Hoofdstuk 14 Summary

A public limited liability company under Dutch law (nv) with listed shares is characterised by the separation of capital and labour. This means that the shareholders contribute capital to the company and that the management board, under the supervision of the supervisory board, manages the company and determines its policy and strategy. Particularly in a listed Dutch company with a wide diversification of share ownership, it is the management board that exercises actual power. In the performance of their duties, the management board and the supervisory board are, by law, required to be guided by the interests of the company and of the enterprise connected with it (vennootschappelijk belang). The Dutch Corporate Governance Code, which applies to listed Dutch companies, characterises such a company as a long-term alliance between its various stakeholders. Stakeholders comprise not only the shareholders, but also employees, creditors, suppliers and other parties. Furthermore, the interests involved can include public interests such as security, infrastructure, technology, etc. The Code goes on to state that the management board and supervisory board have responsibility for weighing up these interests, generally with a view to ensuring the continuity of the company and its affiliated enterprise, as the company seeks to create long-term value.

Since the shares in a Dutch listed company are freely transferable, they can easily be acquired by new (or existing) shareholders. In the general meeting, each shareholder will usually be guided by his own interests, mostly focusing on financial performance. The management board, on the other hand, is required to represent the interests of the company, its enterprise and all stakeholders; therefore there is inherently a potential conflict with the interests of shareholders. Such a conflict is more likely to materialise if a shareholder acquires a majority stake and thus becomes able to control the general meeting. In such a scenario, the management board’s autonomy may be jeopardised; the shareholder may even try to replace the managing directors and supervisory directors to enable him to change the company’s strategy as he sees fit. Protective measures limit the extent of shareholder control and can therefore assist the management board in keeping the focus on long-term corporate interests and avoiding undue weight being given to the interests of shareholders. In the Rodamco North America judgment (the RNA judgment), the Dutch Supreme Court has ruled that the use of protective measures is allowed, provided that the measure in question is required with a view to safeguarding the continuity of the company (and/or its policy) and the interests of the stakeholders. This well-known criterion is commonly referred to as the RNA standard.

Protective measures are usually deployed in what are popularly referred to as “wartime” (oorlogstijd) situations. One such situation is where a third party – in most cases a shareholder – seeks to acquire all of the company’s shares by launching a public bid that does not have the support of the management board and the supervisory board. The scenario in which a shareholder tries to change the company’s strategy, for example by seeking to replace the management board and/or supervisory board or by frustrating decision-making without launching a public bid, can also be characterised as a wartime situation. In these situations protective measures are permitted, provided that the RNA standard is met.

Preference shares are the most commonly used protective measure in the Netherlands. The empirical research I conducted, described in section 2.5 of my thesis, shows that 57% of the Dutch companies included in the Dutch AEX index have implemented the possibility of issuing such shares. In addition, all of the companies that have applied for a listing on the Dutch stock exchange during the last couple of years and that do not have a controlling shareholder have done so. Although the mere possibility of issuing preference shares is usually a sufficient deterrent, some companies have in fact gone on to issue such shares; in my thesis I refer to Stork (2006), ASMI (2009), KPN (2013) and Mylan (2015). The Stork and the ASMI share issues have been the subject of litigation before the courts.

The main advantage of preference shares when used as a protective measure is that the holders of other types of shares do not have a pre-emption right when the preference shares are issued. Consequently, the proportional ownership (i.e. voting rights) of the holders of other types of shares is fully diluted by such an issuance. In addition, preference shares can be acquired for a minimal up-front payment. This is in part because of the possibility under Dutch law to agree, when shares are subscribed, that up to 75% of their nominal value need only be paid after being called up by the company. This means that if the nominal value of a preference share is EUR 1, it can be acquired for EUR 0.25 (subject to the obligation to pay up the remaining nominal value when called). Assuming that the ordinary shares in a listed company have the same nominal value as the preference shares in that company and therefore carry the same number of voting rights, an ordinary share acquired for e.g. EUR 20 will, in terms of control, have the same weight as a preference share acquired for EUR 0.25. Holders of preference shares are entitled to a minimal, usually fixed, dividend, to be paid by the company before any dividend on other shares. Beyond that, preference shares do not carry any right to participate in the company’s profits. Therefore, the issuance of preference shares does not result in economic dilution of the other types of shares (and hence pre-emption rights are unnecessary insofar as they aim to make it possible to avoid such dilution).

In chapters 4 and 5, I have elaborated on the modalities of using preference shares as a protective measure. First of all, the company’s authorised share capital – which is set out in the articles of association – should consist of an equal number of preference shares and ordinary shares. This will allow the company to issue as many preference shares as the number of ordinary shares in issue. In addition, the articles of association should stipulate that holders of preference shares will receive the preferred dividend set out in the articles before dividends are paid out in respect of any other shares. Furthermore, upon the company’s dissolution, the holder of the preference shares should receive the amount paid up on the shares, plus any unpaid preferred dividend over the period from when the last distribution on the shares was paid up until the dissolution date.

Under Dutch law, the general meeting may authorise the management board for a maximum period of five years to issue, or grant rights to subscribe for, preference shares. For optimum protection of the company, the authorisation should permit the issue of/granting of subscription rights for preference shares up to a maximum corresponding with 100% of the company’s issued share capital, less any preference shares already issued. The management board then grants a special purpose vehicle, which is always in the form of a foundation, the exclusive right to subscribe for the preference shares. This right to subscribe for shares is generally characterised as a call option and is granted by means of a unilateral legal act on the part of the company. In practice, the company and the foundation also enter into a call option agreement, which provides for various aspects relating to the issuance of the preference shares. If the agreement does not contain any restriction on the exercise period, the foundation will always be able to exercise the right to subscribe for the preference shares, even if the management board is no longer authorised to issue or grant rights to subscribe for such shares. This is advantageous, because it cannot be guaranteed that the general meeting will keep renewing the management board’s authorisation.

The foundation should be entitled, each time it exercises the call option, to acquire preference shares from the company up to a maximum corresponding with 100% of the ordinary shares (and any other shares) already in issue at the time, less one ordinary share. If the foundation already holds preference shares, such shares will be deducted from the abovementioned maximum. Upon the exercise of the option, the preference shares are issued by the company to the foundation, which in turn accepts them.

To enable the foundation to exercise the call option repeatedly – i.e. even after preference shares that have been issued are subsequently cancelled by the company – the general meeting resolution authorising the management board to grant rights to subscribe for such shares and, by extension, the management board resolution granting the foundation the call option must explicitly state that the option may be exercised repeatedly. It is insufficient if a provision to this effect is laid down only in the call option agreement.

In chapters 9 and 11 I have dealt with the foundation, its structure and how it functions. As stated above, the foundation is specially incorporated for the purpose of protecting the company and is given the exclusive right to subscribe for preference shares in the company. The main advantage of using a foundation is that it only has one corporate body – its board – and does not have a general meeting, hence it is impossible for an external party to gain control over it.

The foundation must be fully independent from the company in order to avoid the application of the Dutch mandatory bid rules. Under Dutch law, the general rule is that if a party acquires “predominant control” of a listed company, i.e. becomes able to exercise 30% or more of the voting rights in the general meeting, it is required to make a bid for the remaining shares of the company. Application of this rule to a foundation that has been set up for the purpose of protecting a company by means of preference shares would defeat the object of the exercise, as the foundation has to have “predominant control” in order to be able to influence decision-making in the general meeting. However, an exception has been made: the foundation will not be required to make a mandatory bid when exercising the call option following the announcement of a public bid for the company, provided the foundation meets the independence requirement set out in Section 5:71(1)(c) of the Dutch Financial Supervision Act. It should be emphasised that the exception applies only after the announcement of a public bid; consequently, the foundation should avoid acquiring predominant control at all other times. In light of the above, it is therefore the practice that all members of the foundation’s board be fully independent from the company, e.g. none of them should be managing directors or supervisory directors of the company, in order to avoid any doubt/questions regarding the foundation’s independence.

The foundation’s articles of association should provide that the foundation’s objects are to protect the interests of the company and of the enterprise connected with it (vennootschappelijk belang) and to counter any influence which may adversely affect the independence, continuity and/or identity of the company and its enterprise in a manner that is contrary to the abovementioned interests. The articles should further provide that the foundation will pursue its objects by subscribing for and holding preference shares in the company’s share capital and by exercising the rights – in particular the voting rights – attached to those shares, as well as by exercising (whether or not in legal proceedings) any other rights conferred on it by law, under the company’s articles of association or under an agreement.

When exercising the call option and when exercising the voting rights attached to preference shares held by it, the foundation must act independently and at its sole discretion, in accordance with its objects as set out in its articles of association. Where preference shares have been issued, the foundation should independently determine whether a “wartime” situation is over and whether it is still justified that the foundation continue to hold those shares. If the foundation’s board has reasonably determined that exercising the call option is necessary to ensure the continuity of the company (or its policy) and that no other realistic or possibly less compromising alternatives are available, the members of the board will not run an increased risk of liability in relation to the exercise of the call option and/or the voting rights.

In section 9.5.2 of the thesis I have examined the exercise by the foundation of its call option, including an analysis of the interests that justify the exercise of the option and the implications of the RNA standard. It is important for the foundation’s board to closely monitor developments at the company and to stay in regular contact with the company’s management and supervisory boards. In addition it may, at its sole discretion, contact stakeholders of the company (e.g. specific shareholders, the works council, etc.) as well as – where applicable – the hostile bidder, in order to solicit and consider their views on the situation at hand. With regard to the call option, a distinction must be made between two questions: (i) whether exercise of the option is permitted under the relevant underlying general meeting resolution and (ii) whether the exercise of the option is legitimate in the specific situation at hand under the RNA standard. In connection with the second question, the foundation’s board must ascertain that it is necessary to exercise the option in order to safeguard the continuity of the company (and/or its policy) and the interests of the stakeholders. In most cases, preference shares will be issued in order to further the taking by the general meeting of decisions that are in the company’s corporate interests. However, the shares can also be issued in order to prevent decisions that are contrary to those interests from being taken by the general meeting. In addition, the issuance of the shares can serve as an instrument to facilitate (or force) further negotiations between the company’s management board and supervisory board, on the one hand, and the hostile bidder, on the other hand. Pursuant to the RNA judgment, the protective measure in question – in this case the issuance of the preference shares – must be adequate to ward off the danger at hand but also proportional. There should be no alternatives available that would be equally effective and that would be less harmful to the company and its stakeholders. It is conceivable that preference shares can even be issued with the aim of rescuing a company in financial distress where one or more general meeting resolutions are necessary to secure the company’s continuity, despite the fact that this was not explicitly provided for in the resolution(s) underlying the issuance of those shares. It can therefore be said that protective preference shares offer a company considerable scope to safeguard its interests, while the RNA standard provides sufficient protection against their abuse.

Chapter 7 of the thesis deals with the financing of the foundation, which will obviously not have any financial resources of its own. The company covers operational costs incurred by the foundation (such as the incorporation costs, the board members’ remuneration, advisers’ fees, insurance costs, etc.) and, if applicable, bank commitment fees in connection with the payment towards the preference shares. To this end, the company and the foundation enter into a cost compensation agreement under which the company makes a lump sum payment to the foundation and the foundation undertakes to repay any unspent funds once it has ceased to serve its purpose. The payment or reimbursement by the company of costs such as those listed above does not fall within the scope of the financial assistance rules (which – in brief – impose conditions on, and in some cases prohibit, the granting by a Dutch public limited liability company of financial assistance for the acquisition of shares in its capital). This is because no loan is involved and the only goal is to enable the foundation to perform its duties.

The foundation’s upfront payment for the preference shares upon issuance (25% of their nominal value) is usually financed by means of a bank loan. In this regard, the bank will already have given an undertaking to the foundation that it will lend it the requisite amount and will have charged the foundation commitment fees (see paragraph 16 above) for this undertaking. Once the foundation exercises the call option, the loan is paid out by the bank upon the foundation’s request, enabling the foundation to pay the company. Subsequent payments of preferred dividend on the shares are used by the foundation to pay the interest on the bank loan; it is therefore important that the amount of preferred dividend specified in the company’s articles of association be at least equal to the amount of interest due. As security for the repayment/payment of the loan and the interest, the preference shares are pledged by the foundation to the bank.

In chapter 8, I have described a few alternative ways of financing the acquisition by the foundation of the preference shares, two of which I consider to be the most feasible. The first is for the shares to be paid up from the company’s distributable reserves. For this to work, the foundation must be entitled to a portion of the company’s distributable reserves in the amount of the full nominal value of the preference shares. Upon the issuance of the shares, the relevant amount is then charged to the foundation’s portion of the reserves. Ideally, the relevant provision(s) should be included in the articles before the company’s shares are listed. In addition it is of course necessary that the distributable reserves be sufficient, at the time the preference shares are issued, to permit the deduction of the relevant amount. The second is for the company to lend the foundation the amount to be paid on the shares. In such a case, the financial assistance rules apply and accordingly the approval of the general meeting is required. One way to secure this approval well in advance is to have the general meeting pass the requisite resolution before the company’s shares are listed. Alternatively, the loan could be made not to the foundation directly, but to a special purpose vehicle that in turn onlends the amount to the foundation. Provided that the vehicle is not a subsidiary of the company, the financial assistance rules will not apply and hence the general meeting’s approval will not be required.

In chapter 12 of the thesis, I have dealt with the subject of the termination of issued preference shares. The first step is for the foundation’s board to independently take a decision that the preference shares held by the foundation be terminated and communicate this to the company’s management board, which will then take the necessary steps to bring about the termination. The call option agreement between the company and the foundation normally imposes a requirement on the company to comply with a request by the foundation for termination of the shares. The usual method is to cancel (i.e. redeem) the shares. This requires a resolution of the general meeting, in which the foundation can of course participate in the voting. I have outlined a few alternative methods by which preference shares can be terminated, some of which require a smaller majority in the general meeting or no separate general meeting resolution at all. One such method is the repurchase of the shares (followed by their cancellation), another is the cancellation of the shares “in advance” (i.e. in the resolution granting, or authorising the management board to grant, the call option) and a third is the entry by the company into a statutory merger or demerger. If the preference shares were issued in a situation other than after the announcement of a public bid, the foundation will have less than 30% of the voting rights in the general meeting (for an explanation of why this is the case, see paragraph 12 above on the mandatory bid rules) and will therefore not be in a position to sufficiently influence the decision-making in the general meeting. In such a case, one of the alternative methods of termination would be more feasible.

One or more hostile shareholders may try to prevent the company from issuing preference shares by requesting the management board to include in the agenda of the general meeting a proposal for a resolution to terminate – by means of an amendment to the company’s articles of association – the company’s power to issue such shares. A proposal to this effect may only be validly brought to a vote if the general meeting has the authority to initiate the proposal. Where the articles vest that authority in the management board or supervisory board, a resolution by the general meeting in the absence of the requisite initiative by the relevant board, or its consent, will be null and void. The same applies if the general meeting’s decision requires subsequent board approval. However, even if the management board is entitled to refuse the inclusion of a proposed resolution in the agenda of the general meeting, it is still required to include the topic as a discussion point in the agenda. Consequently, the management board may come under severe pressure at the general meeting if it appears that a substantial number of shareholders support the hostile shareholder’s proposal.

If an interested party claims that the exercise of the call option and/or the issuance of the preference shares violated the RNA standard, he can seek to have either or both judicially reviewed in preliminary relief proceedings (kortgedingprocedure), full proceedings on the merits (bodemprocedure), and/or inquiry proceedings (enqu ê teprocedure). In preliminary relief proceedings the interested party can, for example, request a preliminary injunction (voorlopige voorziening) ordering a suspension of the voting rights on the preference shares. An order setting aside the resolution to issue the shares is not among the remedies that can be granted in such proceedings. In addition the interested party can commence full proceedings on the merits, claiming that the company and/or the foundation acted unlawfully against the shareholders or other stakeholders and requesting an injunction ordering them to take whatever action is necessary to withdraw the preference shares. Such an injunction will usually be reinforced by an order imposing a periodic penalty payment (dwangsom) for failing to act. Finally, the interested party can request the Enterprise Chamber of the Amsterdam Court of Appeal (Ondernemingskamer) to order an inquiry into the company’s policy and business and grant immediate provisional relief (onmiddellijke voorziening) consisting of, for example, a suspension of the voting rights on the preference shares.