www.TheDefiningTension.com

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

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

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

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

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

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

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

Eindverantwoordelijk voor Landis

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

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

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

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

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

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

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

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

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

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

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

(emphasis mine)

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

[No. 47] European Commission Close to Closing Loophole

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

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

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

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

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

It makes for good reading, all 9 volumes.

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

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

[No. 44] Director Indemnification

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

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

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

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

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

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

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

Boetes voor AFM-begrippen hoog

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

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

Ontmanteling Fortis

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

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

Vertrekpremie oud-topmannen

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

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

[No. 43] On Shareholders and Ownership

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

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

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

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

[No. 38] Links [Updated]

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

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

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

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

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

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

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

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

UPDATE

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

[No. 33] Just Say No!?

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

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

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

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

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

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

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

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

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

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

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

--------

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

Hmm, what to think of this? Some thoughts.

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

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

UPDATE

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

Reaffirmation of the BJR

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

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

[No. 30] Troubles in The Mansion / Karma

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

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

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

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

Schaarse informatie

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

(...)

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

Karma?

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

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

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

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

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

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

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

Good stuff. Here are some key findings.

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

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

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

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

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

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

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

[No. 28] Uh Oh ...

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

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

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

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

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

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

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

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

JEL Classifications: G3, K22, L21

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

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

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

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

[No. 25] Eye of the Tiger

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

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

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

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

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

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

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

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

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

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

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

(...)

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

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

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

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

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

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

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

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

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

[No. 20] Timing is Everything, Right?

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

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

Uhm, or not.

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

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

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

How about them apples?

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

[No. 18] Start-Ups and Breakdowns

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

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

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

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

(HT Maarten Verbrugh)

[No. 13] A Cool Country

Steve Bainbridge has a funny post about Spyker's acquisition of Saab, including some footage by the chaps from Top Gear, who also happen to throw in a comment or two on the Netherlands. The good professor hopes we at TDT don't take offense. Steve, no worries; although the English are well known for their sense of humor, I think - but I'm obviously 100% biased here - the Dutch know a quality joke when they spot one (and there's one right below). And just in case, we have VC Strine's comment that we're a cool country to back us up.

[No. 10] And Again: The Right of Inquiry and the Business Judgment Rule

Ok, here we go again (sigh).

In the latest WPNR (2010/6827, p. 58-64: "Voorontwerp aanpassing enquêterecht"), Fons Leijten adds his comments to the pile of responses generated by the recent draft proposal by the Ministry of Justice, that aims to make some important but relatively modest statutory changes to the right of inquiry. In doing so, he also says a few things about the business judgment rule as proposed by the Ministry of Justice. Unfortunately, (also) Fons doesn't respond to my reasoning in Facetten van verantwoordelijkheid in hedendaags ondernemingsbestuur, Deventer: Kluwer 2009, no. 3.3.3, explaining why it is legally possible and makes sense policy wise to introduce a Dutch business judgment rule in inquiry proceedings. A similar analysis will appear soon in a contribution to the liber amicorum in honour of Huub Willems (authored by Maarten Kroeze and me). Fons mentions it in footnote 37 of his column, but doesn't respond at all due to - how convenient... - insufficient space in his piece to do so. Anyway, I applaud the effort but believe his arguments as to the business judgment rule seriously miss the mark, for reasons I explained there, here and in my dissertation (Rechterlijke toetsing van bestuurlijk gedrag, Deventer: Kluwer 2007, Chapter VI).

Oh, for a nice review of a Delaware Supreme Court footnote discussed at TDT here, go and check Insights - The Corporate & Securities Law Advisor (Volume 23, No. 11, November 2009), citing the post in footnote 3. (HT Joe Christensen). Good stuff.

[No. 8] Some Catching Up To Do

Last week was awfully hectic, as I'm preparing for this Thursday's event. Now that most of the thinking and writing is done, here's some catching up on my part.

1. In the coming three weeks, an investigative committee composed of politicians - the Committee De Wit - that is diving into the reasons why the financial crisis emerged the way it did and what should be done to prevent such a crisis from happening again, will begin with sessions in which persons will be heard re the credit crunch. These are not witness hearings taken under oath, in view of the powers granted to the committee. If the committee does want to hear people under oath, it will have to have it's status changed to inquiry committee, which is a different species.

Some of the persons that will show up are ABN Amro CEO Gerrit Zalm, president of De Nederlandsche Bank Nout Wellink, GroenLinks politician Kees Vendrik and Rabobank director Bert Bruggink. One of the persons who will not show up - because he refuses to appear - is former Fortis director Maurice Lippens, who played a big role in the 2007 take-over battle re ABN Amro (in which Fortis was part of a consortium, together with RBS and Banco Santander). The Islandic financial watch-dog - Icesave anybody? - apparently also refuses to send representative to the hearings. The committee will present its findings this March.

The second part of the committee's activities covers the initiatives taken by the cabinet to tackle the crisis, especially the actions taken by the Minister of Finance, including the financial support given to ING and Aegon, the nationalisation of Fortis/ABN Amro and the whole Icesave breakdown. The committee wil present its findings of the second tranche late 2010.

As a starter, a nice retrospective on the financial crisis can be found here, starting in 1999 (the Interne Bubble), touching on the whole mortgage business and explaining the course of events in 2007 and 2008. More background footage is available in this video.

De Wit is part of the party that proposed recently (i) to add 'financial mismanagement' to the Dutch Criminal Code (apparently with a maximum prison penalty of six years) and (ii) to increase personal liability for bankers when their business judgments don't pan out. I'm very sceptical about these initiatives, as explained here. If only for this reason, the findings of the Committee De Wit will be of interest.

2. Last week the full text of the Bill on Private Company Law Reform was published, as sent to the First Chamber of parliament (the last step in the legislation process). Essential parts of the bill were discussed on TDT, e.g., here and here. In view of legislation technicalities, July 1 2010 as introduction date of this bill may be a bit on the optimistic side.

[No. 7] Huub Willems About the Legislator's Intention to Give the Right of Inquiry a Make-Over

In last year's post No. 175 I discussed the gist of the recent proposal to tweak some elements of the right of inquiry, one of the - if not the - most popular Dutch avenues for corporate litigation. Some elements are quite hotly debated, others far less. The business judgment rule phenomenon has also generated discussion (see, e.g., here and here).

In this weekends Economy section of NRC Handelsblad, former president of the Enterprise Chamber Huub Willems added some further input to the discussion (the whole interview is also available online for registered readers). He is particularly sceptical of the upside of lifting the bar for activist shareholders of large companies to address the court (by requiring a larger amount of stockownership per section 2:346 DCC). His gut-feeling is that under the proposed regime, the litigating shareholders in the well-known cases would also have been able to pass the courtroom doors. Here's a snippet from the interview with Willems.

Maatregelen van minister Hirsch Ballin (Justitie, CDA) om het activistische aandeelhouders moeilijker te maken naar de rechter te stappen, zullen weinig effect hebben. Dat zegt oud-voorzitter Huub Willems van de Ondernemingskamer van het Amsterdamse gerechtshof in een gesprek met NRC Handelsblad.

Minister Hirsch Ballin stuurde afgelopen herfst voorstellen naar betrokken partijen waarin het voor aandeelhouders van grote ondernemingen lastiger wordt om de Ondernemingskamer te vragen een enquête naar wanbeleid in te stellen. Activistische aandeelhouders spannen die procedures aan omdat de Ondernemingskamer bij een enquête ook onmiddellijke voorzieningen mag treffen, zoals het verbieden van beschermingsconstructies of het ontslaan van commissarissen.

Volgens de voorstellen van Hirsch Ballin moeten aandeelhouders 1 procent van het aandelenkapitaal van de bedrijf in eigendom hebben om een zaak te kunnen aanspannen. Bij grote ondernemingen betekent dat al snel dat ze voor tientallen miljoenen euro’s aan aandelen moeten hebben gekocht.

„Mijn natte vinger zegt dat bij alle zaken die ik behandeld heb, de partijen ook onder het nieuwe regime voldoende kapitaal zouden hebben gehad”, zegt Willems, nu plaatsvervangend raadsheer bij de Ondernemingskamer.

De Sociaal-Economische Raad had in 2007 geadviseerd veel hogere drempels vast te leggen voor aandeelhouders. Ook in de Tweede Kamer gingen stemmen op om de macht van aandeelhouders aan banden te leggen. Het gevoel bestond dat Angelsaksische hedgefondsen in Nederland te makkelijk naar de rechter konden stappen. Dat was nadat het Britse hedgefonds TCI bij ABN Amro met 1,5 procent van de aandelen het bestuur van de bank in grote problemen had gebracht.

A similar argument was made by M. Romyn in his comment to post No. 175, also adding some numbers along the way.

The Minister's explanatory notes to the proposal claim (on page 6) that in almost all of the cases involving publicly traded corporations shareholders relied on the current low treshold to gain access to the Enterprise Chamber.

That's a gross overstatement. Of the six "attention drawing" cases you mentioned in your post, not less than half involved shareholders owning 10% or more, i.e. ASMI (28,5%), Rodamco (23,9%) and Stork (> 10,4%). Laurus, in which a single shareholder owned 34%, might be added as well.

The Social-Economic Council report that the Minister refers to to justify his proposal to make it more difficult to start an inquiry procedure specifically mentions (on p. 36) ABN Amro and Stork as "infamous cases that had unpredictable consequences for the policies and strategies of the corporations involved". But those corporations would not have been helped one bit, had the Minister's proposal been the law of the land when their cases were decided.

In the case of Stork, Centaurus had standing as it owned 10,4% of shares, not because of the E 225,000 treshold. In the case of ABN Amro, where CEO Rijkman Groenink voluntarily offered his bank's independence after receipt of a simple letter from The Children's Investment Fund, that fund owned sufficient shares to go to Court under the new proposal, i.e. more than 1%. Thus, the proposal does nothing to reduce the disproportionality that the Minister appears to be so concerned about.

Moreover, as shareholder's advocates VEB correctly point out in this morning's FD newspaper, the E 20 million minimum value requirement may make it much more difficult to initiate an inquiry procedure when a corporation goes belly-up and its shares become worthless.

This may show that the proposed amendment to section 2:346 DCC doesn't tilt the whole playing field, but it doesn't convince me that the proposed amendment is without merit. It's a difficult discussion to pursue based on gut-feeling, without a sound factual basis covering the whole body of case law so far (i.e., without taking into account the research conducted by Kroeze et al).

[No. 6] Once More: the Right of Inquiry and the Business Judgment Rule

1. As I have explained at several places in the last three years, it is well possible (from a legal point of view) and makes good sense (from a policy point of view) to introduce a Dutch business judgment rule in Dutch corporate law, specifically in inquiry proceedings and in certain director liability proceedings. See, e.g.:

• Rechterlijke toetsing van bestuurlijk gedrag, Deventer: Kluwer 2007, chapter VI;
• Ondernemingsrecht 2008-6, no. 66; and
• Facetten van verantwoordelijkheid in hedendaags ondernemingsbestuur, Deventer: Kluwer 2009, no. 3.3.3.

2. In last year's post No. 190, I said a few things about the recent draft proposal by the Ministry of Justice, that aims to make some important but relatively modest statutory changes to the right of inquiry. The explanatory notes to the draft basically suggest that, when the Enterprise Chamber is asked to rule whether 'well founded reasons' (gegronde redenen om aan een juist beleid te twijfelen) or 'obvious mismanagement' (wanbeleid) exist as to matters that fall in the business judgment realm, the focus points applied in US case law could be helpful in this respect in the Dutch setting (thereby referring to the Delaware business judgment rule). This suggestion was inspired by a 2008 report from the Dutch Social-Economic Council, arguing for introduction of a Dutch business judgment rule in inquiry proceedings.

3. Not surprisingly, this suggestion in the explanatory notes is a step in the right direction in my view. As I explained in that post, Prof. Gerard van Solinge's remarks earlier in November - at least that's how I interpreted them - that the draft proposal effectively cut-off the SER's suggestion to restyle the court's review model in the business realm, were incorrect. So far so good.

4. This week Van Solinge published a two-page column in WPNR (Naar een evenwichtig enquêterecht, 2010/6825, p. 1-2) about the draft proposal and the explanatory notes, also touching on the above issue. He now takes as a given that the explanatory notes indeed include the - what I would call - 'Dutch business judgment rule' suggestion, but proceeds with arguing that this suggestion is wrong. I won't rehash here the reasons why Van Solinge's arguments are not convincing at all, but do offer a summary.

• The explanatory notes do not suggest to copy the Delaware business judgment rule 1-to1, but to finetune the Dutch system with elements of the Delaware system that are of added value policy wise. In other words, to shape an autonomously operating Dutch version of the business judgment rule, well embedded in Dutch corporate law.
• This obviously doesn't imply that the Enterprise Chamber - or counsel to the parties before the court - should continue to look at corporate case law developments in Delaware and take those into account, let alone explicitly, when deciding cases. We're talking about an autonomously operating model of judicial scrutiny here.
• And yes, doing so would imply that the way director conduct is reviewed would become a more structured exercise, that is the whole idea behind it in the first place. But no, that would not mean the court could only move in a mechanical fashion, that it would become an inflexible excercise; circumstances of the case at hand would still - and inevitably! - play an important role, while the framework of the business judgment rule still consists of standards, not rules.
• It simply isn't true that the Delaware business judgment rule is only applied in director liability proceedings, so his argument that for this reason the right of inquiry is not suited for a Dutch business judgment rule is of no moment.
• The fact that not all disputes before the Enterprise Chamber in inquiry proceedings concern business judgment related disputes, doesn't take away the fact the a court when confronted with such issues has to deal with them in a fairly predictable and responsible way; a Dutch business judgment rule would facilitate that. This is also a non sequitur.
• Although the suggestion in the explanatory notes does not relate to a proposed amendment of statutory wording, the suggestion should be seen against the backdrop of the core notions 'well founded reasons to doubt the correctness of the company' (section 2:350(1) DCC) and 'obvious mismanagement' (section 2:355(1) DCC). The fact that the explanatory notes do not propose to change the wording of these core notions (correctly in my view; see Ondernemingsrecht 2008-6, no. 66, p. 236: "Aan de bestaande enquêterechtelijke begrippen (...) dient niet te worden gemorreld. De door mij bepleite systematiek van bestuurlijke gedragsnormen en gerelateerde rechterlijke toetsingsnormen kan worden ingepast in deze vertrouwde, overkoepelende normatieve begrippen waarover veel rechtspraak bestaat."), does not take away the fact that it falls well within the legislator's powers to clarify its views on how these notions should be applied.

If you read Facetten van verantwoordelijkheid in hedendaags ondernemingsbestuur, Deventer: Kluwer 2009, no. 3.3.3 you will see that introduction of a Dutch business judgment rule indeed is well possible and preferable policy wise (Van Solinge doesn't respond to my analysis in that publication, that predated his). I do want to clarify that a Dutch business judgment rule would not be applicable when the Enterprise Chamber has to decide whether or not to take a provisional measure (section 2:349a(2) DCC). I explained this in Ondernemingsrecht 2008-6, no. 66, p. 234-235). Van Solinge incorrectly suggests that I argued differently, in his footnote 7.

5. Discussion about this important topic is a good thing, even a must; no doubt about that. But let's stop putting forward uninformed/flawed arguments in this whole discussion, to attack the suggestion that is on the table to start working on a Dutch business judgment rule, and get to the point: do we believe it is advisable to have a Dutch business judgment rule or not, policy wise (as it is legally possible)? That is the core issue, not really addressed by Van Solinge or other sceptics so far. My answer is a bold YES, for reasons explained elsewhere. So far, I haven't seen any convincing arguments supporting a clear no. Maybe this suggests there aren't any really...

[No. 5] The State's '08 Rescue of Fortis Bank and the Liability Aftermath II

In last year's post No. 165 I wrote about the Dutch state's '08 rescue of Fortis and the liability aftermath, more specifically about 16 rulings by the The Hague District Court in 16 liability cases brought by disgruntled Fortis shareholders against the state. The result was a 0-16 victory for the defendant.

In the meantime two more analyses of the rulings have been published. The first one comes from Arnoud Pijls and can be found in Ondernemingsrecht 2009, nr. 175. The second one, that was published today and carries the title I Want My Money Back (a clear reference to former UK MP Margaret Thatcher), comes from Wouter den Hollander of the Publiekrecht en Politiek blog.

[No. 3] The Upshot of Blogging

Steve Bainbridge offers a post on his "love" for the Delaware Supreme Court 1971 decision re Sinclair Oil v. Levien. Actually the post, that isn't his shortest ever but offers some nice insights on standards of review related stuff (which I believe is enough in itself to spend 5 minutes reading time on), is a response to one of Jay Brown's regular 'Delaware bashing' contributions to the blogosphere. The whole thing made me think of that movie called The Usual Suspects; it's not a surprise really to see on which side of the debate they end up. What Steve's response really proves to me is the upshot of blogging, namely responding in a compact, up-to-date and easy accessible way to corporate law related developments. Something we at TDT digg very much.

[No. 2] That's a First Timer...

Or so it seems: a high level employee at ABN Amro Bank in charge of Human Resources and actually allocating bonuses, leaving the bank because he's fed-up with the whole bonus bonanza and the fact that nothing has changed since previous years.

Bankier Kilian Wawoe verlaat ABN Amro uit onvrede over de bonuscultuur in de financiële sector. Als senior personeelsmanager heeft hij het afgelopen jaar geen verandering gezien in de wijze waarop financiële instellingen omgaan met bonussen. Dat zegt Wawoe in een interview met de Volkskrant. ‘Ik ben ervan overtuigd dat je bonussen moet verbieden. Dan kan ik niet nog een jaar aan het circus meedoen, als ik mezelf serieus neem tenminste.’

Onjuiste prikkels

Wawoe constateerde na onderzoek dat de bonussen vaak onjuiste prikkels geven. Hij wil met zijn bevindingen proberen buiten de bank een nieuw beloningsmodel te ontwikkelen. Bij ABN Amro was hij verantwoordelijk voor het personeelsbeleid van diverse buitenlandse vestigingen. Bankiers spreken zich zelden openlijk uit tegen bonussen. Ook na de maatschappelijke ophef, verdedigen banken het nut van bonussen. Banken hebben soms bonussen tijdelijk geschrapt of verlaagd, maar nooit afstand willen doen van variabele beloningen.

Zelfregulering niet afdoende

De Nederlandse banken vinden dat ze door zelfregulering de ernstige uitwassen van bonussen kunnen voorkomen. Wawoe vindt zelfregulering niet afdoende. ‘Mensen zijn nu eenmaal niet gemaakt voor zelfkritiek, bankiers ook niet.’ Verandering is daarom nodig van buitenaf, meent Wawoe. De overheid heeft haar kans na het uitbreken van de kredietcrisis echter verspeeld, bang om het aandelenbelang in de banken te schaden.

(De Volkskrant)

The article refers to the employee - Kilian Wawoe - as a "banker", but I'm not sure folks from HR qualify as such. Surely not every person who works at a bank is a banker. But anyway, his solution? Simply ban bonuses in the banking realm, don't even try to regulate them like policy makers seem to attempt. Talking about a different tack.

I have written before about bonus related complaints, coming from the corners of politicians, policy makers and even the president of the Dutch National Bank. The situation relaxed a bit since then, from the bankers' side of things that is. No doubt:

• Wawoe's remarkable step (a first timer after all);
• his harsh criticism on the Maas Committee that drafted the Banking Code 2009, that was received quite well by the Dutch cabinet (one of the funny quotes from the article is Wawoe's complaint that while the dikes were breaking, the Maas Committee proposed to paint them blue; an original solution, but one that won't work at all);
• his doubts about the position of the government, that - he argues - lost momentum post October 2008 to really do something about the whole bonus hassle, because of its shareholding in ABN AMRO/Fortis and the financial ramifications of actually doing something about the whole bonus hassle; and
• his plans to dive into the bonus issue and come up with a better solution than the ones proposed to date;

will stirr up things in the coming period.

For what it's worth, a poll among over 4000 persons results in over 90% of the votes cast saying that Wawoe did the right thing and set a right example. Maybe there's still some momentum left ...

[No. 1] Second Season

Happy 2010 to all readers of The Defining Tension!

After a productive first year, resulting in 221 posts from the editors and TDT's guest authors (thanks to all of you), we're off to our second season. In the course of 2009 we were able to generate attention in the blogosphere and in academic publications (in- and outside the Netherlands), which is one of the goals of the blog and we're quite happy about that development. Hopefully we can continue to do so this coming year and beyond. To make things not too complicated, we've decided to restart the numbering of the posts at the beginning of each year, which makes this post No. 1.

During the holidays legal developments that require serious attention tend to be a bit slow, at least in Dutch circles. But luckily there's Conrad Black - with a criminal case pending before the SCOTUS - who shares some personal observations re the last decade (dubiously referring to president Barack Obama as a potential "as a shoe-shine boy") and Richard Finlay's response, remarking that "Mr. Black is not a civilized man, but rather a crook who fleeced his own shareholders and perverted the course of justice." If you have 5 minutes to spare, consider reading his whole piece dubbed Conrad Black's Race to the Bottom.

As to substance that really has added value for readers interested in corporate law developments, I should add a reference to Francis Pileggi's Top 5 Corporate and Commercial Cases from Delaware for 2009. Useful as always.