Overview of Dutch law in relation to a Dutch protective foundation for listed companies

Frank Peters / 13 Mar 2017

Why a protective foundation?

The attraction of wider access to capital may persuade some companies to seek a public listing. Typical for the Dutch market though, is the possibility for the listed company to create a defense mechanism against the influence from substantial shareholders in the form of a protective foundation. The protective foundation is created by or on request of the company itself. It is controlled by persons friendly to the company, and is provided by the company with a call option and a funding line to acquire a blocking or other decisive chunk of (preference) shares (at nominal value) and votes.

This is a common structure in the Netherlands. It is even available to companies whose are and listing are outside the Netherlands, and whose only tie to the Netherlands is its formal corporate seat. In all of these situations, Dutch law applies to the relations with shareholders and the company.

Examples of protective foundations

As per March 2017, for instance the f0llowing Dutch listed companies had a structure of this kind in place:

  • Fiat Chrysler (BIT: FCA; NYSE: FCAU), Altice (AMS: ATC), Mylan (NASDAQ: MYL), each of which only has its formal corporate seat in The Netherlands
  • ASMI (AMS: ASM), ING Bank (AMS: INGA), ASR (AMS: ASRNL)

Dutch corporate an securities laws relating to protective foundations

From case law of the Dutch Supreme Court and the Enterprise Chamber (a specialized court in Amsterdam), the following (non exhaustive list of) restrictions pertaining to the issuance of preference shares to a foundation as a protective measure may be deduced:

    1. In principle, the company is at liberty to pursue as a policy to prevent a shareholder that is not friendly disposed to it from obtaining a dominant or significant degree of control. This means that in principle, protective measures are permissible. However, a protective measure may under specific circumstances fall foul of the Dutch legal standards of reasonableness and fairness and thus be impermissible.[i]
    2. The issuance of shares to a foundation may be justified if this is required, amongst other things, in the light of the company’s continuity or that of its policy and the interests of those involved therein.[ii]
    3. The issuance of the preference shares must be necessary to achieve and preserve a status quo within the company for the time being.[iii]
    4. The space created by the issuance of the preference shares must be used for consultation between the parties involved.[iv] The company must be given the opportunity to investigate the intention of the shareholder(s) in question, to communicate on that matter with him or them and other shareholders and to look for alternatives.[v]
    5. The issuance of preference shares must be sufficient and proportional relative to the impending danger.[vi]
    6. A shareholder may not forfeit control for a prolonged period of time by reason of the issuance of preference shares. Therefore, the issuance of shares to a foundation for an unlimited period of time, is impermissible.[vii]
    7. In principle, the foundation may not use its voting rights for purposes other than those for which the foundation has been granted the option.[viii]
    8. The foundation must, independent of the company’s management board and supervisory board, act autonomously, pay proper heed to the various interests involved and ensure that no unacceptable conflict of interest arises.[ix]
    9. If the listed company is a financial institution, the protective foundations will require a declaration of non-objection from the Dutch regulator to (acquire the right to) increase its stake to a more than 10% votingright.
    10. If the protective foundation acquires a 30% stake after a public offer is made, it is exempt from the mandatory public offer for all shares for two years as of the issuance of the shares to the foundation[x]. If no public offer is made, the foundation will have to stay below 30% so as not to trigger the mandatory public offer requirement.

If you would like to know more about protective foundations, their acceptability under Dutch law and how to deal with them as a minority or activist shareholder, please contact Frank Peters.

 

NOTES:

[i] Enterprise Chamber 3 March 1999 (Gucci), JOR 1999/87.

[ii] Supreme Court 18 April 2003, (RNA) NJ 2003, 286.

[iii] Asser-Maeijer 2-II, no. 635, p. 802 and Dutch Supreme Court, 18 April 2003 (RNA), NJ 2003, 286.

[iv] Asser-Maeijer 2-II, no. 635, p. 802.

[v] Enterprise Chamber 17 January 2007 (Stork), ARO 2007, 26.

[vi] Asser-Maeijer 2-II, no. 635, p. 803 and Dutch Supreme Court 18 April 2003, (RNA), NJ 2003, 286.

[vii] Supreme Court 18 April 2003 (RNA), NJ 2003, 286.

[viii] Enterprise Chamber 17 January 2007 (Stork), ARO 2007, 26.

[ix] Enterprise Chamber 5 August 2009 (ASMI), ARO 2009, 127.

[x] Art. 5: 71 Wft.

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