RIGHTS OF MINORITY SHAREHOLDERS IN THE NETHERLANDS L. Timmerman and A doorman IIA 3 Introductory remarks LI Position of shareholders under Dutch company law Historically, the position of shareholders in Dutch companies has been rather weak, especa ly when compared with that of the board of directors. As far as we know,no serious investigation has ever been conducted into the question of why the board of directors of a Dutch company has such a strong position. a parallel may exist with other phenomena in Dutch society, most notably the trust Dutch citizens have always put in their govemment and the acceptance of a very indirect form of democracy Whatever the reasons may be, the wea kness of the position of shareholders has made It unnecessary to direct special attention to the position of minority shareholders 1.2 Shift in powerin favourof shareholders ecently, we have witnessed a strengthening of the position of the shareholderat the expense of the power of the board of directors and the supervisory board. This shift in power in favour of shareholders may result in increasing attention for the position of minority shareholders in the com ing years The shift n power n favour of the shareho lder has many reasons, inchuding a recent nfluential advice from the Social and Economic Council t the Dutch gowernment and parliament the pressure exercised by institutonal nves tors on the Dutch govemmentand companies to lmit the use of anti-take-over devies, the expand ing shareholder base n the Netherlands and the increasing number of foreign profess ional nvestors n Dutch companes. This strengthened position of shareholders has also resulted n increased attention for the position of minority shareholders n the Netherlands. A god illustration of this is the legislative proposal for a new section 2: 1 18a that will give shareholders who hold I percent of the ssued capital the right to place an item on the agenda of ne general meeting of sharcholders. 1.3 Why minority protection? Before elaborating on the protection of minority shareholders in the Netherlands, it will be useful to make some short remarks on why minority shareholders should receive protection and what the ultimate goal of this protection should be. At least three different reasons justify ing minority protection come to mind. First, if the Dutch legal system does not provide adequate protection of minority shareholders compared with foreign legal systems, foreign investors will not invest in Dutch companies and Dutch investors will increase their investments in foreign companies Second, and related to the first point, weak protection of minority shareholders University of Groningen. functioning and thefuture of the rules applicable to statutory hwo-tierenmtities), 5 January 2001
RIGHTS OF MINORITY SHAREHOLDERS IN THE NETHERLANDS L. Timmerman and A. Doorman* III A 3 1 Introductory remarks 1.1 Position of shareholders under Dutch company law Historically, the position of shareholders in Dutch companies has been rather weak, especially when compared with that of the board of directors. As far as we know, no serious investigation has ever been conducted into the question of why the board of directors of a Dutch company has such a strong position. A parallel may exist with other phenomena in Dutch society, most notably the trust Dutch citizens have always put in their government and the acceptance of a very indirect form of democracy. Whatever the reasons may be, the weakness of the position of shareholders has made it unnecessary to direct special attention to the position of minority shareholders. 1.2 Shift in power in favour of shareholders Recently, we have witnessed a strengthening of the position of the shareholder at the expense of the power of the board of directors and the supervisory board. This shift in power in favour of shareholders may result in increasing attention for the position of minority shareholders in the coming years. The shift in power in favour of the shareholder has many reasons, including a recent influential advice from the Social and Economic Council to the Dutch government and parliament, 1 the pressure exercised by institutional investors on the Dutch government and companies to limit the use of anti-take-over devices, the expanding shareholder base in the Netherlands and the increasing number of foreign professional investors in Dutch companies. This strengthened position of shareholders has also resulted in increased attention for the position of minority shareholders in the Netherlands. A good illustration of this is the legislative proposal for a new section 2:118a that will give shareholders who hold 1 percent of the issued capital the right to place an item on the agenda of the general meeting of shareholders. 1.3 Why minority protection? Before elaborating on the protection of minority shareholders in the Netherlands, it will be useful to make some short remarks on why minority shareholders should receive protection and what the ultimate goal of this protection should be. At least three different reasons justifying minority protection come to mind. First, if the Dutch legal system does not provide adequate protection of minority shareholders compared with foreign legal systems, foreign investors will not invest in Dutch companies and Dutch investors will increase their investments in foreign companies. Second, and related to the first point, weak protection of minority shareholders * University of Groningen. 1. Entitled Advies over het functioneren en de toekomst van de structuurregeling (Advice on the functioning and the future of the rules applicable to statutory two-tier entities), 5 January 2001
TIMMERMAN DOORMAN Increases the average cost of capital for a company, putting it at a competitive disadvantage with foreign companies. A final reason for an adequate protection of minority shareholders rights is more normative. There seems to be no good reason why it should be considered fair and equitable to disproportionately disadvantag minority shareholders com pared with larger shareholders, only on the grounds that they hold fewer shares In our opinion, all shareholders, large or small, should receive adequate protection from the law 1.4 Who is the minority shareholder? In Dutch legislation, established case law and doctrine, you can look in vain for a general definition of a minority shareholder. Dutch law assesses whether a specific right or action should be given to a minority shareholder on a situation-to-situation basis and also decides from case to case whether one qualifies as a minority shareholder. This decision whether one hasa right or an action is usually described in Dutch law in tems of percentage of the issued share capital, but sometimes a lso terms of the absolute book value of the shares required, or as a combination of both. The fairness of this adherence to percentages in deciding whether a shareholder is a minority shareholder can be questioned. Dutch aw, for instance, perm its the issue of priority shares. These shares have special controlling rights attached to them, making It possible to control the company without holding a large percentage of the shares nd without providing large share of the company s capital. A consequence of this is that a shareholder providing the majority of the capital may sometimes not control the company. In such a case the majority shareholder is effectively in a minority position with regard to the exercising of controlling rights. Under Dutch company law, capital and control are not necessarily in line, so it is, in our opinion, impossible to define the concept of minority shareholder without bearing in mind the control situation in the company. When a company makes use of a specific control structure, whether that be priority shares, a pyramid structure, orpreference shares, percentages lose much of their relevance. Under these circumstances we would define minority shareholders as those shareholders who, irrespective of the amount of capital they provide, are unable to exercise any significant form of control within the company 1.5 What are minority rights? In Dutch company law several rights are given to all shareholders, irrespective of the num ber of shares they hold. Notall of these rights can be qualified as m inority rights The right to vote in the general meeting of shareholders, forexample, will usually not be a minority right for two reasons. First, because this right is not specific to minority shareholders and second, because this right usually has no significant meaning for minority shareholders. In the event of a disagreement, they will be the ones to lose the vote at the general meeting of shareholders In our opinion, for a right to be a true minority right, it needs to possess the characteristic that it crea tes the possibility that an outcome can be reached that is different from the outcome that the majority of the shareholders wish. This means that the minority shareholder can interfere through a minority right in the affairs of the company, thereby correcting the policies of the majority shareholder. Within the minority rights we draw a distinction between
TIMMERMAN/DOORMAN 2 increases the average cost of capital for a company, putting it at a competitive disadvantage with foreign companies. A final reason for an adequate protection of minority shareholders rights is more normative. There seems to be no good reason why it should be considered fair and equitable to disproportionately disadvantage minority shareholders compared with larger shareholders, only on the grounds that they hold fewer shares. In our opinion, all shareholders, large or small, should receive adequate protection from the law. 1.4 Who is the minority shareholder? In Dutch legislation, established case law and doctrine, you can look in vain for a general definition of a minority shareholder. Dutch law assesses whether a specific right or action should be given to a minority shareholder on a situation-to-situation basis and also decides from case to case whether one qualifies as a minority shareholder. This decision whether one has a right or an action is usually described in Dutch law in terms of percentage of the issued share capital, but sometimes also in terms of the absolute book value of the shares required, or as a combination of both. The fairness of this adherence to percentages in deciding whether a shareholder is a minority shareholder can be questioned. Dutch law, for instance, permits the issue of priority shares. These shares have special controlling rights attached to them, making it possible to control the company without holding a large percentage of the shares and without providing a large share of the company s capital. A consequence of this is that a shareholder providing the majority of the capital may sometimes not control the company. In such a case the majority shareholder is effectively in a minority position with regard to the exercising of controlling rights. Under Dutch company law, capital and control are not necessarily in line, so it is, in our opinion, impossible to define the concept of minority shareholder without bearing in mind the control situation in the company. When a company makes use of a specific control structure, whether that be priority shares, a pyramid structure, or preference shares, percentages lose much of their relevance. Under these circumstances we would define minority shareholders as those shareholders who, irrespective of the amount of capital they provide, are unable to exercise any significant form of control within the company. 1.5 What are minority rights? In Dutch company law several rights are given to all shareholders, irrespective of the number of shares they hold. Not all of these rights can be qualified as minority rights. The right to vote in the general meeting of shareholders, for example, will usually not be a minority right for two reasons. First, because this right is not specific to minority shareholders and second, because this right usually has no significant meaning for minority shareholders. In the event of a disagreement, they will be the ones to lose the vote at the general meeting of shareholders. In our opinion, for a right to be a true minority right, it needs to possess the characteristic that it creates the possibility that an outcome can be reached that is different from the outcome that the majority of the shareholders wish. This means that the minority shareholder can interfere through a minority right in the affairs of the company, thereby correcting the policies of the majority shareholder. Within the minority rights we draw a distinction between
RIGHTS OF MINORITY SHAREHOLDERS INTHENETHERLANDS positive and negative rights. By positive rights we mean the ability to initate policies by the company that would not have been pursued without the initiative(see nos 15-20). By contrast, negative rights refer to the possibility fora minority shareholder a group of minority shareholders to block a resolution that is desired by the majority(nos 21-26 ). In addition to these two categories we can mention a third: that of the so-called norma lising minority rights. These are rights that the minority shareholder can exercise to force the company to comply with statutory provisions or the articles of tion. In this report we will not treat these rights as a separate ategory since Dutch com pany lawdoes not conta in many ofthem2 In this report Chapters II and Ill give general overview of minority rights in the Dutch legislation. Chapters IV, V and vi deal with specific aspects of minority protection. The report ends with a conclusion. In this report decisions from the Enterprise Section of the Amsterdam Court of Appeal will be indica ted with OK (Ondernem ingskamer) Decisions of the Supreme Court of the Netherlands wille be indicated with HR (Hoge Raad). Their most important decisions are published in the Nederlandse Jurisprudentie(N)en Jurisprudentie, Onderneming en Recht (JOR) nd referred to by year of publication and by case number With BV we mean the Dutch variant of the private limited company, with NV the public lim ited company Rules protecting minority shareholders 2.1 Methods ofprotection of minority shareholders In Dutch company aw, rules protecting minority shareholders are mainly but not exclusively statutory in nature. As a result of the fact that minority shareholder protection has never received much attention, protection provisions are found scattered over several sources. both in hard lw and in soft law. Another distinction that can be made is between prov isions that provide minority protection in e narrow sense, usually giv ing shareholders certain rights and a remedy to effectuate these rights, and rules that are primarily directed at improving the availa bility of infomation and of market transparency. This second set of rules usually has a side-effect an improvement in the position of minority shareholders We will refer to this method of protection as protection in the broad sense. We will now discuss eight sources of minority shareholder protection 2.2 Book 2 ofthe Dutch Civil Code Book 2 of the Dutch Civil Code which regulates the legal persons, such as the BV and the nv, may be regarded as the most important source forminority shareholders protection. It can be characterised as hard law and provides protection in the narrow sense. Perhaps its most fundamental prov ision offering protection for minority shareholders is section 2: 201(92) which prov ides for equal protection of the shareholders(see further nos 27-29) We can mentonsection 2: 222(112 ), sections 999-1002 of the Code of Civil Procedure and to tain extent. sections 2: 345-359 and 2: 15-16
RIGHTS OF MINORITY SHAREHOLDERS IN THE NETHERLANDS 3 positive and negative rights. By positive rights we mean the ability to initiate policies by the company that would not have been pursued without the initiative (see nos 15-20). By contrast, negative rights refer to the possibility for a minority shareholder or a group of minority shareholders to block a resolution that is desired by the majority (nos 21-26). In addition to these two categories we can mention a third: that of the so-called normalising minority rights. These are rights that the minority shareholder can exercise to force the company to comply with statutory provisions or the articles of association. In this report we will not treat these rights as a separate category since Dutch company law does not contain many of them2 . In this report Chapters II and III give general overview of minority rights in the Dutch legislation. Chapters IV, V and VI deal with specific aspects of minority protection. The report ends with a conclusion. In this report decisions from the Enterprise Section of the Amsterdam Court of Appeal will be indicated with OK (Ondernemingskamer) Decisions of the Supreme Court of the Netherlands wille be indicated with HR (Hoge Raad). Their most important decisions are published in the Nederlandse Jurisprudentie (NJ) en Jurisprudentie, Onderneming en Recht (JOR) and referred to by year of publication and by case number. With BV we mean the Dutch variant of the private limited company, with NV the public limited company. 2 Rules protecting minority shareholders 2.1 Methods of protection of minority shareholders In Dutch company law, rules protecting minority shareholders are mainly but not exclusively statutory in nature. As a result of the fact that minority shareholder protection has never received much attention, protection provisions are found scattered over several sources, both in hard law and in soft law. Another distinction that can be made is between provisions that provide minority protection in the narrow sense, usually giving shareholders certain rights and a remedy to effectuate these rights, and rules that are primarily directed at improving the availability of information and of market transparency. This second set of rules usually has as a side-effect an improvement in the position of minority shareholders. We will refer to this method of protection as protection in the broad sense. We will now discuss eight sources of minority shareholder protection. 2.2 Book 2 of the Dutch Civil Code Book 2 of the Dutch Civil Code which regulates the legal persons, such as the BV and the NV, may be regarded as the most important source for minority shareholders protection. It can be characterised as hard law and provides protection in the narrow sense. Perhaps its most fundamental provision offering protection for minority shareholders is section 2:201(92) which provides for equal protection of the shareholders (see further nos. 27-29). 2. We can mention section 2:222(112), sections 999-1002 of the Code of Civil Procedure and to a certain extent, sections 2:345-359 and 2:15-16
TIMMERMAN DOORMAN Except as is otherwise provided for in the articles, all shares shall rank pari passu in proportion to the A company limited by shares must treat shareholders and holders of depository receipts whose circumstances are equal in the same manner. Other im portant provisions for the protection of minority shareholders in Book 2 are sections 2: 15 about the nullification of resolutions, section 2: 220(1 10)about the right for shareholders who together hold a certa in percentage of the shares to convene a general meeting of shareholders, section 2: 343 prov id ing a shareholder an exit-opportunity in case the continuation of his shareholding can no longer be reasonably expected of him due to the conduct of other shareholders(no. 33), and section 2: 344-359 about the right to demand an inquiry(nos 30-31) 2.3 Book 3 of the Dutch Civil Code: class action Book 3 of the Dutch Civil Code, on property law in general, contains several im portant prov isions for m inority shareholders For m inority shareholders in Book 3 Is section 3: 305 relevant. This section allows minority shareholders to organise into an association or a foundation and to have the entity bring an action against the company for the benefit of the collective. It is not possible for the entity to sue for damages but it is able to request a declaratory judgement. With this declaratory judgement, the individuals involved can then sue for damages. An association or foundation is entitled to initate a class action if the association or foundation according to its articles of association and in practice, protects the same interest as the interest of the indiv iduals that has been violated and that the interests are fit for undling. Representativeness is not a condition or a hurdle, especally not when the association or foundation lim its its actions to its members. Section 3: 305a reduces the cost of litigation. These costs can be high, caused among other things by the obligation to be represented by counsel and the danger of being ordered to also pay the other party slegalcosts 2.4 Code ofcivil Procedure This book conta ins three relevant sets of provisions for the protection of minority shareholders. These are first sections 999-1002. which concern the annual accounts the annual report and the infomation that has to be added to the accounts and the report. Any affected party can demand that the company alter the aforementioned documents and bring them into line with a legal injunction, provided by the Enterprise Section of the Amsterdam Court of Appeal. Refusal to do so is a crim inal offence. Second, section 2 14 offers minority shareholders the opportunity to request a provisional exam ination of witnesses in preparation for proceedings which are eing considered. Finally, section 84a offers minority shareholders the opportunity to demand in court that they will be allowed to inspect a private instrument Section 2- 201 is the relevant section for the Bv section 92 for the nv
TIMMERMAN/DOORMAN 4 Section 2:201(92):3 Except as is otherwise provided for in the articles, all shares shall rank pari passu in proportion to their amount. A company limited by shares must treat shareholders and holders of depository receipts whose circumstances are equal in the same manner. Other important provisions for the protection of minority shareholders in Book 2 are sections 2:15 about the nullification of resolutions, section 2:220(110) about the right for shareholders who together hold a certain percentage of the shares to convene a general meeting of shareholders, section 2:343 providing a shareholder an exit-opportunity in case the continuation of his shareholding can no longer be reasonably expected of him due to the conduct of other shareholders (no. 33), and section 2:344-359 about the right to demand an inquiry (nos 30-31). 2.3 Book 3 of the Dutch Civil Code; class action Book 3 of the Dutch Civil Code, on property law in general, contains several important provisions for minority shareholders. For minority shareholders in Book 3 is section 3:305 relevant. This section allows minority shareholders to organise into an association or a foundation and to have the entity bring an action against the company for the benefit of the collective. It is not possible for the entity to sue for damages but it is able to request a declaratory judgement. With this declaratory judgement, the individuals involved can then sue for damages. An association or foundation is entitled to initiate a class action if the association or foundation, according to its articles of association and in practice, protects the same interest as the interest of the individuals that has been violated and that the interests are fit for bundling. Representativeness is not a condition or a hurdle, especially not when the association or foundation limits its actions to its members. Section 3:305a reduces the cost of litigation. These costs can be high, caused among other things by the obligation to be represented by counsel and the danger of being ordered to also pay the other party s legal costs. 2.4 Code of Civil Procedure This book contains three relevant sets of provisions for the protection of minority shareholders. These are first, sections 999-1002, which concern the annual accounts, the annual report and the information that has to be added to the accounts and the report. Any affected party can demand that the company alter the aforementioned documents and bring them into line with a legal injunction, provided by the Enterprise Section of the Amsterdam Court of Appeal. Refusal to do so is a criminal offence. Second, section 214 offers minority shareholders the opportunity to request a provisional examination of witnesses in preparation for proceedings which are being considered. Finally, section 843a offers minority shareholders the opportunity to demand in court that they will be allowed to inspect a private instrument. 3. Section 2:201 is the relevant section for the BV; section 92 for the NV
RIGHTS OF MINORITY SHAREHOLDERS INTHENETHERLANDS 2.5 Commercial Code n sections 8 and ll, the Commercal Code conta ins two provisions that can be pplied to protect the interests of a m inority shareholder. Section 8 gives a minority shareho lder the right to ask the court to demand the disclosure of the books and documents that the company is obliged to keep by law during legal proceedings Section 1 1 of the Commercal Code conta ins the obligation to subm it the entire accounts to the other party in legal proceedings. This obligation to subm it is restricted in the sense that it only exists with regard rtners while uncertain at best whethera minority shareholder qualifies as a partner 2.6 Securities Transaction Supervision Act 1995 This statute provides protection in the broad sense. For the purposes of minority shareholder protection, three aspects seem relevant. First, sections 3-6 prohibit the issue of shares to the public unless the company has made sure that adequate information is ava ilable to the investors. Second, sections 29-42 regulate the control and supervision of the securities markets by the Minister of Finance, or by other entities after delegation, the Minister of Finance has delegated his powers to the Stichting Toezicht Effectenverkeer. Finally, sections 46-47 make insider trading a crim inal offence. Recently, rules relating to a public offer have been incorporated into the Securities Transaction Supervision Act 1995. The purpose of these rules is to ensure that shareholders receive adequate and timely information about the public 2.7 Disclosure of Major Holdings in Listed Companies Act 1996 This statute provides protection to minority shareholders through the improvement of market transparency and information provision. This statute obliges anyone who passes certa in shareholding thresholds in either direction to report this to the company and the Minister of Finance, who will make the information available to the public. Again, the Minister of Finance has delegated his powers under this statute to the Stichting Toezicht Effectenverkeer 2.8 Listing and Issuing Rules These are rules developed by the Amsterdam Exchange, which is now a subsidiary of the Euronext Exchange, and to which a company that seeks a listing is bound through the listing agreement it enters into with the exchange. They can therefore be characterised as legally binding, but only in the relationship between the listed company and the exchange. The rules contain several provisions that protect inority shareholders. Examples are sections 8-24, which conta in the obligation to make a prospectus available when issuing securities and that give detailed information on what to include in the prospectus. A second example is section 26, which explicitly states that the issuing company is obliged to treat all shareholders who are in equal circumstances in an equal manner. Finally, section 28 is ant section, giv ing a detailed omation that
RIGHTS OF MINORITY SHAREHOLDERS IN THE NETHERLANDS 5 2.5 Commercial Code In sections 8 and 11, the Commercial Code contains two provisions that can be applied to protect the interests of a minority shareholder. Section 8 gives a minority shareholder the right to ask the court to demand the disclosure of the books and documents that the company is obliged to keep by law during legal proceedings. Section 11 of the Commercial Code contains the obligation to submit the entire accounts to the other party in legal proceedings. This obligation to submit is restricted in the sense that it only exists with regard to partners , while it is uncertain at best whether a minority shareholder qualifies as a partner. 2.6 Securities Transaction Supervision Act 1995 This statute provides protection in the broad sense. For the purposes of minority shareholder protection, three aspects seem relevant. First, sections 3-6 prohibit the issue of shares to the public unless the company has made sure that adequate information is available to the investors. Second, sections 29-42 regulate the control and supervision of the securities markets by the Minister of Finance, or by other entities after delegation; the Minister of Finance has delegated his powers to the Stichting Toezicht Effectenverkeer. Finally, sections 46-47 make insider trading a criminal offence. Recently, rules rela ting to a public offer have been incorporated into the Securities Transaction Supervision Act 1995. The purpose of these rules is to ensure that shareholders receive adequate and timely information about the public bid. 2.7 Disclosure of Major Holdings in Listed Companies Act 1996 This statute provides protection to minority shareholders through the improvement of market transparency and information provision. This statute obliges anyone who passes certain shareholding thresholds in either direction to report this to the company and the Minister of Finance, who will make the information available to the public. Again, the Minister of Finance has delegated his powers under this statute to the Stichting Toezicht Effectenverkeer. 2.8 Listing and Issuing Rules These are rules developed by the Amsterdam Exchange, which is now a subsidiary of the Euronext Exchange, and to which a company that seeks a listing is bound through the listing agreement it enters into with the exchange. They can therefore be characterised as legally binding, but only in the relationship between the listed company and the exchange. The rules contain several provisions that protect minority shareholders. Examples are sections 8-24, which contain the obligation to make a prospectus available when issuing securities and that give detailed information on what to include in the prospectus. A second example is section 26, which explicitly states that the issuing company is obliged to treat all shareholders who are in equal circumstances in an equal manner. Finally, section 28 is an important section, giving a detailed overview of the information that the issuing