Public mergers and acquisitions

Author: | Published: 8 Apr 2002
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The Netherlands' legal landscape is subject to continuing change. Corporate governance, notably in listed companies, is in the spotlight. Traditionally, The Netherlands has a consensus-driven governance model (also known as the Dutch Polder Model) whereby all stakeholders' interests are represented in one way or the other. Hostile bids, until a few years ago, seldom occurred. However, the battle for control over Gucci, the struggle surrounding the strategic direction of international dredging and building conglomerate HBG, and the takeover of Rodamco North America (all Dutch listed companies) are evidence of a toughening market place. It is clear that corporate litigation in this context has rapidly become a critical element of doing transactions involving listed companies in The Netherlands.

This is owing to a number of factors. First, The Netherlands is one of the countries where listed companies have the opportunity to introduce far-reaching protective measures against takeovers. Second, there is, in contrast to many other jurisdictions, no mandatory public bid requirement once the bidder has acquired a certain percentage of shares. Thus, the Enterprise Chamber of the Amsterdam Court of Appeal (specifically entrusted with litigation between shareholders and companies) has become the venue where takeover battles are fought.

While the market is changing at the corporate level, the legislator is following suit on the regulatory front, as is evident from changes in the status and scope of application of the public offering rules. Further, corporate governance is the subject of a number of legislative proposals which have as a common denominator that shareholder value is increasingly a key factor.

We highlight below a few issues which we find are of importance in the context of these developments.

The offering rules

The offering rules applicable to public bids on companies listed at the Amsterdam Stock Exchange (Euronext) were until recently included in Chapter I of the Merger Code of the Socio-Economic Council (the offering rules). The offering rules did not have the status of binding legislation. However, since September 5 2001 the offering rules have been transferred to the Securities Transactions Supervision Act 1995 (Securities Act). Although the legislator departed from the premise that the transfer of the offering rules to the Securities Act should not have significant procedural consequences for the day-to-day practice, some important changes have occurred. Moreover, the supervision on compliance with the offering rules has moved from the Committee for Merger Affairs (established by the Socio-Economic Council) to the Securities Board of The Netherlands, recently renamed the Financial Markets Authority (Autoriteit Financiële Markten). Extensive legal powers have been granted to the Authority. Below, we will address some of the changes which have been made to the offering rules in connection with the transfer to the Securities Act as well as the powers of the Authority.

Two-tier structure, large company regime

In Dutch corporate law, it is mandatory for companies to have a management board to which the day-to-day management responsibilities are entrusted and, optionally, a supervisory board may be installed. A supervisory board will especially advise and supervise the management board but not engage in executive functions. However, if in The Netherlands a company grows to a particular size it is mandatory to set up a supervisory board in accordance with the so-called large company regime.

In summary (i) if the issued capital plus reserves are equal to or greater than €13 million, (ii) the company (or a group company) has set up a works council, and (iii) the company including its group companies employs at least 100 people in The Netherlands, the company has the obligation to register with the trade register that it meets the criteria for the large company regime. Upon registration for a consecutive period of three years the large company regime shall take effect.

This regime provides that the supervisory board (instead of the general meeting of shareholders) is entitled to suspend and dismiss each managing director. Moreover, the supervisory board, and not the general meeting of shareholders, is charged with the right to adopt the annual accounts. Also, a number of decisions of the management board are subject to the approval of the supervisory board. These decisions include issues that relate to the company structure, its existence, material transactions and/or any issue that may have significant consequences for the employees of the company.

The large company regime effectively functions as a protective measure in (public) companies since it limits the voting power of the shareholders. Recently, a proposal to amend the large company regime has been submitted to the Dutch Parliament. This proposal for new legislation will be discussed below.

Protective measures

In The Netherlands companies can be protected against hostile takeovers by a variety of protective measures. This is a feature of Dutch law not found in many other European jurisdictions. A large number of Dutch companies have protective measures. Most notably companies can provide in their articles of association that depository receipts can be issued. Generally, the shares in the companies will then be held by a foundation. The foundation issues depository receipts. These depository receipts are listed at Euronext Amsterdam and give a right to all economic benefits, such as dividend distributions. However, the voting rights remain with the shareholder, the foundation. The issue of depository receipts is usually combined with a so-called x-per cent rule under which depository receipts can only be exchanged against a limited number of shares, say 1% in the share capital of the company.

Furthermore, a company can, as a protective measure, issue preference shares. Preference shares provide a preferred right to dividend distributions although usually limited to a certain percentage, for example 6% of the nominal capital per year. More importantly, preference shares can be issued in case of a contemplated hostile takeover bid. The shares are then issued to a special purpose foundation. This is usually structured in such a way that the managing or supervisory board has a standing authority (renewed on a yearly basis) to issue shares in the company (a power which is usually vested in the shareholders meeting), and that the foundation can exercise a call option on the preference shares in certain circumstances. If the board of the foundation is clearly independent (ie the members can be distinguished from the company, its management and supervisory board), 100% of the outstanding share capital can be issued as preference shares to the foundation. If the board is not independent, for instance if the members also have a seat in the supervisory board, then only the equivalent of 50% of the outstanding share capital can be issued to the foundation. The foundation finances the preference shares by taking out a bank loan and the interest on the loan is discharged out of the preferred dividend distribution. Preference shares only have to be paid up for 25% of the nominal value of the shares so this reduces the funding requirements considerably.

A company can also issue priority shares which provide the shareholders with specific voting rights set out in the articles of association. Most notably, this pertains to the right to submit a binding proposal for the appointment of the management board.

There is a variety of other protective measures and comparable structures which can be implemented by a company. A company could issue two classes of shares with different nominal values, however, with similar economic rights and obligations. Under Dutch law voting rights depend on the nominal value of the shares. Consequently, by issuing a class of shares with a high nominal value, control can be exercised by a party holding a small number of these shares.

Finally, a so-called twin structure is sometimes used by companies (such as Heineken). Thereby the shares of two companies, a holding and sub-holding company, are listed at Euronext. If the holding and sub-holding company each list say 49.9% of their shares, then maximum liquidity is realised, while through the 50.1% shareholding in the holding company control is effectively retained.

A proposal has been sent to the Dutch Parliament providing rules for setting aside protective measures. This proposal for new legislation will also be dealt with below.

In respect of public takeovers and the introduction of protective measures the 13th EC Directive continues to play a role. However, despite the recently issued Report of the High Level Company Experts of January 10 2002, which aims to resolve certain objections made against the draft Directive (primarily by Germany), there is at this stage uncertainty as to when (and perhaps even whether) the Directive will be implemented. In this contribution we will therefore not address the consequences of the 13th EC Directive.

Changes in the offering rules

The transfer of the offering rules to the Securities Act involves, first, that supervision over the compliance with the offering rules is brought within the ambit of the Financial Markets Authority and, second, some changes to the substance of the offering rules.

Supervisory authority

By the transfer of the offering rules to the Securities Act, the Financial Markets Authority is now charged with the supervision of securities transactions, including the supervision of public bids. As a result, the Financial Markets Authority shall be the focal point as to questions regarding the interpretation of the offering rules. In addition, offerers and target companies requesting certain exemptions from obligations imposed under the Securities Act must contact the Financial Markets Authority. The offerer and target are obliged to provide the authority, upon request, all information which, in the discretion of the authority, is reasonably required to determine whether the offering rules are complied with. The Financial Markets Authority is, for example, authorized to enter the (business) premises of either the target or the offerer to obtain any information or documentation it deems appropriate. In addition, the Financial Markets Authority can instruct the offerer or the target company to follow a particular line of conduct. This instruction can either take the form of an order or a sanction. The offering rules are essentially not only directed at the offerer and the target company but also to their managers and directors and consequently the instructions given extend to these managers and directors as well. Any cost relating to carrying out inspections can be recovered by the authority from the offerer. If the offerer or target company would require an exemption the Financial Markets Authority may charge separate costs to the applicant of such an exemption. Any amount levied is variable and depends on the exemption which is requested.

The Financial Markets Authority has, pursuant to the Securities Act, a range of opportunities to impose sanctions. First of all, a violation of the offering rules is an economic offence. Accordingly, punitive measures may be taken. The public prosecutor is charged with investigating and prosecuting such economic offences. Alternatively, the Financial Markets Authority may in case of a violation of the offering rules impose a penalty under administrative law. Although the penalty may strictly speaking be unlimited, the principle of proportionality shall apply.

As outlined above, the Financial Markets Authority is also authorized to order the offerer or the target to adhere to a particular line of conduct. The Financial Markets Authority may further decide to publish any instruction given to either of these parties.

The Financial Markets Authority will usually announce its decision to a relevant party in writing. Any such decision (if it qualifies as a formal decision) will allow a party to appeal against the decision with the Trade and Industry Appeals Tribunal. The decision of the tribunal is final. No further appeal is available. Not only can the addressee of a decision of the authority initiate an appeal with the Trade and Industry Appeals Tribunal but also other interested parties. These interested parties could even file an appeal if the Financial Markets Authority, despite a request, refuses to give instructions to the offerer or the target.

Now that the offering rules form part of the Securities Act, any violation may, if a tort is committed, also give rise to an obligation to pay damages.

Clearly, it follows that parties involved in a public bid may be affected by the extensive decision-making powers of the Financial Markets Authority, and it may be expected that case law will develop as a result.

Substance of the offering rules

As previously noted, the legislator took the opportunity to extend the scope of the application of the offering rules.

The language of the offering rules has been brought, as much as possible, in keeping with the existing framework of the Securities Act. Consequently, the offering rules now apply to public offers made on securities as defined in the Securities Act. Previously, the scope of application of the offering rules was limited to public offers on (depository receipts issued in respect of) shares in a listed company. Now, however, the offering rules extend to any public offer on securities to which a (possible) voting right is associated and also to non-exchangeable depository receipts for shares. This means, that in contrast to the past, the offering rules should also be observed in case of a public offer on (for instance) convertible bonds. However, an exemption applies to offering rules for offers made by companies on their own securities regardless of the type of securities. Moreover, all parties involved in a public bid are bound by the offering rules and the offering rules also apply to foreign offerers.

Previously, the offering rules only applied to a public offer on shares of a Dutch listed company. Under the Securities Act the nationality of the target company is no longer relevant. The offering rules apply if the securities are quoted on a stock exchange in The Netherlands or are regularly traded in this country. The offering rules consequently apply to a public offer made on securities that were issued by a foreign entity and are quoted on the Euronext or are regularly traded in The Netherlands. The offerer can apply for an exemption to comply with certain offering rules with the Financial Markets Authority.

The offerer (and the target company) have the obligation to send, in advance, all relevant documentation in respect of the public offer to the Financial Markets Authority and thereby disclose any announcements that will be made. The offering circular should be sent to the Financial Markets Authority at least 10 trading days before the announcement of making the circular available.

The offerer shall not be at liberty to acquire the securities of the type to which the public bid applied on more favourable conditions than the terms of the public bid. This sanction applies for a period of three years as from the date on which the offer document was made available. A number of transactions are exempt from this sanction including the acquisition of securities in ordinary stock exchange trading.

Although some substantive changes have already been introduced, the Dutch legislator has indicated that further changes to the offering rules may be implemented in the near future. It is expected that stricter rules will apply.

Changes to the large company regime

On January 8 2002 a proposal for amending the Dutch company regime has been submitted to the Dutch Parliament. The changes proposed can in summary be distinguished in the following categories:

  • the appointment and discharge of the supervisory board members;
  • the powers of the supervisory board as opposed to the general meeting of shareholders; and
  • the extended rights of shareholders and holders of depository receipts.

The large company regime is in itself not set aside by the proposed legislation. If the criteria set out above are satisfied a company continues to be obliged to install a supervisory board.

The appointment and the discharge of supervisory board members

Under the large company regime which is in force, supervisory board members are appointed by way of co-optation (ie by the members of the board themselves). Under the new legislation the following steps as to the appointment of the supervisory board members should be taken into consideration.

The supervisory board notifies the general meeting of shareholders and the works council of any vacancy on the board, at least two months in advance. The works council shall have a special right of recommendation. For at least a third of the number of members of the supervisory board the works council shall have the right to require from the board that candidates recommended by the council are included in the proposal for the vacancy. If no agreement between the supervisory board and the works council is reached, the enterprise chamber shall make a decision as to the recommended candidate for the vacancy. The general meeting of shareholders can set aside the candidate proposed by the supervisory board with two-thirds of the votes, representing at least one-third of the outstanding share capital. Then the supervisory board is obliged to re-start the procedure for proposing the candidates for the vacancy in the supervisory board.

The general meeting of shareholders can transfer its rights in respect of the appointment of supervisory board members to a committee of shareholders for the duration of a maximum of two years. If such a committee is installed the supervisory board shall enable the committee to make a recommendation for candidates for any vacancy.

The general meeting of shareholders can dismiss the supervisory board as a whole with a two-thirds majority of the votes, representing at least one-third of the outstanding share capital. Any resolution must be motivated and can only be adopted if the contemplated dismissal is included in the agenda of the general shareholders meeting. The resolution can furthermore only be adopted if the management board and the works council have been duly notified of the intention to dismiss the supervisory board. The works council should be notified at least 30 days before the shareholders meeting. If the supervisory board is dismissed this takes immediate effect and the management board must then request the enterprise chamber to appoint temporary supervisory board members. This temporary supervisory board will ensure that a new supervisory board is formed in accordance with the rules.

The powers of the supervisory board

Under the present large company regime a number of decisions are subject to the approval of the supervisory board. In the new legislation the general meeting of shareholders will have the right of approval in respect of any management board decisions which, in summary, affects the identity or the character of the company, including but not limited to either the execution or termination of material long-term cooperations, such as joint ventures, as well as the acquisition or divestment of assets representing at least one-third of the net equity value of the company on a consolidated basis. If the approval of the general meeting of shareholders has not been obtained the transaction will not be null or void. Third parties are protected, even though the internal approvals have not been duly, timely or properly, obtained.

Furthermore, in contrast with the existing large company regime, the general shareholders meeting will have the exclusive right to adopt the annual accounts, and the articles of association may not provide that the adoption of the annual accounts is subject to the approval of the supervisory board (or any other corporate body).

These changes are examples of the increased focus on the role of shareholders in Dutch companies. The protective element attached to the large company regime is evidently reduced.

Extended rights of shareholders and of holders of depository receipts

Shareholders acting alone or in concert and representing at least 1% of the outstanding share capital or representing a market value of €50 million (in companies listed at Euronext) have the right to demand that certain issues are included in the agenda for the general shareholders meeting. Currently, the relevant threshold is still at 10% of the issued outstanding share capital. The demand must be made in writing and at least 60 days before the shareholders meeting, although the articles of association of the company may provide for a shorter period, however, not less than 30 days.

Holders of depository receipts do not, under the present legislation, have any voting rights (even if the company has co-operated in the issuance of such depository receipts). Under the new legislation the depository receipt holders can demand from the shareholder a power of attorney to cast a vote at the general meeting of shareholders. The power of attorney will only be applicable to the forthcoming meeting of shareholders. This does not mean that the position of the holders of depository receipts becomes identical to the position of the shareholder. The shareholder may refuse to provide a power of attorney to the depository receipt holder if:

  • a public offer has been made or is being prepared in which respect no agreement has been reached with the company;
  • one or more depository receipt holders acting in concert represent at least 25% of the capital of the company;
  • the shareholder which is requested to grant the power of attorney is of the opinion that the depository receipt holder will cast a vote which will substantially be against the best interest of the company.

The shareholder must however grant a power of attorney to the depository receipt holder, regardless of the above referred limitations, if the majority of the board of the foundation holding the shares comprise (former) members of the management or supervisory board or is in any other way not independent.

Protective measures

Already in 1997 a proposal for new legislation providing rules for setting aside protective measures was submitted to the Dutch Parliament. In 2000 further investigation was carried out into whether this proposal should be amended in view of the 13th EC Directive. Although this investigation confirmed that the legislation could be adopted, there is still discussion pending. Particularly, now that there is uncertainty over if and when the 13th EC Directive will be implemented, it is in doubt whether the legislation is likely to proceed.

The most essential elements of the legislation are the following.

If a party, during a period of one year provides and has entered into a dialogue with the target 70% of the outstanding capital, this party may request the enterprise chamber to set aside certain protective measures of the company. In calculating the 70% capital certain shares are disregarded. Essentially, shares either paid up in full or only in part, such as, for example, preference shares, shall be disregarded in the calculation of the 70% if the shares were issued with the aim of protecting the company against takeovers. If there is any discussion over whether the 70% criterion is satisfied, the enterprise chamber can be requested to give a binding decision.

The enterprise chamber can, at the request of the 70% capital provider, give an order that certain protective measures are set aside. This may, inter alia, mean that preference shares should either be withdrawn or transferred to the 70% majority shareholder, the supervisory board should resign, priority shares should be withdrawn or transferred and depository receipts should be exchanged against ordinary voting shares.

Any request for setting aside protective measures which restrict a capital provider from exercising influence on the composition of the management board and the supervisory board can only be dismissed if it is shown by the company that the intentions of the majority shareholders are substantially against the interests of the company.

Furthermore, the enterprise chamber may attach certain conditions to setting aside protective measures. It could for example be required that a public bid on the remaining outstanding share capital is issued. The equitable price for any such offer can be determined by the enterprise chamber after having obtained expert advice.


The regulatory legislation relating to public bids gives extensive powers to the Financial Market Authority, allowing a series of measures against offerers and target companies if the offering rules are violated. The new draft legislation on the large company regime and on setting aside protective measures confirms a trend whereby existing governance structures granting protection to management and supervisory boards are exchanged by a tougher shareholders' value approach. Whether, indeed, shareholders' value will prevail remains to be seen. However, it is clear from day-to-day practice that the impact of this concept can no longer be negated.

Loyens & Loeff
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Loyens & Loeff
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