Dutch treat: Netherlands judiciary only goes halfway towards adopting Delaware trilogy in takeover context.

AuthorQuinn, Danielle

ABSTRACT

This Note examines Dutch takeover law in light of the current inter-EU competition to attract entities to individual Member States. The recent hostile takeover of the Dutch bank, ABN AMRO, provides an excellent example of the Netherlands' opportunity to use its judiciary to solidify its reputation as a competitive, business-friendly jurisdiction. The Dutch Enterprise Chamber can aid the Netherlands in becoming the preeminent EU country--a similar status to Delaware's Chancery Court in the United States. Although the Enterprise Chamber attempted to introduce Delaware law in ABN AMRO, it unfortunately misapplied the law. As a result, the Dutch Supreme Court had to overrule its decision; however, the possibility of adopting Delaware takeover law remains. This Note proposes that the Dutch Enterprise Chamber adopt the Delaware takeover trilogy--Revlon, Unocal, and Unitrin--in order to provide certainty to Dutch takeover law and improve its corporate governance, which, in turn, should aid the Netherlands in attracting enterprises. Although it is too early to know, the Netherlands may become a "European Delaware."

TABLE OF CONTENTS I. INTRODUCTION II. BACKGROUND A. RBS-led Consortium's Acquisition of ABN AMRO 1. The Dutch Enterprise Chamber Decision: An Attempt to Introduce Delaware Trilogy 2. The Dutch Supreme Court Decision: Apparent Rejection of Delaware Trilogy B. Dutch Law 1. Takeover Code & EU Takeover Directive 2. Dutch Takeover Defenses C. Delaware Law 1. Takeover Law 2. Delaware Takeover Defenses III. ANALYSIS: COMPATIBILITY OF DUTCH AND DELAWARE TAKEOVER LAW FROM A COMPARATIVE PERSPECTIVE A. Judicial Decisions: Dutch Supreme Court Leaves Opening Amid Apparent Rejection of Enterprise Chamber's Introduction of Delaware Trilogy 1. Underlying Policy: Promote Certainty and Reliability within Dutch Law 2. Unprecedented Expansion of Shareholder Rights 3. ABN AMRO Poor Facts: Nothing for Revlon- or Unocal-duties to Attach To B. Analysis of ABN AMRO Case Under Delaware Law IV. PROPOSED SOLUTION: DUTCH JUDICIAL ADOPTION OF TAILORED DELAWARE TAKEOVER TRILOGY A. Characteristics of Delaware's Success B. The Current EU Landscape C. Dutch Judicial Adoption of Delaware Takeover Trilogy 1. Benefits 2. Potential Drawbacks V. CONCLUSION I. INTRODUCTION

In October 2007, after a long and contentious battle between two of the world's largest banks, the Royal Bank of Scotland-led Consortium triumphed over Barclays and acquired the Dutch bank ABN AMRO in the largest deal in the banking industry to date. (1) The intense takeover battle began in early 2007 when the third largest bank in the world, UK-based Barclays, publicly announced its intent to purchase the largest Dutch bank, ABN AMRO. (2) Within a month, Barclays and ABN AMRO announced a 63.74 billion [euro] deal, (3) whereby Barclays would acquire ABN AMRO from its shareholders in a stock-for-stock transaction. (4) Shortly after, a Consortium led by the Royal Bank of Scotland (RBS), also a UK bank, entered the arena with an attractive 72.27 billion [euro] combination stock-for-cash and stock-for-stock offer (5)--in face value, nearly 10 billion [euro] more to ABN AMRO shareholders than Barclays. (6) The battle for ABN AMRO had begun.

Desiring to thwart the Consortium's hostile bid and to solidify the deal with Barclays, the ABN AMRO Board allegedly utilized a crown jewel defense by selling off its North American subsidiary, LaSalle Bank Corporation. (7) Bank of America contracted to purchase LaSalle for $21 billion. (8) ABN AMRO management explicitly assured Bank of America that shareholder approval was not required prior to the sale of LaSalle, confirming Bank of America's independent legal research. (9) Almost immediately after announcement of the deal, however, ABN AMRO shareholders expressed significant disapproval. (10) Viewing the sale of LaSalle as a defense by management to deter RBS and entrench themselves under management-friendly terms with Barclays, (11) ABN AMRO shareholders petitioned the Dutch Enterprise Chamber (also known as the Chamber of Business Affairs) to enjoin the deal pending shareholder approval. (12)

Although "hostile takeovers are the exception, not the rule," (13) they are important within the corporate world for a number of reasons. First, they incentivize many bidders and targets to proceed on a friendly basis, since the risk that a friendly merger may turn hostile constantly underlies negotiations. (14) Both parties recognize the possibility that the bidder "may take its case directly to the target's shareholders if the target's board 'just says no' [upon considering the unsolicited attempt]." (15) Second, many companies have used hostile takeovers as a tactic to accomplish strategically important acquisitions. (16) For instance, if a bidder, such as the RBS Consortium, sees two competitors merging--ABN AMRO and Barclays--the bidder may feel compelled to make a hostile bid "as a matter of strategic market positioning." (17) Third, a bidder may feel forced to use hostile means if the target refuses even to talk with the bidder. (18) Finally, hostile takeovers are especially relevant in the context of transnational transactions, such as the battle over ABN AMRO, because "hostile activity has been more active overseas than in the U.S." in recent years. (19)

ABN AMRO's sale of LaSalle raises an obvious question: Under what circumstances, if any, does Dutch law require prior shareholder approval of management's defensive decisions in a takeover context? Dutch law is not clear. A clear legal principle would greatly reduce transactions costs, not only for direct parties to the merger battle--such as ABN AMRO, Barclays, and RBS--but also for third parties, such as Bank of America. (20) Delaware's takeover law provides a much clearer framework for analysis than Dutch law. (21) Although the ultimate outcome of ABN AMRO's defensive strategy (i.e., ABN AMRO sold LaSalle to Bank of America) is consistent with Delaware takeover law, the Dutch principles should be clarified. The Netherlands should adopt the Delaware takeover trilogy--Revlon, Unocal, and Unitrin. (22) The result will lead to more certainty and, in turn, more transactions in the market for corporate control, (23) which fosters a more attractive legal environment that should increase business to the Netherlands. Given the current EU landscape, the Netherlands could take the lead over the UK in the inter-European regulatory competition for businesses. (24) Through its judiciary, the Netherlands has the opportunity to become Europe's Delaware.

Part II of this Note discusses ABN AMRO's corollary sale of LaSalle to Bank of America, including the decisions of both the Dutch Enterprise Chamber and the Dutch Supreme Court. Next, it presents current takeover law in both the Netherlands and in Delaware. Part III analyzes the similarities between the Netherlands and Delaware in the context of the two Dutch court opinions regarding ABN AMRO, and then provides an alternative analysis of ABN AMRO's sale of LaSalle under Delaware law. Finally, Part IV proposes that Dutch courts should adopt a version of the Delaware takeover law analysis, specifically the Revlon, Unocal, and Unitrin doctrines. In order for this proposal to be successful, the Delaware laws must be tailored to fit the Netherlands' civil law system and stakeholder-centered view of corporate governance. (25)

  1. BACKGROUND

    After months of battling against Barclays and ABN AMRO's institutional shareholders, the RBS-led Consortium ultimately prevailed. (26) The resulting RBS-ABN AMRO acquisition was the largest banking deal to date, at 72 billion [euro]. (27) The events leading up to ABN AMRO's acquisition, however, are not only important in the context of banking, but also highlight significant aspects of the market for corporate control, particularly hostile takeovers.

    In general, companies may become unified in a variety of ways (28) and for a number of reasons. (29) One particular method of unification is merging, which "consists of a combination in which one of the constituent companies remains in being, absorbing all the other constituent [companies]." (30) A merger is a form of takeover. (31) The decision to merge or unify two companies is almost always based on a business reason (32)--most commonly to increase the firm's profit, (33) or to obtain access to new markets, products, or technologies. (34) Since corporate statutes in both Delaware and the Netherlands grant broad powers to directors to manage the business and affairs of the corporation, (35) the judiciary's traditional response has been to defer to the board of directors. (36) Judicial review, however, may be sharpened in certain circumstances including defending against hostile takeover bids or engaging in a sale of control. (37) In Delaware, those circumstances evoke application of either the "Revlon test" or the "Unocal standard" supplemented by Unitrin. (38) Currently in the Netherlands, however, there is no clear test or analysis to apply to these situations.

    This enhanced standard of review is justifiable in light of the directors' fiduciary duties of good faith, (39) care, (40) and loyalty (41) to both the company and its shareholders (42) because of the potential conflicting incentives between the director-manager's self-interest in keeping his job--"entrenchment"--and the shareholders' interest in maximizing their own profits. (43) A heightened standard of review subjects the directors' decisions to more exacting scrutiny to determine if the directors breached their duty of loyalty by engaging in "self-dealing" transactions, such as entrenchment. (44)

    The most direct way for a director to entrench himself, and thus breach his fiduciary duties, is by abusing takeover defenses. Defenses against unsolicited hostile bids are not per se illegal. (45) On the contrary, defenses are specifically permitted, and even required in some circumstances under the...

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