The legislative amendments provide an excellent opportunity for management and supervisory board members to reassess their company's current governance structure and internal organisation.
Please find below a number of Questions & Answers with regard to Flex BV and Management & Supervisory Board Members.
How will the role of the management board in relation to dividends and other distributions change under the new rules?
Under the new rules the approval of the management board will be required for resolutions of the general meeting of shareholders on distributions (such approval may be implicit if the management board actually makes the distribution). The management board may withhold approval only if it knows or could reasonably foresee that the BV will be unable to discharge its due and payable debts after the distribution (the distribution test). If the management board knows or chould reasonably foresee this and nevertheless approves a distribution, the management board members and any de facto policymakers (i.e. people in actual control who act as though they are management board members) will, in principle, be jointly and severally liable for the shortfall that has occurred as a result of the distribution.
Before it approves a distribution, the management board must therefore carry out the distribution test. This involves gauging the consequences of the distribution for the liquidity and solvency of the BV. The basic principle is that if the company has been profitable in recent years and there have been no signs of a possible continuity problem the management board need not carry out a more detailed analysis of the BV's continuity. If such an analysis is necessary, all relevant circumstances must be taken into account. Examples of negative signs are the loss of an important sales market, potential claims, major corporate losses or signs that debtors cannot meet their obligations. It is generally assumed that such an analysis should cover a one-year period. For a flow chart showing the steps in this analysis, click here.
Will it be necessary to engage an external expert, such as an auditor, to determine whether a distribution is permitted and, if so, the amount?
No. Generally speaking, the management board is not required to engage experts such as auditors if it is apparent from the BV's books and records that there are sufficient net assets for a distribution. The amount available for a distribution can be determined by using financial indicators that are easy to generate from those books and records: the 'quick ratio' and operational cash flows. The exact amount will ultimately be determined by the management board and shareholders, who will also have to take into account uncertain factors and forecasts that are not evident from the BV's books and records (such as future investment obligations, claims and repayment obligations). If there are doubts about whether an intended distribution can pass the distribution test – in particular where the circumstances have changed since the most recent figures became available – auditors can play a useful role, for example by drawing up cash flow and balance sheet forecasts.
Will the new distribution test impose greater liability on management board members?
No, the introduction of the distribution test will not, legally speaking, impose greater liability on management board members. The test itself is an enactment of existing case law. However, the fact that the new rules explicitly require the management board to approve a distribution in our view increases the likelihood of liability claims actually being initiated.
Q&As in connection with One-Tier Board Act (expected effective date 1 January 2013)
Can a company have a one-tier board structure before the One-Tier Board Act enters into force?
Yes, that is possible. Various companies in the Netherlands already have a one-tier board. The new law will provide a statutory basis for this structure and establish in general terms the responsibilities of the executive and non-executive board members.
Which is preferable: a one-tier or two-tier board structure?
It is not possible to express a general preference for a one-tier or a two-tier board structure. Foreign companies are often more familiar with the one-tier structure; consequently, the formal introduction of this structure in Dutch law may make BVs more attractive for such companies.
The position of management board members will not change substantially in the transition to a one-tier board structure. This is not true of the supervisory board members, but how great the changes will be for them will only become apparent in practice. A non-executive member of a one-tier board will be more aware of the work of the executive members than a supervisory board member is currently of the work of the management board, especially because, in principle, the members of a one-tier board hold meetings together. It is also thought that a non-executive member will be more closely involved in the strategic discussions within the company on account of the joint meetings and will thus be able to gain more first-hand knowledge of what is going on in the company.
Ultimately, however, the differences between a non-executive member of a one-tier board and a supervisory board member should not be overestimated. The structure is less important than the manner in which a non-executive or a supervisory board member carries out his or her duties.
How will a division of duties between executive and non-executive members of a one-tier board (provided that the division is set out in the company's articles of association) affect the liability of an individual board member?
The One-Tier Board Act provides a specific statutory basis for a division of duties within the management board; such a division of duties must be set out in the company's articles of association. A specific management duty which is allocated to one or more management board members does not, in principle, come within the remit of the other members.
Despite such a division of duties, the principle that management board members are jointly and severally liable for mismanagement will continue to apply: a management board member will be liable in full unless he/she can prove that the mismanagement was not attributable to him/her and that he/she was not negligent in acting to prevent its consequences. A division of duties may have a bearing on whether mismanagement can be attributed to an individual board member in a specific case.
From the perspective of liability risks, a good and clear division of duties within the management board can therefore be important.
Background: Responsibility for the company's general affairs may not be allocated to an individual management board member. This will therefore continue to be the responsibility of all management board members jointly (executive and non-executive members alike). In addition, the duty to supervise the management board may, in the one-tier scenario, may only be performed by the board's non-executive members. All duties not specifically allocated to one or more management board members remain the shared responsibility of all members together.
How must a management board member act in the event of a conflict of interest: may he/she represent the company despite such a conflict?
Yes. Once the One-Tier Board Act enters into force, a management board member who has a conflict of interest may represent the BV even if this is explicitly prohibited by the articles of association. The Act provides that a conflict of interest has consequences only for the internal decision-making. A management board member or supervisory board member who has a direct or indirect personal interest in conflict with the interests of the BV in relation to a particular transaction may not participate in the deliberations and decision-making on that transaction. If he/she nonetheless does so, the decision will be voidable and the board member in question may be held liable towards the BV. The transaction with the third party will, however, be valid.
Background: Under the current law on BVs, a management board member who has a conflict of interest is not authorised to represent the BV. If he/she nonetheless does so, the transaction with the third party can, in some circumstances, be invalid. That rule will be abolished.
Must the articles of association be amended in order to take advantage of the new conflict-of-interest rules?
No, that is not necessary. With the entry into force of the One-Tier Board Act the current conflict-of-interest rules will automatically cease to apply in relation to the representation of a BV and any provision in the articles of association which contains the current rules will be deemed to be not applicable. To avoid misunderstandings, however, we would advise that any such provisions be removed from the articles of association (and possibly replaced by the new rules).
Can the new conflict-of-interest rules be set aside in the articles of association?
Yes. The new rules can be set aside (insofar as all management board members and supervisory board members have a conflict of interest and it thus becomes impossible to make a decision) by including a provision in the articles of association authorising management board members with a conflict of interest to participate in the decision-making in that situation.
How many other board memberships may a management board or supervisory board member hold? How do these restrictions affect the board member's current positions and any reappointments?
The One-Tier Board Act imposes a maximum on the number of other board memberships ('supervisory positions') that may be held by a management board member (whether executive or non-executive) or supervisory board member of a 'large' BV. A BV will be regarded as large if (where applicable, according to its consolidated balance sheet) it meets at least two of the following three criteria in two successive years:
the value of its assets, based on the acquisition price and production cost, is over EUR 17.5 million;
its net turnover for the relevant financial year is over EUR 35 million;
the average number of employees during the relevant financial year is 250 or more.
Such BVs may not appoint a person as a management board member if he/she is already a member of the supervisory board or a non-executive member of a one-tier board of more than two large BVs, public limited liability companies (NVs) or foundations, or is the chair of the supervisory board or one-tier board of such a company or foundation.
A person may not be appointed as a member of the supervisory board or a non-executive member of a one-tier board of a large BV if he/she is already a member of the supervisory board or a non-executive member of five or more large BVs, NVs or foundations. For this purpose a position as chair of a supervisory board or a one-tier board is counted twice.
Existing memberships of management boards and supervisory boards will be respected if a person has too many positions on the date when the legislation enters into force. However, this will not apply to reappointments to these positions after that date. Management board members and supervisory board members are therefore well advised to review their existing positions before reappointment and before accepting new positions. In determining the number of other board memberships held, will intra-group positions, positions at foreign legal entities and positions at cultural, charitable or religious foundations be included? In the case of large legal entities that form part of the same group, two or more appointments will count as a single appointment (e.g. if a management board member of a large BV serves on the supervisory boards of four large subsidiaries, these will count only once).
Board memberships ('supervisory positions') at foreign legal entities and at foundations with a cultural, religious or charitable object will not count towards the maximum number of positions permitted. On the other hand, appointments to the supervisory board (or a comparable supervisory body) of large commercial foundations (which run a business and are under a statutory obligation to draw up annual accounts) will count toward towards the maximum number of positions permitted, even if the foundations have a cultural, religious or charitable function.
What are the target figures for gender diversity within the management board or supervisory board of a large BV? What are the sanctions for failing to meet these target figures?
The One-Tier Board Act contains guidelines for balanced gender diversity on the management and supervisory boards of large BVs (see above). A management board or supervisory board is deemed to have a balanced gender distribution if no more than 70% of the members are of the same sex. Large BVs whose management or supervisory board does not meet this standard must disclose this in their annual report. In addition, they must explain why they have failed to meet the standard and describe in a specific plan of action how they propose to achieve a balanced composition of the board in question in the future. However, no sanctions will be imposed for non-compliance with the guideline.