• Equities
  • Responsible Investing

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

Contributor

Related views

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.