Dutch Enterprise Chamber orders investigation into dividend policy KLM

The minority shareholders of KLM have finally gained some success in their years of legal battles against KLM. The Dutch Enterprise Chamber has recently awarded an inquiry request into the dividend policy of KLM. It doubts the correctness of the course of action followed by KLM. Marco Guit, Dutch lawyer specialized in corporate law, discusses the case.

Investigation request by minority shareholder

After the Supreme Court has rejected the claim of Emarcy and VEB (two minority shareholders of KLM) to overturn the KLM decision to retain profits, there was only one place to go to seek justice: the Enterprise Chamber of the Amsterdam Court of Appeal (hereafter: the EC). Minority shareholder Emarcy has requested the EC to launch an investigation into the affairs and the course of action of KLM, especially into the dividend policy. Emarcy objects the fact that KLM and AFKLM (Air France) have linked the dividend on ordinary KLM share The portion of registered capital of a private or public limited company
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to dividend distribution of Air France shares. According to Emarcy KLM has not considered the interests of the minority shareholders sufficiently by linking the dividends.

Duty of care towards minority shareholders

The Enterprise Chamber emphasizes that the corporation needs to exercise due care regarding the interest of minority shareholders when deciding on dividend policy. AFKLM, as being priority shareholder, has the power to decide on this matter. However, there is a conflict of interests between the interest of AFKLM and that of the minority shareholders, since the profits of KLM will indirectly be available to AFKLM and the group. This means that when smaller dividend is distributed amongst the minority shareholders, AFKLM can retain greater profits for its own benefits.

EC: link dividend distribution not substantiated

After comparing the profits over the tax years 2004-2011 of KLM as well as AFKLM, the Enterprise Chamber comes to the conclusion that the dividend policy is indeed intended to link the dividend of KLM shares to the AFKLM shares. This does not seem logical, as the profits per KLM share The portion of registered capital of a private or public limited company
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were substantially higher than the AFKLM shares in that specific period. A well-substantiated reason for this link is however not given by KLM, nor can be found by the EC.

Severe doubts standard of care KLM’s policy

The EC decides that the facts give reason to doubt whether KLM has exercised its duty of care towards the minority shareholders when deciding on the dividend distribution and retained profits. According to the EC this gives reason to doubt the correctness of the dividend policy. It therefore has ordered an investigation into this matter.

Enterprise Chamber: Dutch corporate lawyer

Dutch corporate law knows a special legal procedure to investigate the affairs and the course of action of a company, the so-called inquiry proceedings (in Dutch: enquêteprocedure). The Enterprise Chamber can conduct such an investigation on request of shareholders or an involved industrial organization. A request for inquiry proceedings will only be allowed if the EC consider that there are well-founded reasons to doubt the correctness of the course of action followed by the corporation. In this case phase 1 of the inquiry proceedings has just been concluded. Phase 2 is the actual investigation. To be continued.