A recent Supreme Court ruling in The Netherlands has limited the scope of the procedure by which a company’s management policy may be scrutinised by the Court.
Summary of the Investigation Procedure
Upon request, the Dutch Enterprise Chamber – a specialist court connected with the Court of Appeal of Amsterdam – can order an “Investigation Procedure” if there are “well-founded reasons to doubt the soundness of a company’s policies”. The request can be filed by one or more shareholders who represent at least 10%, or a nominal value of €225,000, of the issued share capital. The Investigation Procedure is an inquiry into the policies and actual affairs of a company.
If the Enterprise Chamber grants the request it will appoint one or more investigators who are authorised to access a company’s administration, books and premises. Directors and employees are legally required to co-operate fully with the investigation.
If the investigator finds “mismanagement”, the Enterprise Chamber can take extensive measures, such as:
suspension or annulment of resolutions by board members or shareholders;
appointment, suspension or even dismissal of board members;
a temporary deviation from the company’s articles of association.
The Enterprise Chamber can even take these measures on a preliminary basis pending the outcome of the Investigation Procedure. For these preliminary measures to be imposed, actual mismanagement need not be established and well-founded reasons to doubt the soundness of a company’s policies will be sufficient. In principle, therefore, shareholders can influence a company’s actions at short notice (sometimes within days). This is particularly critical when we consider disputes arising from proposed takeovers and mergers.
Since 1990, the scope of the Investigation Procedure has broadened substantially. It was originally limited to reorganisation and restoration of a company’s internal relationships but the Enterprise Chamber has now expanded this to establish actual responsibility for mismanagement.
The Dutch Civil Code
The Dutch Civil Code (Articles 2:8 and 2:9) provides that the directors and shareholders must behave reasonably and fairly towards each other. Further, Article 2:107a(1) of the Code stipulates that resolutions concerning an important change to the identity or the character of the company must be put to a shareholders vote.
The ABN-AMRO case – the first instance decision
At the beginning of 2007, the Board of ABN-AMRO Holding decided that the company would sell all its stock in the LaSalle Bank Corporation (“LaSalle”) to Bank of America without asking for the prior approval of the shareholders. This sale took place while the Board of ABN-AMRO Holding was in exclusive negotiations with Barclays concerning a merger on the basis of an exchange of shares. Before the sale, a consortium of three banks had let it be known they also wanted to make an offer to buy the ABN-AMRO Holding stock.
The Dutch Association of Stockholders (Vereniging van Effectenbezitters) (the “VEB”) filed a request with the Enterprise Court to investigate the company policy in relation to the sale of LaSalle. The VEB also requested the Enterprise Court take preliminary measures.
One of the requested measures was that the Board of ABN-AMRO Holding should first seek the approval of the shareholders before completing the LaSalle transaction. On the grounds of reasonableness and fairness, under Article 2:107a CC, the Enterprise Court granted the preliminary measure and suspended completion of the sale of LaSalle until the shareholders had given their approval. ABN-AMRO Holding appealed this decision to the Supreme Court.
The ABN-AMRO case – the appeal
The Supreme Court overturned the ruling of the Enterprise Court.
The Court ruled that principles of reasonableness and fairness can only create new powers for organs of a legal entity in very exceptional cases. The principle of legal certainty demands that such powers rest on accepted legal principles which were not present in this case.
Furthermore, the underlying purpose of Article 2:107a did not justify an arbitrary application of the Court’s powers and such an application was not supported by the relevant case law. Whilst it was a significant transaction, the sale of LaSalle did not constitute an “important change to the identity or the character of the company” for the purposes of Article 2:107a. The Supreme Court went even further and pointed out that, even if there was a duty to seek approval in this case, Article 2:107a did not apply externally. This meant that the preliminary measures here were inappropriate because they frustrated fulfilment of the contract of sale with third parties.
After a period in which the jurisdiction of the Enterprise Court has expanded in favour of shareholders, it is clear that a limit has now been set. Not every act of a board of directors - and certainly not an act which falls within the normal business of a corporation - needs to be approved by the shareholders. Even if a resolution does need to be passed, this will have no external effect on third parties.
How this will effect the balance of power between shareholders and the board is difficult to predict. However, this decision confirms that the power of the shareholders against a company’s board is by no means absolute.