The Bill on the revision and claw back of bonuses is at an advanced stage in the First Chamber of the Dutch parliament and is currently expected to become law on 1 January 2014. What will be the impact on directors and companies?
Which types of remuneration and which directors are subject to the proposed rules?
- bonuses of directors of NVs
- bonuses of directors and day-to-day policy makers of financial undertakings (including banks set up as a cooperative or BV, and insurance companies set up as a mutual insurance association)
- value increases in shares, including depositary receipts, and options to be paid as remuneration to directors of listed companies
The term bonus means the variable portion of the remuneration that is partly or entirely conditional on achieving certain targets or on the occurrence of certain circumstances. This includes guaranteed bonuses, or severance payments agreed between the company and the director.
What new powers or duties are created and who can exercise them?
- A power to revise a bonus to an appropriate amount if payment would be unacceptable according to standards of reasonableness and fairness; this power is vested in the corporate body that determines the remuneration of directors, usually the supervisory board at listed companies
- A power to claw back a bonus insofar as it has been awarded based on incorrect information concerning the underlying targets or circumstances; the company may exercise this power, as well as the supervisory board or a special representative appointed by the general meeting
For listed companies only, a duty to withhold any increase in the value of shares, depositary receipts or options awarded to directors as remuneration; this duty exists when:
- a public offer is announced
- a resolution is proposed to the general meeting about a significant change in the identity or character of the company or its business (2:107a BW resolution)
- a proposal for a merger or division is announced, and the director sells his shares or his appointment is terminated before the merger or division takes effect
Whether a value increase has taken place in a takeover situation is determined based on the value on the following reference dates, after the stock exchange’s close of business:
- date 1: four weeks before the announcement of the public offer
- date 2: four weeks after the public offer ends
- date 3: the day that the director sells his shares/options or the day that his appointment ends
If the value on reference date (3) is higher than on reference date (1), this value increase will be deducted from the director’s pay, but subject to a maximum of the value increase between reference dates (1) and (2).
This provision has received much criticism, and its implementation raises a number of questions. Withholding the value increase allegedly violates the director’s proprietary rights, but the Minister has disputed this reasoning. In addition, the proposed reference dates are unclear and the company’s withholding duty is not subject to any time limit. The business organisation VNO NCW has sent a letter to the Minister asking for clarification.
The Minister has explained that the duty to withhold value increase does not apply to shares/options inherited or purchased by the director. The withholding duty is of a temporary nature and will expire on 1 July 2017. The provisions will be evaluated before 1 July 2016.
Companies will have to account for any remuneration amounts revised, withheld or clawed back. They will need to do this in the explanatory notes to the company’s annual accounts.
Directors will have to make clear remuneration arrangements in consultation with the supervisory board in order to limit any unexpected consequences that the proposed rules may have.