Trend report: New developments in Dutch loyalty sharing schemes

In recent years, several listed Dutch companies have implemented share loyalty schemes, incentivizing long-term shareholder ownership by providing additional dividend or voting rights to long-term shareholders. In our September 2020 Trend Reportwe covered an unprecedented court decision in which the implementation of a loyalty sharing scheme – as part of a merger – was successfully challenged. An expert panel on the modernization of Dutch company law was recently published his advice (in Dutch) on the use of loyalty shares by Dutch companies.

In this trend report, we share our views on how the expert group’s advice can influence the use and development of loyalty sharing schemes under Dutch law.

Loyalty sharing schemes under Dutch law

Loyalty share schemes are intended to encourage long-term shareholder ownership. Provided that the relevant ordinary shares are held by the same stockholder during a certain qualifying period (in most cases three or five years), that stockholder may be granted certain additional “loyalty” benefits; usually additional voting or in some cases additional dividend rights. Dutch company law allows loyalty share schemes to be structured in such a way that eligible shareholders can participate in the loyalty scheme without having to make additional payments (on top of their loyalty shares), and the loyalty shares are transferred back to the company

without payment after the right to loyalty benefits expires. Loyal share schemes can be similar to, but must be distinguished from, dual class share structures where different classes of shares have different rights attached to them (eg high/low voting shares).

In our September 2020 Trend Reportshared our thoughts on Mediaset a decision marking the first time a Dutch loyalty sharing scheme has been successfully challenged in court. According to the Amsterdam Court of Appeal, it was not sufficiently clear that the loyalty share scheme was, in the circumstances of the case, an appropriate and proportionate instrument to stimulate and promote long-term shareholding.

We also indicated in this trend report that we did not expect Mediaset considered to have a significant impact on the use and eligibility of loyalty sharing schemes in the Netherlands, but this is likely to expose the rationale of such schemes to increased levels of scrutiny.

Legal basis for loyalty shares?

At the request of the Dutch Minister of Legal Protection, the expert group on the modernization of Dutch company law assessed the desirability of a statutory basis for loyalty shares. in his letter from 24 January 2023 the Dutch Minister of Legal Protection informed the Dutch House of Representatives of the expert group’s findings and published its advice.

In this advice, the expert group concluded that it is neither necessary nor preferable to introduce a statutory basis for loyalty shares in the Netherlands. The expert group based this conclusion on three grounds, i.e:

  1. Dutch company law already allows the application of loyalty shares;
  2. research and current practice experience do not demonstrably show that a legal basis for loyalty shares would contribute (sufficiently) to the creation of long-term value and/or the sustainable success of a company; and
  3. Loyalty voting rights, according to the expert group, are mainly used by controlling shareholders to consolidate or increase influence without the need for additional capital contributions.

In addition, the panel announced that follow-up advice would address the use or need for limits on loyalty shares.

This forthcoming analysis of possible limitations appears to be prompted by Mediaset a judgment which the Panel notes has left considerable uncertainty, including on the requirements for objective justification for the use of loyalty share schemes (in particular in the case of a controlling shareholder) and on the limits of the additional voting rights granted. It was held that the multiplier of five was inadmissible in the particular circumstances of Mediaset however, the panel notes that it remains unclear whether such a ratio would be acceptable in other circumstances (and if so, what) or whether only a lower ratio would be acceptable as a general rule.

Implications for the future of Dutch loyalty sharing schemes

The Panel’s advice offers further confirmation of the admissibility of loyalty sharing schemes under Dutch company law. The advice that there is no need for a statutory basis for loyalty shares in Dutch law should not lead to changes in current practice. However, the expert group’s advice also emphasizes that it is important to carefully structure and implement loyalty share schemes, especially in companies with a controlling shareholder. Accordingly, due consideration should be given to (i) the purpose of the relevant Loyalty Sharing Scheme; (ii) its proportionality with regard to that objective; and (iii) balancing relevant interests.

In our view, the presence of a controlling shareholder should not in itself render a loyalty share scheme impermissible, nor is it apparent from Mediaset judgement. Much will depend on the degree of influence the controlling shareholder gains through the loyalty scheme and the extent to which this is consistent with the stated objective. The degree of progressivity of the structure, the wider corporate governance structure (including the rights of minority shareholders) and the implementation schedule (e.gon first admission to listing or midstream) as well

seem to play a defining role in this. In this regard, we note that it is a principle of Dutch company law that the parties are free to determine the management and capital structure of a company within the framework of (mandatory) law. As such, in the absence of a statutory prohibition, we believe that parties should have considerable latitude in how they structure a loyalty share scheme, assuming due disclosure, compatibility with the stated purpose and due regard for investors’ interests, including those of the non-controlling shareholders.

although Mediaset assessment provided some guidance, much uncertainty remains. The expert group’s future advice on potential restrictions on loyalty sharing schemes could provide important guidance on how Dutch courts view such schemes.

Among other things, the expert group could provide additional comfort to the Dutch practice by sharing its views on:

  1. what would be valid or lawful purposes for a loyalty sharing scheme;
  2. key considerations in assessing whether the relevant loyalty share scheme is proportionate to that objective; and
  3. the limits of what would be permissible under a loyalty sharing scheme in terms of voting ratio and qualifying period and in what circumstances

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