On 1 October 2012, the Act for simplification and flexibilisation of private company law (Wet vereenvoudiging en flexibilisering bv-recht or "Flex BV Act") entered into force. The new legislation has brought important changes to Dutch law applicable to private companies with limited liability (besloten vennootschappen or "BV's").
The Flex BV Act has increased flexibility and freedom both for Russian investors structuring domestic investments offshore or investing in foreign businesses, as well as for foreign companies investing in Russia. In combination with the Netherlands’ status as a reputable jurisdiction, the attractive Dutch corporate tax system and the broad double taxation and bilateral investment treaty networks, this increased flexibility provides a unique environment for establishing holding companies and joint ventures in the Netherlands.
This newsletter provides an overview of the key changes in Dutch company law resulting from the Flex BV Act.
- The BV as Dutch holding or JV entity
The BV is a Dutch legal entity typically used for holding and joint venture purposes. As per 1 July 2011, the Netherlands already facilitated easier and quicker incorporation of the BV by abolishing the requirement of having to obtain a statement of no-objection (see also the Stibbe Legal Alert - Russia dated 8 November 2011). The Flex BV Act results in a further simplification and flexibilisation of the BV's legal regime, thereby creating an even more favourable corporate climate for Russian investors.
- Key changes under the new Flex BV Act
3.1 Capital and capital protection
Minimal capital requirements no longer apply. Also, a specified authorised capital is no longer required in the articles of association. In the context of capital protection, it is no longer 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 BV's incorporation no longer apply. 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 imposed additional requirements on transactions entered into between the BV and a founder or a shareholder within two years of the BV's initial registration in the trade register, no longer apply. Finally, the rule on financial assistance, meaning that a BV may not provide security for the acquisition of its own shares, ceased to exist. It is the responsibility of the managing board to assess whether such transactions are possible.
3.2. Decision making
A BV may now issue non-voting shares with dividend rights as well as voting shares without dividend rights, which provides a flexible manner to separate profit-sharing and voting rights. In addition, the articles of association may 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 agree to convene the 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 also is possible to adopt resolutions without holding a meeting in person, provided that those entitled to attend the shareholders' meeting have given 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 transferability, the statutory provision applies providing the non-transferring shareholders with a right of first refusal. Other restrictions are also possible if they do not lead to transfers becoming extremely difficult or impossible. 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 be agreed between the parties (and is therefore no longer required to be equal to the 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 has the right to appoint, suspend and dismiss managing and supervisory directors. The meeting of holders of shares of a certain type, or a specific shareholder, may also be granted this right in the articles of association, provided that each shareholder with voting rights has 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 this 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 BV can, if the shareholder fails to comply, suspend the payment of dividends and the exercise of the voting rights. We do note that the articles of association are publicly available, meaning that third parties 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 under the new legislation. 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. The managing board should only approve the distribution if it is not aware, and should reasonably not be aware, that the distribution will ultimately lead to the company's incapacity to pay its due and payable debts (the liquidity test). If distributions are made in breach of the liquidity test, the managing board members may 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 BV is now entitled to repurchase more of its own shares (only one share with voting right and dividend entitlement should at least be outstanding) and it can reduce its share capital without having to go through the lengthy procedure that previously applies. The assets and liquidity tests described above with respect to distributions also applies to the repurchase of shares and capital reduction.
It is clear that the Flex BV Act has resulted in more flexibility to Dutch company law for Russian inbound and outbound investments. Among other things, there are more possibilities to deviate from the provisions of the law in the articles of association, thereby making it easier for a BV to mirror arrangements that are common to Russian investors.
The new legislation applies immediately to all BV's. In order for existing BV’s to benefit from these changes, it is important that the articles of association are reviewed. We would be pleased to advise you on the possibilities of the Flex BV Act for your existing or to be newly incorporated BV’s.