www.TheDefiningTension.com

[No. 25] Proposed Changes to United Arab Emirates Corporate Law

The United Arab Emiraties has proposed to change its corporate law. The aim is to give greater flexibility to those setting up companies and strengthen corporate governance of joint stock companies. The new law will also introduce unified accounting standards for all businesses, amend guidelines for share offerings in local capital markets and extend the possibility of foreign majority ownership of companies nationwide.

[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. 19] The Future of European Company Law

The European Commission has launched a consultation on the future of European Company Law.  European company law is a subject that, understandably, has been overshadowed over the recent years by its sibling, financial law. It will be interesting to see what the Commission is going to come up with once the responses have been analysed - another Company Law Action Plan?

The consultation is available here.

[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. 17] Distribution of Profit in the Health Sector

A few days ago a long expected proposal for legislation was published that will make it possible, if adopted, for certain health organisations such as hospitals to distibute profits to its shareholders or members.  

Dit wetsvoorstel is een uitwerking van het voornemen uit het Regeer- en Gedoogakkoord om gereguleerde winstuitkering mogelijk te maken voor aanbieders van medisch-specialistische zorg (algemene en categorale ziekenhuizen en zelfstandige behandelcentra). Hierdoor zullen zij beter in staat zijn om financiering in de vorm van risicodragend vermogen aan te trekken. De regering is van oordeel dat daardoor de kwaliteit, dienstverlening en doelmatigheid van de medisch-specialistische zorg zal verbeteren. Aan de andere kant erkent de regering dat het ongeclausuleerd toestaan van winstuitkering ook kan leiden tot extra risico’s voor de kwaliteit, betaalbaarheid en doelmatigheid van zorg. Daarom zijn in het Regeer- en Gedoogakkoord randvoorwaarden neergelegd. Ten eerste mag geen winst uitgekeerd worden gedurende de eerste drie jaar na het moment van investeren. Ten tweede mag pas winst worden uitgekeerd na een positieve beoordeling van vooraf gestelde minimumkwaliteitseisen door een onafhankelijke toezichthouder. Ten derde mag pas winst worden uitgekeerd na een positieve beoordeling van de financiële reserves. Door de wijze waarop deze voorwaarden in dit wetsvoorstel worden ingevuld, is een balans gevonden tussen het borgen van de publieke belangen enerzijds en het behoud van de investeringsbereidheid anderzijds.

The Bill includes a definition of distribution of profits.

Onder het uitkeren van winst wordt verstaan het uitkeren van winst als vergoeding voor het ter beschikking stellen van eigen vermogen door privaatkapitaalverschaffers. Winstuitkering is geregeld in boek 2 van het Burgerlijk Wetboek (BW) (art. 2:53 BW voor coöperaties, art. 2:105 BW voor de nv, en art. 2:216 BW voor de bv). In afwijking op het BW wordt niet geacht onder het verbod van winstuitkering te vallen de inkoop van eigen aandelen of vermindering van het geplaatst kapitaal.

However, academic hospitals are not permitted to distibute profit.

In dit wetsvoorstel worden academische ziekenhuizen vooralsnog uitgesloten van de mogelijkheid tot het uitkeren van winst. De meeste academische ziekenhuizen zijn publiekrechtelijke rechtspersonen op grond van de Wet op het hoger onderwijs en wetenschappelijk onderzoek (WHW) en worden sterk gereguleerd door de minister van Onderwijs, Cultuur en Wetenschap. Voor deze academische ziekenhuizen is het op grond van hun publiekrechtelijke grondslag niet mogelijk om winst uit te keren. De overige academische ziekenhuizen hebben een verplichte rechtsvorm, namelijk de stichting of de vereniging, die het uitkeren van winst ook niet toestaat.
Naast bovenstaande juridisch belemmeringen, bestaan er ook inhoudelijke bezwaren tegen het toestaan van winstuitkering bij academische ziekenhuizen. Zij hebben enkele aanvullende functies naast het aanbieden van reguliere medisch-specialistische zorg. Onder deze functies vallen het doen van wetenschappelijk onderzoek en innovatieonderzoek, het ontwikkelen van nieuwe vormen van zorg en het verzorgen van de opleiding tot arts. Academische ziekenhuizen krijgen voor deze taken een vergoeding in de vorm van de academische component (AC). Deze geldstroom is vooralsnog niet duidelijk te scheiden van de bekostiging van geleverde zorg via zorgverzekeraars. Om te voorkomen dat een deel van de academische component bedoeld of onbedoeld wordt uitgekeerd aan aandeelhouders, kiest de regering er voor de academische ziekenhuizen uit te sluiten van de mogelijkheid om winst uit te keren.
Overigens concurreren academische ziekenhuizen bij het aanbieden van reguliere medisch-specialistische zorg met andere aanbieders. In tegenstelling tot deze aanbieders, krijgen academische ziekenhuizen geen mogelijkheid om winst uit te keren. Dat kan een ongelijk speelveld opleveren. Dat hoeft geen probleem te zijn omdat een «gemengd systeem» van naar winst strevende aanbieders met private investeerders en aanbieders zonder private investeerders goed kan functioneren (zie paragraaf 1.3). De regering verwacht daarom dat academische ziekenhuizen door de naar winst strevende aanbieders worden geprikkeld om ook hun doelmatigheid en kwaliteit te verbeteren.

The explanatory notes are very worthwhile to read as the proposal covers entrepreneurship and the legal boundaries to it. Also, John Elkington's three P's seem to fit in here. People, planet and profit.

[No. 16] Ajax: Court of Appeal Decision

The Court of Appeal in Amsterdam last Tuesday overturned the appointment of Louis van Gaal as CEO of Ajax, a victory for supervisory board member Johan Cruyff in his fight against Van Gaal's role with the club. The ruling (LJN: BV3011) was the latest twist in the boardroom battle between Cruyff and the four other supervisory board members at the four-time European champion footbal club Ajax.

The Court of Appeal concluded that the other four board members deliberately put Cruyff offside by appointing Van Gaal and another director, Martin Sturkenboom, in November 2011 without adequately consulting Cruyff. Apparantly, the meeting of the members of the supervisory board was announced in the morning, without mentioning that it would include a vote on Van Gaal as CEO, and took place that same day in the afternoon. Cruyff, who was in Barcelona, was unable to attend and was completely surprised (and shocked) to hear Van Gaal was voted in. Following the court ruling, the four members of the supervisory board have announced they will step down. Just today, I read it is rumoured that former Dutch national team goalkeeper, who also played for Ajax, Juventus, Manchester United and Fulham (see 2012 post 15), Edwin van der Sar might fill in one of the vacant seats. Currently, Van der Sar is doing a master's degree in International Sport Management at (I am not joking) the Johan Cruyff Institute for Sport Studies. I guess that makes him a perfect candidate!      

As corporate law enthusiast and football fan I will write a more detailed piece about this football drama for one of the legal journals. For now, I stop, as I have had enough football for one day.

[No. 15] UK: Fulham Footbal Club, Arbitration and Unfair Prejudice

I just read an interesting 2011 UK court decision regarding the important question whether arbitration blocks an unfair prejudice proceeding. The Court of Appeal case concerned a dispute between a premier league football club and the first and second defendants, the chairman of the Football Association Premier League Ltd and the company itself, that was covered by arbitration clauses in the rules of the company and the Football Association.

The Court of Appeal dismissed the appeal by the petitioner, Fulham Football Club Ltd, regarding the decision of Vos J [2010] EWHC 311 (Ch) on 1 December 2010 granting the first and second defendants, the Football Association and its chairman, a stay of the proceedings brought by the club, in order to allow arbitrations under the relevant arbitration clauses to proceed.

The judge, Patten LJ, said Fulham had petitioned the court complaining that the chairman had broken the rules and acted improperly in connection with the purchase by Tottenham Hotspur FC from Portsmouth City FC of Peter Crouch, the England full-back, for whom Fulham FC had also bid. The judge mentioned that no express provision in the Arbitration Act 1996 or the Companies Act 2006 excluded arbitration as a possible means of determining the dispute. The court was obliged by section 9(4) of the 1996 Act to grant a stay unless satisfied that the arbitration agreement was null and void, inoperative or incapable of being performed. The shareholders in FAPL were the clubs which were members for the time being of the Premier League, so disputes and the scope for relief were likely to be limited. The determination of whether there had been unfair prejudice or unconscionable behaviour was capable of being decided by an arbitrator who would have the power to grant the relief Fulham sought. As Patten LJ said:

Section 994 gave shareholders "an optional right to invoke the assistance of the court in cases of unfair prejudice ... there is nothing in the scheme of these provisions which, in my view, makes the resolution of the underlying dispute inherently unsuitable for determination by arbitration on grounds of public policy".

[No. 14] Proposol for a European Foundation

The European Commission published a proposal for a Council Regulation for a European Foundation that will have legal personality. It is obliged to have a public benefit purpose and must have a cross-border dimension to its objectives or an objective to carry out activities in at least two Member States. Profits are to be used for the pursuit of a public benefit purpose and at the time of incorporation the value of its assets must be at least 25,000 euros. A European Foundation can be set up (1) from scratch, (2) by converting a national foundation into a European Foundation or (3) through a (national or cross-border) merger of national foundations.

The European Foundation acquires legal personality upon its registration in a Member State. The draft Council Regulation also contains rules regarding involvement of employees and volunteers. Remarkably, the FE will be supervised by the supervisory authority of the Member State where it is registered in order to benefit from the procedures already developed at national level. The Regulation sets minimum, but powerful, supervisory powers to guarantee adequate powers for supervisory authorities across the EU. Far reaching is that for example the supervisory authority will have the right to:

1. inquire into the affairs of the European Foundation and, for that purpose, require the directors and employees of the Foundation to make available all necessary information and evidence;

2. appoint an independent expert to inquire into the affairs of the Foundation at the expense of the Foundation where there is evidence of financial impropriety, serious mismanagement or abuse;

3. issue warnings to the governing board and order the governing board to comply with the statutes of the Foundation, the Regulation and the applicable national law where there is evidence to the contrary;

4. dismiss or propose the dismissal of a member of the governing board to a competent court;

5. decide to wind up the Foundation or propose the winding up to a competent court.

The good news is that the European Foundation will be able to transfer its registered office from one Member State to another, without having to wind up or to create a new legal entity and without affecting any right or obligation which existed before the transfer. Furthermore, the European Foundation can also convert itself into a public benefit purpose entity under national law. Thus, after converting a national foundation into a Europe Foundation, or following a merger of two foundations (which can be from the same Member State or from different Member States), the European Foundation can reregister itself in another Member State and following that, convert itself into a national foundation under the laws of that Member State. Concluding, the regulation, if adopted, is a much wellcomed improvement.

[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. 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. 6] Do Institutional Investors Follow Proxy Advice Blindly?

I've just posted a new paper on SSRN that addresses the issue of proxy advisors' influence on the voting behavior of institutional investors. Many thanks to the LSE for inviting me to present the paper last month in London. Hopefully the piece will make a small contribution to the ongoing policy debate in this area, including in the Netherlands where the Monitoring Committee Corporate Governance has recently announced that it will look into the issue this coming year. Here's the abstract:

The effectiveness of shareholder voting as a governance mechanism depends in large part on the voting behavior of institutional investors, many of whom receive recommendations on how to vote from proxy advisors such as ISS. Company managers and policymakers are increasingly concerned that institutional investors follow such voting recommendations blindly, without verifying their accuracy. We hypothesize that institutional investors allocate the limited resources available for verifying the accuracy of voting recommendations to voting decisions that are likely to have the greatest impact on portfolio performance. To test this hypothesis, we analyze proprietary data from four large funds, using the funds’ marginal propensity to deviate from voting recommendations as a proxy for resources devoted to verifying their accuracy. Consistent with our hypothesis, we find that funds tend to deviate from voting recommendations more often when they hold a large stake in the portfolio firm, when the firm performs relatively poorly and when the proposal has potentially significant value implications.

The paper can be downloaded here.

[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. 74] Proposed changes to the Dutch ‘Class Action (Financial Settlement) Act’

Late December the Dutch government published a proposal for changes to the Dutch ‘Class Action (Financial Settlement) Act’. The proposal, if adopted, might make the Netherlands the most attractive jurisdiction worldwide for settling international class actions.

[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. 71] OECD:The Role of Institutional Investors in Promoting Good Corporate Governance

Here is another very interesting publication (dated 12 December 2011!!) from OECD. A must read for anyone interested in corporate governance.

[No. 70] Proposal for a Regulation on European Venture Capital Funds

This week an interesting (draft) proposal has been published that sets out a new “European Venture Capital Fund” label and includes new measures to allow venture capitalists to market their funds across the EU and grow while using a single set of rules. Every fund using the label will have to prove that a high percentage of investments (70% of the capital received from investors) are spent in supporting young and innovative companies. The idea is that by introducing a single rulebook, venture capital funds will have the potential to attract more capital commitments and become bigger.

[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. 

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[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]