On 28 May 2010, the Council of Ministers approved a proposal by the Minister of Justice to introduce rules under the DCC making it possible to adjust or claw back bonuses paid or granted to management board members.
At present, the Corporate Governance Code (for listed companies) and the Banking Code (for banks) already contain rules on the adjustment and claw-back of bonuses. Both codes operate on the apply-or-explain principle; consequently, deviations are allowed provided these are explained in the annual report. The explanatory notes to each of the codes state that the supervisory board should endeavour to modify existing contracts with management board members to bring them in line with the abovementioned rules in the relevant code. In practice, however, this is generally impossible to do if the management board member does not give his/her consent. The proposal makes it possible for bonuses to be adjusted or clawed back, even in cases where the management board member's consent is withheld.
At the same time that it approved the above proposal (i.e. also on 28 May 2010), the Council of Ministers approved a proposal by the Minister of Finance for additional rules enabling the adjustment and claw-back of variable remuneration in the financial sector, by means of an amendment to the Dutch Financial Supervision Act (Wet op het financieel toezicht, FSA). The powers under these proposed rules are broader than those under the proposed DCC rules. The Minister of Finance considers this necessary because, in the financial sector in particular, the past few years have been marked by cases of unreasonably high bonuses and bonuses giving the wrong incentive, as well as requests by financial institutions to the government for financial support.
Both of the proposals are now before the Dutch Council of State (Raad van State). The texts as submitted to the Council of State have not been made publicly available. However, from earlier (publicly available) drafts of the proposals and statements by the relevant ministers, it can be seen that the broad outlines of the proposals are as follows:
Broad outlines of proposal to amend the DCC
- The proposed new rules in the DCC will be applicable to (i) NVs and (ii) private limited liability companies (besloten vennootschappen), cooperatives (coöperaties) and mutual insurance associations (onderlinge waarborgmaatschappijen) constituting a bank or an insurer under the FSA.
- The relevant entity will be required to have a remuneration policy for management board members, adopted by the general meeting of shareholders (in the case of cooperatives and mutual insurance associations, by the general meeting of members). Where there is a works council, it will be entitled to express its opinion on the proposed remuneration policy prior to the policy's adoption (see the preceding section on the right of works councils to express their opinion). In addition, the actual remuneration to management board members will have to be determined by the general meeting, unless another body has been designated for this purpose under the articles of association. Where another body has been designated, a proposal to grant remuneration in the form of shares or options will first have to be submitted by that body to the general meeting for the latter's approval. In the case of listed companies, and as set out in the Corporate Governance Code, it will generally be the supervisory board that is the competent body in this regard (it will hereinafter be assumed that the supervisory board is the competent body). It should be noted that NVs are already subject to the rules such set out in this bullet point.
- The supervisory board will have the power to adjust a bonus and set it at an appropriate level, if payment of the bonus at the original level would be unacceptable according to the criteria of reasonableness and fairness. According to the explanatory memorandum to the draft proposal, a 'bonus' means the variable component of the management board member's remuneration the granting of which is dependent on the achievement of specific pre-determined targets and which can be paid in the form of cash, a pension plan contribution or options, shares or other share-based forms of remuneration.
- Where the granting of a bonus becomes unconditional as the result of a public offer, the supervisory board will be required to adjust the bonus if payment thereof at the original level would be unacceptable according to the criteria of reasonableness and fairness. The same applies to bonuses whose granting is still on a conditional basis at the time the public offer is declared unconditional. The draft proposal does not cover takeovers of listed companies other than through a public offer, e.g. takeovers through an assets-liabilities transaction or a statutory merger. There does not appear to be any justification for this. According to the explanatory memorandum, the proposed rule is intended to replace the amendment previously adopted by the lower house of the Dutch parliament under which, in a 'change of control' situation, the relevant management board member is required to pay back to the company any increases in the value of the shares or options. The question is whether the lower house will agree to the rules now proposed. The company will have the right to claw back, as an undue payment, a bonus following payment thereof, to the extent that (i) the bonus has been paid on the basis of incorrect information, or (ii) the underlying pre-determined targets have not been achieved. Under the draft proposal, claw-back proceedings can also be initiated on behalf of the company by the supervisory board or, in the case of a company with a one-tier board structure, by the non-executive board members.
- In the annual report, the supervisory board will be required to report on any adjustments or claw-backs of bonuses. According to the draft proposal, this requirement will not apply in the case of 'closed' NVs (i.e. where the articles of association provide only for registered shares, contain share transfer restrictions and prohibit the issuing of bearer depositary receipts with the company's co-operation).
Broad outlines of proposal to amend the Financial Supervision Act
- The proposed new rules under the FSA will be applicable to all financial institutions within the meaning of that Act, irrespective of their legal form. We would also point out that, in the draft of this proposal, the territorial scope of the rules has not been delineated and therefore, according to the draft, the rules would strictly speaking also apply to financial institutions that only carry out activities abroad and are consequently not required to obtain a licence in the Netherlands. In our view, it would be sensible to limit the applicability of the rules to financial institutions that have a licence under the FSA.
- The financial institution will have the power to adjust or claw back any variable-remuneration component that has been paid or granted if (i) it subsequently becomes clear that the component was granted on the basis of incorrect information, or (ii) in light of exceptional circumstances during the period in which the pre-determined performance criteria were or must be met, the component has led or will lead to an unfair outcome.
- The power to adjust or claw back variable-remuneration components will apply in respect of the remuneration of all persons determining the financial institution's day-to-day policy, and not only management board members as in the case of the proposal to amend the DCC. Furthermore, all variable (i.e. non-fixed) remuneration components are covered. According to the Minister of Finance, this category is broader than bonuses (as referred to in the proposal to amend the DCC) because it should also be understood to include, for example, profit participation rights.
- The abovementioned power will be vested solely in the financial institution's supervisory board or an equivalent body with a supervisory role. In the absence of a supervisory board or equivalent body, it will not be possible for a financial institution to adjust or claw back remuneration pursuant to the rules proposed by the Minister of Finance.
- With regard to regulatory supervision over the adjustment or claw-back of variable-remuneration components, the draft proposal does not provide for the introduction of additional powers on the part of the AFM or the DCB. However, according to the explanatory notes, the above areas will fall under the general supervisory powers of the AFM and the DCB with regard to the remuneration policies of financial institutions (see below in the section 'Legislative basis for AFM/DCB principles for balanced remuneration policies').