30 Legislation for major corporate events

The letter to the Dutch House of Representatives concerning the progress of the modernisation of company law reveals that the Cabinet shares the conclusion that the ‘creaming off’ regulation included in Art. 2:135.7 (old) DCC was too complex. The Cabinet also intends to propose a more effective regulation. So, more attention is being paid to granting the power to (instead of imposing an obligation on) the supervisory board to adapt the remuneration within the framework of important decisions such as takeovers. This power to adapt could thus be included as an explicit circumstance under Art. 2:135.6 DCC.

I would like to make the following critical comments regarding such a regulation. The best way to ensure transparent decision-making in my opinion is to try to dovetail with the existing regulations designed to prevent conflict of interests. It could be made more explicit that an executive with a substantial personal financial interest in the success of one of the listed major corporate events (e.g. define substantial in relation to his or her fixed remuneration) would in principle have a conflict of interest and should withdraw from the decision-making process. In my view, it is not desirable to want to completely remove possible conflicts of interest as that would lead to a draconian regulation that would never be completely effective.

The question of whether an executive may profit financially from a major corporate event has a legal-political nature. In my view, legally ‘creaming off’ such profit should not form part of company law. In the first place, it is up to the company itself to decide whether executives (and supervisory board members) should be allowed to receive substantial profits in the short term due to the success of an event of significance for the company.

The aforementioned does not alter the fact that the combination of remuneration, shareholding and major corporate events should be a point for attention for listed companies. The holding of shares for the long term, either purchased or acquired as payment, even within the stakeholders’ model as we know it in the Netherlands, need not immediately conflict with the aim of long-term value creation. In many cases long-term shareholder value and long-term value creation will run synchronously. It is when the various values start to diverge that attention must be paid. The above-mentioned major corporate events are a classic case.

When seeking a successor to Art. 2:135.7 (old) DCC, in my opinion the emphasis must lie on encouraging the supervisory board to design a policy concerning the financial incentives of executives (and members of the supervisory board) with regard to events of significance for the company. This policy must primarily ensure that there are sufficient members of the board of management and/or the supervisory board without substantial personal financial interests in the success of the event to guarantee transparent decision-making. Further, designing this policy should encourage the supervisory board to think about the function that remuneration in the form of shares or share-related instruments should fulfil under the changed circumstances.

To meet the first goal, such policy should not only cover the shares and share-related instruments that the functionary would receive as remuneration, but also the shares and share-related instruments that the functionary holds on any other basis. Further, this policy should cover other financial incentives, including golden parachutes and takeover bonuses (related to the company, the acquiring party or a third party). In order to guarantee transparent decision-making, this policy could for example state that certain executives or supervisory board members may not hold any shares in the company. If this were to be seen as undesirable, then they could choose to automatically convert the shares held by some or all of the executives or supervisory board members into cash at the moment when the imminent major corporate event is publicly announced (perhaps on the condition that the event takes place).

In addition to ensuring a transparent decision-making process, the function of remuneration shares and share-related instruments must be considered during their entire term. This function can change significantly due to a significant event. The supervisory board should retain the right to ensure that remuneration in these cases too continues to serve the long-term interests of the company. In this context, it could also be made possible to refer back to the provision already proposed that encourages (or requires) supervisory boards to include a power to adapt in the agreement with the executive. It could be made explicitly clear that this power to adapt would in all cases apply to situations of major corporate events. This would provide the supervisory board with a more tailored instrument. It would also be worth considering a regulation that encourages (or requires) the supervisory board to include a ceiling when awarding remuneration in shares or options to prevent undesirably high payments due to certain unexpected or changed situations. Finally, a position should also be taken regarding the admissibility of transaction bonuses and other forms of variable pay that depend on a major corporate event, independently of the question of whether these would be awarded by the current company or by the acquiring party.

In my opinion, a tailored solution devised by the supervisory board is essential. Legal or other regulations should thus remain limited to encouraging or requiring the supervisory board to develop such policy.