Shareholder Activists Avant La Lettre: The Complaining Shareholders in the Dutch East India Company

Abstract

Under the original 1602 Charter, shareholders in the Dutch East India Company (VOC) had no control and no voting rights. The concept of shareholder meetings did not exist in the VOC (unlike in the East India Company). This article explores the reason for the absence of voting and control rights. We also look at the background of the conflict between shareholders and directors that arose in 1622/1623 when the VOC Charter was extended.

The VOC was the result of a merger between several companies that had already been trading in the East Indies between 1594 and 1602. An understanding of these earlier "pre-companies" is indispensable in an explanation of the absence of shareholder voting rights in the VOC. A pre-company was created for the single journey of a group of ships to the East Indies. After the return of the ships, the directors sold the goods, dissolved the company and distributed the profits to the shareholders. Shareholders could then decide whether or not to participate in a subsequent company. In this situation it was difficult for shareholders to exercise control rights for the simple reason that the ships were at sea for most of the company's corporate existence. Further, shareholders did not feel there was a pressing need for control because, after all, they had an exit option after every single journey. Nor were their interests ignored by the directors, because the same shareholders were needed to contribute funds for subsequent journeys. Another explanation for the absence of shareholder rights during this period is the rapid economic development of the United Provinces in the last decade of the 16th century. As the result of a 1598 trade boycott of Spain and Portugal, there was abundant capital and this was focused on the newly discovered trade route to the East Indies. Investors had no bargaining power with which to assert their rights.

The legal structure of most of these "pre-companies" prevented shareholders from having actual influence. In most of these companies, the shareholders invested their money, not in the company itself, but via one of the individual directors. The directors knew the shareholders they had recruited themselves; however, in principle, the directors did not know the identity of the shareholders who had invested through other directors. The relationship between a shareholder and the company was indirect, which impeded the exercise of control rights. Finally, shareholders may not really have been interested in their control rights given the high returns and the high expectations of the newly opened trade route to the East Indies.

When these "pre-companies" were merged into the VOC in 1602, nothing changed with respect to the absence of shareholder control rights. However, there were crucial differences: the VOC was established for a longer period and had to meet other more long-term challenges than those faced by the earlier companies. It seems the drafters of the 1602 Charter did not fully realize how radically different the VOC would be. The failure to adapt the control structure to suit the different circumstances may have been a source of the various conflicts that arose between the directors and shareholders between 1602 and 1623.

In 1622, when it came time to extend the 1602 Charter, a significant conflict erupted between the shareholders and directors. The so called 'dolerende participanten' (~complaining or dissenting participants) complained about the numerous conflicts of interests that had been arising between the various directors and the VOC. They accused the directors of abuse of power and short-selling. These short positions were seen as resulting in the directors having a personal interest in a decline in VOC share prices. VOC directors were accused of spreading negative rumors about the VOC. The shareholders also accused VOC managers of enriching themselves by selling goods to the VOC at a high price and buying them back at much lower prices. They argued that shareholder approval was required for the VOC to turn to the capital market to borrow funds. They also demanded that large investors be entitled to vote on the appointment of new directors. VOC shareholders supported their arguments by referring to the corporate governance systems in the English East India Company and in the Dutch West India Company (incorporated at the same time).

Publishing their complaints in pamphlets (which today may be perused in the Royal Dutch Library in The Hague), the shareholders mobilized public opinion and attempted to convince merchants not to invest in the Dutch West India Company, that was being incorporated in the same time. They exerted pressure on the government of the day to ensure that more rights were granted to the shareholders when the VOC Charter was extended.

To a limited extent, the activism of the "complaining participants" was successful. The 1623 Charter granted certain rights to large investors, including the right to nominate new candidates for appointment as director. An attempt was made in the 1623 Charter to further regulate trading between the directors and the VOC and to encourage the directors to pay a yearly dividend to the shareholders. In addition, a committee of nine shareholders was entrusted with the supervision of the VOC directors. This corporate body was known as the "Nine Gentlemen" (Heren IX). This early example of a supervisory board had an influence on the development of the two-tier structure that prevails in the Netherlands, Germany and other countries.

Note: Downloadable document is in Dutch.

Keywords: Shareholder activism, Legal history, VOC, East India Company

JEL Classification: B15, D23, K22, O10, O52