Dutch cooling-off period in face of shareholder activism or hostile take-over

On December 7, 2018, the Dutch government published draft legislation aimed at promoting a careful decision-making process in case of shareholder activism or a hostile takeover. If enacted in its current form, the proposal would introduce a statutory cooling-off period of up to 250 days during which the shareholders meeting would not be able to dismiss, suspend or appoint board members of a listed Dutch company under attack.

Scope

The legislation would apply to companies organized under Dutch law whose shares (or depository receipts for shares) are listed on a regulated market or multilateral trading facility operating in the European Economic Area, or on any similar stock exchange operating outside the European Economic Area, including Nasdaq and NYSE.

Conditions to invoke the cooling-off period

The board of a listed Dutch company under attack may invoke a cooling-off period of up to 250 days in case:

1. shareholders, using either their shareholder proposal right or their right to request an extraordinary shareholders meeting[1], propose an agenda item for the shareholders meeting relating to the dismissal, suspension or appointment of a board member (or an amendment of any provision in the company’s articles dealing with those matters); or
2. a public offer for the company is made or announced without the company’s support, provided, in each case, that such proposal or offer materially conflicts with the interests of the company and its business, as determined by the board.

The cooling-off period ends at occurrence of the earliest of the following events:

1. the expiration of 250 days following the date of the relevant shareholder proposal or hostile offer;
2. the hostile offer being declared unconditional (after the expiration of the initial acceptance period); or
3. the board (voluntarily) terminating the cooling-off period.

Effects of the cooling-off period

During the cooling-off period, the shareholders meeting cannot validly resolve on the dismissal, suspension or appointment of a board member (or an amendment of any provision in the company’s articles dealing with those matters), unless proposed by the board itself.

Judiciary review

Shareholders representing 3% or more of the issued share capital may request the Enterprise Chamber of the Amsterdam Court of Appeal for early termination of the cooling-off period. The Enterprise Chamber must deny the request if the board, in view of the circumstances at the time the cooling-off period was invoked, could reasonably have come to the conclusion that the relevant shareholder proposal or hostile offer constituted a material conflict with the interests of the company and its business.

Consultation and transparency

During the cooling-off period, the board must gather all relevant information necessary for a careful decision-making process. In this context, the board must also consult with relevant stakeholders, including shareholders representing 3% or more of the issued share capital. Formal statements expressed by these stakeholders during such consultations must be shared with other stakeholders who are consulted by the board. Ultimately at the end of the cooling-off period, the board must publish a report in respect of its policy and conduct of affairs during the cooling-off period. This report should be tabled for discussion at the next shareholders meeting.

Combination with protective measures and/or existing response period

In an explanatory note, the Government indicates that it is opposed to accumulation of the cooling-off period with protective measures and/or the existing response period under the Dutch Corporate Governance Code. However, the draft legislation does not provide any specific restrictions in this respect. The rules in respect of potential combination or successive application of the various measures available to companies organized under Dutch law should be developed in market practice and case law.

There are a number of interesting differences between the existing response period under the Dutch Corporate Governance Code and the new proposed statutory cooling-off period, which are summarized in the table below.

A common feature of the existing response period and the proposed cooling-off period is the postponement of a shareholder vote during a standstill period invoked by the board. This distinguishes them from more traditional protective measures under Dutch law, such as the issuance of preference shares or priority shares, which (i) are typically activated by an independent foundation and (ii) are focussed on the outcome of the vote, rather than the timing thereof.

Compliance with European rules

Based on advice from the Dutch Council of State (which has also been published), the Government is of the opinion that the proposed legislation does not violate European rules. Relevant rules include in this respect:

1. the European Takeover Directive: the proposed legislation does not interfere with the course of any public take-over itself; merely with the adoption of certain shareholders resolutions during the offer period;
2. the European Shareholders Rights Directive: the Government makes a distinction between the convocation of shareholders meetings and the inclusion of items on the agenda of the meeting, and the valid adoption of shareholders resolutions in respect of such items (only the former, and not the latter being subject to the European Directive);
3. the European freedoms: the Government acknowledges that the proposed legislation could have a restrictive effect on European freedoms, but is of the opinion that such restrictive effect is justified by the public interest of a careful decision making process and proportionality.

Next steps

The general public is invited to submit comments on the draft legislative proposal before February 7, 2019. Following review of the comments and potential revision of the proposal, the legislative proposal may be submitted to Dutch parliament.

[1] The statutory thresholds for shareholders to make use of those rights are 3% and 10%, respectively, unless the company’s articles provide for a lower threshold.