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GT Alert

Minority Shareholders’ Protection Granted by Setting Aside Management and Versatel Attempt to Exclude Corporate Governance Rules

January 2006

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Versatel Telecom International N.V., a Dutch company, wanted to appoint an extra member to its supervisory board at a specially convened shareholders meeting. Like the four other recently appointed board members, this new member was associated with its parent company Tele2 AB or its affiliates. In addition, Versatel sought to exclude the applicability of certain corporate governance rules, applicable to Dutch listed companies, on conflicts of interest for management.

The Enterprise Chamber Court of Appeals in Amsterdam (“the Court”) ruled in favor of the minority shareholders, petitioners for immediate relief, and appointed three supervisory directors, with the exclusive power to decide on any transaction involving Tele2 AB. In addition, the Court ordered Versatel to abide by all corporate governance rules, pending litigation with the minority.

This decision is likely to have a major impact on the landscape of majority versus minority shareholder interests in Dutch listed companies.

The Versatel Case:

Versatel is a Dutch company, listed on Euronext, Amsterdam (AEX). After completion of a successful public bid, Swedish Tele2 AB (“Tele2”) acquired approximately 83 percent of the outstanding shares. Since Dutch law only permits a buy-out of the remaining minority shareholders by a holder of at least 95 percent, Tele2 recently replaced the Versatel supervisory board with four of its own appointees, and prepared for an extraordinary general meeting of shareholders (EGM) to decide to merge Versatel into Tele2 by means of a triangular merger between Versatel, Tele2 and a Dutch subsidiary of Tele2. The minority shareholders, who lost a previous injunctive action seeking to block such an indirect squeeze-out, now argued that having a supervisory board consisting solely of: 1) Tele2 appointees (as noted above, a fifth member was up for election at the EGM); and 2) the intention to cancel certain applicable corporate governance rules, amounted to a neglect of the equitable interests of the minority shareholders.

Versatel argued that the appointment of an additional supervisory director was justified since the appointee – unlike the existing directors – was not a board member of Tele2 itself and had broad experience in the technology market.

In addition, Versatel argued that the corporate governance rules on directors’ conflicts of interests no longer applied when relating to a proposed transaction with Tele2 or any of their affiliates. The Dutch corporate governance code (“Code Tabaksblat”) rule III.6.2 requires supervisory directors to recuse themselves from voting on any matters with which such person has a conflict of interest. In addition, the Code Tabaksblat, rule III.2 requires all supervisory directors to be independent (with the exclusion of one member). One factor to determine such independence is “whether such person is a representative of a legal entity holding at least 10 percent of the outstanding shares, unless it relates to a group company.” Versatel argued that since the merger involved group companies, it could rely on the referenced exception to the conflict rule.

Judgement of the Court:

  1. With the use of the so-called “comply or explain” rule, Versatel indicated in its 2004 annual accounts that it complied with the Code Tabaksblat. In addition, at its most recent general meeting of shareholders, held in September 2005, it did not announce any intention to deviate from the Code. As a result, the minority shareholders (petitioners) were justified in expecting Versatel’s full compliance with the Code.
  1. The replacement of the supervisory board members with Tele2 representatives, in addition to the appointment of an additional director affiliated with the group, indicated the paramount interest and leading role of Tele2 in the affairs of Versatel. Consequently, the Court ruled that Versatel had created a situation that did not provide sufficient protection of the minority interests. In particular, when considering the desired new constituency of the supervisory board, the proposed transaction to merge Versatel with Tele2 and its affiliates would result in the intended termination of the minority shareholdings.
  1. The position held by Versatel that, as a “Tele2 group company,” its supervisory board may consist of “group representatives” would mean that the corporate governance rules on “sound management” could be set aside when becoming such a “group company”. This cannot hold true where minority shareholders exist whose interests oppose the company’s group interest and where the supervision of the policies of Versatel and, in particular, decisions regarding transactions between Versatel and its group companies is in the exclusive hands of supervisory directors who can be qualified as group representatives. In short, the corporate governance rules barring conflicts of interest must continue to apply.
  1. The Court granted the requested injunctive relief by:
    • Appointing three independent supervisory directors with exclusive power to determine all transactions with any group company in which Versatel belongs, and represent Versatel, particularly regarding the proposed triangular merger.

    • Prohibiting any deviation from Code Tabaksblat, and particularly principle III.6.2, regarding conflicts of interest, unless and to the extent that any non-compliance was duly explained in the 2004 annual accounts, all pending the minority shareholders’ litigation.

The outcome of this case is notable since a 17 percent minority was able to block a decision by the sole majority shareholder to merge Versatel. However, it is not clear what the Court’s options would have been if Tele2 had not sought to change the board’s constituency, but tried to amend Versatel’s corporate governance rules.


This Alert was written by Neill André de la Porte and Hans Urlus in the Amsterdam office. Please contact Neill André de la Porte at +31 20 301 7444 or Hans Urlus at +31 20 301 7324 or your Greenberg Traurig liaison, if you have any questions regarding the subject matter of this GT Alert.

© 2006 Greenberg Traurig

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