On 8 December 2009 a bill to amend Book 2 of the Netherlands Civil Code in connection with the amendment of the rules on management and supervision within NVs and BVs (Bill no. 31763) was passed by the lower chamber of the Dutch Parliament. It is expected that the new rules will enter into effect on 1 July 2010. In this memorandum we will present a general summary of the main changes under the bill.
The key features of the proposed new legislation are as follows:
- Creation of a statutory basis for the one-tier board model;
- Changes to the rules on liability pursuant to Article 2:9 of the Netherlands Civil Code (NCC);
- New conflict of interest rules, replacing Articles 2:146/256 NCC;
- A change in the employment-law status of managing directors of listed companies;
- Limitations on the holding by managing directors and supervisory directors of additional directorships;
- Gender representation rules for company boards.
In addition, we will briefly discuss some of the most common practices in the UK and the US with regard to one-tier boards.
ONE-TIER BOARD MODEL
- Book 2 of the Netherlands Civil Code will provide for a one-tier board model – i.e. a single board comprising both executive and non-executive directors – as an alternative to the existing two-tier model (management board and supervisory board).
- Both public and private limited liability companies (NVs and BVs) – including structure regime companies – will have the option of adopting the one-tier board model.
- If a company opts for the one-tier model, this must be laid down in its articles of association.
- Where a one-tier model has been adopted, the executive directors will be responsible for the company's day-to-day management. The general course of affairs of the company will be the responsibility of all the directors, both executive and non-executive.
- All directors will be appointed by the general meeting of shareholders.
- The following duties and powers may not be assigned to executive directors: the determination of the remuneration of executive directors, occupying the position of chairman of the board, the supervision of the performance by directors of their duties, the making of nominations (binding or otherwise) regarding the appointment/reappointment of executive directors and, in the case of structure regime companies, the power to appoint executive directors.
- Subject to the above limitations, it will be possible to assign different duties to different directors in a one-tier board. Companies that choose to do so are therefore advised to clearly delineate the duties and powers of each of their directors, so that it can later be determined which director(s) is/are potentially liable.
- Where a structure regime company has adopted the one-tier model, significant board decisions, e.g. a decision to make a major investment, will require the approval of a majority of the non-executive directors.
NEW LIABILITY RULES UNDER ART. 2:9 NCC
- Article 2:9 NCC will be amended to provide that each director is responsible for all duties that have not been assigned by law or under the articles of association to one or more other directors. Therefore, any duties which have not been assigned to one or more specific directors will be the responsibility of all the directors, both executive and non-executive. For this reason, it is advisable to clearly describe the duties of each director.
- If it is proved that there has been serious culpability in a failure to properly perform the duties of the board, the failure will be attributed to all of the directors in conformity with the principle of collective liability.
- Individual exculpation of a director is possible if he proves that the failure was not attributable to him and, in addition, that he was not negligent in acting to prevent the consequences of mismanagement.
- The foregoing also applies to supervisory directors by virtue of the general rule laid down in Article 2:149/259 NCC.
- If a director seeks to individually avoid liability on the grounds described above, the duties and powers assigned to that director will be taken into account in the assessment of his claim. For this reason, the liability exposure of a non-executive director may be lower than that of an executive director, but higher than that of a supervisory director.
NEW CONFLICT OF INTEREST RULES
- A managing director with a conflict of interest may not participate in the management board's deliberations and decision-making. If it is not possible for the board to take a decision due to a conflict of interest on the part of all the managing directors (or the sole director in the case of a one-member board), the decision in question must be taken by the supervisory board or, in the absence of a supervisory board, by the general meeting of the shareholders.
- At present, violation of the current conflict of interest rules results in the invalidity of the relevant juristic act (rechtshandeling), due to the absence of representative authority.
- In the event of a violation of the new conflict of interest rules, it will be possible for any interested party (e.g. the counterparty in the relevant transaction or a minority shareholder who is of the opinion that the company's interests have been harmed) to institute proceedings to have the decision in question nullified.
- In order to remedy any damage suffered by the company, following the nullification of the decision the company may institute proceedings against the director(s) in question under Article 2:9 NCC in conjunction with Article 6:162 NCC.
- The bill contains two transitional provisions:
- If, prior to the date of the entry into force of the new rules, the company was represented by one or more directors having a conflict on interest, it will be possible for the relevant act(s) to be ratified after the above date through the designation of the director(s) in question as representative(s);
- Following the entry into force of the new rules, it will no longer be possible to rely on any existing arrangements under the articles of association pursuant to which the company in question is to be represented by a party other than a director in all cases in which there is a conflict of interest..
CHANGE IN THE EMPLOYMENT-LAW STATUS OF MANAGING DIRECTORS OF LISTED COMPANIES
- Managing directors of listed companies will no longer be allowed to enter into an employment contract with the relevant company. Such directors will therefore no longer be considered as employees.
- Existing employment contracts will be respected.
- Under the Dutch Corporate Governance Code, a managing director who is dismissed may not receive remuneration in excess of one year's salary. At present, the application of this principle is sometimes thwarted due to the existence of an employment contract providing for a higher level of remuneration. As a result of the above amendment, this will no longer occur in the case of listed companies.
LIMITATIONS ON THE HOLDING OF ADDITIONAL DIRECTORSHIPS
- A person may only be appointed managing director if he holds no more than one supervisory position with a large NV, BV or foundation. However, the explanatory memorandum to the bill states that managing directors will be prohibited from holding more than two supervisory directorships, other than supervisory directorships of group companies. We therefore believe that the text of the bill will probably be amended. In addition, a managing director will not be allowed to occupy the position of chairman of a supervisory board.
- Supervisory positions with a foreign legal entity are not relevant.
- Supervisory directors will be prohibited from holding more than five supervisory directorships, except in the case of group companies. Chairmanship of a supervisory board will count as two supervisory directorships.
- The above rules will not apply to appointments and designations made prior to the entry into force of the new legislation.
GENDER REPRESENTATION RULES FOR COMPANY BOARDS
- Large NVs and BVs, whether they have a two-tier or one-tier board structure, will be required to distribute their board seats in such a way that at least 30% of the seats are occupied by women and at least 30% by men.
- If a company that is subject to the above requirements does not fulfil these targets, it must explain in its annual report why it has not done so and how it intends to do so in future.
COMPARISON WITH THE UK AND THE US
For a better insight into one-tier boards, it may be useful to look at some of the practices commonly followed in the UK and the US.
- Dutch law follows the UK model of separating the roles of CEO and chairman of the board, promoted by Adrian Cadbury in 1993. This model is gradually being introduced in the US, signalling a departure from the "imperial CEO/chairman" model. In the UK, the chairman plays a major role in, among other things, communication with the company's shareholders.
- In both the UK and the US, heavy demands are placed on non-executive directors with regard to nominations, introduction, training, evaluation, time allocation and active participation in strategy development and risk management.
- UK company boards usually consist of a chairman, four executive directors and five or six non-executive directors; US boards usually have a CEO (no other executive directors), a separate chairman and seven or eight non-executive directors.
- In the US it is common practice to work through what are known as executive sessions, i.e. meetings in which only non-executive directors participate and which are held before and/or after each board meeting. A great deal of emphasis is placed on the importance of working in committees consisting solely of non-executive directors. It is sometimes said that company boards in the US are gradually being turned into two-tier or even seven-tier boards.