Shareholder Activism and ESG: From Locust to Green Knight? A Perspective from the Netherlands

1. 43Introduction

In The big fight, Jeroen Smit's book about Unilever and Paul Polman, Polman sets the mood as follows:

''Hedge funds are not at all concerned with long-term value creation. Hedge funds would sell their grandmother if they could make money off it.”^[1]

This is the fairly ingrained – and not very positive – image of activist shareholders. Critics are quick to see the focus on short-term returns as a major drawback of activist shareholders.^[2] However, here and there this notion of a one-sided focus on the short term is subjected to some nuance. The Economist wrote in early 2023:

“Contrary to their reputation or short-term opportunism, activist investors can help boost long-term return. One study of 2,000 activist campaigns concluded that target firms on average outperformed their rivals after five years on both share-price and operating measures.”^[3]

Proponents of shareholder activism also point to the corrective effect on legacy structures and policies. Activist shareholders keep corporate management on their toes. In doing so, they discipline companies and the market.^[4] Proponents 44also believe that these highly focused shareholders can generate good ideas for the company. Even the former “targets” of shareholder activism are not always uniformly negative. See, for example, the former CEO of AkzoNobel in an interview following interactions with Elliott:

“Actually, in retrospect, an activist shareholder like Elliot[t] proved to be a very useful sparring partner. That probably sounds surprising, given our history. Occasional sparring with large, knowledgeable shareholders works very well, as long as you follow all the rules.”^[5]

In the Netherlands, shareholder control is limited.^[6] This is primarily due to the fact that determining policy and setting the strategy are reserved for the company’s board. As a result, the board can set the policy and strategy for the company and its affiliated business with a certain degree of independence (i.e., separate from the shareholders).^[7] Throughout this article, we will be using the terms policy and strategy as synonyms.

In this article, we will try to answer the questions (i) what is the role and what are the rights of activist shareholders under Dutch law, (ii) how these rights relate to ESG developments, and (iii) whether the associated changes in shareholder activism will affect the existing negative image of activist shareholders and their limited rights. We will examine all of this against the backdrop of recent developments – both legislative and practical – around ESG and the broad public support for it. In other words: will the pendulum, that in recent years has placed the power in the company in the hands of the management board and the supervisory board, swing back a bit toward the shareholders? We will discuss these matters from the Dutch perspective and will focus on the rights of shareholders according to Dutch law.

This article is structured as follows. In Section 2, we first outline the current playing field. What and who are activist shareholders, what do they want, what strategies do they employ and what trends can be discerned in practice? In Section 3, we provide a brief overview of the legal and non-legal “tools” that activist shareholders use. In Section 4, we discuss some recent developments in the field of ESG legislation and examine whether those developments affect or should affect existing shareholder rights, or at least the effective exercise of those rights in practice. In Section 5, in light of the developments discussed in Section 4, we discuss some additional “routes of attack” that the ESG-oriented activist shareholder can take. In Section 6, we wrap up with a brief conclusion.

2. 45Activist shareholders: goals, strategies and trends

Shareholder activism is an undefined concept. In our view, it includes every shareholder in a listed company exercising their shareholder rights to force change in relation to that company and its affiliated business.^[8] So broadly speaking, these are “active” shareholders, as distinguished from their non-active fellow shareholders.^[9]

The goals of activist shareholders are diverse and may include, for example, a better capital structure; improving corporate governance; selling non-core divisions; dividend payments; share buyback programmes; or, the most drastic option, putting the whole company into play.^[10] Yet other shareholders are trying to bring about a change of course for predominantly idealistic reasons. Achieving financial returns as a result of the intended change of direction is often not the primary motive in that case. This will mostly pertain to changes to the strategy regarding topics in the ESG sphere. An intermediate form is also common, of course, namely that there is primarily a financial motive, in which ESG elements (whether or not based on idealistic motives) then also play a role.

There is extensive debate on whether or not activist shareholders perform a useful function in the system of checks and balances within the company and whether or not they make a valuable contribution to long-term value creation by the company. Apart from the fact that we do not think a general and unequivocal answer to this question is possible, we will not repeat that debate here.^[11]

In recent years, we have seen a trend of civil society organisations and institutional investors using the same tactics previously reserved for classically activist hedge funds.^[12] Those civil society organisations might include, for example, initiatives such as Follow This. Follow This is a Dutch association that takes an active stance as shareholder at general meetings of companies operating in the oil and gas sector. In particular, it does this by proposing a resolution that, in concise terms, calls for Paris-aligned targets for the Scope 3 emissions re46ported by those companies (which, in short, concerns the emissions from customers due to the use of the energy products sold).^[13] Other organisations such as Fossil Free, Milieudefensie, ClientEarth and Extinction Rebellion are also increasingly active at general meetings.

The trend that also institutional investors, such as large pension funds and asset managers, are taking – especially on ESG issues – a more active stance in general meetings than before,^[14] has been emerging for some time.^[15] However, over the past year, an opposing dynamic has arisen in this arena, particularly in the U. S., where certain Republican politicians actually believe that ESG should not play a role at all in investment choices by asset managers such as BlackRock, Vanguard, Fidelity Investments, and State Street Global Advisors.^{[16], [17]} Perhaps partly because of this, Larry Fink’s Annual Chairman’s Letter to In47vestors was in 2023 considerably more cautious. Not only was the letter this time addressed only to investors, but it also no longer mentioned ESG as a term and it emphasized that there are multiple perspectives (“There are many people with opinions about how we should manage our clients’ money. But the money doesn’t belong to these people. It’s not ours either. It belongs to our clients, and our responsibility and our duty is to them.”^[18]). Nevertheless, there is still very large and sustained growth in ESG investments.

Besides civil society organisations and institutional investors, there are also hedge funds that focus specifically on ESG activism. A well-known example of such an ESG-focused hedge fund is Engine No. 1. Perhaps the most notable victory it has achieved was the appointment at ExxonMobil of three directors with experience in renewable energy and the energy transition. Incidentally, the success of this campaign was partly due to the support of major institutional investors such as BlackRock, Vanguard and State Street Global Advisors using their ownership leverage to encourage their investee companies to tackle ESG issues. In early 2024, ExxonMobil was again front-page news in the context of (anti-)ESG activism.^[19] ExxonMobil sued FollowThis and U. S. asset manager Arjuna Capital to get resolutions submitted by them to the general meeting off the table.^[20] Through these resolutions, FollowThis and Arjuna Capital called on ExxonMobil to accelerate reductions in greenhouse gas emissions, which would also require ExxonMobil to include in its reduction plans targets for its reported Scope 3 emissions. ExxonMobil stated in its complaint that, in previous years, almost identical proposals had already been rejected by a very large majority of shareholders and therefore resubmission of this proposal was not allowed. In addition, ExxonMobil argued that the proposal concerned a topic ‘relating to the company’s business operations’.^[21] For these reasons, it asked the federal District Court for the Northern District of Texas for a declaratory judgment that it did not have to include this proposal in the agenda of the general meeting. Although following this subpoena FollowThis and Arjuna Capital withdrew their proposal, ExxonMobil decided to continue proceedings. Ultimately, the court dismissed ExxonMobil’s claim, although this 48only happened after Arjuna Capital had unconditionally committed not to submit this proposal or similar proposals in the future again.^[22]

As investment bank Lazard signaled a few years ago, ESG is no longer the exclusive domain of civil society organisations, institutional investors or ESG-focused hedge funds.^[23] A recent development is that traditional activists are also increasingly including ESG aspects in their campaigns.^[24] One example was Third Point’s (unsuccessful) campaign to break Shell into an oil and gas arm and a renewables and LNG arm. It explicitly mentioned that such a split – besides increasing shareholder value – could lead to lower CO₂ emissions.^[25] The same was at play in Elliott’s campaign against Scottish energy firm SSE,^[26] in which it was argued, among other things, that if the Renewables division were spun off, that new company could actually expect more investment from ESG funds.^[27] Another well-known initiative is the Say on Climate movement 49(along the lines of Say on Pay) by hedge fund manager Chris Hohn of The Children’s Investment Fund (TCI). The initiative actively campaigns for shareholders to have an annual advisory vote on corporate climate plans, such as a net-zero transition plan. The campaign is backed by institutional investors, activist shareholder groups and proxy advisory services ISS and Glass Lewis.^[28] More than 20 companies have now embraced the Say on Climate initiative, including Unilever, Shell, Glencore and Nestlé.^[29]

So what exactly are the motives of activist shareholders to run ESG campaigns? This will vary for each activist shareholder. Some campaigns are so-called “trojan horse campaigns”, in which hedge funds combine a traditional activist approach, such as selling or splitting up a company, with an ESG initiative. Institutional investors, on the other hand, seek to maximise the long-term value of their entire portfolio. This means mitigating risks or negative externalities of the portfolio, such as climate change, and this can be done by requiring companies to adopt stricter ESG policies. For institutional investors, this therefore provides an incentive to adopt a (more) activist stance. This incentive is additionally linked to changing societal attitudes, the corresponding expectations of investors, and concomitantly the image (and the related commercial advantage to be gained) of the institutional investor in question. In short, just as activist shareholders differ in shapes and sizes, their motives will always differ too.

3. 50The tools of the activist shareholder

The activist shareholder’s toolbox contains various resources, some more legal in nature than others, which are almost always combined. We limit ourselves here to a few key points.^[30]

We start with the most important non-legal tools:

1. The Dear Board letter, of which there are also well-known examples in the Netherlands.^[31] The audience of such a letter consists mainly of the fellow shareholders, other stakeholders of the company, analysts, proxy advisory services and the press. Such letters therefore often mention the pain points the company is struggling with under – or as a result of – its current management, and are often accompanied by proposals for a better future.

2. Another non-legal tool is getting proxy advisory services, such as ISS and Glass Lewis, on side. The power of such agencies can be very great at listed companies.^[32] This is partly due to the fact that a large number of non-active shareholders adopt these recommendations, sometimes on the basis of internal regulations, without question, combined with the large number of non-active shareholders who do not even attend general meetings (either in person or virtually).

3. The influencing of proxy advisory services is often accompanied by PR campaigns, including specialised consultants who can explain the activist shareholder’s position and plans to the (financial) press and other potential supporters.

We will dwell a little longer on the legal tools employed. The position of the shareholder in a Dutch listed company has become considerably weaker since 2007. Scholarly opinion has previously pointed to a “pendulum”^[33] between a 51focus on the primacy of the manage53ment board and the supervisory board, on the one hand, and the rights of shareholders to discipline underperforming management, on the other.^[34] This pendulum movement is broadly visible where shareholder rights are concerned, affecting, among other things, the calling of shareholder meetings, the right of dismissal, the right to put items on the agenda and the right to information.

The pendulum currently swings towards the management board and supervisory board. This has everything to do with the concept of “the strategy of the company”. Activist shareholders generally focus on strategy. Under Dutch law, it has been established case law since 2007 that strategy – in principle – is the board’s domain.^[35] This notion has been enshrined in law for listed companies since 1 May 2021 (in Article 2:129(1) of the Dutch Civil Code (DCC)), which incidentally does not feature the qualifier “in principle”. The general meeting can express its views on strategy only by exercising the rights granted to it by law and the articles of association. Under Dutch law, the key rights of shareholders are:

1. Removal of executive and supervisory directors. The right of the general meeting to remove executive and supervisory directors is an essential power of the general meeting. The law even states that the general meeting can remove executive directors “at any time” (Article 2:134(1) DCC),^[36] and the same is assumed for supervisory directors (Article 2:144(1) DCC).^[37]

2. 52Convening meetings. Any shareholder individually or jointly holding at least 10% of the capital in a public company (NV) may request the board to convene a general meeting. If the board refuses to do so, this shareholder can apply to the court for an interim measure authorising it to convene the meeting itself (Article 2:110/2:111 DCC).

3. Right to put items on the agenda. Shareholders who individually or jointly hold at least 3% (or so much less as stipulated in the articles of association) of the issued capital of a public company (‘naamloze vennootschap’) (or a listed private company (‘besloten vennootschap’))^[38] can request the board to put items on the agenda of that meeting up to 60 days before a general meeting (Article 2:114a DCC^[39]).^[40]

4. Right to information.Article 2:107(2) DCC^[41] lays down that the management board and supervisory board will provide the general meeting with all the information requested, unless a compelling interest of the company is opposed to this. In principle, this article relates to information requested at the meeting that concerns the company’s financial and operational situation, so that the general meeting can reach a sufficiently well-founded decision. Whether a substantial interest of the company arises is at the discretion of the management board and supervisory board. The general meeting does not have the power to decide on this.^[42] The refusal to provide the requested information is not specifically sanctioned. In addition, answering questions posed by shareholders quite often breaks down into a discussion of whether the questions posed are “relevant” rather than the substantial interest that would oppose answering them. In short, the right is there in theory, but in practice it is an ineffective tool for the activist shareholder.

5. Withholding of discharge.With the annual discharge, the general meeting signs off on behalf of the company on the policies pursued by the management board and the supervision exercised by the supervisory board for the company’s past financial year. In recent years, it can be seen that the discharge vote is increasingly used to cast a protest vote.^[43] By not granting discharge to executive and/or supervisory directors, shareholders are increasingly expressing their dissatisfaction with the (alleged unsatisfactory) actions or supervision of the management board or supervisory board. Although the legal relevance of withholding discharge is relatively limited (it formally causes the director(s) and/or the supervisory directors to remain exposed to internal liability vis-à-vis the company), its symbolic value should not be underestimated.

On the statutory right to information (item d), we already noted that it will be ineffective in practice. The same applies to the right of the general meeting to dismiss executive and supervisory directors (item a), the right to convene a general meeting (item b) and the right to put items on the agenda (item c).^[44] The biggest hurdle shareholders will encounter in this regard is that the board will take the position that the removal, the convening of a general meeting or the agenda item proposed is related to the company’s strategy. And decisions concerning the strategy are up to the board, not the shareholders.

So what exactly is this strategy?^[45] This is not entirely clear, but one can assume that according to the board almost all issues that active shareholders want to raise (such as the sale of certain business units, changes in the composition of the management board or supervisory board, changes in governance, etc.) will fall under the heading of “strategy”. So, this effectively puts the shareholder at 54a disadvantage from the start. Whether the ESG policy as a whole or a particular subtopic is covered by the strategy depends on the topic in question, but generally this will be the case.

An illustrative example of the fact that the “strategy” and the autonomous position of the management board and the supervisory board – vis-à-vis the shareholder – in shaping that strategy are, in practice, a real obstacle in the shareholder’s exercise of his rights, can be found in the well-known Akzo case.^[46] There, the Enterprise Chamber at the Amsterdam Court of Appeal (“Enterprise Court”) found that the proposed dismissal of the chairman of the supervisory board qualified as (covert) interference with the strategy. In our view, this goes quite far. Indeed, this raises the question in which cases a shareholder can, in fact, remove the management board or supervisory board (or specific members thereof). This will be self-evident in obvious cases, such as fraud, but where removal is proposed for alleged non-performance, the domain of strategy is likely to be difficult to delineate. This leaves only limited cases where – in the light of the Akzo decision – removal would be possible without question. In other words, whenever a shareholder requests the removal of an executive or supervisory director (or of the management board or supervisory board as a whole), the company will be able to put forward the defence that it is not a failure in performance that is the reason for the removal, but that the real reason lies in the fact that the shareholder does not agree with the strategy. It may be added here that a request to put the dismissal of an executive or supervisory director (or of the management board or supervisory board as a whole) on the agenda will trigger the statutory reflection period^[47] (250 days) or the response time from the Dutch Corporate Governance Code^[48] (revised in 2022) (180 days). This imposes a delay of at least six months before the shareholder is able to exercise any right. In short: exercising the general meeting’s legally enshrined power to remove executives and supervisory directors is actually quite difficult.

In practice, the aforementioned right to put items on the agenda is only effective when it comes to matters that fall within the competence of the general meeting. If the shareholder so requests, those items must be put on the agenda as voting items, after which the general meeting can pass a resolution. But the right to put items on the agenda can, of course, also include subjects that are not within the competence of the general meeting. Those items need not be included as voting items, but only as discussion items.^[49] However, the board is 55in principle obliged to put the requested item on the agenda if the requirements of Article 2:114a DCC are satisfied. Various arguments for refusing agenda requests have been cited in the literature.^[50] In its well-known decision in Boskalis v. Fugro, however, the Dutch Supreme Court ruled that “an [agenda-setting] request under Article 2:114a DCC (...) can only be refused in exceptional cases. A basis for such a refusal may lie in Article 2:8(2) DCC or Article 3:13(1) DCC” (additions and italics by authors).^[51] In this case, Boskalis had asked the board to put on the agenda the topic of aborting protection of Fugro’s subsidiary, as an “item on which the views of shareholders will be sought, in the sense that shareholders will be given the opportunity to express, by casting a vote, whether they are in favour of or against the recommendation contained in the agenda item.” The Supreme Court ruled on this matter that the company could not be obliged to include a topic reserved for the board on the agenda for a vote by the general meeting.^[52] It is in this context irrelevant that this vote has no legal effect and is referred to as an informal vote, a recommendation, a motion or a poll, according to the Supreme Court.^[53] An issue that touches on strategy is not within the competence of the general meeting and is therefore not placed on the agenda as a voting item. Shareholders can only put items on the agenda for voting insofar as the general meeting is authorised to pass resolutions on these.^[54] However, any shareholder can ask the chairman for permission to speak at the meeting and (after having been given the floor) can take a position on a matter related to an agenda item.

The above leads to the intermediate conclusion that the main shareholder rights do not always turn out to be equally effective in practice.

Before we discuss some recent developments in the field of ESG legislation, we would like to conclude this Section on the tools of the activist shareholder by pointing out a potential issue that activist shareholders may encounter if they collaborate in order to influence the ESG policy of the company they invest in. 56This issue concerns the mandatory takeover bid rule and the corresponding ‘acting in concert’ rules, both arising from the Takeover Directive.^[55] The mandatory takeover bid is included in Article 5(1) of this Directive, which reads as follows:

‘Where a natural or legal person, as a result of his/her own acquisition or the acquisition by persons acting in concert with him/her, holds securities of a company (...) which, added to any existing holdings of those securities of his/hers and the holdings of those securities of persons acting in concert with him/her, directly or indirectly give him/her a specified percentage of voting rights in that company, giving him/her control of that company, Member States shall ensure that such a person is required to make a bid as a means of protecting the minority shareholders of that company.’ (italics added by authors)^[56]

In the Netherlands, the mandatory takeover bid rule is implemented in Article 5:70 of the Dutch Financial Supervision Act (DFSA), where a threshold of 30% of voting rights is chosen. Hence, shareholders who cooperate to influence the ESG policy of the company they invest in, may potentially, under Article 5:70 DFSA, be confronted with the obligation to make a bid, if they hold together – taking into account the acting in concert rules – more than 30% of the voting rights. Although we are not currently under the impression that this considered to be a serious issue in the Netherlands among institutional investors, as ESG shareholder activism increases, the mandatory takeover bid rule may deter shareholders from collaborating as part of their ESG efforts. For certain other jurisdictions, for example Germany, in legal scholarship it is noted that the rule causes institutional investors to hesitate in collectively using their voting power to replace boards resistant to climate change proposals, thereby potentially obstructing efforts by shareholders to address ESG issues.^[57]

4. 57Key recent developments on ESG legislation

In this Section we discuss some recent developments in the field of ESG legislation and examine whether, under Dutch law, those developments affect or should affect existing shareholder rights, or at least the effective exercise of those rights in practice. Successively, we address (i) the Dutch Corporate Governance Code (revised in 2022), (ii) the Shareholders’ Rights Directive,^[58] and (iii) the Corporate Sustainability Reporting Directive (CSRD).^[59] Finally, we turn to the shareholder’s right to put items on the agenda in relation to ESG issues.

5. Other ESG tools for the activist shareholder

6. Conclusion

The ESG developments mentioned in this article present opportunities both for activist shareholders, and other shareholders who care about the company’s strategy. In the ESG domain, an avalanche of new laws and regulations is coming. These laws and regulations, we believe, will help shareholders exercise their rights more often and more effectively. ESG shareholder activism will thus gain new momentum. As we noted, the image of the classic activist shareholder tends to be rather negative (“the locust”). But what will the picture be when that classic locust starts taking on ESG-related causes (the good cause)? Will the image of the activist shareholder then remain as negative as before, or will the “locust” suddenly become a “green knight”? In reality, of course, it is all a lot more nuanced than these two caricatured extremes. Activist shareholders come in many shapes and sizes and most are somewhere on the spectrum between the two extremes just mentioned. For us, at least, there is no doubt that ESG shareholder activism is not a temporary trend that will blow over in the short term. In our perception, this is a structural phenomenon that will permanently change our corporate law landscape. As to how and to what extent it will change, we can only speculate at this point.