Publication of the preliminary draft outlining a reflection period

On 7 December 2018 the long-awaited draft bill was issued for consultation on the power of the board of a listed company to invoke a reflection period. Under the proposed changes, in the event of a motion being tabled for a change of strategy or a hostile bid being made, the company's board would be able to invoke a reflection period. During the reflection period, the right of the general meeting to suspend and dismiss managing directors and supervisory directors would be suspended for a maximum of 250 days. The draft bill complies with the coalition agreement of the Rutte III cabinet, in which the reflection period was announced.

Reasons for introducing a reflection period
From the explanatory memorandum drawn up by the ministers, it can be concluded that, when influence is exerted on the strategy, the board of a listed company must have time and tranquillity in order to assess and weigh up the interests of the stakeholders involved in the company. Long-term value creation, as propagated by the Dutch corporate governance code, is central. According to the explanatory memorandum, the reflection period fits within the scope of the shareholders' rights directive and the takeover directive (both in Dutch) and there are arguments supporting the view that the reflection period cannot be regarded as an obstacle to the freedom of establishment nor to the free movement of capital. 

Primacy of the board's strategy
The primacy of the board with respect to the strategy is made explicit in the law. In fact, this is a codification of a number of rulings handed down by the Dutch Supreme Court (ABN AMRO, ASMI and Fugro/Boskalis).

Invoking the reflection period
According to the draft bill, the reflection period could be invoked in three situations:

1. a shareholder tables motions for the appointment, suspension or dismissal of managing directors and supervisory directors;
2. a shareholder tables motions to amend provisions under the articles of association relating to the appointment, suspension or dismissal of managing directors and supervisory directors;
3. a hostile public bid has been announced or issued on the shares.

The reflection period would last a maximum of 250 days, during which the right of the general meeting to suspend and dismiss managing directors and supervisory directors would be suspended. The idea is that careful dialogue takes place between the board of the company and the stakeholders during the reflection period. The stakeholders include in any case shareholders with an interest of at least 3% and the works council.

Safeguards
The preliminary draft contains a number of safeguards to prevent the reflection period being invoked without good reason:

1. the application and the bid made by the shareholder must materially conflict with the interests of the company and the corresponding business undertaking;
2. invoking the reflection period requires the approval of the supervisory board;
3. the board is obliged during the reflection period to come to a careful policy determination and to make a report of the policy conducted during the reflection period available for inspection at the company’s office and on the website;
4. shareholders with an interest of at least 3% may request the Netherlands Enterprise Court at the Amsterdam Court of Appeal to terminate the reflection period.

Cumulation with other protective measures
From the explanatory notes to the preliminary draft, it follows that a company that has priority shares and/or protective preference shares may also invoke the reflection period. Cumulation of protective measures would therefore be possible. This differs from earlier arrangements set out in the coalition agreement of the Dutch cabinet. It would be at the judge's discretion whether a combination of different protective measures in a specific situation would be permitted.

Expected consequences
We expect the reflection period to be used mainly by listed companies that do not have protection in place or do not have a major shareholder. That is a small group of listed companies.

Timing
The consultation ends on 7 February 2019, after which a legislative bill will probably be drawn up. It is expected that the new statutory regulation will enter into force at the earliest at the end of 2019.

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