Company response strategiesPreparation
What are the fiduciary duties of directors in the context of an activist proposal? Is there a different standard for considering an activist proposal compared to other board decisions?
Dutch corporate law requires all directors to be guided by the corporate interests of the company and its business in performing their duties. If the company has a business, the interests of the company generally are particularly defined by the interest of promoting the sustainable success of the company’s business (ie, a focus on long-term value creation, as also expressed in the Dutch Corporate Governance Code). Under Dutch law, there is no duty to maximise shareholder value at all costs. Instead, boards must weigh all relevant aspects and circumstances and shall consider with due care the interests of all stakeholders, including shareholders, employees, creditors and business partners. Boards have a large discretion on how to weigh the various stakeholders’ interests against each other, although the duty of care may require boards to prevent unnecessary or disproportionate harm to the interests of specific stakeholders. The (management) board is responsible for determining and implementing the strategy of the company (in a two-tier board structure: under supervision of a supervisory board).
Responding to an unsolicited approach or activist proposal seeking to change the company’s strategy (including by means of efforts to change the board composition) forms part of the company’s strategy and, as such, falls within the domain of the board. There is no shift of fiduciary duties: the directors must continue to act in the best interests of the company and its business with a view to long-term value creation, taking into account the interests of all stakeholders. Boards should ensure that they have all relevant information to make an informed decision and the proposal should be carefully reviewed, without bias, and assessed against all available alternatives. Shareholders do not have to be consulted prior to the company’s response; boards are (retrospectively) accountable to the shareholders.
Dutch case law confirms the absence of a general obligation for boards to engage with a bidder or activist to discuss the proposal. While boards may ‘just say no’, they should do so only after careful consideration of a serious proposal on its merits and boards should consider whether some form of interaction with the bidder or activist is needed to make sure the directors have all relevant information to make an informed decision.
What advice do you give companies to prepare for shareholder activism? Is shareholder activism and engagement a matter of heightened concern in the boardroom?
Although the absolute number of activist campaigns in the Netherlands is limited, the uptick in (high-profile) activist campaigns in recent years has made shareholder activism and engagement a discussion topic in the boardroom of many listed Dutch companies. No company is immune to activism and preparedness is key. While recommended advance preparations depend on the specifics of the company, a few useful preparations are:
- continuously monitoring market activity, financial performance (particularly relative to peers) and the company’s industry and competitors;
- setting up a small defence team of key directors or officers plus legal counsel, investment banker and public relations firm that meets periodically;
- ‘thinking like an activist’, routinely assessing the company’s strengths and weaknesses and its takeover defences and exploring available strategic alternatives (consider red teaming);
- building relationships and credibility with shareholders and other stakeholders before activists emerge and maintaining regular contact with major shareholders, the marketplace generally and key stakeholders; and
- communicating clearly and consistently on ESG and corporate social responsibility matters, the company’s long-term strategy, its implementation and the progress in achieving it.
What defences are available to companies to avoid being the target of shareholder activism or respond to shareholder activism?
Most listed Dutch companies have adopted one or more structural takeover defences, often in their articles of association. Examples include:
- binding nomination rights and supermajority requirements for appointment and involuntary dismissals of directors;
- staggered boards;
- evergreen call option for preference shares to an independent Dutch foundation whose purpose is to safeguard the interests of the company and its stakeholders and resist any influences that might adversely affect or threaten the company’s strategy, independence or continuity in a manner contrary to such interests, pursuant to which the foundation can effectively acquire up to 50 per cent of the votes;
- loyalty voting shares, providing for additional voting rights for ‘loyal’ shareholders;
- priority shares with certain control rights; or
- listing of depositary receipts for shares rather than the shares itself.
In addition, Dutch companies may use a variety of other tactics such as:
- engaging with the activist, which may result in some form of agreement (see question 21);
- engaging with shareholders and other stakeholders (eg, convince major shareholders with compelling long-term plans or mobilise employees, customers or politicians);
- invoking a response time under the Dutch Corporate Governance Code, pursuant to which the (management) board may stipulate a reasonable period of up to 180 days if shareholders seek to convene an EGM or put items on the agenda that may result in a change in the company’s strategy (eg, dismissal of directors) and during which the board should deliberate, consult stakeholders and explore alternatives (according to case law, such response time must be respected by shareholders absent an overriding interest);
- invoking the put-up-or-shut-up rule under the Dutch public offer rules;
- exploring strategic transactions that make the company a less desirable target;
- issuing new shares (under existing authorisations) or selling treasury shares to a friendly third party (white knight); or
- issuing bonds with a mandatory redemption at a higher value in case of a change of control (macaroni defence).
Do companies receive daily or periodic reports of proxy votes during the voting period?
It depends on the listing venue. Dutch companies with a US listing often (choose to) receive regular updates on the vote tally, especially in contested situations, consistent with market practice in the United States. Historically, this has been less so at Dutch companies with an EU listing. In recent years, the practice in the Netherlands has shifted more towards the US practice of companies receiving updates on the vote tally prior to the general meeting.Private settlements
Is it common for companies in your jurisdiction to enter into a private settlement with activists? If so, what types of arrangements are typically agreed?
While 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 reach a truce with an activist shareholder in return for, for instance, a commitment to consult the activist (and other major shareholders) on new director nominations. In case of activists with a significant shareholding, a settlement may take the form of a relationship agreement wherein the company and the shareholder agree on topics such as strategy and governance and wherein the company may give one or more (supervisory) board seats to the activist.