First ruling on the clash between shareholder rights to include agenda items for shareholders’ meetings and the right of the board to invoke a response time when its strategy is under attack
On 6 September 2013 the Enterprise Chamber of the Amsterdam Court of Appeal ("Enterprise Chamber") issued a decision which affects the balance of power between the shareholders and the board of listed companies. The Enterprise Chamber:
- upheld the response time stipulated by the board under the Dutch Corporate Governance Code (the "Code");
- ruled that the response time is not inconsistent with the right of shareholders to include items on the agenda or convene a shareholders' meeting under the Dutch Civil Code ("DCC");
- and, as a consequence, effectively held that the Code may override the DCC.
The Cryo-Save Group/Amar decision of the Enterprise Chamber is discussed in this legal alert.
2. The right to include items on the agenda of the shareholders' meeting
The DCC allows a shareholder to include items on the agenda of the next shareholders meeting if (i) the shareholder alone, or jointly with other shareholders, represents no less than three per cent of the issued capital, (ii) the request is made no later than 60 days before the relevant shareholders meeting and (iii) the rationale and substance of the request is adequately explained (section 2:114a DCC).
Shareholders can also be given the power to convene a shareholders meeting in the articles of association (section 2:109 DCC) or – under certain circumstances – be authorized by the court to convene a shareholders' meeting (section 2:110 DCC).
Although the rights of shareholders to convene a meeting or include items on the agenda of the shareholders' meeting are therefore clearly provided for by Dutch legislation, there was an open question as to what extent the shareholders of listed companies would be able to exercise these rights if the agenda item proposed to be included could result in a change of the company's strategy. This uncertainty was created by certain best practice rules in the Code.
3. The Corporate Governance Code
The Code contains principles and best practice provisions that regulate the relations between the management board, the supervisory board (if any) and the shareholders of listed companies, based on the "comply or explain" principle. The Dutch Supreme Court has confirmed that the Code reflects legal principles prevailing in the Netherlands.
Best practice rules II 1.9 and IV 4.4 of the Code provide that in response to a shareholder's request to put an item on the agenda of a shareholders' meeting, the board shall be given the opportunity to stipulate a reasonable period in which to respond (“the response time”) if the agenda item may result in a change in the company’s strategy. The maximum response time that the board may stipulate is 180 calendar days. The board must use this time for "further deliberation and constructive consultation" and to explore possible alternatives.
Because the Code explicitly states that "[t]he shareholder shall respect the response time" (IV.4.4) it appears that a shareholder is not allowed to exercise its right under 2:114a DCC or 2:109/2:110 DCC to the extent that such exercise is incompatible with the stipulated response time.
It was unclear how Dutch courts would deal with the tension between, on the one hand, the rights of shareholders under the DCC and, on the other hand, the right of the board to stipulate a response time under the Code.
4. The decision by the Enterprise Chamber
The Cryo-Save/Amar case allowed the Enterprise Chamber to consider for the first time the relationship between the response time and the statutory rights of shareholders.
The Enterprise Chamber held that the response time is not at odds with the right of shareholders to put items on the agenda or their right to convene shareholders' meetings. In the Enterprise Chamber's view, the best practices rules do not deprive shareholders of any rights: they merely elaborate how the shareholders can use their rights while adhering to the general duty to act in accordance with the principle of reasonableness and fairness that must be observed by and among the company, its corporate bodies and its shareholders (section 2:8 DCC). According to the decision, the following tests apply:
- The board has to show that there is a valid reason to assume that a requested agenda item may lead to a change of the company's strategy and that additional time is therefore necessary to deliberate and consult.
- If requirement (1) is satisfied, the shareholder must respect the response time that has been stipulated by the board unless there are sufficiently important reasons (voldoende zwaarwegende redenen) to set aside the response time.
The decision provides some guidance on how the Enterprise Chamber may review future cases involving the response time
- The ruling confirms that a request to include the appointment of a new CEO on the agenda of the shareholders' meeting may give rise to a valid stipulation of the response time, even though such an appointment by itself does not necessarily constitute a change in strategy. This is significant, because it means that shareholder requests to add agenda items that are likely to have a future effect on strategy may also allow the board to invoke a response time. Best practice rule IV.4.4 of the Code also mentions the dismissal of one or more board members as an example of a potential strategy change.
- The decision heavily relies on the fact that the shareholder did not provide a clear response to questions regarding its intentions. This illustrates that shareholders need to carefully consider how to communicate with the board on such matters.
- Although the decision does not mention examples of circumstances that may justify that the response time be set aside, it suggests that a dire financial situation of the company may be a sufficiently important reason for doing so.
5. Remaining questions
The decision does not resolve all questions regarding the legal tension between the rights of shareholders under the DCC and the response time under the Code.
Firstly, we note that the facts of this case made it easy for the Enterprise Chamber to uphold the response time, since the shareholder's behavior did not comply with the principle of reasonableness and fairness that applies among the company’s constituents. Therefore, the Cryo-Save/Amar case does not provide a great deal of clarity on how the Enterprise Chamber will decide in cases where the shareholder has been more careful in observing the reasonableness and fairness test.
Secondly, it is still uncertain what effect the best practice rules can have if a shareholder ex ante informs the market that he will not comply with the response time. We note that various institutional investors (PGGM Vermogensbeheer B.V. and APG for example) specifically reserve their rights with respect to the response time in accordance with the "comply or explain" principle of the Code. Such ex ante deviation from the best practice rules relating to the response time may well have an impact in determining whether the response time should be respected in a specific case.
More generally, and building on the previous point, we note that there is room to criticize the legal test that has been adopted by the Enterprise Chamber. A more stringent test for stipulating a response time has been advocated in legal literature. It is possible that the Supreme Court will be called upon to determine how the statutory right of shareholders to put items on the agenda and to convene shareholders' meetings on the one hand, and the response time under the Code on the other hand, relate to each other.