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Corporate Alert: The ten most important differences between the proposal and the amended Dutch Corporate Governance Code

Corporate Alert: The ten most important differences between the proposal and the amended Dutch Corporate Governance Code

Corporate Alert: The ten most important differences between the proposal and the amended Dutch Corporate Governance Code

14.12.2016 NL law

The Dutch Corporate Governance Code Monitoring Committee (the "Committee") presented the amended Dutch Corporate Governance Code (the "Code") to the Dutch Minister of Economic Affairs, mr. Kamp, on 8 December 2016.

The Code has been amended at the request of the National Federation of Christian Trade Unions in the Netherlands (CNV), Eumedion (a private sector body of representatives of institutional investors focused on corporate governance and sustainability), the Federation of Dutch Trade Unions (FNV), Euronext NV, the Association of Stockholders (VEB), the Association of Securities-Issuing Companies (VEUO) and the Confederation of Netherlands Industry and Employers (VNO-NCW). The most important changes to the Code are the focus on long-term value creation and the introduction of 'culture' as an element of good corporate governance. In addition, various updates have been made to the Code.

The consultation period for the proposal to amend the Code (the "Proposal") ran from 11 February 2016 until 6 April 2016 and yielded 107 responses to the Committee. Click here for the response submitted by Stibbe (in Dutch only). A separate consultation was held for the proposal to make the Code applicable to companies with a one-tier board. This consultation period ran from 3 August 2016 until 28 September 2016 and yielded 20 responses, including a response from Stibbe (in Dutch only). Click here for all responses to the second consultation. In its report of accountability, the Committee explained which proposed principles and best practices have been amended following the responses received in the consultation period. Stibbe has prepared a comparison between the Proposal and the final version of the amended Code.

Dutch listed companies are required to report in 2018 on compliance with the amended Code over the financial year of 2017. This is, however, subject to the condition that the amended Code will be implemented into Dutch law by the Dutch government in 2017.

This corporate alert describes the ten most important differences between the Proposal and the final version of the amended Code.

1. Adressing conduct and culture

The Proposal included provisions prescribing that consultations between the audit committee and either the internal audit function or the external auditor should also address the conduct and culture within the company and its affiliated business. These provisions are not included in the final version of the amended Code.

2. In-control statement

The Proposal required the management board members to state in the management report (het bestuursverslag) that they are 'in control' with respect to certain aspects of the internal risk management and control systems. In the final version of the amended Code, the scope of such statement is more limited in certain respects but broader in others.

The management board must provide a statement that the management report provides sufficient insight into any failings of the effectiveness of the internal risk management and control systems, but – contrary to the Proposal – this statement no longer has to confirm that these systems have worked adequately. The management board does not have to guarantee the continuity of the company for the subsequent twelve months, but must merely confirm that the management report contains such material risks and uncertainties as are relevant to the prospects for the company's continuity for the period of twelve months after the preparation of the report.

The required statement in the management report under the final version of the amended Code is broader than the provision in the Proposal in the sense that the management board must also confirm that, based on the current state of affairs, it is justified that the financial reporting is prepared on a going concern basis. This required statement and the required statement that the management report contains such material risks and uncertainties as are relevant to the prospects for the company's continuity were not included in the original Code (the "2008 Code").

3. Supervisory board member with expertise in innovation

Contrary to the Proposal, the final version of the amended Code does not include the requirement that at least one member of the supervisory board has specific expertise in technological innovation and new business models. However, the explanatory notes to the amended Code do specify that it is important that sufficient expertise is available within the management board and the supervisory board to identify in a timely manner opportunities and risks that may be associated with innovations in business models and technologies.

4. Special committee for takeovers

The Monitoring Committee has decided not to include in the amended Code the proposed provisions regarding the obligation for the supervisory board and the management board to install a special committee tasked with the preparation of the decision making in connection with a (proposed) takeover bid for the company's shares or a public bid for a business unit or a participating interest where the value of the bid exceeds the threshold referred to in section 2:107a(1)(c) of the Dutch Civil Code.

5. Conflict of interest

Similar to the 2008 Code, the basic principle in the Proposal with respect to conflicts of interest (tegenstrijdig belang) was that there are three situations in which a conflict of interest is deemed to exist. However, the final version of the amended Code only lists two situations in which a conflict of interest may exist. This is the case if the company intends to enter into a transaction with a legal entity:

(I) in which a member of the management board or the supervisory board personally has a material financial interest; or

(II) which has a member of the management board or the supervisory board who is related by family ties to a member of the management board or the supervisory board of the company.

The 2008 Code also included a third situation which stated that a conflict of interest exists when the company enters into a transaction with a legal entity in which a member of the management board or supervisory board of the company holds a management or supervisory position. The final version of the amended Code does not include this third situation, neither as a situation in which a conflict of interest is deemed to exist nor as a situation in which a conflict of interest may exist. However, it should be noted that the Committee still appears to believe that this situation may constitute a conflict of interest (Dutch term used: belangenverstrengeling) and should therefore be avoided. In this context, the Dutch legal term belangenverstrengeling may be considered to have a broader scope than the more generally used Dutch term for conflict of interest: tegenstrijdig belang.

6. Remuneration management board members

The Monitoring Committee has reconsidered its intention to drastically reduce the obligations regarding the public disclosure of the remuneration of members of the management board. Certain provisions from the 2008 Code that were deleted in the Proposal have been re-inserted in the final version of the amended Code as items that must be included in the remuneration report. This concerns, for example, the disclosure of the scenario analyses that have been taken into consideration in establishing the remuneration. In addition, the remuneration report must describe the pay ratios within the company and its affiliated business and, if applicable, any changes in these ratios in comparison with the previous financial year. However, on balance, the chapter on remuneration in the amended Code is significantly less detailed than it was in the 2008 Code.

7. Remuneration supervisory board members

An aspect that stands out is that, contrary to the Proposal, the Monitoring Committee has decided not to allow members of the supervisory board, in certain circumstances, to be awarded remuneration in the form of shares and/or rights to shares.

8. Right to put items on the agenda and response time

The provisions regarding a shareholder's right to put items on the agenda for the general meeting and the possibility for the management board to invoke a response time have been amended in the final version of the amended Code in comparison to the Proposal.

The final version of the amended Code reintroduces the provision that a shareholder can only exercise the right to put items on the agenda after he has consulted with the management board. If one or more shareholders intend to request that an item be put on the agenda that may result in a change in the company's strategy, the management board should be given the opportunity to invoke a reasonable period in which to respond (the response time). The amended Code explicitly gives the dismissal of one or several members of the management board or supervisory board as an example, which is similar to the 2008 Code. The final version of the amended Code does not include the Proposal's provision that a change in the company's strategy means a resolution of the management board regarding an important change in the identity or character of the company and the affiliated business which is subject to approval by the general meeting under section 2:107a of the Dutch Civil Code.

The only change in the final version of the amended Code in comparison to the 2008 Code is that at the end of the response time, the management board should report to the general meeting on its consultation with the relevant shareholder.

9. Availability of information in english

The final version of the amended Code does not include the Proposal's best practice provision that information must be provided to the general meeting in English, and may, in addition, be provided in Dutch.

10.Depositary receipts for shares

In the Proposal, the Committee contemplated allowing the issuance of depositary receipts for shares as an anti-takeover protective measure (beschermingsmaatregel), provided that such issuance would serve the long-term value creation of the company and its affiliated business. However, the final version of the amended Code does not contain this provision.

The amended Code recognizes that issuance of depositary receipts for shares can be used to prevent an accidental majority of shareholders from controlling the decision-making process as a result of absenteeism at a general meeting. However, depositary receipts should not be issued as an anti-takeover protective measure. The board of the trust office (het administratiekantoor) should under all circumstances and without limitations issue voting proxies to all depositary receipt holders upon request.

By not including the Proposal's amendments, the provisions in the final version of the amended Code regarding depositary receipts are similar to the 2008 Code provisions. The final version of the amended Code only deviates from the 2008 Code in respect of the maximum appointment period for board members of the trust office. The 2008 Code prescribed a maximum of three four-year terms, whereas the final version of the amended Code prescribes a maximum of two four-year terms, followed by a maximum of another two two-year terms. In the event of a reappointment after an eight-year period requires a  motivation in the report of the board of the trust office.

Please contact one of the Stibbe contact persons for more information.

Team

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