Case of the Month: Commission v. Netherlands
My vote for the most important international law case in the month of September is the ECJ decision in Commission v. Netherlands. The case is important in articulating the standard for the free movement of capital and affirming the protections guaranteed to foreign investors under the EC Treaty. It is another significant blow to government practices put in place to protect formerly state-run enterprises that provide basic public services.
As part of its privatization initiative in the early 1990s, the Dutch government privatized its state postal, telegraph and telphone enterprises. But in privatizing the undertaking, the government retained a minority interest in the company that had veto power over major corporate decisions. Pursuant to such “golden shares” the Dutch government could veto the decision to issue shares, merge, make dividend payments, amend the statutes of the company, or similar major financial or governance decisions.
The Dutch government argued that such veto power was necessary to guarantee the solvency and continuity of the provider of universal postal service. The European Commission disputed that golden shares were necessary for that objective and the ECJ agreed. The decision strongly favors the interests of foreign investors and underscores the ECJ’s commitment to the free movement of capital within the European Union. Privatized companies are now more vulnerable to foreign takeovers, including hostile ones. In my view that is a good thing, leading to greater financial health and competitiveness. The ECJ also left the door open for legitimate arguments that such government veto power may be necessary in certain circumstances, such as guaranteeing the continued provision of important services to the public.
The decision follows a handful of other ECJ cases in recent years that have restricted the use of golden shares. There is much more on this subject in this article by Stefan Grundmann and Florian Möslein at Humboldt University in Berlin. As they note, these decisions might “have much broader effects on general company law. The ECJ [has] focused on whether access to any capital investment is legally or factually prevented or merely made less attractive. Therefore, any arrangement that reduces decision making power of shareholders might be relevant…. The standard of review applied by the Court of Justice has been particularly strict where veto rights had been granted with respect to transactions influencing the shareholder structure.”
Here is an excerpt from the decision:
Movements of capital for the purposes of Article 56(1) EC … include in particular direct investments in the form of participation in an undertaking through the holding of shares which confers the possibility of effectively participating in its management and control (‘direct’ investments) and the acquisition of shares on the capital market solely with the intention of making a financial investment without any intention to influence the management and control of the undertaking (‘portfolio’ investments)… Concerning those two forms of investment, the Court has stated that national measures must be regarded as ‘restrictions’ within the meaning of Article 56(1) EC if they are likely to prevent or limit the acquisition of shares in the undertakings concerned or to deter investors of other Member States from investing in their capital…
In the present case, the Court finds that the special shares at issue constitute restrictions on the free movement of capital provided for in Article 56(1) EC…. By virtue of those special shares, a series of very important management decisions of the organs of KPN and TPG, concerning both the activities of those two companies and their very structure (in particular questions of merger, demerger and dissolution), depend on prior approval by the Netherlands State. Thus, in the first place, as the Commission has rightly pointed out, those special shares confer on the Netherlands State an influence over the management of KPN and TPG which is not justified by the size of its investment and is significantly greater than that which its ordinary shareholding in those companies would normally allow it to obtain. Moreover, those shares limit the influence of other shareholders in relation to the size of their holding in KPN and TPG. Furthermore, those special shares can be withdrawn only with the consent of the Netherlands State.
By making decisions of such importance subject to the prior approval of the Netherlands State and thereby limiting the possibility of other shareholders effectively participating in the management of the company concerned, the existence of those shares may have a negative influence on direct investments. Similarly, the special shares at issue may have a deterrent effect on portfolio investments in KPN and TPG. A possible refusal by the Netherlands State to approve an important decision, proposed by the organs of the company concerned as being in the company’s interests, would be capable of depressing the … value of the shares of that company and thus reduces the attractiveness of an investment in such shares. Thus, the risk that the Netherlands State might exercise its special rights in order to pursue interests which do not coincide with the economic interests of the company concerned might discourage direct or portfolio investments in that company….
The possibility cannot be excluded that, in certain particular circumstances, the Netherlands State might exercise its special rights in order to defend general interests, which might be contrary to the economic interests of the company concerned…. Concerning the special share held in TPG, the Netherlands Government argues that it is necessary in order to guarantee universal postal service and, more particularly, in order to protect the solvency and continuity of TPG, which is the only undertaking currently capable in the Netherlands of providing that universal service at the level required by statute…. However, the special share at issue goes beyond what is necessary in order to safeguard the solvency and continuity of the provider of the universal postal service….
Given the whole of the above, the Court finds that, by maintaining in the statutes of KPN and TPG certain provisions, providing that the capital of those companies is to include a special share held by the Netherlands State, which confers on the latter special rights to approve certain management decisions of the organs of those companies, which are not limited to cases where the intervention of that State is necessary for overriding reasons in the general interest recognised by the Court and, in the case of TPG in particular for ensuring the maintenance of universal postal service, the Kingdom of the Netherlands has failed to fulfil its obligations under Article 56(1) EC.