4.6.4 Enterprise Chamber cases and standards

In OGEM (1990), which had gone bankrupt, both the Enterprise Chamber and the Supreme Court found seven instances of mismanagement: (i) the public announcement of a recent acquisition had stated a price lower than the real one, (ii) shares had been bought back without supervisory board consent, (iii) a building had been acquired in exchange for shares in OGEM without infomiing the board, (iv) overly optimistic information had been given to shareholders about results, (v) property mortgages had been provided to banks contrary to interral regulations (this occurred because none of the board members bothered to read the documents relating to mortgages), (vi) the supervisory board had refused to pay the former CEO his due indemnity, (vii) a consultancy agreement had been made with a critical shareholder to keep him quiet. In general, the executive directors acted independently of one another and had strong egos and no respect for the supervisory board, whose chairman blindly supported the CEO. Two memoranda from supervisory board members who objected to the course of events were swept under the carpet. The Hague District Court found the management board members and supervisory board members liable and the case was settled for fairly moderate amounts. None of the directors was insured.

In Bobel (1999)1 the management board members and supervisory board members had acted solely in the intererts of one majority shareholder and had grossly neglected their tasks of management and supervision. This had gone on for over 25 years, until the company went bankrupt. The Enterprise Chamber held that this constituted mismanagement and ordered the directors to pay for the costs of the investigation. The order for costs was reversed by the Supreme Court.

Gucci (2000)2 was the first large case in a corporate power battle in which certain parties sought an interim injunction from the Enterprise Chamber rather than from the president of the District Court. Previously it had been customary to request injunctions from the president of a District Court, who usually issued prompt and clear temporary injunctions (kort geding).3 The French company, Louis Vuitton Moet Hennessy (LVMH), had built up a 34% shareholding in Gucci NV, which was the holding company of Gucci. It was a Dutch NV, listed on the Dutch stock exchange. Gucci reacted to the threat of LVMH by creating an employee stock owner plan (ESOP) under which employees would buy Gucci shares worth NLG 2.5 billion and would be lent the full amount by the company. Companies are forbidden to lend money to anyone wanting to buy their shares 4 The Enterprise Chamber decided the case holding the middle ground and issued a temporary injunction depriving both LVMH and the ESOP of the right to vote their extra shares. This Gucci 1 decision laid down obligations for controlling shareholders, stating that a 24.5% shareholder is a controlling shareholder and has obligations to other shareholders. Gucci quickly found another French company, Pinault Printemps Redoute (PPR), as a white knight. A month later the Enterprise Chamber ruled against Gucci, because the financing of the shares was illegal. The Supreme Court held that while the investigation is still pending the Enterprise Chamber may issue only temporary and not final injunctions.

RNA (2003)5 created 3 rather temporary defence mechanisms in reaction to the threat of Westfield's tender offer for RNA shares, because RNA was against integrating with Westfield's extemal management. The Enterprise Chamber blocked the defence mechanisms. However, the Supreme Court reversed this judgment and permitted the mechanisms, ruling that in this case temporary defence mechanisms were permitted.

In Stork (2007)6 the management and supervisory boards used a defence mechanism to block shareholders from voting to dismiss the supervisory board. The reason why the shareholders Paulsen and Centaurus were so adamant was that they disagreed with the management and supervisory boards about strategy. They wanted a split up, and management did not. Communication was bad and the Enterprise Chamber found that all sides were at fault and therefore froze the whole matter and appointed three super-supervisory board members. In the end Stork was taken over by a private equity group, which confirmed that it would not split up the company in the first four years. The Enterprise Chamber held that a defence mechanism cannot be used for the purpose of blocking a shareholder's vote and that the supervisory board should play a mediating role between shareholders and management, but that shareholders have an obligation to explain their views in more detail when they communicate with boards. These have become important standards of conduct.

The recent case of ASMI (2010)7 once again involved a dispute between management and shareholders — the UK activist pension fund, Hermes, was actively arguing with management about splitting up the company. Here too the company used a defence mechanism to influence — not block — voting. The Supreme Court clearly held that the management board determines strategy and the supervisory board supervises strategy and is not obliged to discuss matters with individual shareholders outside the shareholders' meetings, nor is it under a legal obligation to mediate between management and shareholders (thereby differing from the Enterprise Chamber's opinion in the Stork case), but should try to help keep communication as good as possible. In this case the Supreme Court did not condemn the use of such a defence mechanism, and referred the case back to the Enterprise Chamber without ordering a further investigation and the Enterprise Chamber stopped the investigation.

ABN AMRO (2007)8 was engaged in strategically planned merger tallcs with Barclays. Under the proposed merger ABN AMRO would keep its identity and influence. It sold LaSalle, which it had planned to sell for a long time. The Enterprise Chamber blocked the sale until shareholder consent. LaSalle accounted for less than one third of ABN AMRO's business at about the time when a new consortium consisting of RBS, Fortis and Santander made an overture for a tender offer. In this important case the Supreme Court gave a clear opinion on several issues. The board should consider the intererts of all stakeholders. Directors determine strategy, the supervisory board monitors this and the general meeting of shareholders can state its views and has rights given by law and the articles of association. Article 2:107a DCC about shareholder consent should not be interpreted broadly and, even if such consent had been required, it would not affect the validity of resolutions in relation to third parties.

Landis (2005)9 was distributor of ICT products and had grown very quickly as the result of a series of acquisitions, some at a high price. It was an example of "overstretching". There was no accounting and the market had been given misleading information. Landis and many subsidiaries went bankrupt. It was held that there had been clear mismanagement. The important question was whether a shareholder can request an investigation of the management of unlisted subsidiaries. This was answered in the affirmative by the Supreme Court.

In HBG (2003)10 the Enterprise Chamber tried (i) to raise the standards of communication conceming important joint ventures, even though there is no legal requirement for consent by shareholders, and (ii) to oblige boards to provide information to shareholders in great detail. The Supreme Court reversed these efforts of the Enterprise Chamber by confirming that boards do not have to consult shareholders about decisions that do not require shareholder consent. On the point of detailed information, the Monitoring Committee has in the meantime introduced an obligation to give detailed information on a website. This has been confirmed in the Frijns Code.11 This means that now there is an obligation to provide detailed information and courts would mle against boards that fail to do so. See sub-section 4.6.2, third to last paragraph.

Laurus (2007)12 is the most important case conceming the relationship between an Enterprise Chamber investigation resulting in a declaration of mismanagement and later liability cases before a District Court. The Supreme Court held that a district court liability case is a new case and that the declaration of mismanagement by the Enterprise Chamber should not influence the decision in the later case. Because the Enterprise Chamber investigation is informal and there is often no proper trial, the District Court is not bound by the investigation. Such an investigation might exercise some influence, but the Supreme Court was clear that the conclusion of the investigation does not form legal precedent. The facts were that Laurus had a very ambitious strategy. Neither the Enterprise Chamber nor the Supreme Court condemned the ambitious strategy as such. The courts also permitted a safe to Casino. The issue was whether there had been sufficient follow-up by the management and supervisory boards in their monitoring of the plan once it started to fail. Both courts held that there had been mismanagement by the management board, but clearly stated that this did not mean it had made any decision about liability. The supervisory board members won in the Supreme Court, because the arguments put forward by the plaintiffwere insufficient to enable the supervisory board members to defend themselves. This was a case of insufficient follow-up to a failing strategy plan. These are very complicated cases and largely dependent on the facts.

Given the facts of Dutch mismanagement cases, the Delaware approach might be the following:

 in OGEM: the Delaware approach might be disloyalty and a lack of care shown by most inside directors and, possibly, also by some supervisory board members, because they did not try to monitor or read essential documents, misinformed the other board members and shareholders and refused to react to red flags;

 in Bobel the Delaware approach might be to establish how dependent each individual director was on the majority shareholder. Inside directors would probably be held more liable than outside directors. Some directors would probably be held liable, especially those who had committed gross negligence and/or shown disloyalty to the company, because disloyalty is not exculpable;

 in Landis, there was no accounting and the market had been given misleading information. By Delaware standards some of the directors would be liable for disloyalty and lack of care;

 in Laurus, the Delaware approach would be not to condemn an ambitious strategy since the Delaware vice-chancellor did not condemn Citigroup and applied the business judgment mle. I think in Delaware one would check whether the board was not disloyal and seriously consider the aspect loyalty in relation to the sale to Casino. I think that in Delaware as in the Netherlands these cases would depend on the facts. Delaware might possibly be slightly more lenient in liability cases, provided that the independent directors had not been guilty of disloyalty and had discharged their duty of care sufficiently not to have been guilty of intentional misconduct, because they would otherwise be exculpated.

In the Dutch Enterprise Chamber injunction cases, the Delaware approach might be as follows:

 in the Gucci poison pill case, the financing provided for the issue of shares under the ESOP was in breach of article 2:98c DCC forbidding financial assistance; the Delaware approach would be to also issue an injunction to block the pil if Delaware law included a statutory prohibition to this effect;

 in RATA the Delaware approach would be to accept the defence mechanisms as a proportionate reaction and would permit the defence in accordance with their Unocal criteria;

 in Stork, the Delaware approach might be to apply the Unocal and Blasius criteria and not accept the issuing of shares to block the right to vote for the appointment or dismissal of directors, because this would be regarded as manipulating such voting rights;

 in ABN AMRO, I think that the Delaware approach would be to apply Time (Wanier) and not Revlon, because the board had a developed strategy and the sale of LaSalle was part of that strategy. I therefore believe that the Delaware approach would be to tule in the same way as the Dutch Supreme Court and would not stay the sale of LaSalle. Another point is that in Delaware the threshold for the requirement of shareholder consent for disposals is much higher (50-100% of the value of the company, whereas in the Netherlands it is one-third of the value of the company);13

 in HBG, where the shareholders wished to be consulted on major transactions, the Delaware approach would be, like the Dutch Supreme Court, not to give a right of consultation to the general meeting if there were no legal requirement to do so.