On 1 October 2012 the Act for simplification and flexibilisation of private company law (Wet vereenvoudiging en flexibilisering bv-recht or "Flex BV Act") will enter into force, making important changes to Dutch law applicable to private companies with limited liability (besloten vennootschappen or "B.V.'s").
The Flex BV Act will introduce increased flexibility and greater freedom in structuring businesses for Brazilian investors. It will be easier for Brazilian investors to adjust the B.V. to mirror the features of the Brazilian limited liability company (sociedade limitada), common to Brazilian investors. In combination with the attractive Dutch corporate tax system, the broad double taxation and bilateral investment treaty network, this increased flexibility provides a unique environment for establishing companies and joint ventures in the Netherlands.
This newsletter provides an overview of the key changes in Dutch company law resulting from the introduction of the Flex BV Act.
2. The B.V. as Dutch holding entity
The B.V. is a Dutch legal entity typically used for holding purposes. In this context, it should be noted that the legislation on the supervision of legal entities (Wet Controle op Rechtspersonen) introduced on 1 July 2011, has already resulted in an increase in the flexibility of Dutch company law by abolishing the requirement of having to obtain a statement of no-objection prior to incorporating a B.V. (see also the Stibbe Legal Alert - Brazil dated 30 August 2011). The introduction of the Flex BV Act will result in a further simplification and flexibilisation of the B.V.'s legal regime, thereby creating an even more favourable corporate climate for Brazilian investors.
3. Key changes under the new Flex BV Act
3.1 Capital and capital protection
Under the Flex BV Act minimal capital requirements will no longer apply. Also a specified authorised capital will no longer be required in the articles of association. In the context of capital protection, it will no longer be necessary to submit an auditor's statement in case of a non-cash payment on shares. Additionally, the bank statement required to be submitted when shares are paid up in cash upon a B.V.'s incorporation will no longer apply. Also, the capital can be denominated in a foreign currency. Shares do not need to be paid up in full and the parties are free to make arrangements as to when this will happen. The 'nachgründung', which imposes additional requirements on transactions entered into between the B.V. and a founder or a shareholder within two years of the B.V.'s initial registration in the trade register, will also no longer apply. Finally, the rule on financial assistance, meaning that a B.V. may not provide security for the acquisition of its own shares, will cease to exist. It is the responsibility of the managing board to assess whether such transactions are possible.
3.2. Decision making
Under the Flex BV Act, a B.V. may issue non-voting shares with dividend rights as well as voting shares without dividend rights. It thus provides for a flexible manner to separate profit-sharing and voting rights. In addition, the articles of association can provide that holders of certain types of shares can exercise multiple votes.
The period for convening a shareholders' meeting is reduced to eight days. However, if the notice to convene a shareholders' meeting is not provided in time, resolutions can be adopted nonetheless, if those entitled to attend the shareholders' meeting all agree to convene a meeting. Additionally, shareholders' meetings can now be held outside of the Netherlands if provided for by the articles of association or those entitled to attend shareholders' meetings have provided their consent. Furthermore, it will also be possible to adopt resolutions without holding a meeting in person, provided that those entitled to attend the shareholders' meeting have provided their consent to this manner of adopting resolutions. This does not mean, however, that every shareholder has to vote in favour of the proposal.
3.3. Transfer of shares
It is no longer required to include provisions in the articles of association that restrict the transferability of shares, such as making a transfer subject to the shareholders' or the managing board's approval, or providing for a right of first refusal. However, if the articles of association do not include any provision on the transferability, the statutory provision applies which provides the other shareholders with a right of first refusal. Other restrictions are also possible if they do not lead to transfers becoming extremely difficult or impossible. In this context it should be noted, though, that a lock-up, during which the transfer of shares is prohibited for a certain period of time, is possible. If a shareholder wishes to transfer shares but cannot do so because of the applicable transfer restrictions, then such shareholder must always be able to dispose of its shares for a price that can under the new rules be agreed between the parties (and is therefore no longer required to be equal to fair market value). In this context, the articles of association must include a pricing mechanism.
3.4. Appointment of directors and the right to give instructions
The general meeting will have the right to appoint, suspend and dismiss managing and supervisory directors. The meeting of holders of shares of a certain type may also have this right, if provided for in the articles of association. However, each shareholder with voting rights should have the opportunity to participate in the decision-making process of the appointment of at least one board member or supervisory board member. Additionally, the articles of association can limit the circle of eligible persons. The binding nature of a nomination for appointment is still possible, but no more than one person is required.
Another important change is that the managing board can be given specific instructions by the general meeting of shareholders or another corporate body. The managing board must comply with these instructions, unless following such instructions would be detrimental to the company.
3.5. Arrangements between shareholders in the articles of association
Arrangements between shareholders can now be included in the articles of association, such as tag-along rights or special requirements in relation to the identity of the shareholder. The inclusion of these provisions in the articles of association are favourable because a breach will have third party effect and the B.V. can, if the shareholder fails to comply, suspend the payment of dividends and the exercise of voting rights by a defaulting shareholder. We do note that the articles of association are publicly available meaning that any third party can obtain a copy of the articles of association from the trade register.
3.6. Distributions, repurchase of shares and capital reduction
The level up to which distributions may be made from the shareholders' equity has been revised in the Flex BV Act. The paid-up capital and the called-up capital no longer form part of the mandatory shareholders' equity and may be distributed. The remaining limitation for a distribution is the requirement that a distribution can only take place if the company's equity exceeds the reserves which the company must maintain by law or pursuant to the articles of association (the assets test). Distributions require the approval of the managing board. Before granting its approval, the managing board must also apply a liquidity test. If the managing board is aware or should reasonably have been aware that the distribution will ultimately lead to the company's incapacity to pay its due and payable debts, their approval should be denied. If, however, approval is granted in such situations, the managing board members will be held jointly and severally liable for the deficit that resulted from the distribution. The same applies to a receiving shareholder, but only to the extent of the amount it received.
A B.V. will be entitled to repurchase its own shares, as long as one share with voting right and dividend entitlement remains outstanding. It can reduce its share capital without having to go through the lengthy procedure that currently applies. The assets and liquidity tests described above with respect to distributions will also apply to the repurchase of shares and capital reduction.
It is clear that the introduction of the Flex BV Act on 1 October 2012 will bring more flexibility to Dutch company law for Brazilian investors.
The Flex BV Act will enter into force with immediate effect. This means that from 1 October 2012 on the new legislation will immediately apply to all B.V.'s. To anticipate these changes it is important that the articles of association of existing companies are reviewed, in order to establish whether the B.V. can benefit from the implementation of the Flex BV Act. The Flex BV Act will ease a large number of corporate provisions and introduces more possibilities to deviate from the provisions of the law in the articles of association, which offers Brazilian investors a great deal of freedom to incorporate or structure their B.V. as they see fit.