Minority Shareholders’ Protection Granted by Setting Aside Management
and Versatel Attempt to Exclude Corporate Governance Rules
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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
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
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
Judgement of the Court:
- 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.
- 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.
- 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.
- The Court granted the requested injunctive relief by:
Appointing three independent supervisory directors with
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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