The new Dutch Corporate Governance Code, issued December 8, 2016, provides an interesting analog to The New Paradigm, A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, issued September 2, 2016, by the International Business Council of the World Economic Forum. The new Dutch Code is applicable to the typical two-tier Dutch company with a management board and a supervisory board. The similarities between the Dutch Code and the New Paradigm demonstrate that the principles of The New Paradigm, which are to a large extent based on the U.S. and U.K. corporate governance structure with single-tier boards, are relevant and readily adaptable to the European two-tier board structure.
Both the New Paradigm and the Dutch Code fundamentally envision a company as a long-term alliance between its shareholders and other stakeholders. They are both based on the notions that a company should and will be effectively managed for long-term growth and increased value, pursue thoughtful ESG and CSR policies, be transparent, be appropriately responsive to shareholder interests and engage with shareholders and other stakeholders.
Like The New Paradigm, the Dutch Code is fundamentally designed to promote long-term growth and value creation. The management board is tasked with achieving this goal and the supervisory board is tasked with monitoring the management board’s efforts to achieve it.
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The Act on simpler and more flexible laws of private limited liability companies (“BVs“) will come into force on 1 October 2012. The changes introduced by this Act will offer greater freedom in structuring BVs. This article summarises the key changes and possibilities introduced by the new law. It also addresses a few points relevant to existing BVs.
For a matrix with the key changes please click here.
1 New possibilities
The new law offers a number of new possibilities when incorporating a BV or amending the articles of association of an existing BV. Some of these possibilities are summarised below.
The requirement of a EUR 18,000 minimum capital will be abolished, and also, as a consequence, various formalities, such as a bank’s statement for cash payment on shares and an auditor’s statement for contributions in kind.
Under the new law, the articles of association do not have to specify an authorised capital. As a result, the current requirement that 20% of the authorised capital be issued will no longer apply. Under the new law, the articles of association may provide for a par value of the shares in a currency other than euro.
1.2 Shares without voting rights and shares without entitlement to profits
The new law allows the articles of association to limit or exclude certain shares from sharing in the profits. Certain shares may also be excluded from voting.
This offers shareholders greater flexibility in structuring their mutual relationship and provides an alternative to issuing depositary receipts for shares, the current option for separating profit-sharing and voting rights.
1.3 Right to give instructions
The general meeting or another corporate body will be allowed under the new law to give specific instructions to the managing board. The managing board must follow these instructions unless this is not in the company’s interest. Under the current law the managing board can only be required by the articles of association to follow general policy principles.
1.4 Obligations of shareholders under the articles of association
Under the new law, the articles of association may attach to share ownership certain contractual obligations towards the BV, other shareholders or third parties. The articles may also attach certain requirements to share ownership and provide that shareholders must offer or transfer all or part of their shares in certain situations.
In current practice, these types of obligations are regularly included in a shareholders’ agreement. The advantage of including the obligations in the articles of association is that a provision can be added suspending a shareholder’s voting rights, profit-sharing rights and/or meeting rights if the shareholder fails to meet its obligations.
1.5 Appointment of managing and supervisory directors
There will be greater flexibility in how to appoint and dismiss managing and supervisory directors of companies that are not qualified as ‘large’ and therefore not subject to the Dutch structure regime. Under the new law, the articles of association may allow a shareholder to appoint, suspend and dismiss its “own” managing or supervisory director. Every shareholder with voting rights should be able to take part in the decision-making about the appointment of at least one managing director and one supervisory director, respectively.
Under the current law, the articles of association may not contain this type of provision. Parties often try to achieve the same result via a combination of binding nominations and a shareholders’ agreement.
2 Changes for existing BVs
The new law will offer new possibilities when incorporating a new BV or amending the articles of association of an existing BV. It also introduces changes that will be of immediate relevance to existing BVs as of 1 October 2012.
If and how these changes could affect a company will vary and depend partly on the wording of the company’s existing articles of association. These may contain a reference to sections of the current law that will change or cease to apply under the new law. It depends on the wording and intent of the relevant provision in the articles whether it will continue to apply after the new law enters into force. We would therefore recommend assessing whether existing articles of association will be applied and interpreted differently as a result of the new law or seeking advice on this. The following key areas could play a role:
Distributions may only be made insofar as the company’s equity exceeds any reserves maintained by law or pursuant to the articles of association. In principle, distribution of share capital will be permitted under the new law. Under the new law a resolution of the general meeting to make a distribution will not have effect until the company’s managing board has approved the resolution. The managing board will refuse to give its approval if the company is unable to continue paying its due debts after the distribution.
Shareholders resolutions to make a distribution adopted before 1 October 2012 will remain subject to the current law.
2.2 Repurchase, capital reduction
The same rules will apply to repurchase and capital reduction as those introduced for distributions. In the case of capital reduction, the possibility of creditors’ opposition will no longer exist. This means that it will no longer be necessary to file a resolution to reduce the capital with the Trade Register and publish it in a national newspaper. A resolution to reduce the capital involving repayment to shareholders will not have effect until the managing board has approved the resolution. As in the case of distributions, the managing board will refuse approval if the company is unable to pay its due debts after the repurchase or capital reduction.
The prohibition of repurchasing more than 50% of the issued share capital will cease to exist after 1 October 2012. But a party other than the company or one of its subsidiaries will at all times have to hold at least one voting share. Under the new law, it will also be possible to cancel certain shares only.
A shareholders’ resolution to reduce capital adopted before 1 October 2012 will remain subject to the current BV rules.
2.3 Prohibition on financial assistance
The current law provides that a BV may not provide security for the acquisition of its own shares and may only extend loans insofar as the free reserves allow this. This financial assistance prohibition will cease to exist under the new law.
Existing companies have frequently included the financial assistance prohibition for information purposes in their articles of association. In such cases this restriction will generally no longer be in effect. Only in specific cases will such restriction remain in effect, provided that in principle this restriction will no longer be externally enforceable against third parties but can only be enforced internally.
2.4 Depositary receipt holders with meeting rights
BVs with depositary receipts issued with the company’s cooperation before 1 October 2012 will have to attach meeting rights to such depositary receipts if they amend their articles of association after 1 October 2012.
If depositary receipts have been issued with the company’s cooperation before 1 October 2012, the company must enter the details of the depositary receipt holders in its shareholders register before 1 October 2013.
If such details of these depositary receipt holders have not been entered in the shareholders register one month before the date of the first general meeting to be held after 1 October 2012, these depositary receipt holders will have to be called to the general meeting in the manner prescribed under the current BV rules.
2.5 Managing and supervisory directors – vacancy or being prevented from acting
Under the current law, the articles of a BV must provide for situations where there is a vacancy on the managing board or a managing director is prevented from acting. The new law also requires such provision for supervisory directors. Existing BVs will have to include the provision for supervisory directors if they amend their articles of association after 1 October 2012.
The new law will also allow provisions in the articles of association specifying when managing or supervisory directors are deemed ‘prevented from acting’.
2.6 Convening general meetings
Under the current law, general meetings must be convened at least 15 days before the date of the meeting. This period is reduced to 8 days under the new law.
General meetings held after the new law takes effect may be convened applying the new shorter notice period. If the articles require a longer notice period, however, that longer period will have to be observed.
3 More information
The following tools can be found on De Brauw Blackstone Westbroek’s website:
DUTCH UPDATE – Dutch Court Assumes International Jurisdiction and Declares An International Collective Settlement Binding
- The Netherlands has become an attractive venue for settling international mass claims, irrespective of whether any litigation has taken place in the Netherlands.
- The Netherlands is the only European jurisdiction offering a procedure to declare a collective settlement binding on all class members on an “opt out” basis.
- Recently, the Amsterdam Court of Appeal declared an international collective settlement binding in a case where none of the potentially liable parties and only a limited number of potential claimants were domiciled in the Netherlands.
- The decision will in principle have to be recognized in all European Member States, Switzerland, Iceland and Norway and, depending on local law, possibly in other countries as well.
On 17 January 2012, the Amsterdam Court of Appeal declared an international collective settlement binding in a case where none of the potentially liable parties and only a limited number of the potential claimants were domiciled in the Netherlands. This decision confirms the Court of Appeal’s earlier provisional decision to assume international jurisdiction. The decision will in principle have to be recognised in all European Members States, Switzerland, Iceland and Norway. The Netherlands is the only European country where a collective settlement can be declared binding on an entire class on an “opt out” basis. This makes the Netherlands an attractive venue for settling international mass claims, irrespective of whether any litigation has taken place in the Netherlands. This option has become more important since the U.S. Supreme Court’s decisions in Morisson v. National Australia Bank and Hoffman-La Roche v. Empagran.
See for more general information on the Dutch Act on the Collective Settlement of Mass Claims (Wet collectieve afwikkeling massaschade; the “WCAM”): Ruud Hermans and Jan de Bie Leuveling Tjeenk, International Class Action Settlements in the Netherlands since Converium, in The International Comparative Legal Guide to: Class & Group Actions 2012.
Background of the case
Converium Holding AG (“Converium”) is a Swiss reinsurance company (currently known as SCOR Holding AG). Converium was a wholly owned subsidiary of Zürich Financial Services Ltd (“ZFS”) until 2001, when ZFS sold all its Converium shares through an IPO. Converium shares were listed on the SWX Swiss Exchange and Converium ADSs were listed on the New York Stock Exchange. Converium’s share price declined after the company announced increases in its loss reserves in the period from 2002 through 2004. These announcements led to securities class actions in the United States against Converium and ZFS on behalf of a worldwide putative class. The United States District Court for the Southern District of New York (the “U.S. Court”) certified a class consisting of all U.S. persons who had purchased Converium securities on any exchange, as well as all persons – regardless of their residence – who had purchased Converium securities on a U.S. exchange (the “U.S. Purchasers”). The U.S. Court excluded from the class all non-U.S. persons who had purchased Converium securities on any non-U.S. exchange (the “Non-U.S. Purchasers”). The U.S. class action was settled and these settlements (the “U.S. Settlements”) were approved by the U.S. Court. Both Converium and ZFS then settled the potential claims of all Non-U.S. Purchasers with a Dutch foundation representing the Non-U.S. Purchasers (the “Non-U.S. Settlements”). The Non-U.S. Purchasers were predominantly domiciled in Switzerland and the U.K. Only a few were domiciled in the Netherlands. De Brauw acted as legal counsel to ZFS in its successful application to the Amsterdam Court of Appeal to declare this settlement binding.
The Amsterdam Court of Appeal (the “Court”) confirmed its provisional decision on jurisdiction which followed substantially the same line of reasoning as its Shell decision. But the Converium settlement is less connected to the Netherlands than the Shell settlement. In Converium, none of the potentially liable parties and only a limited number of the interested persons were domiciled in the Netherlands. The Court emphasised the significance of a Dutch foundation representing the interested persons and having to distribute the settlement relief under the settlement agreement. This suggests that even without any interested persons domiciled in the Netherlands the Court could have jurisdiction to declare the settlement binding. In its earlier provisional decision, the Court explicitly referred to the limitations for the U.S. courts to do the same in securities and anti-trust cases as a result of the U.S. Supreme Court’s decisions in Morrison v. National Australia Bank and Hoffman-La Roche v. Empagran.
In Converium, a number of defendants argued that the amount of settlement relief for the Non-U.S. Purchasers under the Non-U.S. Settlement concluded by Converium was unreasonable, because the amount of settlement relief for the U.S. Purchasers under the U.S. Settlements was relatively higher. The Court dismissed this objection on the ground that the legal position of the Non-U.S. Purchasers differed substantially from the legal position of the U.S. Purchasers, because the Non-U.S. Purchasers had been excluded from the class by the U.S. Court and no litigation by Non-U.S. Purchasers had been initiated outside of the U.S.
The same defendants also argued that the amount of settlement relief was unreasonable, because the fees for U.S. plaintiffs’ lead counsel, to be deducted from the settlement relief, were too high. The Court dismissed this objection on the ground that the work in connection with the settlement had been carried out for a substantial part within the U.S. jurisdiction by U.S. law firms and that what is considered customary and reasonable in the U.S. may be taken into account in applying the reasonableness test under Dutch law.
The Court also ruled that the representativity test had been met because the Dutch foundation representing the interested persons had various participants and supporters, including shareholder associations and institutional shareholders, domiciled in Switzerland and the U.K., where most known Non-U.S. Purchasers were domiciled.
The Netherlands is the only European jurisdiction offering a procedure to declare a collective settlement binding on all class members on an “opt out” basis. Using the Shell decision as a precedent, the Converium decision confirms that the Amsterdam Court not only has jurisdiction to declare an international collective settlement binding on all class members, irrespective of their domicile, but also has the appetite to facilitate such settlements even if the parties to the settlement and the class members only have a limited connection to the Netherlands.
All EU Member States, Switzerland, Iceland and Norway will in principle have to recognize the Converium decision. However, no case law on this issue exists at this point. Whether other countries will also recognize it, will depend on local law.
The Converium decision confirms that the Netherlands is Europe’s most attractive venue for facilitating international settlements. It is irrelevant in this context whether the settlement forms the outcome of class action litigation, and if it does, in which country the litigation took place.
- New legislation, expected to become effective on July 1, 2012, introduces for the first time one-tier Dutch board structure, a single board comprising both executive and non-executive directors, as an alternative to the historical Dutch two-tier board structure where there is a management board and a separate supervisory board.
- Once the new bill becomes law, limitations on the power of managing directors to represent the company externally in case of a conflict of interest as included in the articles of association will cease to be effective.
- The Bill puts limitations on the number of supervisory positions that a managing director or a supervisory director of an NV or a BV that qualifies as a large company (“Large Company“) may hold.
The Bill on Management and Supervision of Dutch Companies (the “Bill“) was adopted by the First Chamber of the Dutch Parliament on 31 May 2011 and is expected to enter into force on 1 July 2012.
The Bill introduces statutory provisions on the one-tier board structure, a single board comprising both executive and non-executive directors. This structure is an alternative to the two-tier board structure where there is a management board and a separate supervisory board. The bill provides a one-tier board structure for a public company with limited liability (naamloze vennootschap) (“NV”) and for a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) (“BV”). Similar to supervisory directors in a two-tier board, non-executive directors in a one-tier board can only be natural persons. The one-tier board structure will also be available for companies that are subject to the structure regime (structuurregime).
A one-tier board requires a basis in the articles of association. The tasks of the executive and non-executive directors in a one-tier board however, may be allocated under or pursuant to the articles of association, provided that the general meeting stipulates whether a director is appointed as executive or as non-executive director and furthermore provided that the task to supervise the performance by the directors of their duties cannot be taken away from non-executive directors. In addition, an executive director may not be allocated the tasks of (i) chairman of the board, (ii) fixing the remuneration of executive directors, or (iii) nominating directors for appointment. Nor may an executive director participate in the adoption of resolutions (including deliberations in respect of these) with regard to the remuneration of executive directors. Tasks that have not been allocated fall within the power of the board as a whole.
Regardless an allocation of tasks, all directors remain collectively responsible for proper management. All directors will be jointly and severally liable for failure of one or more co-directors. An individual director is only exempted from liability if he proves that he cannot be held seriously culpable for the mismanagement and that he has not been negligent in preventing the consequences of the mismanagement. In this regard a director may, however, refer to the allocation of tasks between the directors. In view of this potential liability of directors, especially non-executive directors for the day-to-day management, it is imperative that the tasks within the one-tier board be allocated precisely.
The requirement that a binding nomination for the appointment of a member of the management board or supervisory board of an NV or a BV consists of at least two persons for each vacancy will be abolished.
Conflicts of interest
The Bill amends the statutory provisions on conflicts of interest of members of the management board of an NV or a BV. Whereas current law provides for a restriction of the power to represent the company externally, the Bill departs from the external effect and proceeds on the principle that conflicts of interests have to be dealt with internally. It provides that a member of the management board may not participate in the adoption of resolutions (including deliberation in respect of these) if s/he has a direct or indirect personal conflict of interest with the company and its related enterprise. If all members of the management board have a conflict of interest, the resolution concerned will be adopted by the supervisory board. Failing a supervisory board, the resolution will be adopted by the general meeting, unless the articles of association provide otherwise. A similar provision applies to members of the supervisory board.
If a managing director or a supervisory director does not comply with the provisions on conflicts of interest, the resolution concerned is subject to nullification (vernietigbaar) and the managing director or supervisory director concerned may be held liable towards the company.
Once the Bill becomes law, limitations on the power of managing directors to represent the company externally in case of a conflict of interest as included in the articles of association will cease to be effective. Transactions that were entered into before the Bill became law and in which a managing director had a conflict of interest will, however, be assessed on the basis of the old rules on conflicts of interest and may be ratified by the general meeting.
Limitation on number of supervisory positions
The Bill puts limitations on the number of supervisory positions that a managing director or a supervisory director of an NV, a BV or a foundation (stichting) that qualifies as a large company (“Large Company”) may hold. Other Dutch legal entities, such as the association (vereniging) and the cooperative (coöperatie), will not be affected. Foreign legal entities and their supervisory position will also not be affected. An NV, BV or foundation qualifies as a Large Company if at the end of the financial year it meets at least two of the following criteria:
- the value of the assets according to the balance sheet with explanatory notes is, on the basis of acquisition and manufacturing costs, more than EUR 17.5 mln;
- the net turnover is more than EUR 35 mln;
- the average number of employees is 250 or more.
The Minister of Public Safety and Justice has recently submitted to the Second Chamber of the Dutch Parliament a remedial act which clarifies that, when assessing whether the criteria for qualifying as a Large Company are met, the point of departure should be the financial figures on a consolidated basis as at the balance sheet date. Furthermore a transitional regime will be introduced which provides that the limitations on the number of supervisory positions will only apply to an NV, BV or foundation that has qualified as a Large Company for a period of at least two consecutive financial years. Also, it is proposed that the participation in the decision-making process by a managing director or a supervisor director who holds more than the number of positions permitted will not have any effect on the legal validity of such decision-making.
In addition, the limitation on the number of supervisory positions that can be held in a foundation as a result of the Bill, only applies to foundations that are subject to mandatory accounting and financial reporting requirements. As a consequence, the number of supervisory positions that can be held in foundations that do not carry on one or more businesses generating a (total) annual net turnover of EUR 4.4 mln (and are not otherwise subject to mandatory accounting and financial reporting requirements) will not be limited by the Bill. As a result, foundations that are primarily aimed at, for instance, religious, charitable or cultural objectives, will most likely be excluded from the scope of the new rules in this respect.
The Bill provides that a person may not be managing director of a Large Company if s/he holds more than two supervisory positions with Large Companies or, if s/he acts as chairman of the supervisory board/supervisory body established by the articles of association or, in the case of a one-tier board, the management board of a Large Company. Pursuant to the explanation of the Minister of Public Safety and Justice, in the case of a one-tier board, the reference to “managing director” must be considered a reference to an executive director. The term “supervisory position” refers to the position of supervisory director, non-executive director or member of a supervisory body established by the articles of association.
Furthermore, the Bill provides that a person may not be a supervisory director or, in the case of a foundation, a member of the supervisory body of a Large Company if s/he holds five or more supervisory positions with Large Companies. Acting as chairman of the supervisory board/supervisory body established by the articles of association or, in case of a one-tier board, chairman of the management board will count twice. Pursuant to the explanation of the Minister of Public Safety and Justice, in case of a one-tier board, the reference to “supervisory director” must be considered a reference to a non-executive director. Supervisory positions in Large Companies that are part of the same group will be counted as one supervisory position.
A transitional regime is provided for. A person may continue in his/her position who, at the time of the act entering into force, holds more positions than is allowed. The new rule will apply, however, to re-appointment or new appointments.
No employment agreement
Under current law, usually a double legal relationship exists between a managing director and a Dutch (listed) company: a company law relationship and an employment agreement. According to the Bill, the legal relationship between a managing director and a Dutch listed company will no longer be considered an employment agreement. This does not mean that there will be no agreement between the managing director and the Dutch listed company concerned. What the nature of such agreement will be, however, does not follow from the Bill. There are various potential scenarios, one of which is an agreement sui generis, or an agreement of assignment (overeenkomst van opdracht). The new rules apply to new situations only; existing employment agreements will be grandfathered.
The Bill includes provisions on well-balanced participation of men and women in the management boards and supervisory boards of NVs and BVs that qualify as Large Companies. The Bill provides that NVs and BVs that qualify as Large Companies should pursue that at least 30% of the seats be held by men and at least 30% of the seats be held by women, insofar as these seats are allocated to natural persons. If an NV or BV acts as managing director (“Managing Director Legal Entity”) of an NV or BV that qualifies as a Large Company, the above also applies to the Managing Director Legal Entity as well as to each NV and BV that acts as managing director of such Managing Director Legal Entity.
A well-balanced allocation of seats should be taken into account at the occasion of:
- the appointment or the nomination for appointment of managing directors;
- drafting the profile for the supervisory board’s size and composition, as well as the designation, the appointment, the recommendation and the nomination for appointment of supervisory directors; and
- drafting the profile for the non-executive directors, as well as the (nomination for) appointment and the recommendation of non-executive directors.
If a Large Company does not comply with the rules on gender diversity, it is required to set out in its annual report (i) why the seats are not allocated in a well-balanced manner, (ii) how the company has attempted to achieve a well-balanced allocation and (iii) how the company aims to achieve a well-balanced allocation in the future.
The provisions on gender diversity will apply for a limited period only; they will cease to be effective as per 1 January 2016.
The Minister of Public Safety and Justice announced to evaluate the act three years after the act’s entry into force.
 Dutch listed company refers to an NV whose (depository receipts for) shares are admitted to trading on a regulated market or a multilateral trading facility in the European Economic Area or to a comparable system from a State outside the European Economic Area.