Round-up: Private Equity, Securities Lending and Draft Amendments - International Law Office

Private Equity
Securities Lending
Draft Amendments

Private Equity

On January 23 2008 the Dutch Private Equity and Venture Capital Association issued a press release entitled "Companies Flourish after Private Equity Investment". This was a surprising statement, as it was generally thought that private equity leads to increased indebtedness, short-term views and distributions of super-dividends to private equity shareholders in order to recover investments quickly.

The press release was based on a survey conducted by the association in cooperation with Ernst & Young, which stated that “after a buy-out, companies make new strategic and financial choices that have a positive impact on turnover, employment and benefit”. A large majority of the companies surveyed said that they had developed a growth strategy after the buy-out and 17% even said that they would no longer have existed without the buy-out.

An English version of the survey can be downloaded from the association’s website at www.nvp.nl.

Securities Lending

On January 8 2008 the minister of finance presented a letter to Parliament which had been sent to the European commissioner for internal markets and services on June 27 2007. In the letter, the subject of which was European recommendations on shareholders' rights, the minister informed the commissioner of two issues affecting shareholders’ rights: securities lending and the role of intermediaries in the voting process.

The Corporate Governance Commission recommended that although securities lending has positive effects on market liquidity, the scope for discouraging securities lending for the (exclusive) purpose of acquiring voting rights must be investigated. In line with that recommendation, the minister stated that:

• greater transparency is needed for parties to lending agreements;
• parties must be properly informed of the effect of the lending agreement; and
• the investor must explicitly agree to its securities being used for securities lending so as to prevent financial intermediaries from lending out securities on their own initiative.

Regarding the question of whether borrowed shares must be voted on, the minister stated that the right to vote is essential for a shareholder and that a provision to the effect that borrowed shares would not bear voting rights would have far-reaching consequences for the system of company law and the validity of general meeting decisions, apart from the unwanted side-effect that votes would be lost.

Regarding the role of intermediaries in the voting process, the minister recommended that the ultimate investor must be able to control the voting rights. This could happen, for example, by voting instructions being given through an intermediary’s client, with the intermediary then voting in accordance with the instructions.

Draft Amendments

While the proposal for the implementation of the Transparency Directive (2004/109/EC) is still pending in Parliament, the Ministry of Finance has published a draft proposal for amendments to the Financial Supervision Act, the Securities Giro Act and Book 2 of the Civil Code, in order to be consulted on by professional parties. The draft proposal has been prepared on the basis of cabinet reactions to earlier recommendations from the commission. The main features of the proposal are:

• a new threshold of 3% for the notification of major interests (currently 5%);
• the introduction of a regulation regarding notification of the intention of shareholders which hold a substantial interest; and
• the introduction of a regulation for the identification of shareholders and for communication among listed companies and their shareholders and, indirectly, among shareholders themselves.

Raising the threshold for the right of shareholders to have items added to the agenda of a general meeting of a listed company from 1% of the issued capital to 3% is also proposed. Professional parties are invited to post their reactions to the draft proposal before February 14 2008.

For further information on this topic please contact Lous Vervuurt at Bird & Bird by telephone (+31 70 353 8800) or by fax (+31 70 353 8811) or by email (lous.vervuurt@twobirds.com).