Double Dutch

3 minute read

Tensions have emerged in the Netherlands, where shareholder rights are being weighed against the status quo established in the Dutch corporate model.

In that model, company boards are required to weigh up the interests of all stakeholders - employees, creditors, suppliers and customers - as well as their investors. The management board, under the supervision of its supervisory board, has discretion to decide on company strategy. Under this structure, 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 in 2017 following several long-running takeover battles. One that received a great deal of attention was the bid by the US paint producer PGG for the Dutch chemicals company, Akzo Nobel. Two friendly offers from PGG failed to bring the board to the negotiating table, but its failure to engage disappointed PGG management and some established shareholders.²

Pointing to the way in which Akzo’s returns lagged some of its peers, investors felt that serious engagement might be constructive.  The debate soon spilled into the political space as well, with the Dutch Finance Minister suggesting the planned deal might lead to a “disappearance of knowledge and research”, which would not be in the national interest.²

In Akzo’s case, the battle extended to include a legal challenge by an activist investor, designed to remove the Chairman of the Board for failing to carry out responsibilities to shareholders.² The legal challenge failed, PGG withdrew, and Akzo Nobel promised to embark on radical restructuring and step up distributions to shareholders. 

In this Q&A, Mirza Baig, Head of Investment Stewardship at Aviva Investors, considers the implications for investors of potential intervention by the Dutch government in the corporate sector.

Q: In the light of the recent activity, what are the key proposals from the Economic Affairs Minister?

Mirza Baig: The government’s preferred option was a legal time-out or cooling-off period, lasting twelve months, that might be called on when an active shareholder demanded change or following a successful hostile takeover. The idea was that the cooling-off would allow the target company a window in which to consult stakeholders and consider its options.

Dutch law already allows companies to adopt poison pill-type structures in the face of hostile takeovers, often using a legal structure known as a stichting³. Through this, new preference shares can be issued, diluting the power of ordinary shareholders in a contested bid, in an attempt to maintain the status quo. More than 60% of companies listed on the Amsterdam Exchange are thought to have these anti-takeover structures in place.³

Possibilities being considered include enhancing that protection by simplifying the route to issue preference stock, making it easier for target companies to protect themselves. Increasing the minimum holding required by a bidder for an unconditional takeover bid and introducing a minimum bid time have also been under review. 

This area is complex in the face of existing European takeover legislation, which is intended to level the playing field across European member states.   

Q: What were your main concerns about the time-out proposals?               

Mirza Baig: Our main concerns revolved around the fact that the government appeared to be willing to introduce legislation that might allow the suspension of general meetings and strip the right of shareholders to vote - it would be a significant erosion of shareholder rights. The initial proposals suggested that a longstanding shareholder, even one that has owned shares for decades, might be blocked from engagement in the cooling-off period.  

As providers of capital, we believe it is difficult to justify locking shareholders out. Removing them from the corporate conversation weakens the process of oversight. If shareholder rights can be suspended, management can be insulated from accountability. Over the long term, this can allow a culture of mediocrity to grow, with inefficient use of capital. It may allow less scrutiny of pay awards, for example – albeit within the established management and supervisory board structures.

Ultimately, we believe that long-term shareholders, management and government have the same interests. Well-run, thriving companies are a sign of success. That success is good for employees; it reflects well on management; benefits shareholders and is positive for the wider economy as well.

Q: Are there any precedents in Europe?

Mirza Baig: France also has legislation in place that deviates from the principle of ‘one share, one vote’. The 2014 Florange Act provides for double voting rights for ‘loyalty shares’ - shares held for at least two years, unless two-thirds of shareholders vote to overturn it. This legislation favours long-term shareholders, but it also allows a board to thwart a potential takeover without shareholder approval.⁵

Q: What is the likelihood the more extreme stance against shareholder activism will be successful in the Netherlands?

Mirza Baig: Significantly, the Dutch government recently announced it will revisit the proposals, saying they are “still under construction.” ⁶ The government was lobbied extensively by international investors, who opposed the way in which the debate was developing.

Q: What other issues does the Economic Affairs Minister have in focus now?

Mirza Baig: Other important proposals relate to identifying sectors regarded as vital for the Dutch economy with the intention to shelter them from foreign investment. Infrastructure, utilities, telecoms and defence might be included, as well as the maritime and chemicals industries.

There is also talk of encouraging Dutch pension funds to invest more in Dutch companies. A significant part of the shareholder base in major Dutch-listed companies is international. Increasing Dutch investment might help protect Dutch companies from takeover, but it will not diversify their risk effectively and could narrow the field for other, serious, long-term investors. 

References

¹ Akzo Nobel: Activist shareholders hit wall of Dutch stakeholder model. University of Oxford Faculty of Law. 1 June 2017

² Akzo Doesn't Worship Shareholder Value. Good for Akzo. Bloomberg View. 2 June 2017

³ Shedding Light on the Dutch “Stichting”: The Origins and Purpose of an Obscure but Potentially Potent Dutch Entity. Jones Day. February 2016

⁴ Eumidion: Evaluatie van het AvA-seizoen. Cited in: Shedding Light on the Dutch “Stichting”: The Origins and Purpose of an Obscure but Potentially Potent Dutch Entity. February 2016

⁵ Impact of Florange Act (France). Institutional Shareholder Services (ISS). 6 November 2014  

⁶ Dutch government to rethink plan to curb foreign takeover attempts. Reuters. 4 July 2017