24 March 2021

Management of listed companies to get statutory timeout right

Sven Dumoulin
Reinier Kleipool
Casper Nagtegaal
+ 1 other expert

A new bill will take effect on 1 May 2021 allowing the management board of a Dutch listed company a statutory 250-day timeout (more often referred to as “statutory response time”). The bill was adopted by the Senate on 23 March 2021. In this article, we give an outline of its functionalities and impact.

The statutory response time may be invoked if shareholders request a change to the composition of the company’s boards or of corresponding provisions in the articles of association, and in the case of an unsolicited public offer. This gives the management board the time and opportunity to identify and weigh the interests of the company and its stakeholders and to decide on the way forward. The bill also codifies the management board’s authority to determine the company’s strategy.

Background

The bill was introduced in response to the ongoing public debate in the Netherlands on protecting Dutch companies against shareholder activism and hostile takeover attempts. The issue was revived following unsolicited attempts to take over AkzoNobel and Unilever. With the bill, the Dutch government aims to give management boards more room and time to consider the effect that a fundamental strategy change brought about by shareholders or a public offer may have on the company and all of its stakeholders.

A number of parties have criticised the bill and have questioned its necessity. In their view, listed companies have sufficient instruments available to respond to shareholder activism and hostile takeovers, and the bill could have a negative impact on the business climate in the Netherlands. Despite this criticism, the bill was approved by the Dutch legislature.

Scope

The bill applies to Dutch NVs and BVs with shares or depositary receipts listed on a stock exchange or on a multilateral trading facility, in or outside the EU.

When can the statutory response time be invoked?

The management board can invoke the statutory response time if:

  • shareholders individually or jointly representing 3% of the issued share capital (or a lower percentage set in the articles of association) request the management board to put on the agenda of a general meeting a proposal to:
    1. appoint, suspend or dismiss any managing or supervisory directors, or
    2. amend any provisions in the articles of association regarding the appointment, dismissal or suspension of managing or supervisory directors; or
  • an unsolicited public offer is announced or made.

The management board may only invoke the statutory response time if it considers the shareholders’ request or the offer, to materially go against the interests of the company and its affiliated enterprises. This requires a reasoned management board decision that has been approved by the supervisory board, if there is one.

The bill equates depositary receipts holders with shareholders and stipulates that for companies with a one-tier board structure, the management board’s powers and duties vest in the board as a whole.

Length of response time

The statutory response time can be no more than 250 days. When it starts depends on the type of event that the management board is responding to.

In the situations under (1) and (2) above, the clock starts running:

  • one day after the statutory deadline (or the deadline set in the articles of association) for requesting that an item be put on the general meeting agenda – this implies that the response time will generally start on the 59th day before the day of the first general meeting to be held after the request; or
  • if the item is contained in a shareholder request to call an extraordinary general meeting, at the moment the district court authorises the shareholder(s) concerned to call the meeting.

In the case of an unsolicited public offer, the response time starts running no later than one day after the offer was made. It may start earlier if so decided by the management board. However, invoking the response time does not prevent an unsolicited offer from becoming unconditional.

The management board must invoke the statutory response time within a “reasonable timeframe”. Which timeframe is appropriate for the board will depend on the circumstances.

If the management board decides to invoke the response time at a later date than when the clock started running by law, this will shorten the response time it can use. By way of example, if the response time is invoked 30 days after the clock started running, the actual response time that the board can use is 220 days.

What are the consequences of invoking the response time?

Invoking the response time will have the following consequences for the management board, the company and its stakeholders:

  • During the response time, the general meeting cannot vote on proposals to change the composition of the company’s boards or any corresponding provisions in the articles of association, to the extent that shareholders have requested that these proposals be made. The proposals may, however, be discussed at the general meeting at the request of the relevant shareholder(s). If the proposals are put forward by the company (that is, by the management board or the supervisory board), they can be voted on.
  • The management board must use the response time to collect the information it needs in order to come to a prudent decision regarding the shareholder request or, as the case may be, the offer. For that reason, it must, in any case, consult the company’s shareholders that represent 3% or more of the issued share capital, as well as the works council, and it must ask for their views. The management board must publish those views on the company’s website in so far as the consulted parties have agreed to this. Other stakeholders may also be consulted.
  • The management board must report on the policy and course of action pursued during the response time. This report must be placed on the company’s website no later than one week after the last day of the response time. The report must also be included as a discussion item on the agenda of the first general meeting held after the response time has ended.

Invoking the response time as well as discussing related topics in conversations with stakeholders as mentioned above, may qualify as inside information. This should be given due and careful consideration at the time.

If invoked, when will the statutory response time end?

The response time ends once the 250 days have lapsed (see above on when the clock starts running) or earlier if the management board so decides. This latter decision requires supervisory board approval. If invoked in relation to an unsolicited public offer, the response time also ends automatically on the day after the public offer is declared unconditional.

Litigation

Under the bill, shareholders that are, at the time the response time is invoked, individually or jointly entitled to request agenda items for general meetings, may initiate special court proceedings before the Dutch Enterprise Chamber to terminate the response time.

The Enterprise Chamber must honour this termination request if:

  • the management board, when invoking the response time, could in the given circumstances not have reasonably considered the shareholder request or public offer to materially go against the interests of the company and its affiliated enterprises;
  • the management board can no longer reasonably consider that continuing with the response time will contribute to careful policy-making; or
  • during the response time, one or more other response measures are activated which, in nature, purpose and scope, correspond to the response time, and these measures have not been terminated or suspended within a reasonable period following a written request to that effect from the shareholders concerned.

The third ground aims to avoid an accumulation of active response measures. It will ultimately be up to the court to decide what qualifies as a response measure and whether the decision to invoke another response measure is incompatible with the statutory response time.

Management board’s authority to determine the strategy enshrined in law

Although the bill focuses on the right to invoke a response time, it also contains another important element for Dutch listed companies, as it codifies the management board’s authority to determine the company’s strategy. This statutory primacy is expected to allow a stronger focus by the management board on long-term value creation and leaves more room for a broader stakeholder approach.

Practical impact

The statutory response time widens the management board’s range of possible actions when confronted with specific shareholder activism or an unsolicited public offer. It allows boards to stabilise the situation and to take more time to weigh the interests of the company and all those concerned with it, engage with stakeholders, and explore alternatives. In practice, we expect the response time mainly to add value in situations where shareholders seek a change in the board’s composition, and to have a predominantly symbolic effect in unsolicited public offer situations. The mere option for the management board to invoke a response time may shift the actual balance of powers in discussions with active shareholders or potential bidders. All in all, the bill supports the management board in its responsibility for carrying out the company’s strategy and creating long-term value, and it adds legal certainty and a clear process.

Q&As

When a new bill takes effect, this can always give rise to questions. We answer a few potential questions about the statutory response time below.

What is the difference between the statutory response time and the response time set out in best practice provisions 4.1.6 and 4.1.7 of the Dutch Corporate Governance Code (Code response time)?

  • The Code response time can be invoked for all agenda requests that may lead to a change in the company’s strategy, while the statutory response time is limited to agenda requests regarding the appointment, suspension or dismissal of a board member and related provisions in the articles of association. The statutory response time, on the other hand, can also be invoked for unsolicited public offers without any agenda requests being made.
  • The Code response time does not allow the requested item to be put on the general meeting agenda (either as a voting or a discussion item), while the statutory response time allows the item to be discussed at a general meeting, but not to be voted on.
  • The Code response time is shorter: 180 days compared to 250 days of statutory response time.
  • The Code response time ceases to apply when a shareholder holds at least 75% of the issued capital as a consequence of a successful public offer. The statutory response time ends when the public offer is declared unconditional.

Will there be a conflict of interest when invoking the statutory response time?

A board member will not automatically have a conflict of interest when invoking the response time in relation to a shareholder request to suspend or dismiss a board member. But the question does arise for each board member whether he/she can serve the company’s interests in an unbiased manner when participating in the discussions and the decision-making process (regarding the statutory response time being invoked). This will need to be carefully considered at the time that board(s) consider(s) invoking the response time.

Can a company waive the right to invoke the statutory response time?

The articles of association of a company can include the so-called “no frustration rule”, which stipulates that the boards must refrain from actions that may frustrate the successful pursuit of a public offer, unless those actions are approved by the general meeting. In such case, the company cannot invoke the statutory response time. Companies cannot include a waiver of the right to invoke the response time in their articles of association, as the response time is a mandatory power of the management board.

Will invoking the response time be the only measure a management board can take in the above situations?

The response time is additional to other statutory powers and responsibilities of the management board, and there is also the possibility of activating company-specific response measures. The best strategy to pursue requires a thorough assessment of the given situation and the response measures available.

If you have any further questions about the bill, please reach out to your De Brauw client team or to one of our corporate advisory experts.

Two related motions

Although not directly related to the contents of the bill, two motions were accepted during the parliamentary proceedings:

  • a motion asking the government to explore restrictions on financial incentives for executives when they agree to a merger or takeover (afroomregeling); and
  • a motion asking the government to draw up a proposal to discourage quarterly reports by listed companies and to promote loyalty shares.

New developments in the context of these motions can be expected. We will of course keep you informed on these.