Directors of Dutch companies may be involved in approving and/or carrying out the distribution of dividends to shareholders. The coronavirus outbreak has obviously cast a cloud over the financial health of certain companies, some of which must now determine whether to abandon their longstanding dividend policies in view of the current situation.
Other companies, notably privately held enterprises, can face pressure to declare dividends in order to generate liquidity for shareholders. In particular, the directors of a BV may find themselves in an uncomfortable situation as it is the shareholders' prerogative to decide on a dividend distribution, which the board has only narrowly defined power to veto. In other words, the board bears responsibility in the decision-making process but has limited means to block a dividend distribution. For directors who find themselves in such situations, the following key points are relevant:
- The board of a private limited company (BV) needs to ensure that - in addition to the (limited) balance sheet test provided for by Article 2:216(1) of the Dutch Civil Code (DCC) - dividend distributions do not jeopardise the company's continuity. In this regard, the board needs to assess whether the company will be able to continue to fulfil its current obligations.
- In its assessment, the board will of course have to take into consideration the company’s financial position and credit margin. However, the board should also consider external factors, such as market and industry developments, which affect or could affect the company’s activities. The coronavirus pandemic is a significant external factor which the board cannot – and should not - disregard in its analysis of whether to proceed with or allow the proposed dividend distribution.
- Directors may incur liability in the event of questionable dividend payments. If dividends are distributed to shareholders even though the board should reasonably have known that the company would not be able to meet its obligations, the directors may be held liable for the deficit caused by the distribution (Article 2:216 (3) DCC). Depending on the circumstances, an ill-advised dividend distribution may also contribute to the conclusion that the company was improperly managed (Article 2:9 DCC). Moreover, a dividend payment may be found to have contributed to the company’s insolvency, potentially leading to liability for the shortfall in assets, on the basis of Article 2:248 DCC.
How to proceed
- Map out the company's liquidity position and weigh it against the company’s current obligations.
- Asses how the coronacrisis could affect the business in the short and medium term (one to two years ahead), i.e. the extent to which turnover could be affected, expected developments in the costs structure, the extent to which the company has or needs a financial buffer to weather the storm. At this stage, it is obviously not possible to assess the specific impact given the large number of variables and substantial uncertainty surrounding the coronavirus situation, but an assessment on the basis of scenario planning could give a rough idea of the various outcomes.
- If the company’s financial position and prospects are believed to be solid despite the coronacrisis, the board could approve a proposed dividend distribution (assuming all other formal requirements are met as well) and cooperate in carrying out the dividend payouts.
- Come to a reasoned decision on whether to proceed with the dividend distribution. Document the board’s considerations (e.g. by way of meeting minutes, call notes, email correspondence, etc.) for future reference.
- If necessary, discuss with shareholders whether the dividend distribution could be deferred until the effects of the coronavirus outbreak on the company are clearer and a more precise assessment can be made of the likely impact on the company's financial position and operations.
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