At the end of 2009, the Dutch House of Representatives (Tweede Kamer) passed two significant bills on corporate law. Both bills entail major changes to the Dutch Civil Code. Bill No. 31763 amends certain rules on management and supervision in public and private liability companies (NVs and BVs) and introduces the one-tier board (“Management and Supervision Bill”). The second bill, the simplification and flexibility of private company law bill (Wet vereenvoudiging en flexibilisering van het BV-recht), means a complete overhaul of, and a substantial flexibility in, the corporate structure of Dutch private limited liability companies (the “Overhaul Bill”). Both bills still have to be adopted by the Senate (Eerste Kamer). It is expected that the new rules be effective after July 1, 2010. This article briefly outlines the Management and Supervision Bill as passed by the House of Representatives. We will provide an analysis of the Overhaul Bill in a future edition.
Management and Supervision Bill
The bill introduces the long-awaited opportunity of establishing a one-tier board consisting of executive directors and non-executive directors. Currently, executive directors and non-executive directors sit on separate boards (the managing board and supervisory board). A company wishing to opt for a one-tier board, must by shareholder vote, amend its articles of association to reflect this change in its corporate structure. The one-tier board can also be implemented at so-called ‘structure regime’ companies (structuurvennootschappen), which currently require two-tier boards.
In keeping with current legislation, both natural and legal persons may be appointed as executive directors. Only natural persons may be appointed as non-executive directors. The bill limits the number of positions that directors may hold: a person may not be appointed as managing director if he holds more than one supervisory position1 with large NVs, BVs or foundations;2 a supervisory director may not hold more than five supervisory positions (where chairmanship is regarded as two supervisory positions). All directors are appointed by the general meeting of shareholders. By introducing one-tier boards, Dutch law permits ‘Anglo-American’ legal functioning of management. However, directors’ liability is (wholly) different from such systems.
The employment relationship of managing directors of listed companies will change as a result of the bill as well. A managing director may no longer enter into an employment agreement with a listed company and is expected to rely on his ‘corporate relationship’ by having been appointed as managing director. The aim of the legislator here is to force compliance by directors and companies of the guideline (under Dutch corporate governance rules) that redundancy packages not exceed the value of their annual salary in case of dismissal. We expect however that, separate from grandfathering rules, directors will seek ‘fair’ compensation in excess of the referenced guideline by entering into service contracts with the company or employment agreements with group companies.
Executive directors are in charge of the daily operations of the company. Both executive and non-executive directors are responsible for the company’s general course of affairs. Specific duties can be assigned to one or more directors who can adopt resolutions required/necessary for the performance of that specific duty. However, certain tasks may not be assigned to executive directors, including: determining executive directors’ pay; serving as Chairman of the Board; and supervising the performance of directors’ duties.
A new conflict of interest rule has been included in the legislation. A managing director who has a personal conflict of interest with a company transaction is excluded from any deliberations and decision-making with respect to that transaction. If all managing directors have a conflict of interest, the supervisory board will have to adopt the resolution. If no supervisory board is installed or the supervisory board members also have a conflict of interest, then the general meeting will have to adopt the resolution, except when the articles of association state otherwise.
Under the new rules, each director is liable for all duties not assigned to any other director(s). Duties that are not assigned to one or more directors are therefore the responsibility of all directors, both executive and nonexecutive. We suggest that duties are specifically designated in the interest of an individual director. A director can be held liable if a serious fault can be attributed to such director. A director can, however, exculpate himself if no serious fault can be found on his part and that he was not negligent in preventing the mismanagement from happening. It is likely that a court will take into account the division of tasks and allocation of duties when considering directors’ liability. Non-executive directors should therefore be less likely to face liability claims than executive directors. However, given the existence of one board only (in particular given the continued collective responsibility of general affairs), non-executive directors could face a higher risk of liability than currently supervisory directors serving on the supervisory boards in a two-tier system.