Cool off: Could proposed Dutch legislation diminish corporate accountability?

Dutch legislators seem intent to push ahead with controversial proposals intended to rein in shareholder activists and make hostile takeovers more difficult, as Louise Piffaut explains.

4 minute read

Taking the interests of different corporate stakeholders into account is never straightforward, but the debate has become particularly heated in the Netherlands. Here, company boards are required to weigh up the interests of all stakeholders, including employees, creditors, suppliers, customers and shareholders. It is quite possible for a board to reject a potential takeover, even if the majority of shareholders support it.1

These issues have come to the fore following long-running takeover battles for Dutch companies. Failed bids by US paint producer PGG for chemicals company Akzo Nobel2 and Kraft Heinz for Unilever3 have focused minds and led to a new legislative proposal that would allow Dutch-listed companies to call for a ‘time-out’ period in the face of a hostile bid or shareholder activism.

Under the proposal, no significant strategic changes could be made during the ‘time out’. Furthermore, shareholders would not be able to prompt the dismissal or suspension of executives or members of the supervisory board, unless the plans were put forward by the board itself.4

In this Q&A, Louise Piffaut, ESG analyst at Aviva Investors, considers the implications.

Can you summarise how far the proposals have progressed?

After recent failed takeovers, the Dutch Ministry of Economic Affairs started exploring a legal time-out or cooling-off period lasting a whole year that could be called on after a hostile takeover bid or when a shareholder demanded change. The idea was that the cooling-off period would allow the target company a window in which to consult stakeholders and consider its options, without external scrutiny.

We now have a draft bill setting out a slightly shorter 250-day period, but these proposals will inhibit shareholders – the ultimate owners of the company – from being able to express views, engage in dialogue or prompt action in a timely way.  

The consultation period has just closed, and the legislation is back on the drawing board for last amends. Once complete, the final step will be presenting that legislation to parliament later this year.

What’s brought these proposals about?

The proposal reflects national concern about Dutch companies losing control of their destiny and becoming hostage to certain interest groups. This is part of a wider debate about whether companies in strategic industries like technology and defence need to be protected, as well as companies that create unique intellectual property.

Whether it is necessary to shelter companies from activists – from hedge funds to long term investors, with all their different motivations - is a debate taking place in many countries. In France, for instance, there has been interest in General Electric’s acquisition of Alstom’s power division (whose equipment powers French nuclear reactors) and Chinese investors’ involvement in Peugeot-Citroen.5

In the Netherlands, it’s not just about national interests. Parliament seems broadly supportive of trying to shelter strategic industries, but the possibility of job losses featured significantly in the Akzo Nobel/PPG case, for example.6

However, the legislation does not fit comfortably with the free movement of capital within the European Union (EU). The impetus is also different to the EU Shareholder Rights Directive agreed in 2017;7 one of its key aims was to encourage shareholders to take a closer interest in and engage more with the companies they invest in. That legislation is due to be implemented into Dutch law by the middle of 2019.  

What does this mean for corporate accountability?  

There is a need for proper checks and balances within a company. A shareholder’s right to hold board members to account is an important part of a mature, healthy, well-functioning organisation. That ability for shareholders to call an extraordinary general meeting, to try to have a director dismissed or another appointed, are critical. Even if they are not ultimately successful, they raise a flag and bring issues to the attention of the board and other shareholders in a way that cannot be ignored.

The proposed Dutch bill comes at a time when the broader trend is towards greater investor oversight, to protect against mismanagement, short-termism and corporate failures.

In this case, the proposal would make it harder to call individuals to account. Within any time-out, the board could consult on its own terms and decide the issue raised was not in the best interests of the company to pursue. But the board would define ‘best interests’. This is why many international investors have concerns. Whilst in favour of stakeholder engagement, it should not come at the expense of shareholder rights.

Of course, there may well be disagreement about the best way to create long-term value for shareholders, something the board is tasked to do under the Dutch Corporate Governance Code.8 When it comes to having a dialogue, the idea is that the board would use the cooling-off period to engage with all stakeholders. However, it’s a subjective process. In past hostile takeovers, the board’s engagement with the bidder and other shareholders has been limited.

Could the proposals be counterproductive?

We don’t believe the changes are necessary and may make the Netherlands less attractive to international investors, as the Dutch Shareholders Association suggests.   

The Corporate Governance Code already provides a 180-day cooling-off period. The Code essentially provides a set of recommendations; it’s not embedded in law. The proposed legislation would extend the response time and embed it, which might have significant legal implications.

Dutch law already has provisions that can be used in the face of hostile takeovers and shareholder activism, which already raise concerns. Dutch companies can adopt poison pill-type structures, using a legal structure known as a stichting. This allows new preference shares to be issued to dilute the power of ordinary shareholders in the case of a hostile bid. More than 60 per cent of companies listed on the Amsterdam Exchange are thought to have stichting in place.10

Such provisions explain the ‘Dutch Discount’9, where valuations of Dutch companies might be slightly lower than competitors elsewhere.

Are there any other concerns?

Introducing such a long period between a potential change and the time at which something occurs might introduce other risks. The Dutch Authority for the Financial Markets (AFM) is considering whether a long time-out might introduce a higher risk of insider dealing and market manipulation.11 That is difficult to assess at this point.

How does what’s happening in the Netherlands fit in with the situation globally?

The subject of corporate accountability is very much alive. We can see this in the debate on dual-share structures. Structures that offer disproportionate voting rights to certain classes of share can lead to accountability deficits and may ultimately detract from performance.12

These structures are common among US tech companies, particularly to maintain the influence of founders or key stakeholders. For example, we have a situation where the founders of lift-sharing app Lyft are seeking a listing that might give them a voting majority - despite holding less than 10 per cent of the stock.13

Institutional investors are understandably not supportive of share classes where they might be disadvantaged. Index providers like Standard & Poor’s and FTSE Russell are also becoming increasingly sensitive to the dual-share issue and may exclude companies that do not support ‘one share, one vote,’ as in the Snap Inc. controversy in 2017. Ultimately, Snap was excluded from the S&P500.

Another differential voting rights mechanism that we have been observing is the granting of enhanced voting rights for long-term shareholders. Countries like France, Italy and more recently Belgium have decided to grant double voting rights for shareholders that have held registered shares for a given period. This mechanism also breaches the ‘one share, one vote’ principle, which strongly disadvantages international shareholders.

Protectionist measures such as differential voting rights and the proposed Dutch bill go against a global trend towards greater corporate accountability investors are increasingly pushing for.

References:

  1. Akzo Nobel: Activist shareholders hit wall of Dutch stakeholder model. University of Oxford Faculty of Law. 1 June 2017
  2. PPG walks away from battle to buy Akzo Nobel. Reuters. 1 June 2017
  3. Kraft's failed Unilever bid shows it needs growth over cost cuts. Reuters. 17 February 17, 2017
  4. Dutch cooling-off period in face of shareholder activism or hostile take-over. Lexology. 11 December 2018
  5. France to bolster anti-takeover measures amid foreign investment boom. Reuters. 19 July 2018
  6. Dutch provinces oppose Akzo Nobel takeover, fear job losses. Reuters. 20 March 2017
  7. Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32017L0. 828
  8. Dutch corporate governance code 2009. Dutch Civil Law
  9. Shedding Light on the Dutch “Stichting”: The Origins and Purpose of an Obscure but Potentially Potent Dutch Entity. Jones Day. February 2016 
  10.  Shedding Light on the Dutch “Stichting”: The Origins and Purpose of an Obscure but Potentially Potent Dutch Entity. Jones Day. February 2016
  11. Dutch Proposal on Statutory Cooling-Off Period. Baker McKenzie. 20 February 2019
  12. Renee Adams and Daniel Ferreira. One Share-One Vote: The Empirical Evidence. Review of Finance (2008) 12: 51–91
  13. Lyft founders to tighten grip with supervoting shares in IPO: WSJ. Reuters. 12 February 2019

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