1. General Information on Corporate Governance in …

1 1 Corporate Governance in the netherlands J. van Bekkum, Hijink, Schouten & J. W. Winter *Readers are reminded that this work is protected by copyright. While they are free to use the ideas expressed in it, they may not copy, distribute or publish the work or part of it, in any form, printed, electronic or otherwise, except for reasonable quoting, clearly indicating the source. Readers are permitted to make copies, electronically or printed, for personal and classroom use. 1. General Information on Corporate Governance in the netherlands The Corporate Governance system in the netherlands has witnessed important changes over the last decade. Following a very public debate about the maintenance of the wide arsenal of defensive measures against takeovers in the first half of the 1990s, a first attempt was made to produce Corporate Governance recommendations for listed companies.

2 The 40 recommendations of the Peters Committee, published in 1997, triggered General awareness of Corporate Governance questions. The discussions on Corporate Governance were held against the background of the Dutch Corporate law system that imposes a stakeholder rather than shareholder orientation of executive and supervisory boards of companies. The Dutch Corporate law system includes distinct elements of employee co-determination: far-reaching works council powers and the Dutch structure regime for large companies, allowing employees to have a say in the appointment of supervisory directors. Dutch Corporate law also, in General , allows a wide-ranging set of mechanisms that can be used to not only defend companies against hostile takeovers, but also substantially reduce shareholders involvement in Corporate affairs under normal circumstances, including non-voting depositary receipts for shares, priority shares with special control rights, and structural delegation of authorities to the executive board.

3 The 40 recommendations of the Peters Committee heralded a fundamental overhaul of Dutch Corporate law to restore the position of shareholders, through a combination of changes in 2004 to Book 2 of the Dutch Civil Code (DCC), containing the companies act, a Corporate Governance Code issued by the Tabaksblat Committee in 2003 and case law of the Enterprise Chamber of the Amsterdam Court of Appeal (the Enterprise Chamber). This court has broad authority to order investigations into the affairs of companies and to order immediate measures to be taken for the duration of the proceedings. * The authors are grateful to Stephen Machon for editorial assistance. This paper takes into account developments in Dutch Corporate Governance prior to 1 October 2009 only and does not constitute legal advice.

4 Electronic Journal of Comparative Law, vol. (December 2010), 2 The 2004 changes of Book 2 DCC included: (i) the introduction of the authority of the shareholders meeting to approve major transactions that will have a material impact on the nature of the company, including acquisitions or divestures of a value exceeding one-third of the company s balance sheet total; (ii) the right of shareholders holding 1% of share capital or shares with a market value of 50 million, to submit items for the agenda of the General meeting; (iii) the right of holders of depositary receipts for shares to receive a power of attorney to vote on the underlying shares, which can be refused when the company is or will become subject to a takeover threat; (iv) the right of the General meeting to adopt the remuneration policy for executive directors and to specifically approve share-based schemes; and (v) the right of the General meeting of companies governed by the structure regime to appoint supervisory directors (who previously appointed themselves) and to dismiss the supervisory board as a whole.

5 Application of the 2003 Corporate Governance Code through a comply-or-explain mechanism was made mandatory in a Royal Decree as of 2004 for Dutch companies with a share listing. The Code was adopted by a committee chaired by Mr. Tabaksblat, consisting of representatives of listed companies, shareholder associations (both retail and institutional) and independent Governance experts, which committee was set up by relevant associations of business and shareholders. The acceptance of the Code was helped by Corporate Governance scandals in 2003, the most prominent of which were the misleading financial statements issued by Royal Dutch Ahold and the oil reserves statements of Royal Dutch Shell. The Corporate Governance Code includes principles that are held to be generally accepted and detailed best practice provisions on the executive board (key issues: risk management and executive remuneration), the supervisory board (key issues: increased monitoring commitment, committees, independence), the General meeting (call to institutional investors to use their voting rights, procedure), and the auditing process and external auditor.

6 A Monitoring Committee was set up following the adoption of the Code. This Committee has issued annual monitoring reports, reflecting on the level of compliance with the Code. In 2008, the Monitoring Committee also adopted a set of revisions to the the same period, securities regulation for listed companies has changed fundamentally. Prior to 1990, securities regulation was primarily a self-regulatory affair, with a minimum of rules promulgated by the Amsterdam Stock Exchange. In the 1990s, more and more mandatory rules were introduced into this system, first of all with the introduction of criminal prohibitions on insider trading and notification obligations for substantial holdings. As of 2000, the self-regulatory system was completely overhauled and replaced by mandated securities regulation, of which the core can now be found in the Act on Financial Supervision (Wet financieel toezicht; AFS ) and decrees issued under this Act.

7 The supervision of compliance with securities regulation, and General supervision of conduct on financial markets, has been delegated to the Autoriteit Financi le Markten (AFM), a private body with public law powers of investigation that may also levy administrative fines for non-compliance. The AFM s authority ranges from investigating insider trading and notification of substantial holdings, approving prospectuses for securities issues and offer 1 The current Corporate Governance Code is available at < >. Electronic Journal of Comparative Law, vol. (December 2010), 3 documents for public offers as well as supervising the offer procedure to reviewing financial statements of companies with listed securities and supervision of trading on the Euronext Amsterdam exchange, including suspension of trading.

8 Most of the decisions of the AFM are subject to appeal before the administrative court in Rotterdam, which has resulted in the AFM operating in a litigious environment. Share ownership of listed companies in the netherlands is mainly dispersed, with a relatively low number of controlling shareholders. Recent numbers indicate that as many as 70% of the shareholders of Dutch listed companies are foreign shareholders. This has made Dutch companies particularly vulnerable to shareholder activism by hedge funds, as seen in the cases of Stork, ASMI and ABN AMRO. In these cases, the Enterprise Chamber intervened with immediate measures mostly to preserve the status quo and allow for an orderly process of debate and conflict resolution. The financial crisis has strengthened sentiments in the media and among politicians that the movement to restore shareholder rights has gone too far, and that this should be curbed since this has made companies subject to excessive short-term activist pressure from certain shareholders.

9 The government has submitted proposals to parliament that seek to increase the transparency provided by investors by lowering the threshold for notification of substantial holdings from 5% to 3% and requiring notifying shareholders to state whether they object to the strategy of the Internal Corporate Governance More fundamental revisions have not been announced to date. Boards One-tier and two-tier Models Dutch listed companies predominantly apply the two-tier board system, comprising a management board and a supervisory board. This is the classical Dutch board system that can be traced back to the first listed company in the world, the VOC, incorporated in 1602 and that introduced a form of a supervisory board in 1623 following shareholder pressure to improve the company s Governance .

10 The two-tier model is required for companies governed by the structure regime, in which case the employees, through the works council, have the right to nominate candidates for one-third of the members of the supervisory board (see section , below for further Information ). Most large listed companies are exempt from the structure regime, as a result of which they may opt for a one-tier board. Of the larger listed companies only one has actually adopted the one-tier board, Unilever An amendment to Book 2 DCC, which is currently being discussed in parliament, will further facilitate the introduction of the one-tier model, mainly by clarifying that a company's articles of association may distinguish between the roles of executive and non-executive directors, thus also affecting directors' 2 Bill amending the AFS, The Act on Transfers of Securities by Giro and Book 2 DCC, Parliamentary Proceedings II 2008/09, 32 014, No.