The second episode in the AkzoNobel saga: activist shareholders lose again in Dutch court, but reach settlement

In a decision of 10 Augustus 2017, the Dutch court in summary proceedings (“voorzieningenrechter”) denied the request of two activist shareholders of AkzoNobel, Elliott and York, to convene an extraordinary general meeting (“EGM”) to dismiss Akzo’s chairman of the supervisory board. The reason for the shareholders’ request was the decision of Akzo’s board not to engage in negotiations with PPG concerning its takeover bid on Akzo. The Dutch court, however, held that the shareholders failed to show a “reasonable interest” and should await the general meeting of 8 September 2017, where Akzo’s board will provide further explanation on this topic. Shortly after this decision, on 16 August 2017, Elliott and Akzo reached a standstill agreement, where Elliott agreed to suspend further litigation for at least three months.

These developments are the second step in the AkzoNobel saga, after an earlier decision of the Dutch Enterprise Chamber already denied the requests of Akzo’s activist shareholder (discussed in an earlier blogpost here).

Previously in the AkzoNobel saga

Previously, PPG Industries, an American paint and coatings company, had made an unsolicited takeover bid for its Dutch rival, AkzoNobel. Akzo’s supervisory board and management board refused to negotiate with PPG, even after the latter upped its bid twice. Activist shareholder Elliott, together with other disgruntled shareholders, did not agree with the board’s approach and requested the supervisory board to convene an EGM to oust Akzo’s chairman, Antony Burgmans.

The board denied this request and Elliott’s challenge to this decision failed before the Enterprise Chamber. The Enterprise Chamber justified its decision based on the board’s competence to determine the strategy of the company, as well as procedural grounds, i.e. that Elliott should have filed its request with the court in summary proceedings (“voorzieningenrechter”) and not the Enterprise Chamber (see a previous blogpost for a more thorough analysis).

After the decision of the Enterprise Chamber, PPG retracted its takeover bid, which implies that it could not launch a takeover bid for at least six months.

But Elliott does not give up …

Nevertheless, Elliott had lost all trust in Akzo’s chairman due to Akzo’s response to the PPG offer. On 7 July 2017, it filed for summary proceedings with the court of Amsterdam in order to convene an EGM with the goal of dismissing Akzo’s chairman.

Akzo responded by announcing on 25 July 2017 that it will convene an EGM on 8 September 2017, but without adding the dismissal of its chairman to the agenda. Indeed, the only agenda items for the announced EGM are the approval of Akzo’s new CEO, Thierry Vanlancker (Akzo’s old CEO, Ton Büchner, stepped down due to health reasons), as well as the explanation by Akzo’s board of its decisions concerning the PPG bid.

In addition, because the announcement was made only 45 days before the EGM (in accordance with article 115 of the Dutch Civil Code), shareholders could not add items to the agenda, as this should be done 60 days before a general meeting (article 114 of the Dutch Civil Code). This enraged Elliot and other shareholders, who argued that this violated the rights of shareholders.

The impossibility to add items to the agenda is a logical consequence of Dutch law, however, which stipulates a deadline for adding items to the agenda of a general meeting that is earlier than the deadline for convening a general meeting. Nevertheless, this might be surprising for company lawyers outside the Netherlands. In Belgium, for example, the situation is precisely the reverse: the deadline for adding items to the agenda is 22 days before the general meeting (article 533ter of the Belgian Companies Code), while the deadline for convening a general meeting in a listed company is 30 days (article 533§2 of the Belgian Companies Code).

After this, Elliot and York’s only hope to oust Akzo’s chair was the summary proceedings to convene a general meeting before the court of Amsterdam.

The decision of the court in summary proceedings

In the summary proceedings, Elliot and York argued that the conditions under Dutch law for shareholders to convene an EGM were fulfilled: they own 10% of the share capital (article 2:110 of the Dutch Civil Code) and they have a “reasonable interest” (article 2:111 of the Dutch Civil Code).

It is the latter concept that is the central element in the dispute. The supervisory board and Akzo stated that the dismissal of its chairman was “irresponsible, disproportionate, harmful and not in the best interest of AkzoNobel”. They argued that the shareholders should wait before convening an EGM until after the general meeting of 8 September 2017, where the supervisory board will explain its behavior concerning the PPG bid.

Elliot and York, on the other hand, stated that the legislative intent behind this requirement was solely to avoid “bullying” and that a rejection of a shareholder’s request to convene an EGM can only be justified in exceptional circumstances. They argued that they have a reasonable interest in convening an EGM, because they (and a large number of other shareholders) have lost all trust in Akzo’s chairman, and that the explanation given by the board will not be able to alleviate their concerns.

The court did not follow Elliot and York, however. It held that the principle of reasonableness and fairness (“redelijkheid en billijkheid”) implies that if the power to dismiss directors is used by shareholders as an instrument for punishing them for a certain policy, directors should be able to explain themselves beforehand during a general meeting. The court decides that the request of Elliot and York is premature and that they should wait for the explanation given by the board during the general meeting of 8 September 2017. Elliot and York can file for a new request afterwards.

Should the decision in the AkzoNobel case come as a surprise?

For company lawyers outside the Netherlands, this decision might come as a surprise. In Belgium, for example, neither the Companies Code nor case law requires that shareholders show a “legitimate interest” in convening an EGM.

But the decision in the AkzoNobel is not that surprising from a Dutch perspective, as it is consistent with the Dutch stakeholder model and with previous case law in the Netherlands, as was also noted in a previous blogpost concerning the first decision in the AkzoNobel case. For example, in the Boskalis case, the Dutch court held that the board of Boskalis could refuse the request of a shareholder to add a shareholder vote concerning a recommendation to abolish certain takeover defences to the agenda.

In addition, in the Cryo-Save case, the Dutch Enterprise Chamber held that the board of Cryo-Save was right to refuse to convene a general meeting to appoint a new CEO and could invoke the “response delay” of 180 days from the Dutch Corporate Governance Code. According to the Court, this time period follows from the principle of “reasonableness and fairness” in article 2:8 of the Dutch Civil Code, even though the Corporate Governance Code is only a non-binding self-regulatory document and even though this time period conflicts with the statutory period to add items to the agenda or to convene a general meeting (respectively 60 and 42 days before the general meeting). While some authors defended the Cryo-Save decision, others have heavily criticized it.[1]

From this case law, it seems clear that Dutch law has restricted the rights of shareholders to convene a general meeting and add items to its agenda to a considerable extent. One can question whether this is still in conformity with the Shareholder Rights Directive. Article 7(1) of this directive stipulates that members states shall ensure that shareholders have the right to put items on the agenda of the general meeting, but that member states have the possibility to restrict this right to the annual general meeting, provided that shareholders have the right to call a general meeting with an agenda including at least all the items requested by them.

However, in the AkzoNobel case, Elliott and York had neither of these options: they could not add items to the agenda of the general meeting because the period was set too short, and neither could they convene an EGM, because the court did not consider the requirement of “legitimate interest” fulfilled.

The central question is thus whether the Shareholder Rights Directive prohibits that member states create an additional substantive hurdle for shareholders to convene a general meeting, as under the case law of the Dutch courts. The text of the directive does not contain such possibility and article 3 only allows member states to strengthen shareholder rights. On the other hand, recital 7 of the preamble states that the directive is “without prejudice to different time-frames and modalities which are currently in use across the Community”.

Does this mean that Dutch law violates the Shareholder Rights Directive? Some Dutch scholars have argued exactly this[2], and they seem to have a point. It is unclear, however, whether this will have any practical impact on the rights of shareholders in the Netherlands.

The standstill agreement between Elliott and AkzoNobel

After it bit the dust for the second time against AkzoNobel, Elliott concluded a standstill agreement with AkzoNobel, where it agreed to suspend all ongoing litigation for three months. This seems mainly aimed at the inquiry proceedings, which were meant to go to trial on 20 September 2017.

Elliott also agreed to support the nomination of the new CEO, Thierry Vanlancker, the separation of the Specialty Chemicals department, and the two new directors that were nominated for the supervisory board. In return, AkzoNobel agreed to consult with its shareholders, including Elliott, to nominate a third director for its supervisory board.

Some commentators have suggested that this enlargement of Akzo’s supervisory board could make it more open to a potential future takeover bid by PPG. In addition, Akzo’s chairman Anthony Burgmans had announced earlier that he would step down in April 2018, when his mandate would end, “absent exceptional circumstances”.

Conclusion

For now, Akzo and Elliot seem to have made peace. Akzo’s board has another chance of proving that it can create more value for Akzo’s shareholders then the PPG bid, while Elliott has made some openings for a potential future takeover bid. Hence, Akzo’s shareholders might not be worse off after all, despite the fact that they won’t have had a say in the Akzo-PPG saga.

Still, the decisions in the AkzoNobel case don’t provide a rosy outlook for shareholder rights in the Netherlands, quite the contrary, as they seem to follow the trend in Dutch corporate law to reinforce the autonomy of company boards. As noted above, this might be considered as a violation of the Shareholder Rights Directive. Symbolic for this trend is also the proposal by the Dutch Minister of Economic Affairs, Henk Kamp, to give boards of Dutch companies one year of “reflection time” when they receive an unsolicited takeover bid. Whether this trend is a good thing is up for debate, and this blogpost is not the place to settle this debate. Still, it is clear that Dutch law goes further in this trend than many other European countries (including Belgium) and that it is probably the most ardent supporter of the “stakeholder model” in company law. The decision discussed in this blogpost nicely illustrates this fact.

Tom Vos

 

[1] Criticizing it, for example: R. ABMA, “Rechtskarakter responstijd” (annotation), Ondernemingsrecht 2013/117. In defence of the decision: H.-J. DE KLUIVER, “Reactie op commentaar bij uitspraak Cryo-Save Group/Salveo Holding”, Ondernemingsrecht 2013/127;

[2] F.M. PETERS and F. EIKELBOOM, “De strijd over het agenderingsrecht tussen Elliott en Akzo”, WPNR 2017/157.