Leiden Law Blog

Polishing golden shares

Polishing golden shares

Every so often, the Dutch Government issues a proposal to introduce ‘golden shares’ for financial institutions. Last spring, a motion was filed in the Dutch House of Representatives during the plenary parliamentary debate of 4 April 2018, with the request to examine the extent to which the introduction of golden shares in financial institutions (particularly in systemically important banks), as an instrument to influence remuneration policy, would be possible. This was in response to a rise in the remuneration of the chairman of the board of ING bank. The Dutch Minister of Finance, Wopke Hoekstra, initially seemed willing to consider this option and announced that it would be investigated. But not even a week later, the plan was brushed aside by the Minister. This quick reaction and seemingly cursory examination, raised questions with the Permanent Commission for Finance. The Minister responded to these questions in writing on 11 July 2018. The specific request in the submitted motion suggested a golden share for the government in financial institutions with a right of approval for remuneration decisions in order to be able to implement the government’s remuneration policy. This arrangement did not comply with the requirements of European law. A golden share with veto rights to influence the remuneration policy of financial institutions, when the government has decreased her current share of more than 56 percent, is supposedly in violation of the free movement of capital and the freedom of establishment.

The suggestion of a golden share arrangement in financial institutions was thus dismissed as being unfeasible by Minister Hoekstra. The swiftness with which the suggestion of a golden share was judged could underscore that golden share constructions are generally seen as being unfeasible. In my opinion, such a judgment regarding the use of golden shares would be unjust. The use of golden shares arrangements is admittedly under the strict control of the CJEU based on the wish to protect the free movement of capital and/or establishment and shareholder interests, but golden shares (and related arrangements) do not have to be disregarded altogether.

Given the deliberations of the CJEU in Commission/Belgium, which have also been mentioned by the Minister, it is possible to shape a golden share arrangement that conforms with the rules of free movement. Therefore, golden share arrangements should not be deemed unfeasible in advance, based upon a possible negative European law judgment. More attention should be paid to the specific pros and cons of an arrangement in each case and to the setup of a possible golden share arrangement so the possible implementation of such an arrangement can be judged on its merits. It is a pity that the motion does not pay attention to the requirements that the free movement rules set for golden share arrangements. In my opinion, a differently formulated proposal, which could achieve a similar result on these important issues, would not have been rejected. Golden share arrangements can be valuable. Golden shares continue to be appealing, not only in times of ‘protectionism and self-interest’, but also when policymakers seek to safeguard the public interest. Additionally golden shares can serve as an anti-takeover device during a hostile takeover.

Golden shares not written off by the CJEU

A good starting point for examining what options the CJEU leaves for golden shares is the case of Commission/Belgium, in which the Court held that under strict conditions, a golden share arrangement may be deemed compatible with the free movement rules. In this case between the European Commission and Belgium, there were two parts to the contentious regulation . The first part consisted of special rights regarding ‘the transfer, use as security or change in the intended destination of the company's system of lines and conduits which are used or are capable of being used as major infrastructures for the domestic conveyance of energy products.’ These had to be notified in advance to the responsible Minister. This Minister then had the right to oppose the change if he considered the operations to be harmful to the national interests in the field of energy policy. The second part focussed mainly on the protection of the objectives of the energy sector: two representatives of the Federal Government on the board of directors of the company (to be appointed by the Minister) could ask the Minister to annul decisions of the board that they thought were in violation of the national energy policy, including the objectives of the government regarding the energy supply of the country. The Belgian regulation was deemed, in contrast to the Portuguese and French regulations that were simultaneously examined by the CJEU, to be in accordance with the free movement requirements. The court considered that, although it was a restrictive governmental measure, it could be justified as being a legitimate public interest because it satisfied the proportionality test. The Belgian government’s measures regarding the shares with special control rights were very specific. The right of the government was not a system of prior approval, but the regime at issue was one of opposition, with a strict time period in which to express objections. Moreover, the rights connected to these shares were only applicable to decisions regarding strategic assets of specifically designated companies. It was not proven by the Commission that less far-reaching measures were possible. As Oostwouder argued in 2002, the first series of golden share cases of the CJEU leaves room for government control through golden share arrangements, provided that there is a system that only allows for government intervention after certain legal actions have been taken by the company and based on objective criteria that can be verified by judicial review. The autonomy of the company concerned is therefore not limited in advance and the government intervention can only occur if specific, judicially reviewable objectives of public policy are being pursued.

In asking the question to what extent the government (still) needs to have a certain amount of influence in certain (privatized) companies, from a company law perspective, not enough care and attention is given to shareholders’ rights. The Minister of Finance states, without further substantiation: ‘It is not necessary for the stability of the Dutch financial system to hold a golden share, also because this can be realized by (more effective) laws and regulations.’ Nevertheless, one should keep in mind why a certain degree of governmental influence is desired. This is usually the case because the company has a certain public interest. This could be called a national strategic interest. In the ING case, the government should not be motivated by a desire to adjust or approve individual remuneration decisions, but rather be interested in promoting a healthy and stable financial system, in which it intervenes only when actions of the company endanger these objectives. Despite the fact that ‘commercial banking’ was not previously seen as a justification for limitation of free movement, this judgment could be, and in my opinion, should be, different for systemically important banks in light of the financial crisis and its aftermath. To ensure the public interest of financial stability (as formulated by financial institutions), a majority shareholding by the government is not strictly necessary, as we learn from Commission/Belgium. The government could be better prepared in certain situations, with similar measures to oppose, possibly, the appointment of certain supervisory board members and a right to annul decisions that clash with the public interest in question. Currently, a golden share in a financial institution is not the most obvious solution given the disentanglement of the government with the banking system. Future deliberations, however, when proposing golden share arrangements, should at least give consideration to the conditions under which golden shares would be allowed.

To be continued.

1 Comment

Ronald Jacobs
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