The expropriation of shareholders and bond holders of the Dutch Bank "SNS Bank" by the Minister of Finance was legitimate, as the Administrative Law Division of the Council of State has ruled in its judgment today, the 25th of February 2013.
The judges of the Council of State have only partially annulled the decision of the Minister of Finance of 1 February 2013 to expropriate securities and capital components of SNS Bank and SNS Reaal. The expropriation of securities, including shares, subordinated bonds and participation certificates and the subordinated private loans, is in accordance with the law; however the judges held that future claims could not be taken into public ownership.
The Minister had based his decision on the recently implemented "Act of Intervention" of 1 June 2012 that entailed an amendment of the Dutch Financial Supervision Act. Based on this law amendment the discretionary power for the Minister to expropriate a financial institution or bank in case of danger for "the stability of the financial system" was introduced in Dutch law. The expropriation of SNS is the first time that the Minister has executed this authority. Furthermore, it is the first time in Europe that a bank of this size and that qualified as systemically important has been expropriated by a state.
The judgment of the Council of State follows the public hearing on 15 February 2013. Affected parties could file an appeal within ten days after the decision of the Minister. More than 700 parties had filed an appeal, of which more than 30 were represented at the public hearing, amongst them hedge funds, the Dutch Investors Association and many subordinated bond holders.
During the hearing many different complaints against the decree of the Minister were brought forward, such as: the decree is not in accordance with the Financial Supervision Act, because the situation of SNS Bank did not constitute a severe and immediate danger for the stability of the financial system and not all alternatives had been considered with due care before the decision was taken. The Council of State ruled today that the Minister had used his authority as a last resort and after having duly researched all alternatives, thus the Minister was entitled to conclude that the stability of the financial system faced a serious and immediate threat.
Furthermore, it was stated that decision is in conflict with the European Convention on Human Rights, especially article 1 of the First Protocol to the ECHR (right to property) and article 6 (fair trial). According to case law of the European Court on Human Rights in Strasbourg, an interference with peaceful enjoyment of possession must strike a 'fair balance' between the demands of the public or general interest of the community and the requirements of the protection of the individual's fundamental rights (ECHR, 20 July 2004, Back vs. Finland, par. 53). The applicants argued that the decision of the Minister lacked this 'fair balance' and imposed an extreme and disproportionate burden on the expropriated bond holders. The compensation terms are material for the requisite fair balance, they argued. Since the Minister had announced in his letter to parliament that expropriated parties would not be entitled to any compensation, the decision is illegitimate. The Council of State today ruled differently: the interference with the right to property was lawful because it was based on the Financial Supervision Act. Furthermore, the judges held that the decision was proportional since the law provides for a procedure to grant an "appropriate compensation" to affected parties, before the Enterprise Chamber of the Amsterdam Court of Appeal.
The Council of State has mentioned before that the compensation is not a part of the decision, since the compensation terms will be judged by the Enterprise Chamber of the Amsterdam Court of Appeal. According to the Financial Supervision Act the Minister of Finance has to issue an official offer of compensation to the expropriated parties at the latest 8 days after the judgment (e.g. 5 March 2013) and then to instruct the Enterprise Chamber of the Amsterdam Court of Appeal to set the compensation in accordance with this offer. The Court of Appeal has the authority to establish a higher compensation than the proposal of the Minister if the court considers it likely that the compensation is to low. The compensation should be a complete compensation for the damaged caused by the expropriation, considering the market value of the expropriated shares and bonds at the moment of expropriation and taking in to consideration the future perspective of the company.
It is expected that many expropriated investors will make their way to the Enterprise Chamber of the Amsterdam Court of Appeal to convince the court that a higher compensation is appropriate.
Within six months after the judgment of today, the affected parties can file an appeal with the European Court of Human Rights in Strasbourg stating that the decision of the Minister is an infringement of their right to property under article 1 of the First Protocol to the European Convention on Human Rights. Although the Court in Strasbourg has decided in the Northern Rock case that the government has a 'wide margin of appreciation' when it comes to economic policies and the valuation of shares, the case of SNS differs from Northern Rock (ECHR, 10 July 2012, Grainger and others vs. the United Kingdom, case no. 34940/10, par. 42). In the last case the applicants only contested the valuation of the compensation, not the expropriation itself. The affected parties in the case of the Dutch bank should state that the decision itself was not in accordance with the ECHR. It can be argued that the fact that the law on which the decision is based is in conflict with international principles, such as legal certainty; that the fast procedure conflicts with the principle of due process and that compensation schemes are not part of the decision, but are handled by a separate procedure, makes the decision illegitimate.