On 13 November 2012 the upper house of the Dutch parliament passed the Corporate Governance Act. The Act is expected to enter into force on 1 July 2013. The purpose of the Act is to strengthen the corporate governance of listed companies by curbing shareholder activism and promoting dialogue between shareholders and the management board. The Act contains the following changes to the rules on corporate governance:
- The threshold for the right of shareholders of both listed and unlisted public limited liability companies ('NVs') to have items placed on the agenda of the general meeting of shareholders will be raised: in future only shareholders who have a holding of 3% or more will have this right. The current limit is 1%. Under the Act the present alternative requirement of a € 50 million shareholding in the case of listed companies is also to be abolished.
- A new lower minimum threshold of 3% is introduced for the disclosure of capital interests and/or voting rights in a listed company.
- In future, an investor in a listed company will be required to disclose not only his capital interests and/or voting rights but also his gross short positions.
- An arrangement is introduced enabling listed companies to trace the identity of their 'ultimate investors'. In addition to information on the investors' identity, the company will also be able to obtain information about their individual positions. To safeguard the privacy of small investors, the company’s right to access information will be restricted to shareholders with an interest of at least 0.5%.
The Act was introduced in 2009 following recommendations of the Corporate Governance Monitoring Committee in May 2007. The recommendations were a direct consequence of the acquisition of ABN AMRO by a consortium of three banks, which occurred following an activist campaign by hedge fund TCI, which held only about 2% of the shares. The main aim of the recommendations was therefore to curb shareholder activism and promote cooperation between shareholders and the management board.
The Act reflects this aim, although fairly far-reaching amendments were made while it was under consideration by the lower house of parliament. For example, the controversial requirement of strategy and intention disclosure was dropped. Under this requirement, the company would have been obliged to publish its strategy on its website, and shareholders who had a duty to disclose capital interests and/or voting rights would have had to indicate whether or not they objected to this strategy. The Monitoring Committee itself retracted this recommendation when it updated the Corporate Governance Code at the end of 2008. The lower house also considered that the provision would not be effective and would merely result in polarisation, partly because it wrongly gives the impression that shareholders have control over corporate strategy. Since the judgment of the Dutch Supreme Court in the ASMI case, it has been clear that primary responsibility for determining a company’s strategy and policy lies with the management board of the company. On this subject see our newsletter of 6 August 2010.
Higher threshold for placing items on shareholders' meeting agenda
The Act raises the shareholding threshold for the right to have items placed on the agenda of the general meeting of shareholders from 1% to 3%. This right, known as the 'agenda right', may also be exercised jointly by a group of shareholders, provided they represent at least 3% of the issued capital. The provision relates to both listed and unlisted NVs. The alternative shareholding threshold of € 50 million, which applies to shareholders of listed NVs, is to be abolished. These changes will substantially restrict the right of shareholders to have items placed on the agenda of the general meeting of shareholders. However, an NV may provide in its articles of association for a lower threshold for the exercise of this agenda right.
Introduction of lower threshold for the disclosure of capital interests
At present an investor in a listed NV is obliged to notify the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten) if the total capital interest and/or voting rights which he holds (or is deemed to hold) reaches or crosses (in an upward or downward direction) certain thresholds. The present thresholds are 5, 10, 15, 20, 25, 30, 40, 50, 60, 75 and 95%. The Bill adds a new lowest threshold of 3% on the grounds that this would be more in line with what is customary elsewhere in Europe and with the increase in the threshold for the 'agenda right' referred to above.
Obligation to disclose gross short positions
In addition to this lower threshold for the disclosure of capital interests, i.e. gross long positions (whose value appreciates if the share price rises), the Act introduces an obligation to disclose gross short positions (whose value moves in the opposite direction to the share price). The same disclosure thresholds as referred to above will apply here. The aim of this new disclosure obligation is to increase transparency in relation to the actual net economic interest of the holder of a significant long position, who may also possibly have taken a short position in the same listed company. At the same time, this will help to shed more light on 'empty voting', i.e. voting by a person who is legally entitled to exercise the voting rights in the general meeting of shareholders but has little or no corresponding economic interest.
This new disclosure obligation was added to the Act by amendment at the very last moment during the plenary debate in the lower house of parliament. The explanatory note to the amendment gives the example of an investor who has acquired a 4% shareholding, but also holds a short position of 3.99%. Such an investor will exercise his voting rights on the basis of, on balance, a very limited economic interest. The new obligation does not seem to be properly thought through in all respects. For example, in view of the rationale for the amendment, it is hard to see why a holder of 3.1% of the shares need not disclose a short position of 2.9% whereas a holder of 3.3% of the shares must disclose a short position of 3.1%.
Identification of shareholders
The Act contains a complex arrangement enabling listed companies to trace the identity of their 'ultimate investors'. This will apply to Dutch listed companies and foreign companies with a listing on a Dutch stock market or multilateral trading facility.
In brief, the procedure takes the following form:
Identification request: in the run-up to its annual or extraordinary general meeting of shareholders, a company may request Euroclear Netherlands and its member institutions and other intermediaries to provide the names and addresses of those investors for whom they administer shares (or depositary receipts for shares) together with details of their positions. The idea is that the company can proceed through the entire chain of custody until the last link, the investor, is identified. In addition, one or more shareholders who, either alone or together, have a capital interest of at least 10% have the right to request the company to institute an identification procedure. The procedure can only be used to identify investors with an interest of at least 0.5%. This limitation is intended to protect the privacy of small investors.
Procedure and sanctions: the company must submit the request within 60 days before the general meeting. The bank or other institution to which the identification request is made must reply within three working days and, if possible, supply the requested information. If no reply is forthcoming, the company may apply to a district court for an order directing compliance. Initially the Act included a sanction for non-compliance - a three-year suspension of the voting rights on the relevant shares - but this has been dropped. The provision for the reimbursement of costs has also been dropped.
Duty of secrecy: the company has an obligation to keep the information obtained secret and to handle it with due care. The company must also organise the information in such a way as to ensure that it is protected from loss and unlawful processing.
Passing on of information
An investor who, either alone or together with other shareholders, holds at least 1% of the shares or holds shares or depositary receipts for shares with a market value of at least € 250,000 will have the right to request the company to pass on certain information to the other shareholders. The information must be connected with an item that is on the agenda of the general meeting. The company must send the information or post it on the company's website with the utmost speed, in any event within three working days. A company that decides to send the information must also post it on its website. The company is not obliged to accede to such requests in all circumstances. If the information is supplied too late or gives an incorrect or misleading impression, the company may refuse to pass it on. This also applies if the information is of such a nature that it would not be reasonable or fair to expect the company to pass it on. Examples mentioned in the explanatory memorandum to the Act are offensive criticism or unduly large documents.
Transitional law: practical aspects
The rules described above will apply from the date on which the legislation enters into force (expected on 1 July 2013). An exception is the increase in the threshold for the agenda right, which will not apply in so far as an agenda item (requested by a shareholder with an interest of less than 3%) has already been included in the notice calling the general meeting.
Of greater importance in practice is that the higher threshold for the agenda right will not apply in so far as the present lower threshold of 1% is still explicitly included in the company’s articles of association after the entry into force of the legislation. The articles of association will therefore have to be altered in this respect if the company wishes to apply the higher threshold.
Finally, the Act provides that shareholders who are obliged to disclose their capital interests and/or voting rights as a result of the introduction of the new 3% threshold will have four weeks within which to do so after the date of its entry into force.