Retaining profits KLM in conflict with duty of care minority shareholders?

The Dutch Supreme Court has given a final decision in the ongoing litigation between VEB (a Dutch shareholders association) and Air France KLM. VEB had demanded for higher dividends. The question is if the resolution of KLM to retain profits was justified taking the interest of minority shareholders into account? Marco Guit, Dutch lawyer specialized in corporate law, discusses the judgment.

History: resolution retain of profits leads to low dividend

In 2004 Air France took over KLM. Air France becomes holder of 96,3% of the ordinary share The portion of registered capital of a private or public limited company
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and the priority shares of KLM. VEB represents the minority shareholders. In accordance with the articles of association A document, drawn up when a Dutch company or legal person is set up, and which regulates the operations of the company and defines its purpose.
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Articles of Association
of KLM, the priority shareholders (i.e. Air France) decided in 2008 to retain 90% of the profits. The remaining were distributed to the shareholders resulting in a dividend of € 0,58 per KLM share The portion of registered capital of a private or public limited company
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Nullification decision on ground of unfairness?

VEB argue that such a low dividend is not in line with market rates. According to VEB Air France had abused their powers being priority shareholders to lower the dividend of the KLM share to match the dividend of the Air France share. KLM as a company had much better results though. The resolution therefore is contrary to the principles of reasonableness and fairness: Air France KLM has not considered the interest of the minority shareholders sufficiently. In a lawsuit VEB demands nullification of the resolution but the Court as well as the Court of Appeal deny the claim.

Duty of care towards minority shareholders

The Supreme Court points out that the priority shareholder (as also being the major shareholder) in the case should exercise due care regarding the interest of minority shareholders. However, a judge must adopt a reticent attitude when judging the decision-making of a company. A body with decision-making authorities naturally needs to be fee to judge and decide as it sees fit. The Court of Appeal was right in her judgment that Air France KLM had sufficiently considered both the company’s interests and the interests of minority shareholders. VEB has to resign itself to the lower dividend.

Corporate lawyer in shareholders dispute

According to article 2:8 of the Dutch Civil Code a corporate entity and all its involved legal bodies have to behave toward each other in a fair and reasonable manner. The code of conduct entails the duty of care when the interests of minority shareholders are involved. A shareholder has several instruments to dispute the policy or decisions of a company. Article 2:15 Civil Code provides for a nullification procedure when a decision is contrary to principles of reasonableness and fairness. You can read more about buying out shareholders or resolving a deadlock between shareholders.