An attempt at courtship has ended up in court. Over the past months, US paints and coatings giant PPG Industries (‘PPG’) has tried to woe the management and shareholders of Dutch rival Akzo Nobel (‘Akzo’) with friendly takeover offers. It has been rewarded by a consistently aloof response from Akzo’s boards, and especially its Chairman Antony Burgmans, who has so far refused to enter talks. On May 29, the Enterprise Chamber of Amsterdam (a Dutch commercial court) rejected efforts by some of Akzo’s shareholders, led by activist investor Elliott Management Corp. (‘Elliott’), to force a shareholder vote intended to oust Mr. Burgmans.
The case comes at a critical time in what has become an increasingly bitter exchange. Akzo has so far rejected three unsolicited friendly offers from PPG, arguing that they undervalue the company, do not make any serious commitments to its stakeholders, demonstrate a cultural lack of understanding, and entail significant risks and uncertainties (including lengthy reviews by the EU’s competition authority).
Investor Dissent Over Akzo’s Lack of Engagement with PPG’s Bids
But following PPG’s second offer, some of Akzo’s largest shareholders have become increasingly frustrated with the company’s refusal to engage. Elliott, supported by other shareholders, called on Akzo’s supervisory board to arrange an extraordinary general meeting (EGM) to oust Mr. Burgmans, seen as an obstacle to talks with PPG. However, Akzo’s board rebuffed these efforts. When PPG’s third offer, valuing Akzo at €26.9 billion (a premium of 39.7% percent over its undisturbed price), was similarly rejected, it resorted to a legal challenge. “[N]o director”, it noted, “should be above the judgment of shareholders”. Elliott requested a judicial investigation (“enquêteprocedure”) into the decision-making of the board concerning PPG’s offer and filed for “immediate measures” (“onmiddellijke voorzieningen”), asking the court to order Akzo to call an EGM to vote on Mr. Burgmans’ position. In its decision of May 29, the Enterprise Chamber rejected the request for immediate measures, finding no serious grounds to question the proper management of the company.
Decision of the Board Not to Talk to PPG
The decision covered two main legal issues. First, the Enterprise Chamber held that the supervisory board and the management board did not act carelessly (“onzorgvuldig”) by deciding not to negotiate with the potential bidder PPG and that there is no general duty to do so under Dutch law. It affirmed that the management board, under supervision of the supervisory board, sets the company’s strategy. While the board is accountable towards shareholders in fulfilling this task, it is not required to consult shareholders before deciding whether to talk to bidders. The Chamber considered that the boards acted in an informed manner, after meeting more than 15 times and consulting with multiple expert advisers and stakeholders. This is consistent with recent Dutch case law (including Fugro, ASMI and TMG), which refrains from reviewing strategic decisions by boards on their merits.
Accountability to Shareholders: Should Akzo Convene an EGM?
The second legal issue concerned Elliott’s request to hold an EGM to vote on Mr. Burgmans’ position as Chairman. Akzo refused this request, characterising it as “irresponsible, disproportionate, damaging and not in the best interests of the Company”. While shareholders representing at least 10% of issued share capital can request a general meeting, the supervisory board argued that this request failed to meet the ‘legitimate interest’ test required by Dutch law. Elliott was quick to condemn Akzo’s decision, calling it “groundless” and “an egregious dismissal of shareholder rights, further evidence of self-entrenchment and (…) a continued affront to proper corporate governance”. The reality, it argued, is that “Akzo Nobel is afraid of calling the EGM because shareholder feedback apparently indicates that shareholders would vote to remove Mr. Burgmans” (see here for an overview provided by Elliott). Despite Elliott’s vigorous plea, the Enterprise Chamber held that this decision of the supervisory board gave no reason to doubt the proper management of the company. Hence, it did not order any immediate measures.
For UK investors, this decision may be particularly hard to fathom. After all, it seems to make a mockery of the rights of shareholders to convene meetings and to vote on the appointment and dismissal of directors. However, upon closer inspection it seems the case turned at least in part on procedural points. Under articles 2:110 and 2:111 of the Dutch Civil Code, shareholders should request the “voorzieningenrechter”, not the Enterprise Chamber, to rule on a request to call a general meeting. As the Chamber noted, Elliott did start out on this path but so far failed to follow through. That said, the Enterprise Chamber still took a very light-touch approach in reviewing the board’s decision to disallow an EGM at such a critical point in the company’s life. This raises the question how much freedom boards should be accorded in filling in the ‘legitimate interest’ test.
To further understand the court’s approach, the broader context of Dutch corporate law should be considered. The court held that the request for the EGM was at least in part motivated by a desire of Elliott not only to oust Mr. Burgmans, but to pressure the board to change its strategy. Such pressure is contrary to the principle that the management board, under supervision of the supervisory board, decides on the strategy. As part of this role, it has discretion to decide whether to discuss its strategy with the shareholders. In fact, the court stresses that the board’s objective to create value while weighing the interests of the stakeholders could even imply that the board refuses to endorse a bid, even if a majority of shareholders support it. Going further, it notes that it is also possible for a board to reject a bidder’s proposal, even if it is likely that a stand alone scenario will generate less value for shareholders (in the long run) than the bid (in the short run).
Finally, although the court did not meet the shareholders’ request, it explicitly observed that the relationship between the board and Akzo’s shareholders is seriously strained. USS, one of Akzo’s largest shareholders, stated that the board was riding “roughshod over shareholders’ rights”. In a recent presentation to investors, Elliott posed the rhetorical question “Does Akzo deserve stakeholder trust?”. Even though it did not engage in a substantive review of the board’s decision, the court warned that such strains can be damaging to Akzo and its stakeholders. Akzo will have to take action to improve relations with its shareholders.
Akzo lauded the judgment as a victory, but PPG remains resolved. They have to rush. The Dutch takeover code stipulates they have until today to provide final documentation and evidence of financing of the offer or abandon it for six months. PPG requested an extension to this bid deadline, but the Dutch Financial Markets Authority (AFM) did not grant it. They can either drop the bid, or follow through and initiate a hostile takeover attempt.
But such an attempt would not be without risk. As part of its defensive tactics, Akzo can resort to a nearly one-hundred years old anti-takeover defence that makes it practically impossible to overthrow the company’s supervisory board and install directors more favourably disposed to a takeover. In 1926, a foundation (which can only be governed by Akzo supervisory board members) was granted 48 priority shares in the Akzo Nobel group, giving it the right to make binding nominations to the management and supervisory boards (see: Articles of Association, articles 25 and 32). It can use these rights when it deems that the interests of the company and its stakeholders are at risk. Although a 1928 amendment to Dutch law provides for the possibility to challenge such binding nominations in 1928, arrangements established before that time were allowed to remain in place. In addition, at the last annual meeting Akzo’s board received the right to issue up to 20% of new shares which can be placed at friendly parties, in order to further dilute potential bidders.
As surprising as the Enterprise Chamber’s decision may seem from an Anglo-Saxon perspective, it continues a well established Dutch tradition of the stakeholder model. Dutch courts have consistently held that directors should take into account “the interests of all stakeholders, including shareholders” (HR (Supreme Court) 13 July 2007, ABN-AMRO). Despite pressure from activist investors like Elliott, there seems to be no appetite to change this position. Quite the contrary. Following bids for Dutch ‘crown jewels’ like Unilever, KPN, PostNL, and earlier ABN AMRO, and encouraged by senior business leaders and even the employers’ association (VNO-NCW), politicians from left to right have recently proposed a new law that would further entrench the board by allowing it “time to reflect” upon receiving a bid. Although this may be lauded by boards, such a trend may risk further exacerbating the ‘Dutch discount’, the phenomenon that investors under-price Dutch corporates because of their poor governance.
Arguing his case, PPG’s CEO told the judges: “The era of elitism and ‘the board knows best’ is over. (…) The shareholder needs to be heard.” Nevertheless, PPG seems to have hit the wall of the Dutch stakeholder model. And if this case, not to mention the political climate, provides any indication, there are surely more to follow.
Tom Vos is a PhD Candidate in Corporate Law at the Jan Ronse Institute of Company and Financial Law at KU Leuven. Thom Wetzer is a DPhil Candidate in Law and Finance at the University of Oxford. This post also appeared on the "Corporate Finance Lab".