Understanding the Dutch Poison Pill

Seve Jan van der Graaf is an analyst at Glass, Lewis & Co. This post is based on a Glass Lewis publication by Mr. van der Graaf.

Related research from the Program on Corporate Governance includes Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here), and The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

Ahold Delhaize, the biggest food retail group in the Benelux region with a rough market cap of €25 billion, is facing pushback from shareholders over a unique Dutch practice. The company recently announced that it had extended its call option agreement with a foundation called “Stichting Continuïteit Ahold Delhaize” or “SCAD” (roughly translated as the foundation for continuity of Ahold Delhaize), without giving investors the opportunity to vote on the deal.

To be clear, SCAD is not a charitable foundation—instead, the entity effectively functions as a poison pill for Ahold Delhaize. In Dutch corporate law, foundations need to have a purpose, but that purpose does not need to include the public good. As a result, these legal structures are the go-to anti-takeover mechanisms for Dutch companies, from family-owned entities to public issuers, taking several different forms. Here, SCAD was established for the purpose of protecting the continuity, independence and identity of Ahold Delhaize. It fulfils this purpose through the call option agreement, which gives SCAD the right to buy all 2,250 million of Ahold Delhaize’s authorised but unissued cumulative preference shares—which, not coincidentally, amount to 50% of the company’s authorised share capital, effectively blocking any attempt to take control.

In other cases, the deal is more flexible. For example, rather than setting out a specific number of shares, telecom provider KPN’s agreement allows its own foundation to acquire as many (as yet unissued) preference shares as it needs to match the number of shares outstanding when the option is exercised. In other words, no matter what KPN’s share capital is, the foundation can take up to a 50% stake by calling in the option.

These continuity foundations aren’t the only Dutch protectionist foundations. Another variant is the “Stichting Administratiekantoor” (“STAK”), or administrative foundations, which split the economic right of a share from its voting right. The STAK serves as a buffer, holding all the company’s shares and in turn issuing equivalent share certificates or depository receipts. These typically have the same economic rights (dividend) as a normal share, but no voting rights, leaving control in the hands of the STAK and its own board. The structure has proven particularly applicable for family businesses, where separating economic and decision-making rights can help to provide smooth succession and inheritance in complicated circumstances. A successful businessperson with dozens of grandchildren can issue share certificates through the STAK, allowing them to share the family’s profits without giving away control of the business itself.

While particularly well suited to private family concerns, STAKs are also used by publicly traded companies. For example, when the Dutch state relisted ABN Amro in 2015, the shares were not actually sold directly to the market. Instead, “Stichting Administratiekantoor Continuïteit ABN AMRO Group” sold depository receipts for every share it took over from the Dutch state. Under normal circumstances, receipt-holders won’t notice anything: ABN Amro’s STAK allows receipt-holders to cast votes as if they held normal shares. However, at any point in time during a public bid, these voting rights can be revoked for up to two years, with power reverting to the STAK.

ABN Amro’s structure represents something of an outlier, reflecting the importance of the blue chip bank to the Dutch economy (and the disastrous results the last time it was subject to a takeover back in 2007). However protectionist measures of some form remain highly prevalent: as of 2015, seventeen of the twenty-one blue chip AEX-listed companies operating under Dutch law had option agreements in place with continuity foundations. Moreover, guarding against unwanted corporate advances is front of mind in the Netherlands after unexpected bids for Unilever and AkzoNobel, with the Dutch government proposing a 250-day “thinking time” when public takeover bids occur.

However, a variety of stakeholders are pushing back against this fortress mentality. At Ahold Delhaize, the French activist hedge fund CIAM and Dutch investor advocate VEB were vocal in calling for a shareholder vote on any extension. While they didn’t get one, investor concerns helped to shape the revised agreement, which includes two new provisions if the option is exercised:

  • within six months, the company will have to convene an explanatory meeting for shareholders; and
  • within one year, the company will have to convene a special meeting with a proposal regarding the cancellation of the preference shares held by the foundation.

The impact of these provisions may be limited—by the time a year has passed, the momentum for a takeover bid will likely be gone. Nonetheless Eumedion, the Dutch corporate governance forum, hailed it as a small victory, since no other AEX company has provided a “hard commitment” to offering accountability should the takeover protections be exercised. It’s incremental progress for investors, but progress nonetheless.

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