Dutch law recognizes two different types of corporations: the N.V. (Naamloze Vennootschap) and the B.V. (Besloten Vennootschap). Both the N.V. and B.V. are separate legal entities, distinct from their shareholders, with a capital stock divided into shares. The N.V. and the B.V. can be used for the same business purposes, and their audit and disclosure requirements are almost identical. Due to limitations on the transferability of its shares, the B.V. is a privately held corporation, while the free transferability of N.V. shares makes the latter a public corporation.
A further distinction is made between "regular" and "large" corporations (structuurregime). Under Dutch law, an N.V. or a B.V. qualifies as "large", if it meets three cumulative tests, being:
- The corporation's issued capital plus reserves, including its retained earnings, equal NLG 25,000,000 or more (this amount may be changed by Royal Decree);
- The corporation or a "dependent company" has established a Works Council (ondernemingsraad);
- The corporation, together with its dependent companies, normally employs one hundred or more persons in the Netherlands.
A corporation that qualifies as a "large" corporation must notify the Trade Register thereof. Three years of uninterrupted registration automatically render special "large" company rules applicable, which govern the distribution of powers in such a "large" corporation. These rules, in principle, supplement the rules applicable to "regular" corporations, but prevail over the latter in case of a conflict.
For completeness' sake, it is noticed that corporations qualifying as "large" may, under certain conditions, be fully or partially exempt from the applicable large company rules, while a "regular" company may voluntarily adopt the "large" company status. It would go beyond the scope of this contribution to elaborate on this subject.
2. DISTRIBUTION OF POWERS: THE TWO-TIER SYSTEM
Dutch corporations are subject to a two-tier management system. This consists of a management board which performs executive functions, and a supervisory board which advises and supervises the management board. This system applies to both N.V.'s and B.V.'s. There is little difference between the distribution of powers in an N.V. and a B.V. The shareholders have identical powers (and limitations thereto), and the management board (directie or bestuur) and, where applicable, the supervisory board (raad van commissarissen) have the same responsibilities whether the corporation is an N.V. or a B.V..
Each board has its own responsibilities, powers, and duties. Neither of them is, from a legal point of view, subordinated to the shareholders, nor is the management board hierarchically subordinated to the supervisory board. The articles of association of the corporation (hereinafter "the articles") may require the management board to obtain prior approval of the supervisory board or the shareholders with respect to decisions on matters listed in the articles or determined by the supervisory board or the shareholders' meeting.
The two-tier system is optional for "regular" corporations, which need not have a supervisory board. It is mandatory for corporations that have qualified as "large" corporations. Furthermore, when the N.V. or B.V. is a "large" corporation, the supervisory board has a much more prominent position in the corporate hierarchy. The mandatory two-tier system for "large" corporations is intended to reduce the power of the shareholders and to increase the power of the employee-based Works Council.
3. POWERS OF THE MANAGEMENT BOARD
The management board is the executive body and may be made up of individuals and/or corporations. It has at least one member. The members of the management board have collective powers and responsibilities. They share responsibility for all decisions and acts of the management board and for the acts of each individual member.
The management board is responsible for the management of the corporation and for its representation, i.e. the actions of the corporation towards third parties. The law is not specific about the powers of the management board in undertaking "the management of the corporation." These are generally understood to imply all powers, except for those expressly attributed to the shareholders or the supervisory board either by law or in the articles of the corporation.
The corporation's business policies are determined by the management board within the confines of the corporate purposes, with due regard for the interests of the corporation, the shareholders, the employees, and, according to certain legal commentators, the corporation's business relations, as well as certain basic societal interests. The management board oversees the implementation of its policies and the corporation's day-to-day affairs, in addition to implementing decisions of shareholders' meetings and of the supervisory board. It prepares the annual accounts and the annual report. The articles may empower the management board to create reserves and thereby allocate profits and consequently determine the amount of profits available to the shareholders for dividend distribution.
The initial management board is appointed by the founders when the corporation is first incorporated. Their names appear in the deed of incorporation. Thereafter, managing directors are elected by the shareholders. The articles may also require the shareholders to consider a nomination from the supervisory board or from a particular type or class of shareholders (usually the holders of priority shares). The removal of a member of the management board requires a resolution of either the shareholders or the supervisory board, whichever have the power to elect the members.
4. POWERS OF THE SUPERVISORY BOARD (OF NON-LARGE CORPORATIONS)
The supervisory board is distinct from the management board and the same individuals cannot serve on both boards. Unlike the management board, which may have corporate members, the supervisory board must consist of individuals. The number of supervisory directors is determined by the articles or by a shareholders' resolution. The supervisory board may consist of a single supervisory director, unless it is a "large" corporation (see sub 5), in which case it must have at least three supervisory directors. The members of the supervisory board have collective powers and responsibilities. They share responsibility for all decisions and acts of the supervisory board and for the acts of each individual member.
The supervisory board has a primarily supervisory and advisory function. The articles of the corporation may give it more specific powers, but the supervisory board cannot exercise executive functions. The supervisory board is normally not empowered to give specific instructions to the management board, determine the business policy of the corporation, or appoint or remove managing directors. The precise duties and responsibilities of the supervisory board may vary, and depend on the articles of the corporation.
The primary responsibility of the supervisory board is, as indicated above, to supervise the policy of the management board and the general course of corporate affairs. This supervision includes the power and duty to intervene, whenever necessary, and to take such corrective actions as may be required in the interests of the corporation, always within the confines of the articles and the law. Each supervisory director must sign the annual accounts. The management board must consult the supervisory board on all important matters including, but not limited to, any matters delineated in the articles. The supervisory board may also, on its own initiative, provide the management board with advice and request any information it deems appropriate. The articles usually provide for the right to inspect the books and records and for unrestricted access to the corporate premises. The management board has the statutory duty to provide the supervisory board in a timely fashion with the information necessary to carry out its responsibilities and perform its duties. The articles may require the management board to obtain prior approval from the supervisory board for actions concerning matters set forth in the articles or in resolutions of the supervisory board.
The initial supervisory board, if there is to be one, is appointed by the founders when the corporation is incorporated. Thereafter, supervisory directors are elected by the shareholders. If the articles so provide, a maximum of one-third of the members of the supervisory board may be elected by someone other than the shareholders. Unless otherwise provided in the articles, the shareholders may remove a member of the supervisory board at any time and without any monetary compensation.
5. "LARGE" CORPORATIONS: EXTENDED POWERS OF THE SUPERVISORY BOARD
As indicated above, the rules for "large" corporations provide for a supervisory board with broadened powers, which are taken away from the realm of authority of the management board and the shareholders.
The supervisory board of a "large" corporation has the following special powers:
- the power to elect, suspend and remove all managing directors;
- the power to adopt the annual accounts;
- the power to approve or disapprove certain specified actions of the management board; and
- the power to fill its own vacancies.
With regard to (a) it is noticed that the power to elect the members of the management board cannot be made subject to a nomination by any class or type of shareholders, including priority shareholders.
As mentioned under (c), the management board must obtain the approval of the supervisory board prior to undertaking an (extensive) number of decisions and/or actions, like for example any proposal to amend the articles, any proposal to dissolve the corporation, the termination of the employment of a significant number of employees of the corporation etc., etc. The supervisory board, however, cannot force the management board to take action on any of the matters set forth above. These initiatives remain at the sole discretion of the management board.
With regard to (d), the process is, in short, as follows. After initial appointment in the deed of incorporation, the supervisory directors are appointed for a four-year term by the existing members of the supervisory board. The supervisory board can only appoint new supervisory directors after complying with a certain procedure, involving among other things solicitation of recommendation for candidates from the shareholders and the Works Council. The shareholders or the Works Council may, under circumstances, veto the election the supervisory directors wish to make, which veto can be challenged before the Enterprise Chamber, a division of the Amsterdam Court of Appeal, which may declare either that the veto is unfounded or that it should be upheld. This election procedure cannot be made subject to nominations or other involvement in elections by a specific class or type of shareholders.
6. RECENT DEVELOPMENTS IN DUTCH CORPORATE GOVERNANCE
At present, corporate governance is a "burning issue" in the Dutch legal landscape, especially in relation to listed corporations, many of which qualify as "large" corporations. The discussion was triggered a few years ago by The Dutch Association of Stockholders (Vereniging van Effectenbezitters) and the Amsterdam Stock Market Association (Vereniging Amsterdamse Effectenhandel), which claimed that, especially in "large" corporations, Dutch corporate law would be defective when it comes to protection of investors' interests.
One of the results of the discussion was the establishment of the "Committee of Corporate Governance in the Netherlands", chaired by Mr J. Peters, on 9 April 1996. On 28 October 1996, the Committee presented its draft report, entitled "Recommendations regarding Corporate Governance". Like the "Cadbury Report" (the 1992 report on corporate governance in England of the Cadbury Committee), the "Peters report" assumes that amendments to existing legislation are not desirable, given "the great variety in the way in which corporations are organized in the Netherlands". The committee therefore requests for a further contemplation on the influence of shareholders by the corporations' managements and shareholders, and limits itself to giving recommendations.
These recommendations can be divided into four categories, i.e. guidelines for the supervisory board, guidelines for the management board, recommendations towards shareholders and recommendations relating to the compliance of the aforementioned guidelines and recommendations. The reactions to the report in the various (legal) magazines so far range between scepticism and enthusiasm.
When the committee presented its draft report to the public, it requested in the accompanying letter to be provided with written reactions before the first of January 1997. Presently, the committee is working on its final report, contents of which will be discussed in this place in due course.
The content of this article is intended to provide a general outline of the subject matter. Specialist advice should be sought about your specific circumstances.
For further information please contact Mr Ewout J. Stumphius on 31.10.4034644 (telephone)/31.10.4149388 (telefax), Loeff Claeys Verbeke, Rotterdam.
