The Netherlands has seen its fair share of activism this year, with Elliott Management’s push to sell national champion AkzoNobel to America’s PPG Industries causing the most controversy. In part because of this campaign, which ended in PPG withdrawing its bid, the coalition government led by Prime Minister Mark Rutte is considering strengthening legal defense mechanisms for domestic companies faced by activist shareholders and foreign suitors. Under the proposals, Dutch companies would benefit from a cooling-off period of up to 250 days after they receive a request for a “fundamental change of strategy” – code for a takeover, or possibly even an activist demand. Shareholders in companies with a market capitalization of over $750 million could also see the reporting threshold reduced from 3% to 1% ownership.
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The proposed law is at an incipient stage and still vague – the Cabinet has written just six lines on it – so a lot of questions remain open. Ferdinand Mason, an M&A lawyer at Jones Day, says it might take at least a year before the proposal becomes law and is likely to be “watered down and qualified in such a way that it would be fairly workable.” Nonetheless, he thinks the government’s primary purpose might be to send a message. “It does show the political sentiment, it gives you a feel that if you are an activist and you’re coming into the Netherlands it is not going to be an easy ride.”
Although it is not yet clear when or whether the motions will pass, it is indicative of a political and cultural climate averse to foreign activist shareholders. Guy Wyser-Pratte, an activist investor active in the country over a number of decades, recently told Activist Insight the Dutch landscape is worse for activism than Germany, identifying the so-called “administratiekantoor” or “stichting” as the main block for activists.
To understand the Dutch aversion to activism, one needs to take a step way back. Up until 2003, the nation’s corporate landscape was dominated by boards, with lax corporate governance and weak shareholder rights. Then the Ahold scandal erupted. At the time the third-largest supermarket chain in the world, Royal Ahold disclosed that it had overstated its accounts for the previous years, in an Enron-type fraud that prompted calls for better corporate governance and increased oversight. Legislation was duly changed, but the dominance of shareholders did not last long.
In 2007, ABN AMRO had faced calls from The Children’s Investment Fund to break up. The activist’s proposals had been advanced at the annual meeting and shareholders voted in favor of a carve-out, with a consortium of banks then acquiring the parts separately and Belgian bank Fortis taking over the Dutch operations. The 2008 financial crisis hit and it emerged that the consortium had overpaid for ABN AMRO, with the Dutch government forced to bail out Fortis. Skepticism of activism has remained high ever since.
New rules might deepen the valuation gap of Dutch companies. Mason reckons that boards already have a lot of independence and 60% of Dutch issuers have poison pills and takeover devices in place, with the “stichting” sowing most confusion among foreign investors. An independent, multipurpose vehicle that can be used, among many other things, to deter a hostile bidder by allowing it to buy the target’s preference stock, the “stichting” effectively acts like a poison pill with directors. The mechanism became famous in 2015, after American generic drugmaker Mylan used it to defend itself against a takeover bid from Teva Pharmaceuticals.
The “stichting” is not the only thing contributing to an unfriendly landscape for activist shareholders. The Netherlands has a corporate legal system similar to Germany, focused not only on the benefits of shareholders but also of stakeholders like employees, the government, and society at large. Maarten Wildschut, a fund manager at occasional activist RWC Partners, says, “I wouldn’t say the Dutch context is necessarily hostile against shareholders. The Dutch society chose a more balanced stakeholder approach.”
Despite a difficult environment, the Netherlands has seen an increase in activity in the past two years. In 2016, four Netherlands-based companies were publicly subjected to activist demands, equal to the combined activity for the previous three years, according to Activist Insight Online. In 2017 thus far, that total has already been equaled. And while, as Wildschut says, aggressive, American-style activism may not work in the country, success can be achieved with a constructive approach. Over the years, RWC has used a largely behind-the-scenes strategy, and currently owns stakes in Advanced Metallurgical Group and Corbion.
“I think activists should realize that the Dutch market requires a very specific approach and it’s just not going to get easier,” Mason says. The biggest activists in the country are large pension funds such as PGGM, which usually use an “informal approach” to drive changes, according to Mason. “The limitations of Dutch law and the specifics of Dutch corporate culture have created a practice of activism which is quite informal and effective, driven by major Dutch pension funds, from which activists can learn,” he adds.
Wyser-Pratte, who this year unsuccessfully campaigned against the acquisition of Refresco, believes the landscape in the Netherlands is so difficult that it is hard to envision it getting worse. “If they want to make it tougher, I don't see how they can,” the U.S.-based activist says. On takeovers, he says, “In the U.K., shareholders have the final say, under Dutch law, they don't.” Wyser-Pratte thinks the country’s aversion to foreign activists stems from the fact that it is a small nation and wants to protect its companies. “The Dutch have been buying all over the world, they're a mercantilist nation. But you try and do the same there and good luck,” he concludes.
Article by Activist Insight