In context

Changes to management and supervision of legal entities: get ready for summer

February 14, 2020
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In context

The lower house of the Dutch parliament has adopted a bill on the management and supervision of legal entities in late January 2020. We expect the upper house to pass the bill as a formality without debate, paving the way for the bill to enter into force on 1 July 2020, or on 1 January 2021 at the latest.

 

The purpose of the bill is to improve the quality of management and supervision of associations, cooperatives, mutual insurance companies and foundations (collectively referred to in the bill as “legal entities”). The bill has no direct impact on NVs/BVs. The bill does have indirect impact if these NVs/BVs are managed by a foundation or if depositary receipts for shares have been issued by an “administration office” foundation. In fact, the proposed management and supervision rules for “legal entities” are synchronised with the rules for NVs/BVs.

Revised governance

The bill allows for the smooth adaptation of the new rules into existing articles of association. Where relevant, entities may, however, consider amending their articles or board rules to revise their governance structure, with the introduction of:

  • the option of setting up a one-tier board consisting of both executive and non-executive directors;
  • a provision describing the statutory duties and responsibilities of the supervisory board;
  • a prohibition for managing and supervisory directors to participate in deliberations and decision-making where they have a personal conflict of interest;
  • mandatory provisions in the articles of association on (a) how the legal entity is to be managed if all managing positions are vacant or all managing directors are unable to act and (b) how the duties and responsibilities of the supervisory board will be dealt with if all positions on the supervisory board are vacant or all supervisory directors are unable to act.

 

Statutory basis for supervisory board of foundations/associations

The bill provides a statutory basis for establishing supervisory boards at foundations and associations. The Dutch Civil Code does not currently address supervision of the management board at those entities by a separate corporate body. Consequently, many associations and foundations have a supervisory board or supervising committee without a statutory basis. As a general rule, supervisory directors at these entities cannot be held liable for the improper performance of duties, because the relevant statutory provisions on director liability do not apply to these supervisors. With the new bill, supervisory directors at a foundation or association may be held liable by the legal entity if they fail to fulfil their duties properly.

 

One-tier board

The bill’s wording introducing one-tier boards at legal entities is based on existing NV and BV legislation:

  • Generally, non-executive directors on a one-tier board can only be individuals.
  • The tasks of the executive and non-executive directors on a one-tier board may be allocated in or under the articles of association, but the task of supervising the performance by the executive directors 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) setting the remuneration of executive directors, or (iii) nominating executive or non-executive directors for appointment.
  • Nor may an executive director participate in the adoption of resolutions that concern the remuneration of executive directors.
  • Tasks that have not been allocated fall within the power of the board as a whole.
  • Regardless of how tasks are divided, all executive and non-executive directors remain collectively responsible for proper management. All directors will be jointly and severally liable for the failings of one or more co-directors.

 

Absence of directors or inability to act

The bill requires the articles of association of new incorporated legal entities to include provisions on the management of the legal entity if all managing director positions are vacant or all managing directors are unable to act. Existing legal entities benefit from a transitional provision exempting them from the obligation to amend their articles of association on this point. But once an entity decides to amend its articles (for any reason) it must include the new provisions. The same requirements and exemptions apply where the legal entity has a supervisory board or non-executive directors.

 

Conflict of interest

A managing director of an NV or BV with a conflict of interest, may not participate in the discussion and decision-making of the board about the matter giving rise to the conflict. If a director breaches this rule, the decision can be voided. These rules also apply to supervisory directors and executive or non-executive directors in a one-tier board. The bill introduces the same legislation for the other legal entities.

 

Current legislation provides that if an association, cooperative or mutual insurance company has a conflict of interest with one or more directors, the general meeting may appoint one or more persons to represent the legal entity. This statutory rule is often included in the articles of association. Legal entities with this provision in their articles will not have to amend their articles, as the transitional provisions stipulate that the provision can no longer be invoked after the bill becomes law.

 

If the articles of association require that management board or supervisory board resolutions be taken unanimously by all directors in office, the articles of association must be amended to facilitate decision-making where a director has a personal conflict of interest. Amending the articles might also be necessary if other quorum requirements would hinder decision-making by the board in situations where one or more directors cannot participate in the discussion and decision-making of the board, because the matter being discussed gives rise to the conflict.

 

Number of votes

The bill prohibits legal entities from providing in their articles of association that a director may cast more votes than the other directors combined. An example of this is the provision that the chairman of the board may cast as many votes as his/her fellow board members plus one. Under a transitional provision in the bill, a provision in the articles of association that does not comply with the prohibition, will remain valid until five years after the bill has entered into force, unless the articles are amended before the end of those five years.

 

Personal liability of directors in case of bankruptcy

Under current legislation, each managing director of (i) an NV, (ii) a BV, (iii) an association whose articles are laid down in a notarial deed and which is subject to corporate income tax, and (iv) a foundation subject to corporation tax, may be personally liable towards the trustee in bankruptcy for debts of the legal entity that remain unpaid after the legal entity is liquidated (except for the possibility of individual disculpation). This liability arises where:

  1. the management of the bankrupt entity has evidently improperly performed its duties during the three years preceding the bankruptcy, and
  2. it may be assumed that this is an important cause of the bankruptcy.

 

In principle, conditions (a) and (b) must be proven by the trustee in bankruptcy. The position of the trustee in bankruptcy is considerably reinforced, however, if management has failed to keep its books properly or has failed to publish its annual accounts in accordance with statutory provisions. In either case, mismanagement is deemed to have occurred, and mismanagement is refutably presumed to have been an important cause of the bankruptcy. This means that the trustee benefits from a statutory presumption that there is evidence of mismanagement.

 

The regime will continue to apply to the legal entities mentioned above. The bill introduces the application of the regime to an association and foundation which must, under or pursuant to the law,  draw up financial accounts equal to the annual accounts of Title 9 Book of the Dutch Civil Code. This will have consequences for semi-public associations and foundations, such as health care institutions, educational establishments and pension funds.

 

The regime will also apply to other associations and foundations with articles that have not been laid down in a notarial deed and to associations and foundations not subject to corporate income tax. However, the statutory evidence presumption will not apply and, as a consequence, the threshold for liability in bankruptcy is higher.

 

Removal by court of foundation’s directors

The bill was submitted in response to incidents concerning governance and supervision of foundations in the semi-public sector. The bill introduces new legal grounds for the court to dismiss foundation directors. The court may remove a director for dereliction of his duties, for other important reasons, or on account of any significant change of circumstances, as a result of which the foundation may not reasonably be required to maintain him or her as a director. Such an application may be made by an interested party or the public prosecutor.

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