4.2.5 Convergence:• adaptation of Dutch legal concepts to foreign ones

In this section — "who are the shareholders?" — this sub-section 4.2.5 on adaptation of Dutch legal concepts to foreign concepts is a side step. As will be seen it is an important point of the Dutch legal culture. The reason for the adaptation is amongst others to favour the wishes of the foreign investors, who represent more than 70% of the shareholders in Dutch listed companies. Dutch company law in many ways meets special wishes of foreign investors. First, exemptions were introduced in company law in the 1970s and 1980s, for certain holding companies from a variety of legal requirements for Structure Regime companies as well as exceptions from obligations regarding the consolidation and publication of accounts. Many of the changes introduced by the Tabaksblat Code and the subsequent changes in company law of 2004 can be seen as an adaptation to UK practices. Second, in December 2009 the Act on the alternative of a one-tier board system and the draft act on a more flexible BV law was accepted by the second house of representatives, "de Tweede Kamer", and the Act has been approved by the Senate, the "Eerste Kamer" on 6 June 2011. Third, several legal concepts, such as the interpretation of agreements, good faith in negotiations and the interest of the company, connected with the stakeholder model, are in some cases being interpreted by the Dutch courts in the light of English-American jurisprudence and international trade practices.

The Act on Structure Regime Companies, introduced in 1971, required large companies with more than 100 employees and an equity of €16 million or more, to have a supervisory board. Such a board was given the right to co-opt itself, to veto important transactions and to appoint the managing directors.1 Such a structure regime is unattractive to foreign investors; it reduces shareholder influence to the extent that even a majority shareholder does not have control over the company. At the request of the Dutch Association of Entrepreneurs exemptions were added in the 1971 Act on Structure Regime Companies to mitigate this regime for Dutch companies with more employees outside the Netherlands than in the country. In such cases shareholders appoint and dismiss the managing directors.2 Furthermore, holding companies that only have the function of financing a group of companies and again have more employees outside the Netherlands than in the country, are exempt from all the legai requirements of the structure regime.3 The reasoning is that the Netherlands has employee participation rules, but that these rules only apply to the territory of the Netherlands. One of the reasons for these exemptions was to facilitate foreign investors. This still applies, as was reconfirrned by an advice of 2008 of the Social Economie Council, Sociaal Economische Raad (SER), the forum for consensus discussions between government, employees and entrepreneurs.4

Other facilities for foreign and Dutch international concerns that have intermediate holding companies in the Netherlands are: first, that the intermediate holding company does not have to consolidate its accounts with its subsidiaries,5 second, that it does not have to have its accounts publicly registered6 if its European top parent company has consolidated this intermediate holding into its accounts and has filed a statement that it guarantees all obligations of the intermediate holding company. These are special Dutch facilities for intermediate holding companies that the Netherlands wishes to attract. There are many intermediate holding companies in the Netherlands, because of the many double tax treaties and the tax exemption for income and capital gains from a subsidiary, called the participation exemption and a dependable ruling system to go with it. This participation exemption differs from the tax credit system known in most other countries and can be considered as further evidence of the Dutch international trading tradition.

Many aspects of the Tabaksblat Code of 2004, such as the mentioning of the possibility of a one-tier board system are to be seen in the light of adapting to foreign business practices. The same applies to the Act on changes to the Structure Regime of 2004, including changes such as appointment of the supervisory board by shareholders and a say for shareholders on important transactions.7

Since the introduction of the BV (limited company) in 1971, comparable with the UK Ltd., the German GmbH and the French Sarl, the Dutch BV law was nearly the same as the NV law and rather rigid. In December 2009, the second House of Parliament, "de Tweede Kamer", accepted a draft for a law on the BV very different from the NV law. The draft contains many provisions facilitating foreign investors. The law is called the Act on the Flexible BV with pliable rules for calling general meetings, the possibility to hold general meetings outside the Netherlands, and to adopt shareholders' resolutions in writing outside a meeting, the creation of shares of various classes with different votes and profit rights, with flexibility for the appointment of directors, feasible qualitative requirements for directors, the possibility for shareholders to give binding instructions to directors, the exclusion of transferability of shares and the deletion of capital protection requirements, such as the elimination of financial assistance rules for BVs. In the same month of December 2009, the draft law on the possibility of a one-tier board as an alternative to the existing two-tier board system for NVs and BVs was accepted by the "Tweede Kamer" and has been confirmed by the "Eerste Kamer" on 6 June 2011. These initiatives indicate the willingness of the Dutch government and even the trade unions, who supported these bills, to further adapt Dutch corporate laws to Anglo-American practices.8 The fact that there has been an increase of foreign shareholding in Dutch listed companies from 37% in 1995 to 85% in 2008 shows that the Netherlands has been an attractive centre for foreign investors and for internationally operating foreign conglomerates.

The judiciary too has contributed to this internationalization of Dutch company law, in two areas: interpretation of agreements and negotiating parties not bound.

In the 1980s and 1990s the Supreme Court seemed to let the supposed intent of the parties and the principle of reasonability prevail over the literal text of written agreements. The cases Haviltex9 of 1981 and Hoog Catherijne10 of 1995 are examples of this type of interpretation.

This created confusion among English and American parties who are used to extensive and exhaustive documents. Recent decisions of the Supreme Court indicate that an unambiguous and clear contractual clause has to be interpreted according to its obvious literal meaning, especially if both parties are experienced and have been advised by legal and financial experts and certainly if the agreement contained an "entire agreement clause". Meijer/Pontmeijer of 200711 is an example.

In the 1980s there were several judgments, e.g. Plas/Valburg of 1982,12 which made clear that if parties negotiated and showed an intent to continue the negotiation, one party could not suddenly terminate the negotiations without incurring liability. There was a so-called pre-contractual good faith obligation to continue the negotiations or conclude them in an orderly fashion. This caused problems for UK and US parties, in mergers and acquisitions negotiations. They were used to having an easy way out, by stipulating in their letter of intent that all offers are "subject to contract". Judgments of the 1990s made it clear that if a letter of intent contained a "subject to contract" clause, parties could make use of this literal text: Van Engen/Mirror of 1995 and De Ruyter/MBO of 1997.13 This is another example of Dutch jurisprudence adapting to international business practices.

One of the principles of Dutch company law is that directors act in "the interest of the company and its enterprise", in Dutch "belang van de vennootschap en de met haar verbonden onderneming". This is the "pluralist" or "stakeholder" approach. The question is: is the tendency of convergence and adaptation to international trends as described above in this sub-paragraph a reason for demanding more attention to long-term shareholder interests?

In 1971 the DCC introduced the obligation for supervisory directors that they should execute their duties in the interest of the company and its enterprise (article 2:140/250 DCC). The addition of the words "and its enterprise" was meant to stress the point that all factors should be taken into account, including the interest of subsidiary companies.15

In the Netherlands some authors, including Maeijer, argue that the "interest of the company" is one single concept of the continuity of the enterprise while others, including Van Solinge and Nieuwe Weme, Van der Grinten and Van Schilfgaarde and Winter see it as a mix of various interests. Those who see it as a mix of various interests go on to say that the directors should weigh the interests and decide according to the "upshot", in Dutch "resultante".

In my view directors must consider all the interests and may then decide as they deem fit. I do not think the words "weigh", "upshot" or "resultant" are realistic. Entrepreneurial directors' decisions are not based on arithmetical weighing of interests with one answer. In many situations more than one decision can be a reasonable decision. Then there is not one and only one correct decision. I would like to add that in the last decade communication has become more important in recent years. Directors must inform all interested parties in time. I would summarize my view as: consider all interests, freedom of entrepreneurial decision, proper and timely information to interested parties; in other words a business judgment rule with proper information to all parties as an additional element.

Strangely enough, the concept of "the interest of the company" was not mentioned in the articles of the 1971 DCC, dealing with the specific task of the management directors. Most authors, however, agreed that managing directors too have to be guided by "the interest of the company". These words have been included in the task description for all directors, both management and supervisory, in article 2:129/239, paragraph 5 DCC of the Act.

It is important to discuss this principle, because first, it is seen by many as the beacon or the compass for all directors (supervisory, managing, non-executive and executive directors), second, it is broad enough to apply in different situations, third, it is sufficiently vague to allow for the development of an interpretation based on case law, and fourth, it is comparable with the UK Common Law principle of the "interest of the company", updated in section 172 of the Companies Act 2006 to the "success of the company" or "enlightened shareholder value". It also tailles with the US concept that the directors have fiduciary duties of loyalty to the company in combination with the business judgment rule to act in the interest of the company.

What does the duty to act in "the interest of the company and its enterprise" mean? Under Dutch law, as in UK and US law, the trend seems to be that directors, when making a decision, should consider all factors and interests, i.e. the interest of shareholders (long-term, short-term, large, small, minority, etc.), managers, employees, creditors, the community, e.g. the environment, associated companies and other constituencies. As long as all those interests are running in tandem, there is no problem, but what if there is a conflict?

Professor L Timmerman wonders whether all these interests should carry equal weight or whether there should be a hierarchy, and if so, should the long-term shareholders carry the heaviest weight?16

Timmerman refers to the Tabaksblat (2004) and Frijns (2008) Codes, especially to preamble no. 7 to the Frijns Code:

Furthermore he refers to section 172 of the UK Companies Act 2006 with its concept of the "success of the company" and "the enlightened shareholder value".

The "interest of the company" has been a subject for many corporate law authors in the last few years.17

The "interest of the company" is an old, well-known term in UK Common Law. Section 172 of the Companies Act 2006 — and especially the relevant debate about it — builds on the vague text "interest of the company" the modern term "the success of the company", which appears in the text of this section 172. The accepted interpretation rejects a "pluralist" approach (in the UK the term "pluralism" means equal treatment of all factors making up the "interest" or the "success" of the company) and imposes on a director the obligation "to have regard" to all factors, many of which are defined, including the meaning of "long-term". His basic duty is to promote the purposes of the company "for the benefit of its members as a whole". This may go contrary to the aims of short-term shareholders.19 It is up to the directors, in good faith to determine what policies the success of the company demands.20 Directors are, in the UK, expected to make business judgments and decisions in good faith, and courts are generally reluctant to second guess those judgments and decisions.21

The Attorney General, Lord Peter Goldsmith, said in Parliament in 2006:22 "onder the duty to promote the 'success of the company' the weight to be given to any factor is a matter for good faith judgment of the directors. Importantly, his decision is not subject to a reasonableness test, and, as now, the courts will not apply a reasonableness test to directors' business decisions." I call this: "the director is free to decide" and I add: "as entrepreneur". With respect to "entrepreneurship" I refer to the words "entrepreneurial leadership" in Al supporting principal of the UK Corporate Governance Code, discussed in 2.5.3 above.

Communication is also important. In the Netherlands information to shareholders should be developed further than up to now.

A recent UK study23 discusses categories of shareholders: founders, families, foundations, employees, engaged shareholders, unengaged shareholders, such as some investment institutions and sovereign wealth funds, traders and speculators, such as hedge funds, and says that without saying that any particular category is good or bad the first are logically interested in longterm strategy or "stewardship", while others play in a "casino economy" and are useful for liquidity of the market. The study finds indicators that shareholders who are not interested in stewardship may be on the increase and globalisation of capital markets could make communication between boards and shareholders more difficult. It concludes with the opinion that directors should focus their dialogue on the stewardship shareholders which would require them to obtain a clearer picture of whom and where such shareholders are.

In the US boards do not have to follow shareholder instructions. Shareholders have the right to elect directors, but not to give them binding instructions. The directors must take their own decisions, but with requirements of due proces s. US judges apply the business judgment rule. There is no reasonableness test, but alternatives and the interests of the company and all concerned must have been considered. A decision may in no way be disloyal to the company, i.e. no self-interest: loyalty to the long-term shareholder interests, not plurality, is the US bright-line.

US practice makes a distinction between shareholders, from "traders" to "strategie investors (like Buffet and Monk)". It is also held advisable to communicate directly with these long-term shareholders.24

On the other hand, Netherlands' jurisprudence, for example ABN AMRO of 2007 and ASM/25 of 2010, supports pluralism in the Dutch sense. Boards should consider all interests involved. This could lead to several alternatives, resulting in several acceptable business judgments.

Now we come back to the question of hierarchy when considering the interests and the influence of shareholders. Dutch, like their US and UK colleagues, do not have to follow instructions from shareholders.26 Traditionally, Dutch boards could even behave remotely towards shareholders. As we have seen (vide preamble 7 of the Frijns Code above and the laws of 2004 in favour of shareholders), a growing influence of shareholders has been acknowledged in Dutch corporate culture. There is a strong current in UK and US literature that recommends boards to communicate with those shareholders who are interested in long-term stewardship.27

For the Netherlands I would like to refer to the Verenigde Bootlieden case of 1994, where the Supreme Court said that there can be reasons to deal with different shareholders in different ways and to the DSM case of 2007 and especially in the conclusion to that case of the advocate genera1.28 In the Netherlands the literature on one-on-one meetings of directors with shareholders started with Eisma,29 who realized in 1998 that the Dutch should adapt to the UK and US practice, but concluded that he was basically against oneon-ones, because he found two dangers: such contacts could be in contravention of the principle of the equality of shareholders expressed in article 2:92, paragraphs 1 and 2 DCC and could lead to insider trading prohibited by the then Fondsenreglement 28h. Professor Vletter-Van Dort30 in her thesis deals with these aspects in detail and basically agrees with Eisma, but does find examples of exceptions for the equality of shareholders and concludes, along the lines of the Verenigde Bootlieden judgment, that if it is in the interest of the company to make an exception to this principle, the court should allow it. I would argue that it can be in the interest of the company to have one-to-ones with shareholders, who have a long-term interest and with any shareholder who expresses the wish to have a one-on-one with the board. I do realize the danger of spreading insider knowledge which article 28h of the former Fondsenreglement intended to avoid and which prohibition is now laid down in articles 5.25i and 5.27 of the Act on Financial Supervision (Wet Financieel Toezicht).

Generally institutional investors in the UK have larger percentages of shares than Dutch investors have. This would seem to decrease the Dutch interest in one-on-ones. However, 56% of the Dutch listed companies report to have more than 12 one-on-ones per year and 34% report to have more than 50 one-on-ones per year.31

Boards should sound out long-term shareholders and listen. A good base of long-term shareholders is important and worth cultivating. Because shareholders fall in different categories, boards should be free to choose with which soit of shareholders they communicate. They must make their communication policy public on their website.32 Thoughtful communication should be established with all "stakeholders" as this is usually directly or indirectly in the interest of long-term shareholders. Boards should communicate with relevant stakeholders in specific cases, but in all cases with shareholders. The UK practice is in favour of one-on-ones, also called one-to-ones. The UK FSA has issued a guideline for this. In the US the Securities and Exchange Commission (SEC), and in the Netherlands the Autoriteit Financiële Markten (AFM), have set up websites with question and answer programmes on the subject of one-on-one meetings between representatives of a board and individual shareholders. Both authorities confirm that one-on-ones are permitted. They emphasize that boards in such one-on-ones must not give sensitive information, that is not available to others.33 In the Netherlands, the AFM has, after one of its directors said he was against one-to-ones, issued a Q&A — comparable with the SEC 's Q&A — confirming that one-to-ones are permissible with caveats for sensitive information. Sometimes lock-up and secrecy agreements will be necessary.34 The UK Stewardship Code of 2010 also emphasizes that representatives of institutional investors should meet with board members. This Code advises at the same time that institutional investors should avoid becoming insiders.35 One-on-ones with selected shareholders are usually held by the CEO and CFO, sometimes in the presence of the chairman of the supervisory board or of the one-tier board. In some cases of one-on-ones it may be necessary to agree to lock-ups restricting trade in shares of the company for a specific period.36 The Frijns Code, too, deals with this subject, vide preambles 9 and 1 0:

The UK and US examples teach us that classifying shareholders in different categories and ranging these groups into an order of priority is a worthwhile effort.

"Hierarchy", according to UK and US ideas, does mean that in all decisions the boards must think of the long-term shareholders. If there are no shareholders that express a view it would be the imaginary long-term shareholder and if there is a shareholder who expressen a long-term view, boards must consider these views. They must take time and energy to explain their thought process to shareholders. It is important for the board to manage its relationship with shareholders. The board must make clear what its strategy is, what growth it is aiming for and what acquisition strategy it has. If an opportunity comes about to buy a company, it should go ahead without asking shareholders and explain immeditely after the acquisition how it fitted in the strategy. If it does not give this information, it will have a problem.37

The same applies to closing a factory. Communication in advance with the works council and later with shareholders as well is vital. Boards should be free in their good faith business decisions and free from a reasonableness test, but they should take time to explain to shareholders. This implies that I am in favour of giving long-term shareholders a higher position on the ladder of information obligations, because they are always concerned.38