RIGHTS OF MINORITY SHAREHOLDERS IN THE NETHERLANDS

 

L. Timmerman and A. Doorman*                                                                             III A 3

 

 

 

1            Introductory remarks

 

1.1        Position of shareholders under Dutch company law

 

Historically, the position of shareholders in Dutch companies has been rather weak, especially when compared with that of the board of directors. As far as we know, no serious investigation has ever been conducted into the question of why the board of directors of a Dutch company has such a strong position. A parallel may exist with other phenomena in Dutch society, most notably the trust Dutch citizens have always put in their government and the acceptance of a very indirect form of democracy. Whatever the reasons may be, the weakness of the position of shareholders has made it unnecessary to direct special attention to the position of minority shareholders.

 

1.2        Shift in power in favour of shareholders

 

Recently, we have witnessed a strengthening of the position of the shareholder at the expense of the power of the board of directors and the supervisory board. This shift in power in favour of shareholders may result in increasing attention for the position of minority shareholders in the coming years.

 

        The shift in power in favour of the shareholder has many reasons, including a recent influential advice from the Social and Economic Council to the Dutch government and parliament,[1] the pressure exercised by institutional investors on the Dutch government and companies to limit the use of anti-take-over devices, the expanding shareholder base in the Netherlands and the increasing number of foreign professional investors in Dutch companies. This strengthened position of shareholders has also resulted in increased attention for the position of minority shareholders in the Netherlands. A good illustration of this is the legislative proposal for a new section 2:118a that will give shareholders who hold 1 percent of the issued capital the right to place an item on the agenda of the general meeting of shareholders.

 

1.3        Why minority protection?

 

Before elaborating on the protection of minority shareholders in the Netherlands, it will be useful to make some short remarks on why minority shareholders should receive protection and what the ultimate goal of this protection should be. At least three different reasons justifying minority protection come to mind. First, if the Dutch legal system does not provide adequate protection of minority shareholders compared with foreign legal systems, foreign investors will not invest in Dutch companies and Dutch investors will increase their investments in foreign companies. Second, and related to the first point, weak protection of minority shareholders increases the average cost of capital for a company, putting it at a competitive disadvantage with foreign companies. A final reason for an adequate protection of minority shareholders= rights is more normative. There seems to be no good reason why it should be considered fair and equitable to disproportionate­ly disadvantage minority shareholders compared with larger shareholders, only on the grounds that they hold fewer shares. In our opinion, all shareholders, large or small, should receive adequate protection from the law.

 

1.4        Who is the minority shareholder?

 

In Dutch legislation, established case law and doctrine, you can look in vain for a general definition of a minority shareholder. Dutch law assesses whether a specific right or action should be given to a minority shareholder on a situation-to-situation basis and also decides from case to case whether one qualifies as a minority shareholder. This decision whether one has a right or an action is usually described in Dutch law in terms of percentage of the issued share capital, but sometimes also in terms of the absolute book value of the shares required, or as a combination of both. The fairness of this adherence to percentages in deciding whether a shareholder is a minority shareholder can be questioned. Dutch law, for instance, permits the issue of priority shares. These shares have special controlling rights attached to them, making it possible to control the company without holding a large percentage of the shares and without providing a large share of the company=s capital. A consequence of this is that a shareholder providing the majority of the capital may sometimes not control the company. In such a case the >majority= shareholder is effectively in a minority position with regard to the exercising of controlling rights. Under Dutch company law, capital and control are not necessarily in line, so it is, in our opinion, impossible to define the concept of >minority shareholder= without bearing in mind the control situation in the company. When a company makes use of a specific control structure, whether that be priority shares, a pyramid structure, or preference shares, percentages lose much of their relevance. Under these circumstances we would define minority shareholders as those shareholders who, irrespective of the amount of capital they provide, are unable to exercise any significant form of control within the company.

 

1.5        What are minority rights?

 

In Dutch company law several rights are given to all shareholders, irrespective of the number of shares they hold. Not all of these rights can be qualified as minority rights. The right to vote in the general meeting of shareholders, for example, will usually not be a minority right for two reasons. First, because this right is not specific to minority shareholders and second, because this right usually has no significant meaning for minority shareholders. In the event of a disagreement, they will be the ones to lose the vote at the general meeting of shareholders. In our opinion, for a right to be a true minority right, it needs to possess the characteris­tic that it creates the possibility that an outcome can be reached that is different from the outcome that the majority of the shareholders wish. This means that the minority shareholder can interfere through a minority right in the affairs of the company, thereby correcting the policies of the majority shareholder. Within the minority rights we draw a distinction between positive and negative rights. By positive rights we mean the ability to initiate policies by the company that would not have been pursued without the initiative (see nos 15-20). By contrast, negative rights refer to the possibility for a minority shareholder or a group of minority shareholders to block a resolution that is desired by the majority (nos 21-26). In addition to these two categories we can mention a third: that of the so-called >normalising= minority rights. These are rights that the minority shareholder can exercise to force the company to comply with statutory provisions or the articles of association. In this report we will not treat these rights as a separate category since Dutch company law does not contain many of them[2].

In this report Chapters II and III give general overview of minority rights in the Dutch legislation. Chapters IV, V and VI deal with specific aspects of minority protection. The report ends with a conclusion. In this report decisions from the Enterprise Section of the Amsterdam Court of Appeal will be indicated with OK (Ondernemingskamer) Decisions of the Supreme Court of the Netherlands wille be indicated with HR (Hoge Raad). Their most important decisions are published in the Nederlandse Jurisprudentie (NJ) en Jurisprudentie, Onderneming en Recht (JOR) and referred to by year of publication and by case number. With BV we mean the Dutch variant of the private limited company, with NV the public limited company.

 

2            Rules protecting minority shareholders

 

2.1        Methods of protection of minority shareholders

 

In Dutch company law, rules protecting minority shareholders are mainly but not exclusively statutory in nature. As a result of the fact that minority shareholder protection has never received much attention, protection provisions are found scattered over several sources, both in >hard= law and in >soft= law. Another distinction that can be made is between provisions that provide minority protection in the narrow sense, usually giving shareholders certain rights and a remedy to effectuate these rights, and rules that are primarily directed at improving the availability of information and of market transparency. This second set of rules usually has as a side-effect an improvement in the position of minority sharehol­ders. We will refer to this method of protection as protection in the broad sense. We will now discuss eight sources of minority shareholder protection.

2.2        Book 2 of the Dutch Civil Code

 

Book 2 of the Dutch Civil Code which regulates the legal persons, such as the BV and the NV, may be regarded as the most important source for minority shareholders protection. It can be characterised as >hard= law and provides protection in the narrow sense. Perhaps its most fundamental provision offering protection for minority shareholders is section 2:201(92) which provides for equal protection of the shareholders (see further nos. 27-29).

 

Section 2:201(92):[3]

Except as is otherwise provided for in the articles, all shares shall rank pari passu in proportion to their amount.

A company limited by shares must treat shareholders and holders of depository receipts whose circumstances are equal in the same manner.

        Other important provisions for the protection of minority shareholders in Book 2 are sections 2:15 about the nullification of resolutions, section 2:220(110) about the right for shareholders who together hold a certain percentage of the shares to convene a general meeting of shareholders, section 2:343 providing a shareholder an exit-opportunity in case the continuation of his shareholding can no longer be reasonably expected of him due to the conduct of other shareholders (no. 33), and section 2:344-359 about the right to demand an inquiry (nos 30-31).

 

2.3        Book 3 of the Dutch Civil Code; class action

 

Book 3 of the Dutch Civil Code, on property law in general, contains several important provisions for minority shareholders. For minority shareholders in Book 3 is section 3:305 relevant. This section allows minority shareholders to organise into an association or a foundation and to have the entity bring an action against the company for the benefit of the collective. It is not possible for the entity to sue for damages but it is able to request a declaratory judgement. With this declaratory judgement, the individuals involved can then sue for damages. An association or foundation is entitled to initiate a class action if the association or foundation, according to its articles of association and in practice, protects the same interest as the interest of the individuals that has been violated and that the interests are fit for bundling. Representativeness is not a condition or a hurdle, especially not when the association or foundation limits its actions to its members. Section 3:305a reduces the cost of litigation. These costs can be high, caused among other things by the obligation to be represented by counsel and the danger of being ordered to also pay the other party=s legal costs.

 

2.4        Code of Civil Procedure

 

This book contains three relevant sets of provisions for the protection of minority shareholders. These are first, sections 999-1002, which concern the annual accounts, the annual report and the information that has to be added to the accounts and the report. Any affected party can demand that the company alter the aforementioned documents and bring them into line with a legal injunction, provided by the Enterprise Section of the Amsterdam Court of Appeal. Refusal to do so is a criminal offence. Second, section 214 offers minority shareholders the opportunity to request a provisional examination of witnesses in preparation for proceedings which are being considered. Finally, section 843a offers minority shareholders the opportunity to demand in court that they will be allowed to inspect a private instrument.

 

2.5        Commercial Code

 

In sections 8 and 11, the Commercial Code contains two provisions that can be applied to protect the interests of a minority shareholder. Section 8 gives a minority shareholder the right to ask the court to demand the disclosure of the books and documents that the company is obliged to keep by law during legal proceedings. Section 11 of the Commercial Code contains the obligation to submit the entire accounts to the other party in legal proceedings. This obligation to submit is restricted in the sense that it only exists with regard to >partners=, while it is uncertain at best whether a minority shareholder qualifies as a partner.

 

2.6        Securities Transaction Supervision Act 1995

 

This statute provides protection in the broad sense. For the purposes of minority shareholder protection, three aspects seem relevant. First, sections 3-6 prohibit the issue of shares to the public unless the company has made sure that adequate information is available to the investors. Second, sections 29-42 regulate the control and supervision of the securities markets by the Minister of Finance, or by other entities after delegation; the Minister of Finance has delegated his powers to the Stichting Toezicht Effectenverkeer. Finally, sections 46-47 make insider trading a criminal offence. Recently, rules relating to a public offer have been incorporated into the Securities Transaction Supervision Act 1995. The purpose of these rules is to ensure that shareholders receive adequate and timely information about the public bid.

 

2.7        Disclosure of Major Holdings in Listed Companies Act 1996

 

This statute provides protection to minority shareholders through the improvement of market transparency and information provision. This statute obliges anyone who passes certain shareholding thresholds in either direction to report this to the company and the Minister of Finance, who will make the information available to the public. Again, the Minister of Finance has delegated his powers under this statute to the Stichting Toezicht Effectenverkeer.

 

2.8        Listing and Issuing Rules

 

These are rules developed by the Amsterdam Exchange, which is now a subsidiary of the Euronext Exchange, and to which a company that seeks a listing is bound through the listing agreement it enters into with the exchange. They can therefore be characterised as legally binding, but only in the relationship between the listed company and the exchange. The rules contain several provisions that protect minority shareholders. Examples are sections 8-24, which contain the obligation to make a prospectus available when issuing securities and that give detailed information on what to include in the prospectus. A second example is section 26, which explicitly states that the issuing company is obliged to treat all shareholders who are in equal circumstances in an equal manner. Finally, section 28 is an important section, giving a detailed overview of the information that the issuing company has to provide to the public. It contains the general obligation to make available all the facilities and information necessary for the shareholders to be able to exercise their rights. The most important, more specific, obligation can be found in section 28h. This provision contains the obligation to immediately make available a publication on every fact or event concerning the issuing company that can be expected to significantly influence the price of the company=s stock.

 

2.10      Corporate Governance in the Netherlands; report by the Peters Committee

 

In 1996 and 1997, the Corporate Governance Committee (also called the Peters Committee after its chairman) presented two reports[4] (a draft and a final version). Among other things, these reports contained 40 recommendations concerning corporate governance in the Netherlands. The report mainly focuses on the relationship between the board of directors, the supervisors and the shareholders. It pleads for a strengthening of the position of shareholders and urges them to participate more actively in the affairs of the company. The report is an example of a code of best practice in the sense that it is not legally binding; it merely makes recommendations. However, it does try to improve the position of the shareholder in a direct way. Examples include recommendation 26, which asks companies and investors to reassess the role played by shareholders, based on the principle that capital and control should be in line, and recommendation 29 which asks management to assess the desirability of an increased influence of investors and how to achieve this. Recommendation 27, the general meeting of shareholders should be the forum to which the supervisory board and the board of directors report and are accountable, recommendation 28, the board of directors and the supervisory board should have the confidence of the general meeting of shareholders, and recommendation 30, requests made by investors who represent 1% of the issued capital or NLG 500,000 in shares to have items placed on the agenda should in principle be honoured, are more detailed.

 

        It was left to companies to voluntarily adopt the recommendations. Evaluation showed that only a small percentage of Dutch firms made significant changes to their corporate governance policy and that conformation was particularly weak with regard to those recommendations concerning increased shareholder power. Therefore, the Dutch government has started to translate some of these recommen­dations into legislation. A good example is the proposal for a new section 2:114a that will give shareholders who hold 1 percent of the issued capital or shares with a market value of _ 50 million (this concerns listed companies) the right to place an item on the agenda of the general meeting of shareholders. This is a direct legal translation of recommendation 30 of the Peters Committee. Another example is the new provision in Book 2 that adoption/approval of the annual accounts does not imply a discharge for the board members from liability for their management. Under this new rule, both have to be separate items on the agenda of the general meeting of shareholders.

 

3            An overview of minority rights

 

3.1        Overview of the thresholds for minority shareholders= rights (positive minority rights)

 

Scattered throughout Book 2 of the Civil Code, there are several different thresholds for minority shareholders to qualify for a right. The most important positive minority shareholders= rights are listed below, including the number of shares the shareholder has to hold in order to be able to exercise the corresponding right.

 

3.2        A single share

 

The following rights attached to a single share are minority rights.

Section 2:222(112) The right to convene a general meeting of shareholders when those who are authorised under section 2:219(109) or the articles have failed to do so, but only after authorisation by the President of the District Court. Section 2:222(112) is an example of a normalising minority right (see no. 5).

Section 2:343 The right to demand in court that one=s shares will be acquired by other shareholders when one=s rights or interests are prejudiced by the conduct of one or more co-shareholders to such an extent that the continuation of the shareholding can no longer reasonably be expected of one.

Sections 999-1002 Code of Civil Procedure The right to request the company to alter the annual accounts and annual report and to bring them into line with a legal injunction. These sections are also an example of a normalising minority right (see no. 5).

 

3.3        5% of the issued capital

 

Section 2:331 The right to prevent a transferee company resolving to merge by a resolution of the board of directors. Under normal circumstances a company merges by resolution of its general meeting of shareholders (section 2:317 subsection 1). However, the law makes an exception to this rule for the transferee company on the grounds that for such company a merger can possibly be of little importance and does not substantially affect the position of the shareholders. If the articles do not prevent this, and if the company has stated its intention to do so in the published notice of the deposit of the merger proposal, a merger by a resolution of the board of directors is possible. However, subsection 3 enables a group that represents at least 5% of the issued capital to prevent this by requesting the board of directors to convene a general meeting of shareholders to decide on the merger within one month after such publication.

Section 2:334ff The right to prevent the transferee company resolving upon the division by a resolution of the board of directors. This right is comparable with the right to prevent a the company resolving to merge by a resolution of the board of directors.

 

3.4        10% of the issued capital

 

Section 2:220(110) The right to convene a general meeting of shareholders. This right is restricted in several ways because convening a general meeting of shareholders without the consent of the board of directors amounts materially to a deed of mistrust and can thereby harm the interests of the company.

Section 2:346 The right to ask for an inquiry. This right will be discussed in more detail in nos. 30-31.

 

3.5        1/3 of the issued capital

 

Sections 2:336 and 2:342 The right to demand in court that a shareholder, usufructuary or pledgee of a share who has the right to vote transfers his shares or his voting right should his conduct prejudice the interests of the company to such an extent that continuation of his shareholding or of his exercise of the voting right cannot reasonably be tolerated.

 

3.6        Analysis of the above-mentioned thresholds.

 

The rights of shareholders or a group of shareholders who have reached a certain threshold refer to four different criteria: a single share, 5%, 10% and 33 1/3%. First, it is interesting to note the low threshold for asking for an inquiry. Even though the initial hurdle seems rather high, 10% of the issued capital, it is significantly lowered by stating that it also suffices to hold shares with a nominal value of _ 225,000. Especially for large companies, this _ 225,000 threshold is much lower than the 10% of the issued capital hurdle. This cannot but reflect the fact that the Dutch legislator has considered it necessary for the inquiry proceedings to provide adequate protection to (smaller) minority shareholders. A second interesting point is that Dutch company law contains four different hurdles for exercising minority rights. However, there does not seem to be any coherent thought behind this division into four categories. There seems to be no reason why, for example, a minority shareholder should require only 5% before being able to exercise the right to prevent a transferee company resolving to merge by a resolution of the board of directors, but 10% before he is able to exercise the right to convene a meeting of shareholders.

 

3.7        Negative minority rights

 

In the following nos. an overview of qualified quorums and majorities is geven which Book 2 prescribes.

 

3.8        Blocking power for a single shareholder.

 

Section 2:15 The right to ask for nullification of a resolution if the shareholder who requests nullification has a reasonable interest in the due performance of the obligation which has not been performed. This right can be exercised with regard to a resolution by any constituent body of the legal person.

Section 2:231(121) Subsections 1 and 3 limit the amendment of the articles of association. They state that if the articles exclude the power to amend certain provisions in the articles from the general meeting of shareholders or even completely exclude the power to amend the articles, such is nevertheless possible by a unanimous vote at a general meeting of shareholders at which the entire issued capital is represented.

Section 2:323 The right to ask for avoidance of a legal merger if the requesting shareholder has a reasonable interest. This section lists four grounds for avoidance of a legal merger. For the protection of minority shareholders, the right to declare avoidance of the merger on the grounds of avoidance of a resolution of the general meeting of shareholders required for the merger is particularly relevant.

Section 2:334u The right to ask for avoidance of a division of the legal person if the requesting shareholder has a reasonable interest. Generally speaking, the division of a legal person can be declared void for the same reasons as apply to a legal merger.

Section 2:238(128) The articles of association may contain a provision that allows for the passing of resolutions by shareholders outside the context of a general meeting of shareholders. Relevant in this context is that even should the articles explicitly provide this option, resolutions may only be passed by a unanimous written vote of the shareholders entitled to vote.

 

3.9        90% of the issued capital (blocking power when the minority group possesses more than 10% of the issued capital).

 

Section 2:18 A resolution to convert, passed in accordance with the requirements for a resolution for an amendment of the articles, and a 9/10 majority of the votes cast at the general meeting of shareholders are needed for a conversion from one legal entity into another. Section 2:181(71) subsection 2 These sections give an additional right to minority shareholders. This right can be characterised as a positive right but will be discussed here because it is attached to the right embedded in section 2:18. When a public or a private limited company is converted into an association, a co-operative or an insurance guarantee company one loses the quality of shareholder and becomes a member. Because this conversion fundamentally changes one=s proprietary rights position, section 2:181(71) offers any shareholder who has not consented to the conversion resolution the right to request that the company indemnify him for the loss of his shares.

 

3.10      2/3 of the votes cast (blocking power when the minority group possesses more than 1/3 of the votes cast).

 

Section 2:206a(96a) subsection 7 In the event of a capital increase, there is in general a pre-emption right for the existing shareholders. However, section 2:206a(96a) subsection 6 states that this pre-emption right may be restricted or excluded and that the general meeting of shareholders can transfer its powers in this matter to another constituent body. Subsection 7 then states that for these decisions, a 2/3 majority of the votes cast is required if less than half of the issued capital is represented.

Section 2:209(99) subsection 6 A reduction of the capital is possible by a resolution of the general meeting of shareholders. For the NV, this resolution requires the approval of 2/3 of the votes cast if less than half of the issued capital is represented at the meeting. There is no corresponding section for the BV, mainly due to the fact that this provision serves to protect the shareholders not present at the meeting. The underlying view was that shareholders in a BV have closer links with the affairs of the company and that they will sooner appear at a meeting should they disagree with a proposed resolution.

Section 2:330 This section contains a provision concerning the majority required for a legal merger.

Section 2:334ee Analogous to the legal merger, in the case of a legal division of a company, a resolution to divide an NV or a BV requires 2/3 of the votes cast should less than half of the issued capital be represented at the general meeting of shareholders.

 

3.11      1/3 of the votes cast (blocking power when the minority group possesses more than 2/3 of the votes cast).

 

Section 2:243(133) subsection 2 It seems strange to discuss a provision that requires 2/3 of the votes cast and also represents at least 50% of the issued capital as a right belonging to a minority. However, if we define minority in a broad sense, not only with regard to percentages of the capital, but also with regard to the controlling position in the company (see no. 5), this right can be seen as a minority right. The articles may contain a provision that states that the appoint­ment of a director by the general meeting of shareholders shall be made from a list of candidates containing the names of at least two candidates for each vacancy. The articles may grant this binding right of nomination to everyone. Subsection 2 then states that the general meeting may resolve by a resolution passed by a 2/3 majority representing more than half of the votes that such a nomination list shall not be binding.

 

3.12      Analysis of the above mentioned thresholds

 

As with the positive rights described in nos. 15-20, we can observe several thresholds before a minority shareholder obtains the negative right to block a decision desired by the majority. However, because the exercise of the aforementi­oned negative right is made dependent on the size of the stake of the majority, it is unnecessary for minority shareholders to combine their holdings before being able to exercise their rights. Analogous to the positive minority rights, the allocation of negati­ve minority rights either on an individual or on an aggregate level is not elaborately thought-out and seems to be more or less random. It is interesting to note that Dutch company law does not prescribe any qualified majorities for two important decisions within a company. These are the amendment of the articles (section 2:231(121)) and the winding up of the company (sections 2:19-21). However, in practice, many articles of association contain provisions that prescribe a qualified majority for amendment of certain, or in some cases all, sections of the articles.

 

4            The principle of equality

 

4.1        Relation to reasonableness and fairness

 

The relevant section of Dutch company law with regard to the principle of equality (section 2:201(92) subsec­tion 2) (see no. 7) is a direct result of the EC=s second company law directi­ve.[5] This directive is limited to subjects related to capital protection and is also only applicable to public companies. This means that the Dutch legislator is under no obligation to extend the range of the principle of equality beyond the subject of capital protection. Examining the Dutch text however, it gives no indication that its scope is limited to capital protection issues. The conclusion that section 2:201(92) subsection 2 is not limited to capital protection becomes even stronger when we examine the Memorandum of Reply.[6] It states explicit­ly that the principle of equality extends beyond issues of capital protection.

 

        Two important rules following on from the principle of equality as defined in section 2:201(92) can be found in sections 2:206a(96a) and 208(99). These sections indicate that, in principle, existing shareholders have a pre-emption right on any issue of shares pro rata to the aggregate amount of their shares. Section 2:206a(96a) subsection 6 states that the general meeting of shareholders can decide to pass off the pre-emption right. Nevertheless, the principle of equality overrides such a decision[7]. Section 2:208(99) subsection 4 states that a partial repayment on shares or a release from the obligation to pay up must be made pro rata to all the shares unless, in respect of the issue of a certain class of shares, the articles provide that a repayment may be made or a release may be given exclusively in respect of such shares.

 

The principle of equality is of the utmost importance for the protection of minority shareholders. The Dutch Supreme Court does not regard section 2:201(92) subsection 2 as a provision from which no departure is allowed. It interprets the rule of section 2:201(92) flexibly. First of all, it is important to realise that, as Van Schilfgaarde mentions[8], the equality defined in subsection 2 is not an absolute equality but rather a relative one; equality in proportion to the amount of capital the shareholder in question provides.

 

        However, the exact content of the principle of equality is in our opinion dependent on the nature of the subject in question. With regard to certain rights, for example, the right to vote in a general meeting of shareholders and the right to receive a dividend, equality is indeed relative; there it is proportio­nal to the number of shares the shareholder holds. With regard to certain other rights however, mainly information related rights, the equality has a different nature; there it is absolute, for under Dutch company law a company is not generally permitted to provide certain (important) information to large share­holders but not to smaller shareholders.

 

Second, departure from the principle of equality is permitted when shareholders are not in equal circumstances. Finally, departure is also permitted when there is a reasonable and objective justification for the unequal treatment[9]. The relations­hip between subsection 2 and subsection 1 is intriguing, as subsection 1 of section 2:201 (92) opens up the possibility to provide in the articles that the rule that all shares rank pari passu in proportion to their amount is not applicable. The Dutch legislator has indicated that in his opinion a provision in the articles as mentioned in subsection 1 can mean that the shareholders are not in equal circumstances, as mentioned in subsection 2[10]. However, we question the opinion that different shareholders can be said to be in different circumstan­ces on the basis of the articles alone. The legislator has clearly indicated that in his opinion section 2:92 subsection 2 is nothing more than an elaboration of section 2:8, which prescribes the dictates of the reasonableness and fairness of the relation between the company and its shareholders. We are of the opinion that not only is subsection 2 an elaboration of section 2:8, but that subsection 1 and the subsections 1 and 2 together cannot be understood correctly either without paying attention to the influence of reasonableness and fairness. The question, in our opinion, should therefore be >do the principles of reasonable­ness and fairness ensure that a different treatment of shareholders solely based on a provision in the articles is reasonably and objectively justified?=. We do not think that, generally speaking, the answer to this question can be in the affirmative.

A further question is whether a company may include provisions in its articles that draw a difference between shareholders who are in equal circumstances, if all the shareholders agree? Would such a provision of inequality also be used against shareholders who do not belong to the group of shareholders which voted in favour of such a provision, but became shareholders later, assuming that the provisions in the articles are sufficiently known to these new sharehol­ders? Would it be allowed to treat shareholders unequally if all of them agreed, even if there is no explicit provision in the articles that allows this? These are all fundamental questions for which Dutch company law, established case law and doctrine hardly provide any answers. On the grounds of section 2:201(92) subsection 1, it is undoubtedly possible to determine in the articles that in certain cases shares have different rights and obligations attached to them. But, as in all matters concerning company law, the principles of reasonableness and fairness (section 2:8) play a decisive role in the background. From a company law point of view, equality and freedom of contract are not principles that take precedence over the principles of reasonableness and fairness, but can and should be seen either as resulting principles (equality) or principles that may never conflict with the demands of reasonableness and fairness (complementary therefore means freedom of contract). This point of departure means that the following frame of reference could in our opinion be useful when studying these questions.

 

        On the basis of section 2:201(92) subsection 1 alone, it is impossible to legally validate divergence in the articles from the principle of equality as described in subsection 2. However, a divergence in the articles is possible when the law explicitly states elsewhere that divergence from the principle of equality in the articles is allowed with regard to a specific subject. By restating the principle from section 2:201(92) subsection 1 and limiting the opportunity for divergence to a specific subject, the legislator has made it clear that it has in abstracto made the trade-off between the principles of equality and that of freedom of contract B the principles of reasonableness and fairness do not oppose an unequal treatment of shareholders with regard to this specific subject. One example of this approach in our opinion is section 2:99 subsection 4 (the articles may provide for a partial repayment on the shares or a release from the obligation to pay up may be given exclusively in respect to a certain class of shares). What happens if the articles contain a provision with regard to a specific subject that diverges from the principle of equality but this diverging provision has no other basis in the law than section 2:201(92) subsection 1? As mentioned above, in our opinion the point of departure should be that, in general, the principles of reasonableness and fairness speak against this diver­ging provision in the articles. However, since it concerns a weighing-up of the interests in concreto, circumstances may lead to the conclusion that divergence in the articles solely based on section 2:201(92) subsection 1 must be conside­red legally valid. In this the fact that none of the parties concerned with the company (which group may be larger than the shareholders alone, since the interests of the company as an entity of its own should sometimes also be taken into account) object to the unequal treatment of the shareholders could play a role. This general approval means that a divergen­ce from the principle of equality in the articles solely based on section 2:201(92) subsection 1 is less quickly in conflict with reasonableness and fairness. Another reason why divergence in the articles from the principle of equality solely based on section 201(92) subsection 1 could be considered legally valid is that such divergence has been long-term practice in Dutch company law, as for example the practice of so-called priority shares.

 

4.2        Relation of the principle of equality to securities law

 

There are certain subjects with regard to which it is impossible to legally validate divergence from the principle of equality through a provision in the articles. This impossi­bility exists mainly with regard to subjects like transparency, predictability, information disclosure, etc. For these subjects, the distinction between listed and unlisted companies is relevant. The aforementioned subjects are mainly important for listed companies, and also for the shareholders of these types of companies, who in general do not know each other and therefore find no protection in the private character of the company. Provisions in the articles cannot be applied for these kind of companies with regard to divergence from the principle of equality on subjects like transparency, predictability and information disclosure. An unequal treatment of shareholders with regard to these subjects may violate the legislative provisions of securities law. Examples include section 28h of the Listing and Issuing Rules and section 46a of Securi­ties Transaction Supervision Act 1995. One may go so far as to say that in securities law the principle of equality plays a more important role than it does in company law.

 

4.3        Selective distribution of information.

 

Closely related to the principle of equality in securities law is the issue of selective distribution of information. Eisma describes selective contacts as >contacts between the board of directors of a listed NV and one or more, but not all shareholders, especially institutional investors outside the formal general meeting of shareholders.[11]

 

        These selective contacts can be between certain shareholders and the company directly, but also between the company and financial analysts. Eisma notes that in his opinion institutional investors are increasingly demanding these selective contacts and that companies are willing to fulfil these demands, probably even to a greater extent than can be derived from publicly available information.

 

It is not hard to imagine that during these selective contacts the company provides certain shareholders with information that is not yet available in that form to the other shareholders: so-called selective disclosure of information. Dutch law, doctrine and established case law contain no specific answer to the question of whether these selective contacts are allowed. However, two provisi­ons contain rules that affect the answer to this decision. The first is section 46a of the Securities Transaction Supervision Act 1995. This section forbids the disclosure of inside information to third parties, unless in the normal exercise of one=s job, profession or function. This means that the structural disclosure of inside information as part of an investor relations policy is not allowed, since that cannot be considered as being part of the board=s normal job, profession or function[12].

The second relevant >rule= is the principle of equality, which can in Dutch company law be found in the aforementioned section 2:201(92) subsection 2 and in section 26 of the Listing and Issuing Rules. Both sections put an obligation on the company to treat shareholders who are in equal circumstances in an equal manner. In our opinion one cannot base the conclusion that certain shareholders are not in equal circumstances solely on the fact that one sharehol­der holds more shares than another, since for both categories of shareholders, receiving adequate information is relevant[13]. This means that in general the principle of equality prevents selective contacts and selective disclosure of information. However, existing case law[14] states that departure from the principle of equality is allowed if there is a reasonable and objective justificati­on for this departure. Therefore, generally speaking, the principle of equality prevents selective contacts and disclosure because institutional investors and other[15] large shareholders are in equal circumstances, but one has to determine on a case-to-case basis whether departure from the principle of equality is allowed in this situation because there is reasonable and objective justification.

 

        One could argue that selective contacts and disclosure are under certain circumstances in the best interests of the company and that it is therefore compatible with the duty of the board of directors to engage in these selective contacts and disclosure.[16] The reasoning behind this is that certain large shareholders make their shareholding dependent on the fact that they belong to the group of shareholders with which the company has selective contacts. If the company did not engage in selective contacts, demand for its shares would reduce, thereby increasing the cost of capital for the company. Not only is this not beneficial for the company itself, it is also harmful to the other sharehol­ders.

 

5            Special audit (the inquiry proceedings)

 

5.1        Introduction

 

The inquiry proceedings have developed into an important, if not the most important, source of minority shareholder protection.

 

        Its success is also revealed by the statistics: between 1971 and 2001 approxima­tely 260 requests to start inquiry proceedings were filed. In approximately 205 of this 260 cases, the Enterprise Section ruled that there were well-founded reasons to doubt the correctness of the policy.[17] Moreover, between 1997 and 2001, the request for immediate measures was granted in about 60 cases (see no. 31). In approximately 20 of these 60 cases, the decision to grant immediate measures was coupled with the direct judgement that there were well-founded reasons for doubting the correctness of the policy of the company. In another 14 cases, this judgement was made at a later stage in the proceedings. In the remaining cases (approximate­ly 26) the Enterprise Section did not decide that there were well-founded reasons to doubt the correctness of the policy, even though it had granted immediate measures. The fact that the inquiry procee­dings seem a popular method for minority protection could very well be caused by the fact that the proceedings contain a cost allocation system that is benefi­cial for the plaintiff, since it is the company that pays the costs of the inquiry. This is different in other proceedings that purport to protect minority sharehol­ders. This may explain their comparative unpopularity.

 

The scope of the inquiry proceedings is very broad; section 2:345 subsection 1 states that the object of the inquiry is the policy and the conduct of business. The court may limit the inquiry either to a specific subject or to a specific period of time. The plaintiff cannot claim for damages through the inquiry proceedings. At the end of the proceedings he can only request measures which are purported to further the interests of the company.