The Enterprise Chamber has ruled that a company’s response to an unsolicited takeover proposal falls within the board’s authority to determine the company’s strategy. The board does not have to consult with shareholders first, but remains accountable to shareholders for the company’s actions. The ruling sets out important viewpoints for board conduct and other aspects of corporate governance in takeover situations.

Background

Akzo Nobel N.V. recently received three unsolicited takeover proposals from PPG Industries, Inc. The AkzoNobel management and supervisory boards have unanimously rejected these proposals, in each case after an extensive and careful decision-making process. On 1 June 2017 PPG announced the withdrawal of its takeover proposal for AkzoNobel.

In response to the proposals by PPG, activist hedge fund Elliott International, L.P. demanded from AkzoNobel that it enter into discussions with PPG. After AkzoNobel rejected PPG’s third proposal, Elliott filed a petition with the Enterprise Chamber in Amsterdam requesting a corporate inquiry into AkzoNobel’s conduct and policies, and certain interim measures, including an extraordinary general meeting to vote on the dismissal of the chairman of AkzoNobel’s supervisory board.

Corporate governance in takeover situations

In its judgment of 29 May 2017, the Enterprise Chamber denied the requests by Elliott and others to order interim measures, as it did not see sufficient reason to order any such measures. The Enterprise Chamber will rule on the request for a corporate inquiry at a later date.

The ruling by the Enterprise Chamber sets out important viewpoints for corporate governance in takeover situations.

Authority and accountability of the board

• A company’s response to an unsolicited takeover proposal falls under the authority of the management board to determine the company’s strategy, under supervision of the supervisory board.
• Shareholders do not have to be consulted prior to the company’s response to an unsolicited takeover proposal, but the management and supervisory boards remain accountable to shareholders for the company’s actions.
• In assessing an unsolicited takeover proposal, the board must be guided by the interests of the company and its stakeholders with a view to long term value creation. As a logical consequence, an unsolicited proposal could be reasonably rejected even against the will of (a majority of) shareholders.
• While the Enterprise Chamber does not test the validity of the grounds for rejecting an unsolicited takeover proposal, it is important that the company show it has seriously considered the proposal by following a careful decision-making process. Relevant factors are:
  • the intensity and frequency of management and supervisory board meetings;
  • the assistance from respected external financial and legal advisers;
  • the range of topics considered when rejecting the proposal (e.g. value, timing, certainty and stakeholder considerations).

Duty to negotiate

• There is no general obligation for a target company to enter into substantive discussions or negotiations with a bidder that has made an unsolicited takeover proposal, not even in the case of a serious bidder making a serious bid.
• The obligation of managing and supervising directors to properly perform their duties may lead to a requirement to enter into discussions or negotiations with a bidder. Whether substantive discussions or negotiations with a bidder are required depends on the actual circumstances, which may include:
  • whether the company has decided to abandon its standalone strategy;
  • the bidder’s strategic intentions;
  • to what extent the company can assess the proposal without substantive discussions;
  • other interactions between the company and the bidder, including whether the company has given the bidder sufficient insight into the reasons for its rejection as to enable the bidder to improve on its proposal;
  • whether the company can realistically withdraw from such discussions or negotiations, especially if there are reasons to anticipate a breach of confidentiality, which could impact the company’s share price and shareholder base.

Relationship with shareholders

• Shareholders are entitled to adequate information about the considerations underpinning those policies, not only with a view to exercising their rights as a shareholder, but also to determine their own investment policies.
• A continued lack of confidence of a substantial number of shareholders in the company’s strategy as determined by the management and supervisory boards is harmful to the company and its stakeholders. It is in principle up to the boards of the company to consider how the company can normalise its relationship with shareholders.

With this ruling, the Enterprise Chamber confirmed that it is the exclusive authority of the boards of a Dutch company to determine the response to an unsolicited takeover proposal. The boards do not have a duty to consult with shareholders prior to responding to an unsolicited takeover proposal. In such a situation, the boards need to carefully take into account the interests of all stakeholders of the company and they remain accountable to shareholders on the position taken in response to an unsolicited takeover proposal.