Dutch Change of Control Gain Capping Rule Ineffective
More than three years after its submission, the Dutch Senate is still in debate about the so-called Claw Back Bill. This Bill is partly inspired by an excessive acquisition bonus, received by Jan Bennink in 2007. The same Jan Bennink recently demonstrated at D.E Master Blenders 1753 that the purpose of "his Bill" could easily be circumvented. The part of the Bill to prevent excessive acquisition bonuses has thus become pure symbolic politics. It would be better to delete that part or strongly to tighten it (in such a way as the proposed Swiss rules under which all payments related to a successful takeover, merger or acquisition to executives will be prohibited). Ineffective legislation will only lead to more social unrest.
The objective of the Dutch Claw Back Bill is (a.o.) to prevent executives from earning millions of euros as "their" company is acquired. The news that Jan Bennink, then CEO of Numico, pocketed € 80 million due to the acquisition of the baby food company by the French company Danone, caused great social upheaval in the Netherlands. That amount was even larger than what former ABN AMRO CEO Rijkman Groenink earned as a result of the acquisition of the largest Dutch bank in the same year: € 26 million. The value of the shares and stock option packages of these CEOs skyrocketed when the share price of "their" companies exploded on the news of the acquisition. “Never again”, the legislator must have thought. He proposed a special rule aimed to cap windfall gains realised on company shares or stock options by an executive of a listed company as a result of a change of control, i.e. an acquisition or a legal merger or demerger. From the beginning, experts doubted the effectiveness of the proposed rule. The proposed rule only applies to shares and stock options and not to other financial instruments whose value depends on the share price movements, such as stock appreciation rights (SARs) and Phantom Stock. Listed companies can rather easily convert their existing share and/or stock option plan into these derivatives. In addition, shares and stock options purchased by the executive are out of scope. Listed companies may therefore choose to pay out the long term bonuses for executives in cash and request their executives to buy company shares at the same time.
The ‘initiator’ of the Bill, Jan Bennink, has added a new dimension of future circumvention of the intent of the legislator in his role as CEO of D.E Master Blenders 1753. At an extraordinary general meeting (EGM), scheduled for April 17th, 2013, the Board of the coffee and tea company proposed shareholders to offer Mr. Bennink a share award with an annualised grant value of € 4 million. In that remuneration proposal, the Board remarked that it reserved the right to settle the awards in cash of an equivalent value, “if regulatory restrictions prevent the making of a share settled award”. Whether this condition was included to circumvent the new change of control gain capping rule was not clear. Shareholders could not ask this question, because the EGM was cancelled as a result of the intended public takeover bid by an investor group led by Joh. A. Benckiser (JAB). From the two months later published offer memorandum it became clear that the value of the special share award would still be granted to Mr. Bennink (after the offer was declared unconditional). However, the grant would not be in stock, but in cash and not paid by D.E Master Blenders 1753, but by JAB. Moreover, the bidder also announced that Mr. Bennink’s performance shares granted under earlier long-term incentive share plans would vest after the offer was declared unconditional and would be settled in cash. The lesson is that even in case Dutch listed companies stick to the 'old fashioned' share and stock option remuneration schemes after the Claw Back Bill enters into force, executives do not have to fear the legal change of control gain capping rule directly. The monetary consequences of the change of control gain capping rule will become part of the negotiations between the bidder and the target company in the sense that bidder could be asked to compensate any possible losses as a result of the new rule.
In short: the change of control gain capping rule is ineffective and deserves reconsideration by the Senate. It seems better that the legislator ensures that supervisory directors take account of any possible outcome of the bonus scheme when setting the performance targets and developing the bonus mechanisms. The legislator should mandate that in the agreements between companies and executives, supervisory directors always have the authority – without judicial intervention – to adjust any bonus to an appropriate level if payment of the bonus were to be unacceptable according to the criteria of "reasonableness and fairness". The content of such an ultimate remedy should be made public and should be submitted to the AGM for approval.
Rients Abma is Managing Director of Eumedion