No consistent dividend policy? Reason for an inquiry by the Enterprise Division!

A ruling of the Enterprise Division of the Court of Appeals of Amsterdam ordered an inquiry into, among others, the dividend policy of a family business. When does the Enterprise Division order an inquiry and how did the court reach this decision? Dutch corporate lawyer Hidde Reitsma discusses the case.

Inquiry proceedings at the request of the shareholder

At the request of shareholders, holders of depository receipts or of the company itself, the Enterprise Division of the Amsterdam court of Appeal (ED) can order an inquiry into the policy and the affairs of the company. This is called inquiry proceedings. In this action, a shareholder submitted the request. What was the case? The requester was shareholder in a company in which all the directors and shareholders were related. The requester had been a director for some time, but he had resigned this position.

Insufficient information provided by the board of management

For years, the requester tried to obtain information from the board of management about the figures concerning the subsidiaries, the valuation principles and the manner of depreciation, investment plans and other matters. The board however refuses to provide him with this information. The requester therefore applied to the ED. He states that there are sound reasons for doubt about a proper policy of the company. For example, he is not sufficiently informed about the conduct of business within the company and the dividend policy is wrong and incomprehensible.

Duty of care of company for minority shareholder

The ED finds that, although the requester is no longer a director, and therefore not entitled to the same information that the board of management, the company should nevertheless, due to its duty of care for minority shareholders, keep a close watch on the interests of the requester. All the more because there is a closed family relationship. The information requested is of interest to the requester’s position as shareholder. According to the ED, there no proper reason for denying information to the requester.

No relationship between the profits and the amount of the dividend

Concerning the dividend distributions, the ED agrees with the requester that there is no relationship between the amount of the dividend and the proceeds of the company. There is no transparent and consistent dividend policy. In light of the continuing demand by the requester for a transparent dividend policy, a proper dividend policy was to be expected from the company. The requester’s suspicion that dividends are in fact being paid out to the shareholders-directors (albeit under the heading of management fee), is of course increased by the lack of a transparent and consistent policy.

Enterprise chamber: sound reasons for doubt

Also in view of these circumstances, the ED finds that there are sound reasons to question a proper policy of the company. The ED is therefore of the opinion that an inquiry into this matter is justified. The requester also asked, as immediate relief, to appoint a supervisory director body of a limited company or association that supervises the executive policy of the legal person
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supervisory director
to the company. The ED grants this request. The supervisory director shall in any case ensure that the requester receives the requested information.

Inquiry also granted in KLM case

The main interest of a shareholder in a company is to obtain dividend distributions if the company has made a profit. This makes a transparent dividend policy so important, as well as explaining this policy to the shareholders in the General Meeting of Shareholders. In this case neither of these actions were taken. It was therefore justified that the Enterprise Division ordered an inquiry. This lack of clarity concerning dividend distributions was also evident, among others, in a more prominent case, that of the minority shareholders of KLM versus KLM/Air France.