The Shareholder Rights and Activism Review: Netherlands
Shareholder activism is a hot topic in many Dutch boardrooms. In the past five years, several activist campaigns aimed at Dutch multinationals made headlines in the Netherlands, as well as abroad, including in particular the Boskalis versus Fugro battle and the campaigns of Elliott Advisors against AkzoNobel, NXP and NN Group. Following these campaigns the level of public shareholder activism seems to have decreased, even more so as a result of the covid-19 pandemic. Given the current unstable global economic situation, it is difficult to predict what the level of shareholder activism activity will be in this and the coming year. In any case, discussions between boards and shareholders on matters such as strategy, capital returns, executive compensation and environmental, social and governance (ESG) matters, will continue to dominate the agendas within Dutch listed companies. Aside from shareholder activism, we have also witnessed a global wave of increased protectionism in recent years. In the Netherlands, this development was partly fuelled by numerous (unsuccessful) hostile approaches in recent years, including for PostNL, Unilever and AkzoNobel, after which both the general public and the government called for increased protection of (certain) Dutch companies. In 2020, we see that the first steps towards legislation have been taken.
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.
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 boards 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 focuses 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.2
Dutch Financial Markets Supervision Act and the Market Abuse Directive
The Dutch Financial Markets Supervision Act (FMSA) contains, among other things, 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 and the Takeover Directives. In 2016, several market abuse provisions were removed from the FMSA, and are now dealt with in the Market Abuse Regulation, which has a 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.3 The Dutch bill implementing the revised EU Shareholder Rights Directive entered into force at the end of 2019. The new rules on remuneration and related party transactions are effective as of 1 December 2019. The provisions relating to electronic voting, shareholder identification and transmission of information to shareholders take effect on 3 September 2020. A remuneration policy needs to be in place for the executive and supervisory boards and must be approved by the general meeting at least every four years. The general meeting will have an annual advisory vote on the remuneration report. In addition, material related party transactions will require the approval of the supervisory board and will be subject to increased transparency requirements. Investors will be required to be transparent how they invest and how they engage with companies they invest in.
Dutch Stewardship Code
Dutch pension funds, insurers and asset managers published the first Dutch Stewardship Code in July 2018.4 The Stewardship Code sets forth certain principles on institutional shareholder engagement, which, among other things, are aimed at stimulating institutional investors to cast informed votes at shareholder meetings, engaging with listed companies on strategy, performance and ESG topics, and being transparent on its voting policy and history. From financial year 2019 onwards, asset owners and asset managers are expected to apply the Code's principles and to report on its implementation.
ii Division of powers – roles of the executive and supervisory boards, and the general meeting
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). Most Dutch public limited liability companies with a listing on the Amsterdam Stock Exchange have a two-tier board.5 In a two-tier board, 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. It is accountable to the supervisory board and the general meeting of shareholders.
The supervisory board is charged with supervising and advising the executive board. It 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. It 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, 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 or dismiss board members, although Dutch companies may deviate from this principle in the articles of association. The vast majority of Dutch listed companies have limited the power of the general meeting to appoint and dismiss board members, by providing that the appointment or dismissal occurs only upon a (binding) proposal from the executive or supervisory board, or can only be taken with an increased majority requirement.
iii Stakeholder model as the guiding principle for a company's boards
The executive and supervisory boards must always act in the best interests of a 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 a company's main interest is to promote shareholder value, which is the predominant model in jurisdictions with an Anglo-Saxon legal tradition. Yet, in recent years, in these jurisdictions there is a debate around the role of a company and its purpose in modern-day society, in particular if companies, asset managers and asset owners should commit to sustainable long-term investment.6
The Dutch stakeholder model also applies in takeover and activist situations, as was confirmed in the case of Elliott Advisors v. AkzoNobel (see Section V.ii).
Key trends in shareholder activism
i General overview
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.
This wave is partly explained by the (global) surge in the early 2000s of changes in corporate law and corporate governance practice aiming to readjust the balance of power between shareholders and boards of directors by enforcing shareholder rights. In the Netherlands, this new way of thinking resulted in, among others, the introduction of the right to place an item on the agenda in 2004. Not surprisingly, this also had an effect on the relationship between companies and its shareholders and, in some cases, even led to (long-term) conflicts between companies and activist shareholders. After the takeover saga concerning ABN AMRO (UK hedge fund TCI holding 1 per cent of ABN AMRO's stock demanded that the board actively pursued certain transactions, including a sale of the company, to maximise shareholder value), the pendulum regarding shareholder rights swung. By the end of the first decade of this century, the Dutch government introduced measures that limited shareholder rights, for example raising the threshold for shareholder to invoke the right to put an item on the agenda from 1 to 3 per cent. Together with case law that limited the areas where shareholders could effectively exercise their right to put an item on the agenda, this had a large impact on the tactics used by activist shareholders (see subsection iv).
More generally, a surge in shareholder activism must also be seen in light of the stance of the global economy and macroeconomic conditions. The period after the 2007–2012 financial and economic crisis was characterised by an uplift in the global economy that, in combination with low interest rates, generated a boost in M&A activity and, consequently, increased shareholder activism activity. JPMorgan reported 676 campaigns globally in 2018 and 590 in 2019, as opposed to 381 campaigns globally in 2012. From those numbers, in Europe, there were 62 campaigns in 2012 and 139 and 129 in, respectively, 2018 and 2019.15
Since 2010, the Netherlands has seen numerous publicly known activist shareholder campaigns. The total level of shareholder activism is most likely significantly higher, however, since shareholder activism in the Netherlands often takes place behind closed doors.
Given the relatively low number of activist shareholder campaigns in the Netherlands compared with the United States and the United Kingdom, trends described in this section are not only based on statistics, but are also based 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 below). These activist hedge funds often seek to initiate M&A activities by 'suggesting' that a company spin off or 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.
|The Children's Investment Fund (TCI)||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); selling 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); selling 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 and NXP||Pressing for a takeover by PPG (AkzoNobel); contesting the agreed offer price in the takeover by Qualcomm (NXP)|
|PGGM, CalSTRS and the City of New York and the State of New York Pension Funds||Mylan||'Vote no' campaign regarding board nominees and executive compensation package|
|ValueAct Capital||Royal Vopak||Stakebuilding|
|Elliott Advisors||NN Group||Stakebuilding; discussions about undervaluation; return of capital to shareholders and strategic footprint|
|The Third Way (group of investors)||Wereldhave||Stakebuilding; proposals for adopting an alternative strategy|
|DavidsonKempner||QIAGEN||Contesting the agreed offer price in the takeover by Thermo Fisher|
iii Institutional investors – active behind the scenes
Over the years, we have seen increased attention to shareholder activism from institutional investors. 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 do. Private engagement to challenge boards remains preferred whereby institutional investors tend to focus on corporate governance issues, such as remuneration policy and corporate social responsibility. In line with a recent global trend, Dutch institutional investors show an increasing focus on remuneration and ESG issues; some have actively challenged the companies they invest in to take more responsibility for their contribution to society. For example, Aegon pushed Dutch oil giant Shell to commit to the targets of the Paris Climate Agreement.
The trend of increased attention to shareholder activism from institutional investors is mainly driven by the fact that a vast majority of institutional investors invest through index funds in listed companies. Because positions in index funds cannot immediately be offloaded when a company's stock is underperforming, institutional investors turn to activism to bring the stock price back in line with, what they think, the value of a company's assets. Globally, we have witnessed several examples of traditional long-only funds embracing activist tactics and other institutional investors publicly supporting activist campaigns.16 Although most activism from institutional investors takes place behind closed doors, 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 Group, waged against animal and fish feed company Nutreco. APG and NN Group 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 Group questioned the Nutreco boards' decision to sell the company to SHV. Eventually, SHV raised its offer, and APG and NN Group sold their shares.
iv 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 is largely driven by the increased financial capacity of the large activist hedge funds. Globally, the total level of capital deployed for new activist campaigns in 2019 amounted to US$42 billion and in Q1 2020 it amounted to US$ 14.4 billion.17
In the Netherlands, this trend was first observed with hedge funds targeting Ahold in 2006 (market cap at that point over €10 billion), ABN AMRO in 2007 (market cap at that point over €50 billion) and Philips in 2007 (market cap at that point over €30 billion). In recent years, Shell (market cap over €230 billion) was targeted by activist shareholders, who were pushing for more focus on sustainable energy and a business model that is more climate change-proof. In 2017, Elliott Advisors targeted AkzoNobel (market cap around €20 billion) and NXP (market cap around €30 billion) and in 2020 Elliott Advisors targeted NN Group (market cap around € 10 billion). A company's large size thus does not deter activist shareholders.
v Objectives of activist shareholders – five common themes
M&A has been 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 in 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 had undervalued NXP. We have seen similar dynamics at QIAGEN, where Davidson Kempner opposed the recommended offer made by Thermo Fisher for QIAGEN. The significant slowdown of M&A activity as a result of the covid-19 pandemic will generally reduce the number of M&A opportunities for activist shareholders in the short term. However, activists may find new opportunities in certain industries with potential for further consolidation due to the weakened competition and lower takeover prices, resulting from the impact of the covid-19 pandemic.
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 representation on the supervisory board, dismissal of certain board members, amendments to executive compensation or a challenge to 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.
Activist investors have pushed companies to make strategic changes and 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 the two activist hedge funds – Hermes and Fursa – criticised the front- and back-end strategies of ASMI.
Capital returns and financial targets
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, SBM Offshore, where Centaurus pressured the board to adopt a different financing structure for its fleet, and NN Group, where Elliott Advisors pushed for additional capital returns on an ongoing basis. As a result of the covid-19 pandemic, most Dutch public listed companies have scaled back their share buy-back programmes and have suspended or decreased their dividend in 2020 to maintain sufficient levels of cash to conquer the effects of the covid-19 pandemic.18
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 best-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- and back-end activities.
vi Tactics used by activist shareholders
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 – to split up or sell the company, or to change the company's strategy – at the general meeting.
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 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 a strategy on the executive board 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 a breakup of the company. Instead, activist shareholders now tend to build up pressure on the company by acquiring a stake, trying to influence the company's strategy through private or public engagement with the boards and sometimes demanding changes in the board's composition.
Typically, activists that aim 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, both publicly and privately, in an effort to improve TNT's operational performance, with the aim of proving 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 2017 and against NN Group in 2020.
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 executive compensation. This trend seems to be largely influenced by landmark cases concerning ABN AMRO and ASMI – case law that was recently confirmed by the Enterprise Chamber in the AkzoNobel case. 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.
vii Higher prioritisation of ESG issues
Another global trend, which arrived in the Netherlands, is that shareholders, both financial and institutional investors, 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 as a whole. Activist shareholders and institutional investors alike have taken note of these sentiments, and they are keen to include ESG matters in their campaigns and investment policies. In 2018, for example, Dutch pension fund ABP took the 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'.19 Dutch (institutional) investors are particular involved in environmental matters. For example, ABP, Aegon Asset Management, APG, NN Investment Partners and Robeco are part of Climate Action 100+, a five-year initiative to engage important greenhouse gas emitters and other companies that have significant opportunities to drive the clean energy transition and help achieve the goals of the Paris Climate Agreement. In 2019, Climate Action 100+ filed a climate resolution with British oil and gas company BP, demanding (1) a strategy consistent with the Paris Climate Agreement; (2) a formulation of climate ambitions and goals for the short-, medium- and long-term; and(3) an annual report on the foregoing. The resolution gained support by several senior executives of BP. It is yet to be seen whether the covid-19 pandemic will be a catalyst for change towards a more 'green' economy, or whether these topics are being moved more to the background.
Recent shareholder activism campaigns
i 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 – urging the boards to take down one of Fugro's defence measures – for the general meeting. Fugro agreed to put Boskalis' proposal on the annual general meeting's agenda for discussion – but not as a voting item – because 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.
ii Elliott Advisors v. AkzoNobel (2017)
In 2017, Dutch paint producer AkzoNobel received three unsolicited takeover proposals from its US competitor PPG Industries. Elliott Advisors demanded that AkzoNobel enter into discussions with PPG. After AkzoNobel rejected the first two proposals from PPG, Elliott Advisors – together with certain other shareholders – requested that AkzoNobel convene a shareholders' meeting with the sole agenda item being the dismissal of the chair of AkzoNobel's supervisory board. This request was rejected by AkzoNobel. After AkzoNobel subsequently rejected PPG's third proposal in May, Elliott Advisors filed a petition with the Enterprise Chamber requesting an inquiry into AkzoNobel's conduct and policies, as well as the introduction of certain interim measures, including an extraordinary general meeting to vote on the dismissal of the chair of AkzoNobel's supervisory board, whom Elliott believed was standing in the way of a discussion with PPG. The Enterprise Chamber dismissed Elliott Advisors' requests and set out important viewpoints for corporate governance in takeover situations. First, 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 their response to an unsolicited takeover proposal (although they remain accountable to their shareholders for their corporate actions). Second, 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 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 Advisors initiated proceedings before the Amsterdam District Court requesting an extraordinary general meeting with the dismissal of AkzoNobel's chair as sole agenda item. AkzoNobel subsequently convened an EGM on its own motion, to be held in September 2018, where AkzoNobel would give further explanation regarding its response to the proposals made by PPG. The dismissal of AkzoNobel's chair was not tabled on the agenda of that EGM. In early August 2017, the Amsterdam District Court rejected the request from Elliott Advisors to convene an EGM regarding the dismissal of the chair and ruled that Elliott Advisors should, before requesting the dismissal of the chair of AkzoNobel, await the explanation AkzoNobel were to give regarding its response to PPG's proposals during the EGM in September 2018. On 16 August 2017, AkzoNobel announced that it had reached a standstill agreement with Elliott Advisors.20
iii 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, from both 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 per cent, or approximately US$5.9 billion in aggregate equity value, on the prior offer price. In exchange, Elliott – together with 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, by then, had 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, had concluded that Broadcom 'might take action that threatens to impair the national security of the United States'.21 Later, in 2018, Broadcom completed its redomiciliation to the United States.
Qualcomm's pursuit of NXP also attracted regulatory scrutiny, particularly from the State Administration for Market Regulation (SAMR) of China. In June 2018, after Qualcomm had extended the offer period multiple times, SAMR 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.
iv Dutch state v. Air France-KLM (2019)
On 26 February 2019, the Dutch state acquired a 12.68 per cent stake (worth €680 million) in airline Air France-KLM SA.22 One day later, the state announced that it had increased its shareholding to 14 per cent (worth €744 million).23 The state explained that, through its shareholding, it wanted to be able to exercise direct influence over future developments at the Air France-KLM holding company 'to ensure that Dutch public interests are optimally assured'. One of the reasons for the state to acquire the shares was that it had become apparent that significant decisions about KLM's strategy were increasingly taken at the level of the Air France-KLM holding company, where the French state had significant influence through its 14.3 per cent stake.24 Furthermore, discussions about the reinforcement of existing agreements about public interest (state guarantees) and the management structure were difficult. Given that the position of Schiphol airport and its most important user KLM are of great importance to the Dutch economy and employment – thousands of jobs are directly and indirectly involved with the airport and the intercontinental network of KLM – the state felt the urge to intervene. With the acquisition of the strategic stake, which added to the 5.9 per cent stake the state already held in the company following the merger between KLM and Air France in 2004, the state obtained formal influence at the highest level and secured a seat at the table for future decision-making. The state's move was seen by many as surprising and by some even as incomprehensible and aggressive, reminiscent of actions of an activist shareholder rather than a state shareholder. In May 2020, the Netherlands Court of Audit concluded that the Dutch government acted irregularly by not informing parliament in advance of the acquisition.25
v Elliott Advisors v. NN Group (2020)
On 17 February 2020, Elliott Advisors reported that it had acquired a stake of more than 3 per cent in the Dutch insurance company NN Group. Elliott Advisors later announced that it had teamed up with Dieter Wemmer, a veteran in the insurance industry and former executive at Allianz and Zurich Insurance Group – a tactic more commonly used by activist shareholders.
After several months of private discussions with the management of NN Group, Elliott Advisors launched a public campaign on 12 June 2020 only two weeks before NN Group was to present its strategic priorities and new targets at its Capital Markets Day.26 Rather than placing a frontal attack on NN Group, Elliott Advisors stressed its conviction in NN Group's underlying value and future prospects, which it believed not to be properly reflected in NN Group's current stock price. In a presentation counting 67 pages, Elliott Advisors outlined its views on NN Group's strengths and alleged persistent undervaluation and urged NN Group to use the Capital Markets Day to address these issues. Elliott Advisors also pushed for increased capital returns and portfolio optimisation.
In a response, NN Group stated that it had taken note of the publication by Elliott Advisors and confirmed that it had engaged with Elliott Advisors. At the Capital Markets Day, NN Group seemingly presented its own plans focused on creating sustainable value and did not mention Elliott Advisors once in its presentation. In an interview with the Dutch financial newspaper, NN Group's CEO, David Knibbe, explained that NN Group had already been working on many of the topics addressed in Elliott Advisors' presentation for a while.
The relatively high number of takeover attempts involving Dutch multinationals in recent years has fuelled a political debate on whether those companies should be more protected against foreign takeover threats. Following 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, on 19 May 2020 the Dutch parliament approved an amendment of the Telecommunications Act, which is soon likely to enter into force. The Telecommunications Act will enable 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 expanded to protection of Dutch companies in general. The intentions of the Dutch Cabinet to implement a 250-day statutory time out period and the interventionist move of the state regarding Air-France KLM should be seen in this light.
The rise of protectionist political sentiments in the Netherlands is consistent with the global trend. Not only in the United States, 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 an EU level, for example, a new EU Regulation for the screening of foreign direct investments (FDI Regulation) officially entered into force on 10 April 2019 and will apply as from 11 October 2020. Although the FDI Regulation neither introduces a screening mechanism on an EU level nor introduces a regulatory body that can issue binding decisions, it does create a cooperation mechanism where Member States and the Commission are encouraged to exchange information and raise concerns related to specific investments. It is expected that the framework will have a significant impact on foreign investment control into the European Union, in particular focused on the growing Chinese investments into the European Union. In response to the covid-19 outbreak, the EU Commission has indicated that member states need to be vigilant and use all tools at EU and national level to use or set up screening mechanisms where acquisitions or investments would be a risk to critical health infrastructures.27
The Dutch government submitted a draft bill implementing the FDI Regulation mid-January 2020; it has not yet been submitted to parliament. In addition, the Dutch government has announced that it will submit a draft bill on M&A screening mechanisms for takeovers or investments regarding vital infrastructure or technology affecting national security. Early June 2020, the Dutch government announced that it intends to introduce a reference date in the draft bill on M&A screening mechanisms.28 The reference date is set on 2 June 2020 and the government would retroactively screen takeovers and investments if there is reason to do so based on national security grounds, as per that date once the bill enters into force.
Over the past two decades, there have been several high-profile cases in the Dutch market where activist shareholders have pushed companies to break up, sell divisions and change their corporate governance structures. Following decisions of the Supreme Court in ABN AMRO and ASMI, activist shareholders (while still pursuing the same objectives) have been forced to shift their approach to some extent: from having confrontations over a company's strategy at general meetings (by proposing agenda items), to engaging privately and publicly with boards to change the target company's direction. As a result of these landmark cases, tools available to activists may seem to have lost some of their power over the years. But that's not all. The introduction of the principle of long-term value creation in the Corporate Governance Code; the efforts made to restore the balance of power between boards and shareholders after the financial crisis; and, more recently, the regulatory developments in light of the protection of (certain) Dutch companies, have all contributed to changing how activist shareholders operate and execute their campaigns.
Despite all these changes, the continuous rise of shareholder activism over the years highlights the simple fact that it is here to stay. With this in mind, boards, management teams and general counsel of leading Dutch multinational corporations have to be vigilant and well prepared for the unexpected. Especially, considering that today, activist shareholders are – given these changed circumstances – more comfortable to engage in private negotiations with company boards. The fact that activist shareholders choose to fly under the radar makes them less predictable and makes it harder for the outside world to draw lessons from a company's experience in dealing with an activist shareholder. Apart from continuously monitoring the company's share price and shareholder base and, more frequently, taking a careful look at the company's strategy and vulnerabilities, boards must actively prepare for activist shareholders and unwanted bidders, for example, by conducting simulations and trainings together with their advisors.
There is, however, one thing shareholder activism has not been proven immune to: the covid-19 pandemic and its effects on the global economy. In the immediate aftermath of the covid-19 outbreak, shareholder activist campaigns seem to have declined in Europe. One explanation for this is that M&A activity is now down across the globe, which historically has been one of the most important drivers for shareholder activism. The current volatility and instability of the public equity markets could, however, eventually lead to an increase in opportunistic moves by activist shareholders and strategic and financial parties because they could sweep up a company's stock at a relatively low price, as compared with the underlying value of the company's assets and value creation potential. Companies facing difficult financial situations may also increasingly be confronted with activist shareholders demanding changes to the company's management or strategic path, in an attempt to turn the company around and creating shareholder value on the short- to medium-term. Whether activists will be successful in doing so and whether this will have positive effects on the company on the long term remain to be seen.
All in all, it is likely that the covic-19 pandemic will have an impact on shareholder activism for the next few years – both in terms of activity levels and activist themes. While the covid-19 pandemic has taught us to hold back on crystal ball gazing, a careful prediction is that while shareholder activism may dip on the immediate short-term it is expected to come back to pre-covid-19 levels in the years to come. Especially given the many challenges that companies are facing in the near future, it will be critical for companies to be prepared for when that moment comes and an activist shareholder is – remotely – knocking on the door.
1 Paul Cronheim is a partner, and Willem Bijveld and Frank Hamming are senior associates at De Brauw Blackstone Westbroek NV.
2 For detailed commentary on the 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 (2018).
3 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.
4 First Dutch Stewardship Code available at www.eumedion.nl/en/news/first-dutch-stewardship-code-published.
5 On the Amsterdam Stock Exchange, eighteen Dutch public limited liability companies have a two-tier board structure and two have a one-tier board structure. One-tier board structures are often seen with Dutch public limited liability companies with a listing on the New York Stock Exchange or Nasdaq; for example, Mylan NV, NXP Semiconductors NV and Unilever NV.
6 See for example The UK Stewardship Code 2020 that aims 'to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society', and the statement of the US Business Roundtable that 'moves away from shareholder primacy and includes commitment to all stakeholders'.
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 As a result of the covid-19 pandemic, the Dutch government introduced an emergency bill that allows Dutch companies to organise virtual general meetings. Anyone attending the meeting, including directors and shareholders, can only do so electronically. This includes providing shareholders with the option to follow the general meeting by video or audio webcast.
10 Press release, 'ING reaches settlement agreement with Dutch authorities on regulatory issues in the ING Netherlands business', 4 September 2018.
11 A shareholder can also initiate summary proceedings before the competent district court. However, summary proceedings are much less common, since the Enterprise Chamber is regarded as the specialised court regarding corporate litigation.
12 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 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 Pharmaceutical Industries) 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.
13 According to the 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 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.
14 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 publish an offering prospectus if it issues shares to fewer than 150 retail investors.
17 See, for instance, Lazard's Review of Shareholder Activism – Q1 2020, available at: https://www.lazard.com/media/451191/lazards-q1-2020-review-of-shareholder-activism-vf.pdf.
18 In this regard see also: Press release, 'ECB asks banks not to pay dividends until at least October 2020', 27 March 2020.
19 Press release, 'ABP Pension Fund excludes tobacco and nuclear weapons', 11 January 2018.
20 Press release, 'AkzoNobel reaches agreement with Elliott', 16 August 2017.
21 Press release, 'Presidential Order Regarding the Proposed Takeover of Qualcomm Incorporated by Broadcom Limited', 12 March 2018.
22 Press release, 'The Dutch state acquires 12.68% of the shares in Air France-KLM', 26 February 2019.
23 Press release, 'Update: Dutch state acquires 14% of the shares in holding Air France-KLM', 27 February 2019.
24 For the shareholder base of Air France-KLM see: www.airfranceklm.com/en/finance/financial-information/capital-structure.
25 Press release, 'State's 2019 acquisition of Air France-KLM shares was irregular', 20 May 2020.
27 Communication EU Commission, 'Coordinated economic response to the COVID-19 Outbreak', 13 March 2020.
28 Ministry of Economic Affairs and Climate Policy, 'Announcement of the reference date in the bill on investment assessment for risks for national security in acquisitions and investments' (in Dutch), 2 June 2020.