I OVERVIEW

Shareholder activism is a hot topic in many Dutch boardrooms. In recent years, there has been a rise of shareholder activism in the Netherlands, in line with developments across Europe.2 In 2017 and 2018, several activist campaigns aimed at Dutch multinationals made headlines in the Netherlands as well as abroad, including in particular Elliott's campaign against AkzoNobel and the Boskalis versus Fugro battle. Discussions between boards and shareholders on matters such as strategy, corporate governance, executive compensation and ESG are a regular feature within Dutch listed companies. Aside from shareholder activism, we have also seen numerous (unsuccessful) hostile approaches, including for PostNL, Unilever and AkzoNobel. Finally, the global wave of increased protectionism has also reached the Netherlands with both public sentiment and the government calling for increased protection of (certain) Dutch companies. This chapter gives an overview of the Dutch regulatory and legal framework in which listed companies and their shareholders operate, points out the key trends concerning shareholder activism in the Dutch market, and zooms in on a few topical battles between companies and activist shareholders.

II LEGAL AND REGULATORY FRAMEWORK

i Primary sources of law, regulation and practice

Dutch Civil Code

Book 2 of the Dutch Civil Code (DCC) is the primary source of law with regard to Dutch corporate law. As such, the DCC also covers the rights and duties of, and the division of powers between, the board (one- or two-tier) and the general meeting of shareholders.

Dutch Corporate Governance Code

The Dutch Corporate Governance Code complements the DCC as it lays down principles and best practice provisions that regulate the relationship between the boards and the general meeting. The Corporate Governance Code was revised in December 2016. The new Corporate Governance Code places greater focus on long-term value creation for the company and its business, as well as culture. This fits into the Dutch stakeholder model of corporate governance and can be an important element for companies in encounters with activist shareholders. The Corporate Governance Code applies, in principle, to all Dutch listed companies on a comply-or-explain basis.3

Dutch Financial Markets Supervision Act and Market Abuse Directive

The Dutch Financial Markets Supervision Act (FMSA) contains, among others, disclosure obligations for listed companies, major shareholders and board members, and rules on takeovers of listed companies. The FMSA has implemented numerous EU directives, such as the Transparency Directive and the Takeover Directive. In 2016, several market abuse provisions were removed from the FMSA, and are now dealt with in the Market Abuse Regulation (MAR), which has direct effect in all EU Member States.

EU Shareholder Rights Directive

In 2017, the European Council adopted a revised version of the EU Shareholder Rights Directive, applicable from June 2019.4 Topics include the identification of shareholders, rules that require investors to be transparent about how they invest and how they engage with companies they invest in, voting rights concerning executive compensation (say on pay), and transparency on and shareholder engagement in respect of related party transactions. The Dutch Ministry of Justice and Security and the Ministry of Finance published a draft bill for consultation on the amended Shareholder Rights Directive in February 2018. In line with the amended directive, Dutch pension funds, insurers and asset managers published the first Dutch Stewardship Code in July 2018.5 The Stewardship Code sets forth certain principles on institutional shareholder engagement, among others aimed at stimulating institutional investors to cast informed votes at shareholder meetings, to engage with listed companies on strategy, performance and ESG topics, and to be transparent on its voting policy and history. From book year 2019 onwards, asset owners and asset managers are expected to apply the principles of the Code and report on the implementation of it.

EU Alternative Investment Fund Managers Directive

For hedge funds and private equity funds specifically, the Alternative Investment Fund Managers Directive (AIFMD) is also relevant as it sets out rules and requirements for the authorisation, ongoing operation and transparency of AIFMs.

ii Division of powers – roles of the executive board, the supervisory board and the general meeting

Most Dutch public limited liability companies with a listing on the Amsterdam Stock Exchange have a two-tier board, consisting of an executive and a supervisory board.6 In a two-tier board governance model, the roles of the main corporate bodies can be summarised as follows.

The executive board manages the company and is in charge of the company's aims, strategy, risk profile, results and corporate social responsibility issues. The executive board is accountable to the supervisory board and the general meeting of shareholders.

The supervisory board is charged with supervising and advising the executive board. The supervisory board has certain rights regarding the appointment, suspension and dismissal of executive board members, and the approval of the supervisory board is required for certain important resolutions. The supervisory board is accountable to the general meeting.

The general meeting monitors the performance of the executive and supervisory boards and can exercise the rights vested upon it by the DCC and the company's articles of association. For example, in principle, a decision of the general meeting is needed for resolutions concerning an issuance of shares, dissolution of the company, adoption of the annual accounts, board compensation, or amendment of the company's articles of association. Transactions regarding an important change in the company's identity or character (e.g., sale of a large division) require prior approval of the general meeting. The general meeting also has the power to appoint and dismiss board members. The company's articles of association, however, may limit this power by providing that the appointment and dismissal occurs only upon a (binding) proposal from the executive or the supervisory board, or can only be taken with an increased majority requirement.

iii Stakeholder model as the guiding principle for the company's boards

Under Dutch law, the executive and supervisory boards must always act in the best interests of the company and all its stakeholders, with a focus on long-term value creation. In practice, this means that Dutch boards have a fiduciary duty towards a wide range of stakeholders, including shareholders, employees, customers and suppliers, as well as the communities in which the company operates. This is in contrast with the shareholder model of corporate governance, in which the company's main interest is to promote shareholder value; this model is predominant in jurisdictions with an Anglo-Saxon legal tradition.

The Dutch stakeholder model also applies in takeover situations. When determining whether or not to support an unsolicited takeover proposal, the target's boards must be guided by the interests of the company and all its stakeholders with a view to long-term value creation. As a logical consequence, the target company's boards can reasonably reject an unsolicited takeover proposal even if this proposal is supported by (a majority of) shareholders. This guiding principle was recently confirmed in the case of Elliott Advisors v. AkzoNobel (see Section IV.iv).

iv The activist shareholder's toolbox

This section provides an overview of tools that activist shareholders commonly use in pursuing their agenda. See Table 1 for the various levels of aggression of these tools.

Table 1

Level of aggression

Tools

Least aggressive

Most aggressive

Private discussions and engagement with the company

Public engagement with the company

Stakebuilding

Right to participate in and vote at general meeting

Right to place an item on the agenda

Right to convene a meeting

Initiate litigation

Private discussions and engagement with the company

In the Netherlands, the vast majority of shareholder activism starts with the activist engaging with the board of the company in a private setting. This could take the form of informal one-on-one discussions or conference calls with the company's CEO to discuss strategy and measures to maximise shareholder value, or more formal communication by sending private 'Dear Board' letters.

Public engagement with the company

When a shareholder activist is not satisfied with the company's response to issues raised in private discussions, starting a public campaign may be an alternative strategy to realise its agenda. Typically, this includes the use of both traditional and social media, teaming up with other shareholders and institutional investors, and gaining support from the investor community at large by publishing investor presentations or websites dedicated to the activist campaign.

In the Netherlands, there have been numerous public campaigns by activist shareholders. The most notorious examples in this respect are the 2007 campaign of UK-based hedge fund, The Children's Investment Fund against ABN AMRO and, more recently, the campaign of Elliott Advisors, the British arm of Paul Singer's US hedge fund, against AkzoNobel in the context of an unsolicited approach from US paint producer PPG Industries.

Stakebuilding

For an activist shareholder to ramp up the pressure on the company's boards, building a significant stake may be a critical element in its strategy. Stakebuilding may enable an activist shareholder to add weight to its opinions and to be taken as a serious threat by the company, especially when the activist shareholder reaches the threshold for placing items on the agenda of the general meeting or for convening a general meeting (see below). Even with a small stake (e.g., 1 per cent), an activist shareholder may have significant influence.

When buying shares, the activist shareholder must observe the rules on disclosure of substantial shareholdings. Pursuant to the FMSA, a shareholder must immediately notify the AFM if its percentage of capital interest or voting rights exceeds (or falls below) a number of specific thresholds. Currently, the thresholds are: 3, 5, 10, 15, 20, 25, 30, 40, 50, 60, 75 and 95 per cent.7 A possible new development in this context is the intention of the Dutch Cabinet to give listed companies with a turnover of more than €750 million the possibility to request shareholders with a 1 per cent interest to notify this to the Dutch regulatory AFM. According to recent correspondence of the Minister of Economic Affairs, more clarity on this proposal will be provided in 2018. This intention was included In the Dutch coalition agreement in 2017.

An activist shareholder building up its stake should also be aware of the mandatory offer rules. Under the FMSA, a mandatory offer is triggered by a person, or a group of persons acting in concert, acquiring 'predominant control' (at least 30 per cent of voting rights). When a shareholder reaches this threshold it is, in principle, obliged to make an offer for all remaining shares of the target company.8

Right to participate in and exercise right to vote at general meeting

Every shareholder has the right to participate in and exercise its voting right at the company's general meeting. Generally, the holder of one share is entitled to one vote. The articles of association may stipulate a voting record date 28 days prior to a general meeting. The record date, therefore, determines which shareholders are entitled to vote at a general meeting. Shareholders may vote in person or by proxy, which may be granted electronically.

In the Netherlands a 'vote no' campaign has been seen on numerous occasions. In 2016, hedge fund Highfields Capital Management opposed the plans of insurer Delta Lloyd to pursue a rights offering. Another example is the 2016 'vote no' campaign of Dutch shareholders' association VEB against the pay package for Shell board members. In the Netherlands, shareholders sometimes also express their dissatisfaction by voting against discharge of the board – which is normally granted by the general meeting with an overwhelming majority.

Right to place an item on the agenda

Shareholders holding individually or jointly 3 per cent of the company's stock have a right to submit items for the agenda of the general meeting. The company's articles of association can prescribe a lower percentage of 1 per cent, which relates to the former statutory threshold for submitting agenda items. The company can refuse to put an item on the agenda of the general meeting if this contravenes the standards of reasonableness and fairness. The Corporate Governance Code stipulates that a shareholder may exercise this right only after it has consulted the executive board. See in this respect also the company's right to invoke a 180-day response time (see below).

A notable example in this respect is the case concerning ASMI, a Dutch multinational active in the semiconductor industry. Hedge funds Fursa and Hermes put a proposal on the agenda of the 2008 general meeting to replace the CEO and most of the supervisory board members. Further, in both 2017 and 2018 social activist FollowThis put a 'green' resolution on the agenda of the general meeting of oil giant Shell in which it requested Shell to set and publish targets that are aligned with the goal of the Paris Climate Agreement to limit global warming to well below 2°C. Although the resolution was voted down each time, it gained more support from institutional investors in 2018 than in the year before, in line with institutional investors' higher prioritisation of environmental, social and governance (ESG) issues (see Section III.v).

Shareholders can submit items for the agenda either as a voting or as a discussion item. However, shareholders cannot force the board to put an item on the agenda as a voting item if the general meeting does not have the power to resolve upon the topic; in other words, shareholders cannot use this right to organise referenda or 'motions' on topics belonging to the primacy of the boards. See the 2016 case of Boskalis v. Fugro, discussed below in Section IV.iii.

Right to convene a shareholders' meeting

Shareholders holding individually or jointly 10 per cent of the company's stock (the company's articles of association can prescribe a lower percentage) may request the company's boards to call a general meeting and put such items on the agenda as requested by these shareholders. If the board refuses to do so, such shareholders could request authorisation from the district court to call a general meeting. The court will decide whether the shareholder has a legitimate interest in convening a shareholders' meeting. The board can refuse to call a general meeting if it is of the opinion that the request contravenes the standards of reasonableness and fairness, or does not meet the 'legitimate interest' test. A prominent example of activists exercising this right is Centaurus and Paulson & Co, who called shareholders' meetings at Dutch industrial conglomerate Stork to vote on alternative strategies, including a public-to-private transaction, and on the dismissal of the entire executive board. In 2017, Elliott Advisors also invoked the right to call a general meeting in its crusade against AkzoNobel, which was rejected by the boards of AkzoNobel. In subsequent court proceedings, the Enterprise Chamber and the Amsterdam district court rejected Elliott Advisors' request to convene a general meeting (see section IV.iv).

Initiate litigation

Shareholder litigation typically takes place in inquiry (mismanagement) proceedings before the Enterprise Chamber.9 Any shareholder that alone or acting jointly holds sufficient shares10 may initiate inquiry proceedings and request the Enterprise Chamber to order an inquiry into the policy of the company by independent court-appointed investigators.

The Enterprise Chamber may order an inquiry into the policy of a company if it is demonstrated that there are reasonable grounds to believe that there is mismanagement. This may consist of, for instance, abuse of minority shareholders, insufficient disclosure to shareholders, conflicts of interest of board members, or the unjustified use of takeover defences.

The Enterprise Chamber may at any time during the proceedings order interim measures. The interim measures ordered by the Enterprise Chamber may play an important role in takeover situations and activist campaigns. Interim measures may include suspending executive or supervisory board members, appointing interim executive or supervisory board members, and suspending shareholders' voting rights. These interim decisions tend to carry great weight and, despite being provisional, are often decisive in the outcome of the matter. In fact, it is not uncommon that the Enterprise Chamber postpones a decision to order an inquiry into the policy of the company and only rules on the requested interim measures.

The Enterprise Chamber has repeatedly demonstrated its willingness to act promptly and take rigorous action in takeover and activist situations. In the context of takeovers of public companies, shareholder interest groups and other activist shareholders often use (the threat of) inquiry proceedings to protect the interests of minority shareholders, for example, against the boards of the target company (some or all members of which may no longer be regarded as independent) or a majority shareholder.

v The company's toolbox

Dutch corporate law provides for several structural mechanisms that enable a company to prevent or deter hostile approaches. Many Dutch listed companies have adopted such mechanisms in their articles of association. Examples include the use of listed depositary receipts without voting rights, priority shares with certain control rights, shares with double or multiple voting rights, voting caps, the use of change of control clauses in financing arrangements, golden parachutes, and structures that limit shareholders' control of the board. However, no company is immune to shareholder activism even with such structural mechanisms in place. In the following, we describe some typical response measures that a targeted company could use.11 See Table 2 for the various levels of aggression regarding these tools.

Table 2

Level of aggression

Tools

Least aggressive

Most aggressive

Enter into a dialogue with the activist shareholder

Get the company's message out to shareholders

Relationship agreement

Just say 'No'

Invoke the response time

'Put up or shut up' rule

Issue ordinary shares

Sale of treasury shares

Trigger call-option on anti-takeover preferred shares

Initiate litigation

Enter into a dialogue with the activist shareholder

The most informal response measure for a company is to enter into a dialogue with the activist shareholder. This provides the opportunity for the company's boards to assess the activist's views on the company's strategy, and shows their willingness to listen to the activist shareholder's concerns and suggestions. Building a relationship of trust and creating consensus with the activist shareholder can be a strong tool from which the company can benefit in the long run. Entering into discussions with the activist shareholder may give the boards 'breathing space' and time to determine its strategy if private discussions do not result in a long-term solution.

Get the company's message out to shareholders

A company dealing with shareholder activism could reiterate and emphasise the company's current or revised strategy (in combination with a 'just say no' strategy). The executive board can give presentations to (key) shareholders and potential investors in which it explains that its current or revised strategy is in the best interest of the company and is the preferred path to maximise value for its shareholders. Gaining the support of (other) shareholders might prove pivotal in fending off an activist shareholder. In recent years, we have seen several examples of Dutch listed companies announcing a revised or updated strategy following an unsolicited offer or approach from an activist shareholder.

Relationship or standstill agreement

A growing trend in the Dutch market is that listed companies conclude relationship agreements with large and vocal shareholders. In a relationship agreement, the company and the shareholder agree on topics such as strategy, governance, financing and exchange of information. The company could give one or more supervisory board seats to the shareholder in order to gain support for the company's strategy. Relationship agreements are typically concluded with activist shareholders with a very significant shareholding (typically more than 10 per cent), but also with non-hostile cornerstone investors in the context of an IPO.

Although concluding a relationship agreement may reduce, or channel, the pressure exercised by a shareholder, the board must be aware of the fact that representation of an activist shareholder on the board inevitably has an impact on the boardroom dynamics. Examples include the relationship agreements between telecom company KPN and its Mexican suitor América Móvil (see Section IV), and between critical materials company AMG and hedge fund RWC (see Section IV).

In an activist situation, a company may also seek to enter into a pure standstill agreement to reach a (temporary) ceasefire with an activist shareholder. An example is AkzoNobel agreeing to a standstill with Elliott Advisors in August 2017 to end pending litigation and gain support for the proposed change in its board composition, which included new supervisory board members that were nominated by AkzoNobel following consultation of their large shareholders.

Invoke response time

Pursuant to the Corporate Governance Code, the executive board may invoke a 180-day response time when shareholders request certain agenda items that could lead to a change in the company's strategy, such as the request to appoint a new CEO or dismiss an executive or supervisory board member. The executive board must use the response time for further deliberation and constructive consultation with the shareholder involved, and to explore alternatives. Case law has further defined that, in principle, shareholders must respect the response time as invoked by the executive board; the response time may only be set aside if there are sufficiently important reasons for this. The response time provides the executive board with some 'breathing space' and the opportunity to enter into a dialogue with the activist or seek alternative measures. The government is considering a 250-day statutory time out period for companies confronted with proposals from shareholders concerning a fundamental change to the company's strategy, as included in the 2017 government coalition agreement (see Section V).

'Put up or shut up' rule

The objective of the 'put up or shut up' rule is to prevent a listed company from being the object of rumour and speculation regarding a potential public offer for its securities. At the request of the potential target company, the Dutch financial markets supervisor AFM can impose disclosure obligations on an entity or person that has published information that could create the impression that it is considering the preparation of a public offer. This could be, for example, an activist shareholder who is building up a stake in a company. Following the AFM's instructions, the potential bidder must 'put up' or 'shut up', that is, within a given period either announce a public offer for the target company, or indicate that it does not intend to launch a public offer, in which case it will be prohibited from announcing or launching an offer for the target company for a period of six months.

Issue ordinary shares

As noted above, the general meeting has the power to issue ordinary shares. However, pursuant to the DCC, the general meeting may delegate this power to another corporate body for a period of up to five years. The same applies for the limitation and exclusion of pre-emptive rights of existing shareholders. Typically, as is the case for the vast majority of Dutch listed companies, the general meeting authorises the executive board to issue ordinary shares. In general, the authorisation stipulates that the executive board can issue a certain percentage of shares without preemptive rights for 'general corporate purposes' (often 10 per cent) and a certain percentage for the purpose of 'mergers and acquisitions' (often 10 per cent).12 To defend itself from activist shareholders or hostile bidders, the executive board could decide to issue shares (without preemptive rights) to a 'friendly' third party – for example, a long-time strategic party. Although perceived as aggressive, such an issuance dilutes the activist shareholder's stake in the company, and accordingly reduces its influence. An interesting development is that in January 2018, ISS published its new voting guidelines in which it recommends voting against authorisation for the executive board to issue more than 10 per cent of shares without preemptive rights. This development may lead to boards confining themselves to request an authorisation to issue shares only up to 10 per cent.

Sale of treasury shares

When a company holds a certain number of its own shares (for example, as a result of a share buy-back) and these shares have not yet been cancelled (treasury shares), a company may sell these to a 'friendly' third party. As a result, similar to issuing ordinary shares, the third party acquires a stake in the company and dilutes the shareholding of the activist shareholder. Alternatively, a company could use treasury shares as consideration when purchasing certain assets from a third party. Depending on the specific situation, the company's boards must be aware that this defensive measure, similar to issuing ordinary shares, is likely to be perceived as aggressive not only by existing shareholders, but also by the investor community and regulators.

Defence foundation: issuing anti-takeover preferred shares

The most common Dutch defensive measure consists of the possibility for a company to issue preferred shares to an independent, yet 'friendly', foundation. The company grants the foundation a call option, pursuant to which the foundation can effectively obtain up to 50 per cent of the votes.

The board of the foundation must be independent from the company. Accordingly, the company is not able to determine whether, and if so when and to what extent, the call option is exercised – the foundation has to make its own decision in accordance with its objectives as stated in its articles of association. In general, the foundation's articles of association state that the foundation serves the interest of the company and its stakeholders by safeguarding, among others, the continuity, independence and identity of the company and its business.

Foundations rarely exercise their call option, which may perhaps be partly explained by the fact that the presence of a defence foundation alone may have a deterrent effect on a hostile bidder. One of the few and most recent of examples in which a defence foundation exercised its call option concerns the defence foundation of KPN, which exercised its call option as a reaction to the announcement of América Móvil to launch a hostile bid. Another example is the defence foundation of global pharmaceutical company Mylan NV (which has its registered office in the Netherlands), which made use of its call option in order to deter Teva Pharmaceutical Industries. Examples of hostile approaches where a foundation was in place, but the foundation did not exercise its call option, include Staples/Corporate Express (2008), Boskalis/Smit (2009), Mexichem/Wavin (2012) and Cargill/Nutreco (2014).

Initiate litigation

Although not common, a targeted company can also initiate summary proceedings before the district court or enquiry proceedings before the Enterprise Chamber. In such proceedings, the company can request interim or provisional measures to neutralise the attack or campaign of an activist shareholder.

III KEY TRENDS IN SHAREHOLDER ACTIVISM

i General overview

Shareholder activism is a hot topic in boardrooms in the Netherlands, even though in absolute terms the number of activist shareholder campaigns is relatively limited when compared to the US and the UK. Shareholder activism reached its first peak between 2000 and 2007, when various US and UK-based hedge funds targeted listed companies in the Netherlands. Examples included the financial conglomerate ABN AMRO, Dutch industrial giants ASMI and Stork and other well-known multinationals such as Ahold and Philips.

The Netherlands has also seen a surge in shareholder activism in recent years as a result of market and economic conditions, a boost in M&A activity and increased attention from US- and UK-based hedge funds for European targets. This follows the global trend of a growing number of activist campaigns: JPMorgan reported 606 campaigns globally in 2017 versus 389 campaign globally in 2012.13 In recent years, shareholders have also become more vocal on matters relating to governance, executive compensation and ESG topics.

Since 2010, we have seen numerous publicly known activist shareholder campaigns in the Netherlands. The total level of shareholder activism is most likely significantly higher, however, since shareholder activism in the Netherlands often takes place behind closed doors. Accordingly, companies that are not directly facing shareholder activism, typically prepare for the threat of potential activist campaigns.

In this section, we describe the activist shareholder landscape in the Netherlands, as well as the main trends observed in the past decade. Given the relatively low number of activist shareholder campaigns in the Netherlands compared to the US and the UK, trends described in this section are not only based on statistics, but also on more subjective observations and anecdotal evidence.

ii Activist shareholders: the usual suspects

Activist shareholders in the Netherlands are predominantly US or UK-based hedge funds with a European or global investment focus. Activism comes from both pure-play activist hedge funds, which acquire a stake in a company and subsequently put pressure on the management to adopt their views to maximise shareholder value, and multi-strategy hedge funds, for which shareholder activism is only one of their strategies. Pure-play activist hedge funds typically have an event-driven investment strategy, in which M&A plays a crucial role (see also below). These activist hedge funds often seek to initiate M&A activities by 'suggesting' a company to split-up or to sell a division, and also become active in pending M&A transactions to push for a better price. Over the past decade, some of the largest global activist hedge funds have been active in the Netherlands; the most prominent examples are listed below:

Activist shareholder

Targets

Objective

The Children's Investment Fund

ABN AMRO

Pushing for a sale of ABN AMRO

Centaurus

Stork, Ahold (together with Paulson & Co) and SBM Offshore

Pushing for a split-up (Stork); sale of US activities (Ahold); requesting a different financing structure (SBM Offshore)

Hermes

ASMI, and Océ (together with Orbis)

Pushing for a split-up and changes in board composition (ASMI); litigation against recommended takeover (Océ)

Third Point

DSM and Philips

Suggesting a split-up (DSM); stakebuilding (Philips)

RWC

Corbion and AMG

Stakebuilding (Corbion); discussions about strategy, board composition and board compensation (AMG)

Paulson & Co

Stork (together with Centaurus), KPN and Ahold (together with Centaurus)

Pushing for a split-up (Stork); stakebuilding (KPN); sale of US activities (Ahold)

JANA Capital

Philips and TNT Express

Talks on performance and capital structure (Philips); pushing for a sale and changes in board composition (TNT Express)

Highfields Capital Management

Delta Lloyd

Vote 'No' campaign against Delta Lloyd's proposed rights offering

TT International

TomTom

Suggesting a split-up of TomTom into parts

Eminence Capital

ASMI

Pushing for sale of ASMI's 34 per cent stake in Asian subsidiary ASM PT

Elliott Advisors

AkzoNobel; NXP

Pressing for a takeover by PPG (AkzoNobel); contesting the agreed offer price in the takeover by Qualcomm (NXP)

PGGM, CalSTRS and City of New York and State of New York Pension Funds

Mylan

Vote 'No' campaign regarding board nominees and executive compensation package

ValueAct

Royal Vopak

Stakebuilding

Besides these usual suspects, we have seen increased attention to shareholder activism from institutional investors. The potential role of Dutch pension funds is especially noteworthy, since collectively they currently hold approximately €1,346 billion in assets under management (AUM) and hold substantial equity positions in Dutch listed entities.

After the crisis, European and Dutch politicians called upon institutional investors to take a more active role as shareholders. Even though this did not result in legislative changes, the pressure fuelled the increased engagement of Dutch pension funds in the debate with the companies they invest in. In recent years, Dutch politicians reiterated that Dutch pension funds should, as shareholders, support (Dutch) companies with a focus on long-term value creation. Dutch pension funds responded negatively to this open invitation, stating that their (sole) duty is to properly manage their investments in the interests of the beneficiaries rather than to protect Dutch listed companies.

Activism from institutional investors in the Netherlands typically cannot be characterised as 'aggressive'. Institutional investors tend to focus on corporate governance issues, such as remuneration policy and corporate social responsibility. Most activism from institutional investors takes place behind closed doors. Nevertheless, an example of institutional investors publicly expressing their position in a takeover situation is the 2014 public campaign that Dutch pension fund manager APG, together with Dutch insurer NN, waged against animal and fish feed company Nutreco. APG and NN disagreed with the board's decision to sell the company to SHV, claiming that the offer significantly undervalued Nutreco's business while, at the same time, Cargill and private equity firm Permira had expressed their interest in Nutreco (although they did not make an offer). In a public letter, APG and NN questioned the Nutreco boards' decision to sell the company to SHV. Eventually, SHV raised its offer and APG and NN sold their shares.

Although we see that institutional investors are not unwilling to play a more active role as shareholders, institutional investors typically refrain from exercising public pressure on the companies they invest in and do not tend to carry out aggressive campaigns in the same way as pure-play activist hedge funds. Globally, we see increased activism amongst institutional investors, with several examples of traditional long-only funds embracing activist tactics and other institutional investors publicly supporting activist campaigns.14

iii Targets for activist shareholders: size is no deterrence

One of the recent global trends also observed in the Netherlands is activist shareholders expanding their focus to some of the largest companies. This trend is largely driven by the increased financial capacity of the large activist hedge funds. In the early 2000s, there were only a few activist funds with AUM in the US$10–15 billion range. Currently, nearly 20 funds manage over US$10 billion. On aggregate, activist funds worldwide are estimated to hold at least US$200 billion in AUM.

In the Netherlands, this trend was first observed with hedge funds targeting Ahold in 2006 (market cap at that point over €10 billion in 2006), ABN AMRO in 2007 (market cap at that point over €50 billion) and Philips in 2007 (market cap at that point over €30 billion). More recently, Shell (market cap over €180 billion) was targeted in 2016 and 2017 by activist shareholders who were pushing for more focus on sustainable energy and a business model that is more climate-change proof. AkzoNobel (market cap around €20 billion) and NXP (market cap around €36 billion) were targeted by Elliott Advisors in 2017. A company's large size thus does not seem to deter activist shareholders.

iv Objectives of activist shareholders: five common themes

We see five common themes in activist campaigns in the Netherlands, largely in line with US and UK practice.

Conglomerate discount

Several Dutch companies were pressured by shareholders to unlock shareholder value by divesting or spinning off non-core divisions or breaking up the company. The most well-known examples include Ahold, where Paulson & Co and Centaurus demanded the sale of Ahold's US activities; Stork, where Paulson & Co and Centaurus pushed to break up the company; DSM, where Third Point pushed for a split-up; and ASMI, where Hermes campaigned for a split-up of the company's front-end and back-end activities.

M&A situations

M&A continues to be a fertile hunting ground for activist shareholders: pushing for sales processes, intervening in announced transactions (i.e., 'bumpitrage') and forcing break-ups and divestitures are illustrious objectives from an activist's playbook. TCI's public 'Dear Board' letter to ABN AMRO is notorious is this respect as it brought the bank into play, resulting in the largest ever takeover battle in the Netherlands. Other notable examples include AkzoNobel, where hedge fund Elliott Advisors pressured the company to engage with PPG after PPG's unsolicited proposals to takeover AkzoNobel, and ASMI, where Eminence Capital urged management to sell the company's 34 per cent stake in Asian subsidiary ASM PT. Elliott Advisors was found on the other side of the gamble at NXP, where it opposed the recommended offer made by Qualcomm for NXP arguing that it undervalued NXP.

Strategic

Activist investors have pushed companies to make strategic changes and to improve their performance. This is often part of campaigns aimed at breaking up or selling the company, as discussed directly above. A prominent example is ASMI, where activist hedge funds Hermes and Fursa criticised the front and back-end strategy of ASMI.

Inefficient balance sheet

In several cases, activist investors demanded a return of capital to the shareholders in the form of a share buy-back or dividend payment. Well-known examples include Philips, where shareholders demanded that the capital raised by spinning off Philips' semiconductors unit NXP be returned to the shareholders; and SBM Offshore, where Centaurus pressured the board to adopt a different financing structure for its fleet.

Governance or board composition

Activist shareholders often target the governance structure and composition of the company's boards. Demands made by activist shareholders may include being represented on the supervisory board, dismissal of certain board members, amending executive compensation, or challenging the company's defence measures. Examples include TNT Express, where hedge fund JANA Capital requested the appointment of three new supervisory board members, AMG, where RWC questioned AMG's governance and remuneration practices, and Boskalis, which requested Fugro to dismantle (one of) its defence mechanisms.

v Higher prioritisation of ESG issues

Another global trend that arrived in the Netherlands is that shareholders increasingly demand companies to address ESG issues. ESG issues have become a major corporate governance topic in recent years, reflecting sentiments from a broad group of stakeholders, including customers, employees, suppliers and society at large. Activist shareholders and institutional investors alike have taken note of these sentiments and are keen to include ESG matters in their campaigns and investment policies. In 2018, for example, Dutch pension fund ABP took a next step in its sustainable and responsible investment policy with its announcement to exclude tobacco and nuclear weapons products from its investments. ABP stated that it reached its decision 'after extensive consultation at board level, based on the insights shared by participants, employers, and various special interest organizations.'15

vi Tactics used by activist shareholders

Following the landmark cases concerning ABN AMRO in 2007 and ASMI in 2010, activist shareholders deploy different strategies to force changes in the strategy of target companies.

Tactics used until ABN AMRO (2007) and ASMI (2010): proposals at general meetings to change the company's strategy

Between 2005 and 2010, several large activist hedge funds initiated aggressive US-style campaigns in the Netherlands. These hedge funds typically started their campaigns with 'Dear Board' letters in which they presented their ideas to the company. As a next step in their campaign, these hedge funds generally submitted shareholder proposals at the general meeting to split up or sell the company or to change the company's strategy.

In several cases, the activist shareholders and the company ended up in court to determine who had the final say on the matter. In landmark cases ABN AMRO and ASMI, the Dutch Supreme Court ruled that the company's strategy is within the remit of the executive board, subject to the approval of the supervisory board. As a result, shareholders cannot impose on the executive board a strategy that must be followed. If shareholders disagree with the execution of the strategy by the executive board, or otherwise disagree with how the executive board is running the company, they may attempt to exercise the specific powers vested in them in the DCC and the company's articles of association, such as the power to appoint and dismiss board members. These landmark cases most likely led to a change in how activist shareholders approach Dutch listed companies.

Tactics used in recent years: private and public engagement with the boards to force a change in the company's strategy

After ABN AMRO and ASMI, activist shareholders rarely put forward shareholder resolutions directly aimed at forcing a change in strategy or breakup of the company. Instead, activist shareholders tend to build up pressure on the company by acquiring a stake, sometimes demanding seats on the board, and trying to influence the company's strategy through private or public engagement with the boards.

Typically, activists aiming to change the company's strategy put pressure on the boards by challenging them on a broad spectrum of matters, such as the appointment and dismissal of board members, operational performance, and board compensation. In an aggressive campaign, activist shareholders may demand that their own candidates replace current board members.

As an example, this strategy was followed by US-based activist hedge fund JANA Capital against TNT Express. JANA put pressure on the board of TNT for a long period of time, both publicly and privately, in an effort to improve TNT's operational performance, likely to prove its potential to possible buyers. JANA demanded seats on the supervisory board, including one for a former M&A executive of UPS, which may have been seen by some as an attempt by JANA to arrange a deal between TNT and UPS (TNT was eventually acquired in a friendly deal by FedEx in 2016). More recently, the tactic of trying to influence the strategy of the company by putting pressure on the boards was adopted by Elliott Advisors against AkzoNobel.

In summary, direct confrontations between boards and activist shareholders at general meetings are now generally restricted to topics on which the general meeting has the power to resolve, such as board composition, annual accounts, compensation policy and board members' compensation. This trend seems to be largely influenced by landmark cases ABN AMRO and ASMI, case law that was recently confirmed by the Enterprise Chamber in Elliott Advisors v. AkzoNobel. In addition, in the Fugro case, Dutch courts barred shareholders from putting pressure on the executive board by demanding a 'referendum' vote on a topic on which the general meeting cannot resolve.

IV RECENT SHAREHOLDER ACTIVISM CAMPAIGNS

In this section, we describe some illustrative examples of the trends regarding shareholder activism in the Netherlands.

i América Móvil v. KPN (2014)

An example of a strategic party acting as an activist shareholder is found in the América Móvil v. KPN case. Over the course of two years, América Móvil built up a stake of 29.9 per cent (through a partial public offer) and eventually announced a hostile offer for all KPN shares in order to gain full control. The takeover was countered by KPN's defence foundation based on, among others, purported national security interests. In its battle, KPN deployed numerous defensive mechanisms, including divesting its crown jewel E-Plus to Telefónica, and eventually KPN concluded a relationship agreement with América Móvil in an effort to (at least temporarily) bury the hatchet. América Móvil did not pursue its offer, and it eventually sold its stake and moved on to acquire full control of Telekom Austria in order to gain a foothold in the European telecoms market.

ii RWC v. AMG (2015)

Hedge fund RWC, run by former managers of hedge fund Hermes, built up a stake of approximately 20 per cent in global critical materials company AMG and initiated discussions regarding AMG's strategy, governance and remuneration practices. AMG and RWC eventually reached a ceasefire and signed a relationship agreement. The relationship agreement included the endorsement of AMG's strategy by RWC, the nomination of RWC's managing director and another person for appointment as member of AMG's supervisory board, and the undertaking of AMG to review its prevailing executive compensation policy.16

iii Boskalis v. Fugro (2016)

Dutch dredging contractor Boskalis built up an unsolicited stake of more than 20 per cent in Dutch geoscience service provider Fugro and subsequently submitted an agenda item for the general meeting to urge the boards to take down one of Fugro's defence measures. Fugro agreed to put the proposal of Boskalis on the agenda of the annual general meeting for discussion, but not as a voting item, since decisions regarding defensive measures are the exclusive domain of the boards. Boskalis challenged this decision in court, but without success in both first instance and on appeal. In April 2018, the Supreme Court confirmed that shareholders do not have a right to table voting items on the agenda of a public company's general meeting in respect of matters that are for the board to decide upon, including the policy and strategy of the company.

iv Elliott Advisors v. AkzoNobel (2017)

In 2017, Dutch paint producer AkzoNobel received three unsolicited takeover proposals from its US competitor PPG Industries. Hedge fund Elliott Advisors demanded that AkzoNobel entered into discussions with PPG. After AkzoNobel rejected the first two proposals from PPG, Elliott Advisors requested – together with certain other shareholders – AkzoNobel to convene a shareholders' meeting with the sole agenda item being the dismissal of the chairman of the supervisory board of AkzoNobel. This request was rejected by AkzoNobel. After AkzoNobel subsequently rejected PPG's third proposal, Elliott filed a petition with the Enterprise Chamber in Amsterdam requesting an inquiry into AkzoNobel's conduct and policies, and the introduction of certain interim measures, including an extraordinary general meeting to vote on the dismissal of the chairman of AkzoNobel's supervisory board, whom Elliott believed was standing in the way of a discussion with PPG. The Enterprise Chamber dismissed Elliott's requests and set out important viewpoints for corporate governance in takeover situations. Firstly, the Enterprise Chamber ruled that a company's response to an unsolicited takeover proposal falls under the authority of the executive board to determine the company's strategy, under the supervision of the supervisory board. The company's boards do not have to consult shareholders prior to its response to an unsolicited takeover proposal (although it remains accountable to its shareholders for its corporate actions). Secondly, the ruling made clear that 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, even in the case of a serious bidder making a serious bid. Whether substantive discussions or negotiations with a bidder are required depends on the actual circumstances, for example, to what extent the company can assess the proposal without substantive discussions, the bidder's strategic intentions, and whether or not the target company has decided to abandon its standalone strategy. After this landmark ruling by the Enterprise Chamber, on 1 June 2017, PPG announced the withdrawal of its takeover proposal for AkzoNobel.

In July 2017, Elliott initiated proceedings before the Amsterdam District Court requesting an extraordinary general meeting with the dismissal of the chairman of AkzoNobel as sole agenda item. AkzoNobel subsequently convened an EGM on its own motion, to be held In September 2018, where AkzoNobel would give a further explanation regarding its response to the proposals made by PPG. The dismissal of the chairman of AkzoNobel was not tabled on the agenda of that EGM. In early August 2017, the Amsterdam District Court rejected the request from Elliott to convene an EGM for an EGM regarding the dismissal of the chairman and ruled that should await the explanation AkzoNobel were to give regarding its response to PPG's proposals during the EGM in September 2018, before requesting the dismissal of the chairman of AkzoNobel. On 16 August 2017, AkzoNobel announced that it reached a standstill agreement with Elliott.17

v PGGM, The California State Teachers' Retirement System (CalSTRS), and City of New York and State of New York Pension Funds v. Mylan (2017)

Four pension funds from the Netherlands and the US initiated a public 'vote no' campaign against pharmaceuticals company Mylan (which is incorporated in the Netherlands). The pension funds campaigned against the nomination of six long-standing directors (11.8 years' tenure) and the executive compensation package proposed by Mylan's board, arguing that these directors should be held accountable for its costly record of compensation, risk and compliance failures. The 'vote no' campaign was initiated against the backdrop of a public and regulatory debate triggered by the price-hiking controversy involving Mylan's EpiPen. The campaign had limited success. The appointment of the six contested directors was approved at the annual general meeting but a significant majority of the general meeting voted against the executive compensation package; the latter vote was, however, non-binding and only of an advisory nature.

vi Elliott Advisors v. NXP and Qualcomm (2018)

On 27 October 2016, Dutch chipmaker NXP Semiconductors and US technology company Qualcomm announced that they had reached agreement on Qualcomm's acquisition of NXP at a price of US$110 per share; this valued NXP at US$47 billion, making it Europe's largest ever tech deal. The announcement of the transaction attracted attention, both from the investor community and from regulators around the globe, and showed the growing importance of antitrust and state intervention in M&A deals.

In August 2017, Elliott Advisors joined the party by acquiring approximately 6 per cent of NXP's stock. During its campaign, which showed levels of aggression reminiscent of its AkzoNobel campaign, Elliott argued that NXP's board did not achieve the best deal for NXP's shareholders; in Elliott's words, the consideration offered by Qualcomm 'dramatically undervalued' NXP. Elliott's tactics included launching a website with analyses of its claim in an effort to persuade NXP shareholders not to tender their shares 'for less than fair value'. Later that year, on 6 November 2017, Singapore-based Broadcom raised the number of players to four, announcing an US$130 billion bid for Qualcomm. Broadcom's unsolicited bid for its rival would create the largest tech company in the world. Broadcom's offer was indifferent on Qualcomm completing its bid for NXP, turning the scene into a classic capitalist multiplayer chess game.

The battle of NXP and Qualcomm versus Elliott – a textbook example of 'bumpitrage' – eventually ended with Qualcomm improving the terms of the transaction. Qualcomm increased the cash consideration payable to the NXP shareholders to US$127.50 per share – an increase of 16 percent, or approximately US$5.9 billion in aggregate equity value, on the prior offer price. In exchange, Elliott and eight other NXP shareholders collectively owning approximately 28 per cent of NXP's stock (including New York-based hedge fund Soroban Capital Partners) supported the new deal. In response, Broadcom cut its offer consideration for Qualcomm – which had, by then, been increased – to US$117 billion, and was eventually forced to withdraw its bid after President Trump issued an executive order blocking the proposed transaction. President Trump acted on a recommendation by the Committee on Foreign Investment in the United States (CFIUS) which, after reviewing the combination, concluded that Broadcom 'might take action that threatens to impair the national security of the United States'. Later in 2018, Broadcom completed its redomiciliation to the US.

Qualcomm's pursuit of NXP also attracted regulatory scrutiny, particularly from the Chinese regulator.18 In June 2018, after Qualcomm had extended the offer period multiple times, the Chinese regulator refused to grant clearance for the proposed deal. Subsequently, Qualcomm chose not to close the transaction, incurring an US$2 billion break-up fee payable to NXP.

V REGULATORY DEVELOPMENTS

i Sentiment towards more protection for Dutch multinationals

The relatively high number of takeover attempts involving Dutch multinationals in recent years has fuelled a political debate whether those companies should be more protected against foreign takeover threats. At first, after the takeover battle for KPN in 2014 and the acquisition of Dutch cybersecurity company Fox-IT by UK-based information assurance firm NCC in 2015, a draft bill of the Telecom Act was published, enabling the Dutch government to prevent takeovers of 'telephony, data centres, hosting services and internet' companies that are 'of vital importance to national security and public order'. After unsolicited takeover attempts involving Dutch giants PostNL (2016), Unilever (2017) and AkzoNobel (2017), the focal point of the political debate has expanded to protection of Dutch companies in general. Backed by numerous captains of industry, the Minister of Economic Affairs proposed giving companies more tools to fend off hostile bidders and activist shareholders that pose an actual threat to the company's objective to serve the interest of all stakeholders with a focus on long-term value creation. In 2017, the cabinet announced that it will propose the introduction of a response time of 250 days in the Dutch Civil Code for Dutch public companies that are confronted with proposals from shareholders concerning a fundamental change to the company's strategy. Companies invoking the response time should use this period to consult all stakeholders of the company, to consider alternatives and to account for their policy towards the general meeting. A draft bill has not yet been published. In March 2018, the Minister of Economic Affairs stated that a proposed bill, introducing a statutory response time, has been delayed. The draft bill will first be sent to the Council of State for advice on European law aspects on this topic. It remains to be seen whether this will ultimately lead to legislative changes and if so, in what form.

The rise of protectionist political sentiments in the Netherlands is consistent with the global trend in this respect. Not only in the US, where the CFIUS has intervened in several high-profile transactions (e.g., Qualcomm, Lumileds, Aixtron and Lattice), but also across Europe various initiatives are being deployed that should protect countries' 'national champions' against undesirable control by third parties. On a European level, Commission President Juncker presented a draft EU Regulation in September 2017, establishing a framework for the review of foreign direct investments into the EU. The Commission will in the future pay particular attention to investments affecting projects or programmes that receive extensive EU funding or relate to certain critical industries.

VI OUTLOOK

Over the past decade, there have been a number of high-profile cases where activist shareholders have pushed companies to break up, to sell divisions and to change their corporate governance structures. Following decisions of the Dutch Supreme Court in ABN AMRO and ASMI, activist shareholders (while still pursuing the same objectives), seem to have shifted their approach to some extent from confrontations over the company's strategy in general meetings, to private and public engagement with the boards in order to change the target company's direction. The 2017 landmark case concerning AkzoNobel continues the trend begun by the Supreme Court in the ABN AMRO and ASMI cases. In its activist campaigns against AkzoNobel and NXP, Elliott Advisors has been, however, considerably more aggressive than other recent campaigns in the Dutch market.

We expect that shareholder activism will remain at least at current levels, with an increased focus on M&A, corporate governance and ESG matters. Shareholder activism in recent years has increased the contrast between short- and long-term value creation and between stakeholder interests and (immediate) shareholder value. We expect a continued emphasis by Dutch companies on stakeholders' interests and long-term value creation. A continued rise of shareholder activist campaigns and unsolicited takeover attempts, mixed with the geopolitical trend of protecting a national economies, could result in additional protection of Dutch listed companies against hostile approaches, both from bidders and from activist shareholders.


Footnotes

1 Paul Cronheim is a partner, and Willem Bijveld and Frank Hamming are senior associates at De Brauw Blackstone Westbroek NV in Amsterdam. The authors have been involved in several cases described or referred to in this chapter. The authors do not express an opinion on these cases.

2 Lazard's 'Review of Shareholder Activism - 1H 2018', available at: https://www.lazard.com/media/450655/lazards-review-of-shareholder-activism-1h-2018.pdf.

3 For detailed commentary on the new Dutch Corporate Governance Code, see: RH Kleipool, M van Olffen and BW Roelvink, Corporate Governance in the Netherlands – A practical guide to the new Corporate Governance Code (2017).

4 Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement.

5 First Dutch Stewardship Code available at www.eumedion.nl/en/news/first-dutch-stewardship-code-published.

6 Dutch law gives companies the option to structure their boards based on a one-tier model (single board with both executive and non-executive board members) or a two-tier model (separate executive and supervisory boards). One-tier board structures are often seen with Dutch public limited liability companies with a listing on the NYSE or NASDAQ, for example, Mylan NV, NXP Semiconductors NV and Unilever NV.

7 For non-EU entities with a listing on the Amsterdam Stock Exchange that choose the Netherlands as their EU home Member State, the thresholds are: 5, 10, 15, 20, 25, 30, 50 and 75 per cent.

8 A mandatory offer will not be required if, within 30 days following the acquisition of control, the controlling party reduces its stake below the 30 per cent voting rights threshold, provided that the voting rights held by that controlling party have not been exercised during this period and the shares are not sold to another controlling shareholder of the company. The Enterprise Chamber may extend this period by an additional 60 days.

9 A shareholder can also initiate summary proceedings before the competent Dutch district court. However, summary proceedings are much less common, since the Enterprise Chamber is regarded as the specialised court regarding corporate litigation.

10 If the company's issued share capital does not exceed €22.5 million of aggregate nominal value, persons who alone or acting jointly hold shares representing at least 10 per cent of the issued share capital or representing an aggregate nominal value of at least €225,000; or if the company's issued share capital exceeds €22.5 million of aggregate nominal value, persons who alone or acting jointly hold shares representing at least 1 per cent of the issued share capital or, if the shares are listed, representing an aggregate value of at least €20 million based on the closing price of the last trading day.

The threshold for an activist shareholder to have standing in the Enterprise Chamber can be extremely high as a result of the capital structure of the company. This was the case at Mylan (which was the subject of an unsolicited approach by Teva) where the nominal value of each share was set at €0.01 and the aggregate nominal value of the issued share capital did not exceed €22.5 million. As a result, a shareholder wanting to initiate inquiry proceedings would at the time need to hold shares with a market value of more than US$1 billion to reach the threshold of €225,000 in aggregate nominal value.

11 According to the Dutch Supreme Court, defensive measures can be justified if they are necessary with a view to the (long-term) continuity of the company and its various stakeholders, provided that the measures are taken in order to maintain the status quo, and provided that they constitute an adequate and proportional response. Implementing defensive measures for an indefinite amount of time, generally, will not be justified.

12 In general, a prospectus is required for both the offering and the listing of shares. Under Dutch law, companies can make use of an exemption to publish a listing prospectus if it issues less than 10 per cent of the company's stock to qualified investors during a 12-month period, or to publish an offering prospectus if it issues shares to fewer than 150 retail investors.

13 See, for instance, JPMorgan 2017, 'The 2017 Proxy Season Globalization and a new normal for shareholder activism', available at: www.jpmorgan.com/jpmpdf/1320739681811.pdf.

14 See, for instance, JPMorgan 2017, 'The 2017 Proxy Season Globalization and a new normal for shareholder activism', available at: www.jpmorgan.com/jpmpdf/1320739681811.pdf.

15 Press release, 'ABP Pension Fund excludes tobacco and nuclear weapons', 11 January 2018.

16 Press release, 'AMG signs Relationship Agreement with its largest shareholder RWC European Focus Master Inc', 9 March 2015.

17 Press release, 'AkzoNobel reaches agreement with Elliott', 16 August 2017.

18 On 17 March 2018, China's National People's Congress passed legislation to consolidate the three existing antitrust bodies – MOFCOM (merger control), NDRC (price-related violations) and SAIC (non-price-related violations) – into one. The new antitrust authority, the State Administration for Market Regulation (SAMR), was officially established on 21 March 2018.