Snapshot: Responding to shareholder activism in the Netherlands
Company response strategies
What are the fiduciary obligations of directors in connection with an activist proposal? Is there a different standard for considering an activist proposal compared to other board decisions?
Dutch company law requires all directors to be guided by the interests of the company and its activities in the performance of their duties. If the business has a business, the interests of the business are usually defined in particular by the interest of promoting the sustainable success of the business of the business (i.e. the emphasis on long-term value creation, as also expressed in the Dutch Corporate Governance Code (DCGC)). Under Dutch law, there is no obligation to maximize shareholder value at any cost. Instead, boards should weigh all relevant aspects and circumstances and should consider the interests of all stakeholders, including shareholders, employees, creditors and business partners. Boards have broad discretion over how to balance the interests of various stakeholders, although the duty of care may require boards to prevent unnecessary or disproportionate damage to the interests of specific stakeholders. The (management) board is responsible for determining and implementing the company’s strategy (in a two-level structure: under the supervision of a supervisory board).
Responding to an unsolicited approach or activist proposal to change the company’s strategy (including through efforts to change the composition of the board) is part of the company’s strategy and, as such, is the responsibility of the consulting field. There is no shift in fiduciary duties: directors must continue to act in the best interests of the company and its activity with a view to creating long-term value, taking into account the interests of all parties stakeholders. Boards should ensure that they have all the relevant information to make an informed decision, and the proposal should be carefully considered, without bias, and weighed against all available alternatives. Shareholders do not have to be consulted prior to the company’s response; boards of directors are (in retrospect) accountable to shareholders.
Dutch case law confirms that there is no general obligation for boards to engage with a bidder or activist to discuss the proposal. While boards can “ just say no, ” they should only do so after careful consideration of a serious proposal as to its merits, and boards should consider whether some form of interaction with the bidder or activist is needed to ensure that administrators have all the relevant information. make an informed decision.
What advice do you give companies to prepare for shareholder activism? Are activism and shareholder engagement a matter of heightened concern in the boardroom?
Although the absolute number of activist campaigns in the Netherlands is limited, the increase in (high-level) activist campaigns in recent years has made activism and shareholder engagement a topic of discussion. on the board of directors of many Dutch listed companies. No business is immune to activism, and preparation is essential. Although the recommended prior preparations depend on the specifics of the company, some useful preparations are:
- continuously monitor market activity, financial performance (especially relative to its peers) and the industry of the company and its competitors;
- the establishment of a small advocacy team made up of directors or key executives, as well as legal advisers, investment bankers and a public relations firm that meets periodically;
- “Think like an activist”, regularly assess the strengths and weaknesses of the company and its defenses against takeovers and explore the available strategic alternatives (consider red teaming);
- establish relationships and credibility with shareholders and other stakeholders before the emergence of activists and maintain regular contact with major shareholders, the market in general and major stakeholders; and
- communicate clearly and coherently on environmental, social, governance and corporate social responsibility issues, the long-term strategy of the company, its implementation and progress in its realization.
What defenses do companies have to avoid being the target of shareholder activism or to respond to shareholder activism?
Most Dutch listed companies have adopted one or more structural defenses against takeover bids, often in their articles of association. Examples include:
- binding appointment rights and supermajority requirements for the appointment and involuntary dismissal of directors;
- staggered boards;
- option to permanently purchase preferred shares from an independent Dutch foundation whose purpose is to safeguard the interests of the company and its stakeholders and to resist any influence that could harm or threaten the strategy, independence or continuity of the company in a manner contrary to these interests, in accordance with which the foundation can effectively acquire up to 50 percent of the votes;
- shares with loyalty voting rights providing for additional voting rights for “loyal” shareholders;
- priority shares with certain control rights; or
- list of certificates of deposit for the shares rather than for the shares themselves.
In addition, Dutch companies can use various other tactics such as:
- engage with the activist, which can lead to some form of agreement;
- engage with shareholders and other stakeholders (for example, convincing major shareholders with compelling long-term plans or engaging employees, customers or politicians);
- by invoking a response period under the DCGC, under which the (management) board may allow a reasonable period of up to 180 days if shareholders seek to convene an extraordinary general meeting or to order the day of the points likely to lead to a change in the company strategy (e.g. dismissal of directors) and during which the board must deliberate, consult the stakeholders and explore alternatives (according to case law, this response period must be respected by shareholders in the absence of major interest);
- invoke the set-up or shutdown rule under the Dutch public offer rules;
- explore strategic transactions that make the business a less desirable target;
- the issue of new shares (within the framework of existing authorizations) or the sale of own shares to a third friend (white knight); or
- the issue of bonds with mandatory redemption at a higher value in the event of a change of control (macaroni defense).
Do companies receive daily or periodic reports of proxy votes during the voting period?
It depends on the place of registration. Dutch companies listed in the United States (choose to) often receive regular updates on the vote count, especially in dispute situations, in line with market practice in the United States. Historically, this has not been common practice in Dutch listed companies in the EU. In recent years, practice in the Netherlands has shifted more towards the US practice whereby companies receive updates on the vote count before the general meeting.
Is it common for businesses in your jurisdiction to enter into private settlements with activists? If so, what types of arrangements are generally agreed upon?
Although private settlements with activists are not common in the Netherlands, they do occur from time to time. A company may seek to enter into a pure standstill agreement to achieve a truce with an activist shareholder in exchange for, for example, a commitment to consult with the activist (and other major shareholders) on appointments of new directors. . In the case of activists with significant shareholding, a settlement may take the form of a relationship agreement in which the company and the shareholder agree on matters such as strategy and governance and in which the company can assign one or more seats on the (supervisory) board to the activist. .
Date declared by law
Indicate the date on which the above information is correct.
March 25, 2021.