first (in Dutch: tijdelijke overdracht van aandelen ten titel van beheer), or a temporary change in the articles of association (for instance the authority to issue shares is transferred by the Enterprise Chamber from the general shareholders’ meeting to the board of directors, or the Enterprise Chamber removes a qualified majority requirement). In the mentioned Rhodes Holding decision for example the Enterprise Chamber provisionally ordered that the company’s board of directors could issues shares and could increase the amount of the authorized capital (which was necessary since this share issue exceeded the company’s authorized capital).

It remains to be seen whether such a provisional order would be in line with Article 25 (1) and (2) of the Second Directive. It is true that the Enterprise Chamber can temporarily change a company’s articles of association and yes, Article 25 (2) of the Second Directive allows for the articles of association to provide that the board of directors can resolve to issue shares. However, this seems to be based on the assumption that it is up to the shareholders to determine the contents of the articles of association, and hence to delegate this authority to the board of directors. Moreover, the aim of Article 25 of the Second Directive seems to be to place the authority to issue shares in the hands of the shareholders (cf. Scholten, ‘Emissie van aandelen’, in: Het vennootschapsrecht en de Tweede E.E.G.-Richtlijn, Serie Monografieen vanwege het Van der Heijden-Instituut 18, p. 40 and 41 and H.J. de Kluiver, ‘Noodzaakfinanciering en de rol van de rechter’, in: De financiering van de onderneming, Serie Van der Heijden Instituut 88, p. 40 and 41). The same applies with regard to the increase of the authorized capital.

Now, in the Inter Access case[3] it was argued in cassation that the Enterprise Chambers facilitation of emergency funding was in breach of Article 25 of the Second Directive (see ARO 2011/41 under beroepschrift g.c). However, the Dutch Supreme Court did not explicitly respond to this argument, nor did it ask prejudicial questions to the European Court of Justice. Instead it found that the Enterprise Chamber can derogate from Article 2:206 DCC. Hence the Dutch Supreme Court seems to imply that – if Article 2:206 DCC should be applied in accordance with Article 25 of the Second Directive – this obligation is not based on EU law, but solely on Dutch law. That would mean that not the European Court of Justice, but the Dutch Supreme Court would have the last word as to Article 2:206 DCC. Since the law firm I work for was involved in the Inter Access proceedings, I will leave the question whether this decision was correct unanswered. The point I want to make here is that the Dutch Supreme Court reasoning re Inter Access cannot be applied with regard to the NV/PLC. It is beyond doubt that there is an EU law based obligation to apply Article 2:96 DCC in accordance with Article 25 of the Second Directive (cf. the Pafitis decision quoted below).

It furthermore remains to be seen whether the Enterprise Chamber can circumvent Article 25 of the Second Directive by – not touching the general shareholders’ meeting authority to issue shares and to increase the authorized capital and instead – suspending the obstructing shareholder’s voting rights, or transferring his shares temporarily to a person who can be depended upon to vote in favor of the share issue. The Enterprise Chamber’s (and Dutch Supreme Court's) obligation to apply Dutch law with regard to the NV/PLC in accordance to text and aim of Article 25 of the Second Directive is not limited to Article 2:96 DCC, but also applies to all other provisions, including Article 2:349 (2) DCC (cf. Asser/Hartkamp 3-I* 2011/181).

A further interesting question is whether there is some EU doctrine which would allow the Enterprise Chamber to derogate from Article 25 of the Second Directive in the circumstances in which it usually facilitates emergency funding (cf. Snijders, ‘Beperkende werking van redelijkheid en billijkheid: de Europese dimensie’, in Het Europese recht en het Nederlandse contractenrecht (Serie Onderneming en Recht 42-I). However, the case law (quoted below) of European Court of Justice with regard to Article 25 of the Second Directive leaves that open to doubt. De Kluiver (loc.cit.) thinks that this option is not open to the Enterprise Chamber.

This leads to another interesting question: how should the Enterprise Chamber deal with the fact that the above mentioned questions merit prejudicial questions, whilst that would take an amount of time that a company in need of emergency funding simply does not have. I note that Enterprise Chamber may ask prejudicial questions, but it has no obligation to do so (Article 267 of the Treaty on the Functioning of the European Union). Given the fact that in cases regarding emergency funding the Enterprise Chamber is asked to save the company from bankruptcy, it might be tempting to argue that the company should be saved first and prejudicial questions asked later. However, it should be kept in mind that undoing the consequences – in case the European Court of Justice in the end decides that Article 25 of the Second Directive precludes the Enterprise Chamber’s case law with regard to emergency funding – would lead to a very messy situation in which with lots of difficult questions would need to be answered.

European Court of Justice 12 March 1996, case C-441/93 (Pafitis)[4]:

Article 25 of the Second Council Directive (77/91/EEC) of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent precludes national legislation under which the capital of a bank constituted in the form of a public limited liability company which, as a result of its debt burden, is in exceptional circumstances may be increased by an administrative measure, without a resolution of the general meeting.

European Court of Justice 12 May 1998, case C-367/96 (Kefalas)[5]:

Community law does not preclude national courts from applying a provision of national law in order to assess whether a right arising from a provision of Community law is being exercised abusively. However, where such an assessment is made, a shareholder relying on Article 25(1) of the Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, cannot be deemed to be abusing the right arising from that provision merely because the increase in capital contested by him has resolved the financial difficulties threatening the existence of the company concerned and has clearly enured to his economic benefit, or because he has not exercised his preferential right under Article 29(1) of that directive to acquire new shares issued on the increase in capital at issue.

European Court of Justice 12 March 1996, case C-373/97 (Diamantis)[6]:

32. The preliminary point must be made that, as the Court has already held in Case C-367/96 Kefalas and Others v Greek State and Others [1998] ECR I-2843, paragraph 28, the objective of Article 25(1) of the Second Directive is to ensure, for the benefit of shareholders, that a decision increasing the capital of the company and, consequently, affecting the share of equity held by them, is not taken without their participation in the exercise of the decision-making powers of the company. According to the case-law, that objective would be seriously frustrated if the Member States were entitled to derogate from the provisions of the directive by maintaining in force rules - even rules categorised as special or exceptional - under which it was possible to decide by administrative measure, outside any decision by the general meeting of shareholders, to effect an increase in the company's capital (Karella and Karellas, cited above, paragraph 26).

33. However, Community law cannot be relied on for abusive or fraudulent ends (see Kefalas and Others, cited above, paragraph 20, and the case-law cited there). That would be the case if a shareholder, in reliance on Article 25(1) of the Second Directive, brought an action for the purpose of deriving, to the detriment of the company, an improper advantage, manifestly contrary to the objective of that provision (Kefalas and Others, cited above, paragraph 28).

34. Although national courts may, therefore, take account - on the basis of objective evidence - of abuse on the part of the person concerned in order, where appropriate, to deny him the benefit of the provisions of Community law on which he seeks to rely, they must nevertheless assess such conduct in the light of the objectives pursued by those provisions (Case C-206/94 Paletta [1996] ECR I-2357, paragraph 25). The application of a national rule such as Article 281 of the Civil Code must not, therefore, detract from the full effect and uniform application of Community law in the Member States (Pafitis and Others, cited above, paragraph 68).

[…]

THE COURT (Sixth Chamber), in answer to the questions referred to it by the Polimeles Protodikio Athinon by order of 24 June 1997, hereby rules:

Community law does not preclude national courts from applying a provision of national law which enables them to determine whether a right deriving from a Community law provision is being abused. However, in making that determination, it is not permissible to deem a shareholder relying on Article 25(1) of the Second Directive 77/91/EEC of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, to be abusing his rights under that provision merely because he is a minority shareholder of a company subject to reorganisation measures, or has benefited from reorganisation of the company, or has not exercised his right of pre-emption, or was among the shareholders who asked for the company to be placed under the scheme applicable to companies in serious difficulties, or has allowed a certain period of time to elapse before bringing his action. In contrast, Community law does not preclude national courts from applying the provision of national law concerned if, of the remedies available for a situation that has arisen in breach of that provision, a shareholder has chosen a remedy that will cause such serious damage to the legitimate interests of others that it appears manifestly disproportionate. 

---

[1] http://zoeken.rechtspraak.nl/detailpage.aspx?ljn=AD5138

[2] http://zoeken.rechtspraak.nl/detailpage.aspx?ljn=BQ7369

[3] http://zoeken.rechtspraak.nl/detailpage.aspx?ljn=BO7067

[4] http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61993J0441:EN:PDF

[5] http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&alljur=alljur&jurcdj=jurcdj&jurtpi=jurtpi&jurtfp=jurtfp&numaff=&nomusuel=Kefalas&docnodecision=docnodecision&allcommjo=allcommjo&affint=affint&affclose=affclose&alldocrec=alldocrec&docdecision=docdecision&docor=docor&docav=docav&docsom=docsom&docinf=docinf&alldocnorec=alldocnorec&docnoor=docnoor&docppoag=docppoag&radtypeord=on&newform=newform&docj=docj&docop=docop&docnoj=docnoj&typeord=ALL&domaine=&mots=&resmax=100&Submit=Rechercher

[6] http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&alljur=alljur&jurcdj=jurcdj&jurtpi=jurtpi&jurtfp=jurtfp&numaff=&nomusuel=Diamantis&docnodecision=docnodecision&allcommjo=allcommjo&affint=affint&affclose=affclose&alldocrec=alldocrec&docdecision=docdecision&docor=docor&docav=docav&docsom=docsom&docinf=docinf&alldocnorec=alldocnorec&docnoor=docnoor&docppoag=docppoag&radtypeord=on&newform=newform&docj=docj&docop=docop&docnoj=docnoj&typeord=ALL&domaine=&mots=&resmax=100&Submit=Rechercher 

[No. 64] "Judges are ill-suited by training (and should be disinclined by temperament) to second-guess the business decisions of those chosen by the stockholders to fulfill precisely that function"

Could you imagine the Enterprise Chamber or the Supreme Court opening a ruling with lines like this? No? Ok, me neither.

Then again, if the Delaware Chancery Court does so, it may not be a 100% impossibility. I will let the introductory words written by the new Vice-Chancellor Glasscock in In re The Goldman Sachs Group, Inc. Shareholder Litigation, C.A. No. 5215-VCG (Del. Ch. 2011) of October 12, 2011 (a whopping 68 pages) do the talking. Buckle up!

The Delaware General Corporation Law is, for the most part, enabling in nature. It provides corporate directors and officers with broad discretion to act as they find appropriate in the conduct of corporate affairs. It is therefore left to Delaware case law to set a boundary on that otherwise unconstrained realm of action. The restrictions imposed by Delaware case law set this boundary by requiring corporate officers and directors to act as faithful fiduciaries to the corporation and its stockholders. Should these corporate actors perform in such a way that they are violating their fiduciary obligations—their core duties of care or loyalty—their faithless acts properly become the subject of judicial action in vindication of the rights of the stockholders. Within the boundary of fiduciary duty, however, these corporate actors are free to pursue corporate opportunities in any way that, in the exercise of their business judgment on behalf of the corporation, they see fit. It is this broad freedom to pursue opportunity on behalf of the corporation, in the myriad ways that may be revealed to creative human minds, that has made the corporate structure a supremely effective engine for the production of wealth. Exercising that freedom is precisely what directors and officers are elected by their shareholders to do. So long as such individuals act within the boundaries of their fiduciary duties, judges are illsuited by training (and should be disinclined by temperament) to second guess the business decisions of those chosen by the stockholders to fulfill precisely that function. This case, as in so many corporate matters considered by this Court, involves whether actions taken by certain director defendants fall outside of the fiduciary boundaries existing under Delaware case law—and are therefore subject to judicial oversight—or whether the acts complained of are within those broad boundaries, where a law-trained judge should refrain from acting.

I'm a fan already! You bet I will drop this decision on November 4. [Disclosure: I am, of course, a bit biased here; see, e.g., B.F. Assink, Rechterlijke toetsing van bestuurlijk gedrag, Deventer: Kluwer 2007, no. 2.3]

[No. 63] Conflict of Interests

Last Friday, the Dutch Supreme Court issued another ruling (this time re Weva Consultants/M.E. Beheer; LJN BR0119, available here) about the statutory conflict of interests regime for public and close corporations: s. 2:145/256 DCC,  soon to be replaced by s. 2:129/239 (5-6) DCC new. What will stay in the new regime, however, is the key concept 'conflict of interests' (tegenstrijdig belang). This means that the Supreme Court's case-law as to the same concept used in s. 2:146/256 DCC will keep its relevance in the future. This has been discussed at TDT a number of times; for more details see, e.g., B.F. Assink, De Januskop van het Ondernemingsrecht, Deventer: Kluwer 2010, no. 59.

Interested in the key issues decided last Friday? Then check the text below the fold.

[No. 62] More Fireworks re Titel 7.13

Van Olffen, Van Solinge and Nieuwe Weme rage on about the "abortion" of bill 7.13 (personenvennootschappen) in Ondernemingsrecht 2011-13. Go guys!