The Enterprise Chamber (EC) has provisionally blocked a proposed transaction between fertiliser producer OCI and construction company Orascom Construction (Orascom). Both companies are controlled by the same major shareholder, the (originally Egyptian) Sawiris family, which, based on the EC ruling, holds approximately 58.5% of the shares in OCI and approximately 55% of the shares in Orascom. The intertwined nature of the two listed companies makes the transaction sensitive: when a controlling shareholder is at the helm on both sides, caution is required. In this article, Titiaan Keijzer, Professor of Corporate Law at Erasmus School of Law, takes a closer look at the case. He explains why the EC intervened, discusses the position of minority shareholders and also makes some comments.
A cyclical business in a turbulent market
According to Keijzer, the case is strongly influenced by economic considerations. OCI is a chemical company that produces fertiliser. Both purchasing costs and sales results are largely dependent on fluctuating raw material prices. He explains: "OCI's share price, like that of its competitors, was pressured after Russia invaded Ukraine in February 2022. This led to an activist minority shareholder, Jeff Ubben, approaching OCI in March 2023." He insisted on the sale of business units in order to unlock value. "Where controlling shareholders sometimes oppose activist initiatives, the opposite was true in this case. OCI's controlling shareholder literally stated that he was 'not married to the business' and made the activist's plan his own," Keijzer continues.
Since then, OCI has sold billions in assets and distributed a large portion of the proceeds as dividends. Many investors also joined in, sometimes recently or even after the transaction with Orascom was announced, with those distributions in mind. However, one part remained: a factory in Limburg. Selling it to an external party proved to be difficult. “The component has been up for sale for years. This indicates that a transaction with an external party would probably only be possible at a particularly substantial discount,” according to Keijzer.
Sale to sister company
The solution was, therefore sought within the company's own circle: the remaining part would be sold to Orascom. The purchase price would not be paid in cash, but in Orascom shares. This interdependence resulted in a so-called related party transaction: a transaction between affiliated companies. This is not prohibited, explains Keijzer, but it does require extra care. "In such cases, a conflict of interest can quickly arise. It is important to ensure that the transaction is not entered into on non-commercial terms, i.e. not at arm's length."
That is precisely why additional safeguards apply in such cases. Keijzer explains: "These are intended to prevent the interests of minority shareholders from being harmed, for example by the controlling party selling a business unit to itself at too low or too high a price. The aim is to, where possible, replicate a process that would take place between independent parties." Various safeguards were indeed applied at OCI. Nevertheless, some investors considered this insufficient. They therefore took the matter to court.
The ruling of the Enterprise Chamber
The Enterprise Chamber is a judicial body specialising in disputes relating to company law and forms part of the Amsterdam Court of Appeal.
The EC ruled that mistakes were made in the transaction process. Given the family's position as controlling shareholder in both OCI and Orascom, there was reason for OCI's directors to be alert to possible conflicts of interest. However, there are doubts as to whether the decision-making process was conducted with due care. The reasons and valuations underlying the transaction are also open to question. The fact that OCI's board stipulated a 'fiduciary out', whereby it could withdraw from the transaction with Orascom if an external party made a higher bid, did not constitute sufficient compensation.
Control by the majority, protection of the minority
If the majority of shareholders vote in favour of a resolution, what exactly is the problem? Keijzer explains: "Under the law, the majority shareholder can control the decision-making process at the general meeting of shareholders. This also applies in a case such as this, where a vote involves a related party transaction. There is no obligation for a majority shareholder to abstain from voting in such cases.”
However, this does not mean that a sale can simply be pushed through. Company law provides for corrective mechanisms. For example, minority shareholders can go to court. The threshold for this is relatively low: in the case of a listed company, a shareholding of 1% or a package worth 20 million euros is sufficient, explains Keijzer. "This legal process thus functions (retrospectively) as a corrective mechanism for decisions taken at the general meeting that disproportionately affect minority shareholders and, at the same time, forces the company and/or the controlling shareholder to think carefully about the plans (in advance)."
Intervention by the EC
The Enterprise Chamber can intervene immediately at the start of or during proceedings by imposing what are known as immediate provisions. This occurs when there are valid reasons to doubt the correctness of a company's policy or course of action. In principle, these are temporary measures intended to stabilise the situation and prevent further damage to the company. However, it is conceivable that these temporary measures may ultimately have a permanent effect.
The OK has taken immediate provisions in this case. These measures are far-reaching in nature. "Firstly, this includes a ban on the general meeting of shareholders voting on the proposed (existing) transaction with Orascom. In addition, the OK has appointed two new directors on a temporary basis. In short, these directors have a veto right with regard to whether or not to proceed with the transaction between OCI and Orascom."
This is a far-reaching measure, but does not yet establish the personal liability of directors. However, the intervention may have other indirect effects. Keijzer notes: "It is conceivable that the OK's ruling could already be seen by certain parties as a certain condemnation of the actions of directors. In that sense, this ruling by the OK may have reputational effects, even if the temporary directors appointed by the OK were to allow the transaction to proceed later, perhaps in a slightly modified form. The question is whether that is desirable."
A bitter outcome?
Keijzer also comments on the ruling: "The protection of minority shareholders is, of course, a great asset. And there may well be things that OCI's management could have handled better. Nevertheless, all things considered, I can well imagine that this ruling is perceived as bitter by the directors involved. After all, in an economically challenging situation, a process was set in motion – at the request of an activist minority shareholder – that, for the most part, did exactly what was expected of it: create value for investors."
According to Keijzer, the sticking point became apparent at the end of the process: "In addition to settlement obligations from previous transactions, OCI's directors were confronted with the cyclical nature of the company's activities. The last asset – clearly not a trophy asset – proved literally unsellable after a 2.5-year process in a difficult market. A creative – not perfect – solution was found for this. However, this was insufficient for an activist minority shareholder, who was not the same person who initiated the process in March 2023. All this conjures up the image of the investor as a speculative “greedy caterpillar”.
A trophy asset is a particularly sought-after part of a business that is attractive to buyers because of its quality, market position or strategic value. These are often assets with strong profitability, innovative technology or a unique market position. Such assets are usually relatively easy to sell and often fetch a high price.
Broader perspective: ‘unfavourable for cyclical business sectors’
According to Keijzer, the ruling could have consequences that extend beyond the specific transaction between OCI and Orascom. This applies to various groups of corporate stakeholders.
Keijzer first points to the risk of ‘fearful directors’. He explains: "It is conceivable that companies operating in a cyclical sector will find it more difficult to attract suitable candidates in the future. After all, they are faced with an increased risk profile."
He also sees a potential risk for minority shareholders: "It cannot be ruled out that if directors who take shareholder interests seriously are not rewarded for doing so, directors may be less inclined to initiate a similar process in the future. From this perspective, this ruling really only has losers."
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