GOVERNMENT AND CORPORATE GOVERNANCE (V)
Government drafted model articles of association
The first model articles of association date from March 15, 2011.
For criticism see: K. Frielink, Visie Land op overheids-NV’s verkeerd [Vision Country on government-owned NVs incorrect], Antilliaans Dagblad 15 April 2011, p. 16 and M.L. Alexander, F.B.M. Kunneman, L.G. Santine and R.J. in ’t Veld, Modelstatuten ten sterkste afgeraden [Model articles of association strongly discouraged], Antilliaans Dagblad 20 September 2011, p. 14-15. See also K. Frielink, Stop politieke benoemings- en ontslagcarrousel [Stop politicial appointment and dismissal merry-go-round], Antilliaans Dagblad 14 September 2010, p. 14-15.
In the meantime, the models for the companies and for the foundations have been adjusted in parts and adopted by the government (click here). Since the original models have given rise to quite some debate these will be discussed. In addition, insofar as relevant, later changes will be noted.
Article 2 paragraph 1
We will discuss the model articles of association for the limited liability government-owned company. The first thing that stands out is that in the objectives clause it is laid down that the NV must realize its objectives ‘with due observance of a proper social-economic development, and also in fact the general interest of Curacao’. This provision has, in the meantime, been deleted, but nevertheless it is considered here.
A legal politics choice is behind this provision. In the explanatory notes it is pointed out that these companies take up an exceptional position, not seldom that of monopolist, that they are usually also charged with the performance of public duties, that to a large extent they owe their origin and wealth to the Country Curacao (or its predecessors), and that they carry a special responsibility to society. Book 2 CC provides room to set up the articles of association accordingly.
Apart from the legal politics choice, regarding which opinions may differ, the question presents itself of course on how, as director or supervisory director of a government-owned company, one can ascertain what can be construed as the ‘general interest of Curacao’ and what a ‘proper social-economic development’ means, and how these interests must be weighed and how they can be brought into the decision-making process. The use of such terms carries with it the risk that the director or supervisory director does not weigh up the matter himself, but that the shareholder – ergo the government at that moment – indicates or dictates how these terms must be understood at that moment and in that specific situation.
The provision seems to be inconsistent with the earlier mentioned OECD ‘Guidelines on Corporate Governance of State owned Enterprises’ from 2005. The government often wears multiple hats: e.g. in the telecom sector, the government is both shareholder of one of the largest telecom companies as well as regulator. In this respect the OECD states:
‘The state often plays a dual role of market regulator and owner of SOEs with commercial operations, particularly in the newly deregulated and often partially privatized network industries. Whenever this is the case, the state is at the same time a major market player and an arbitrator. Full administrative separation of responsibilities for ownership and market regulation is therefore a fundamental prerequisite for creating a level playing field for SOEs and private companies and for avoiding distortion of competition.’
The danger is that by using the term ‘general interest’, e.g. pricing policy is conducted, while this subject does not belong to the role of the government as shareholder.
Apart from the government being engaged in market access and regulation, industrial policy (or more in general the economic policy) also belongs to the duties of the government. In that respect the OECD states:
‘Another important case is when SOEs are used as an instrument for industrial policy. This can easily result in confusion and conflicts of interest between industrial policy and the ownership functions of the state, particularly if the responsibility for industrial policy and the ownership functions are vested with the same branch or sector ministries. A separation of industrial policy and ownership will enhance the identification of the state as an owner and will favor transparency in defining objectives and monitoring performance. However, such separation does not prevent necessary co-ordination between the two functions. (…) In implementing effective separation between the different state roles with regard SOEs, both perceived and real conflicts of interest should be taken into account.’
On these grounds, one may wonder whether it is indeed desirable that a criteria such as ‘proper social-economic development’ is included in the objectives clause. Apart from the fact that it is a rather unspecified criteria, issues of macro-economic policy belong to the core responsibilities of the state, but not in the capacity of shareholder, and they do not belong to the core responsibilities of a director or supervisory director, unless and insofar as that policy has been further specified in legislation and regulations.
Article 12 paragraph 1
The board of directors must, according to the first draft of the model articles of association, ‘follow specific instructions given by the general meeting in accordance with the articles of association’. This provision has in the meantime been deleted.
According to the explanatory notes to the first draft, this right to issue instructions mainly means in practice that the board of directors is obligated on instruction of the shareholder to perform certain juristic acts (read: enter into contracts).
Based on such a right to issue instructions, the board of a government-owned company could be obligated to employ certain people, purchase or sell certain assets, enter into or terminate a certain cooperation, etcetera. The influence of the Country Curacao as shareholder on the day-to-day affairs within the government-owned companies would thus be considerably increased. That would have been an undesirable development. The risk of political influence, favoritism, and (other forms of) abuse would, as a result, increase. The provision has therefore been deleted with good reason.
Apart from that, it has been laid down in article 3.2 of the Code Corporate Governance that as far as the board of a government-owned company is concerned the notions of transparency and integrity are the key elements, and that therefore conflicts of interest must be avoided. That is why it is not possible for political authorities to become a member of the board of a government-owned company. That basic principle is not compatible with a shareholder’s right to issue instructions (read: the minister) who as quasi-director (co)determines the policy and who may issue instructions in a matter that the ‘ordinary’ directors are obligated to follow.
If we may believe the stories, for many years now, it has been the case that ministers call with or visit those who they consider to be ‘their’ directors (and supervisory directors) of government-owned companies to pass on what they have on their wish list, and where they assume that such will be executed in accordance with their list. In many cases this is what probably also simply happened. At the time, the proposed right to issue instructions was, in my opinion, not intended to introduce a new phenomenon, but to formalize an existing practice and, if the instructions were not followed, to sooner reach a dismissal. The provision has been deleted, but the practice will probably not change for a while.
Article 13 paragraph 8 sub b(iv) and d(ii)
The original draft included that resolutions of the board with regard to investments that are ‘of a fundamental nature’, and resolutions with regard to participations that are of ‘significant meaning or fundamental nature’ are subject to the approval of the general meeting.
This provision has been deleted with good reason. Notions such as ‘significant meaning’ and ‘of fundamental nature’ are not manageable. Such criteria could potentially be a source of conflicts.
The new draft states that resolutions that are subject to the approval of the general meeting are such resolutions of the board as the general meeting determines by further written resolution. This in itself again offers the possibility to introduce the notions ‘significant meaning’ and ‘of fundamental nature’, but that would certainly not be wise. At least the demand could be made that such a significant restriction of the management authority is clearly and unambiguously formulated, in order to limit the risk of interpretation discussions as much as possible.
Article 18 paragraph 2
Every supervisory director of a government-owned company must in particular protect the general interest of Curacao and weigh this interest relatively heavily, according to the first draft of the model articles of association. This provision has also been deleted in the meantime.
As said, a term ‘general interest’ is too vague and too general to be able to be used as a practicable criteria. Incidentally, the law does allow that a supervisory director is charged with special interests.
According to article 19 paragraph 7 of Book 2 CC Curacao, the board of supervisory directors is directed towards the interest of the legal person, and, insofar as applicable, the enterprise connected to it. Unless the articles of association determine otherwise, this does not exclude a supervisory director, subject to the previous sentence, particularly protecting the interests of the one that has appointed or recommended him and have these interests weighed relatively heavily.
Such a ‘special’ supervisory director will mainly play a part in joint venture relations, but can also be appointed on the recommendation of the government or the external financier.
To have an interest ‘weigh heavily’ does not mean, however, that priority may be given to that interest at the expense of the company’s interest. The law is clear about that.
Artice 18 paragraph 6
The Board of Supervisory Directors may seek advice at the expense of the company that the Board deems desirable for a proper performance of its duty. This text is also in the final version.
In itself, this is an understandable and useful provision. The first draft stated that individual supervisory directors could be represented by external financial, legal or other experts, at the expense of the company. Given the climate of favoritism (nepotism, patronage) discussed regularly, this would have been an excellent way of helping all kinds of people to assignments. Since the restriction has been included that the Board (as body) can have representation, this may possibly mean that a certain brake has been put on the overly unbridled issuance of assignments. Although one cannot expect too much from it. One sees some external experts being regularly engaged, even if serious doubts exist regarding their quality and professionalism.
Some concluding thoughts
In Curacao, the interest of corporate governance is just about professed with the mouth, but in practice the rules and principles of it are experienced as bothersome, in particular of course by those politicians who just (can or) want to dictate what must be done. In Sint Maarten there are already politicians who openly propagate that the Corporate Governance Council there must be abolished, because it would be a waste of the taxpayers’ money and because politicians are, as no other, perfectly able to control the ‘public funds’.
The OECD Guidelines may be considered an international ‘benchmark’. As we have seen, in the core of government it is demanded that policy is formulated, so that it will be clear on how the government will behave itself as shareholder, whereby the basic principles of ‘transparency’ and ‘(public) accountability’ apply, while it is also expected from the government that it adopts a professional and result-oriented position. According to the OECD that also means that the government must not be involved in the ‘day-to-day business’ and that the government must allow the enterprise full operational autonomy. When I take stock of the playing field in Curacao of the last months, or better yet battlefield, then it is clear that we still have a long way to go.
It is unhealthy for the management of a government-owned company to have to bend almost on a daily basis with the often whimsical wishes of the government. And as long as the government itself creates at least the impression that it does not care a straw for the principles of corporate governance, the importance of rules, transparency and judicial review becomes ever more important.
Transparency does not only mean that the government must have a clear vision when it comes to government-owned companies, but that it also publishes that vision and as a result makes it (hopefully) also reviewable. This review should not only take place in parliament, but also by the SBTNO and, of course, (also through journalists) also by the public.
The rules of Corporate Governance themselves do not contain any penal or other sanctions. The Corporate Governance legislation and regulations primarily relate to the behavior of the government (politicians) itself and leaves company law (Book 2 CC) out of it. The Corporate Governance regulations instruct the government to exercise its influence as shareholder to arrange for the government-owned companies to comply with these regulations as much as possible and e.g. lay them down in their articles of association. Although no separate sanctions regime has been introduced, the Corporate Governance regulations will indeed be relevant, e.g. when the court, based on Book 2 CC has to review a resolution against the demands of reasonableness and fairness.
It should be considered to attach sanctions to the regulations of corporate governance, so judicial review can take place quicker and not only e.g. in the context of a dismissals decision. To paraphrase Hobbes: compliance to the regulations of corporate governance may only be reached when there is a fear of a power that forces to comply with these regulations.
Particularly the first draft of the model articles of association show, and that is also confirmed in the explanatory notes, that the government is mainly concerned in getting as much (extra) grip as possible on government-owned companies. That is a wrong and extremely distressing development. Let us hope that the tide is turned before the damage becomes even bigger.
Karel Frielink
Attorney (Lawyer) / Partner
(21 June 2012)
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22 January 2013
See: Corporate Governance and Directors’ Duties: Curacao. A Q&A guide to corporate governance law in Curacao. The Q&A by Maike Bergervoet and Karel Frielink gives a high level overview of board composition, the comply or explain approach, management rules and authority, directors’ duties and liabilities, transactions with directors and conflicts, company meetings, internal controls, accounts and audit, institutional investors and reform proposals. The Q&A is part of the PLC multi-jurisdictional guide to corporate governance law.
See: Government-owned companies: ensuring good corporate governance in Curacao. This article by Maike Bergervoet and Karel Frielink discusses the corporate governance provisions in Curacao for government-owned companies, analysing both the internationally applicable regulations provided by the OECD in their Guidelines on Corporate Governance of State-owned Enterprises, and the domestic provisions laid down in the National Ordinance, the Corporate Governance Code and the Model Articles of Association. This article is part of the PLC multi-jurisdictional guide to corporate governance law.
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