The One-Tier Board Act will probably enter into effect on 1 January 2013. It is expected that proposed remedial legislation now before the lower house will also enter into effect on that date. The purpose of the remedial legislation is to except cultural, religious and charitable foundations from the future rules limiting the holding of multiple board memberships. Certain ambiguities in the proposed legislation have been eliminated by a memorandum of amendment. The main features of the One-Tier Board Act and the proposed remedial legislation are set out below.
The main features of the One-Tier Board Act (hereinafter also the "Act") are:
- the creation of a statutory basis for the one-tier board system;
- the imposition of limitations on the holding of multiple board memberships;
- amendment of the conflict of interest rules;
- the introduction of target figures for achieving gender diversity on management and supervisory boards;
- a change in the employment-law status of management board members of listed companies.
One-tier board system
The Act provides for a one-tier board system as an alternative to the existing two-tier system, in which a management board and supervisory board exist side-by-side. Dutch NVs (public limited liability companies) and BVs (private limited liability companies) will therefore soon have a statutory option to institute a single board made up of both executive and non-executive members.
In practice, a number of large Dutch companies have already instituted a one-tier board system. However, there is a certain degree of uncertainty about the compatibility of such a board with the existing statutory provisions on the allocation of duties, responsibilities and liability among management board members and among supervisory board members. The new rules will not fundamentally change those provisions.
The principle of collective responsibility will continue to apply: each management board member (which includes both executive and non-executive board members in a company with a one-tier system) will remain responsible for the performance of the board's duties and can in principle be held liable for mismanagement if those duties are not performed properly. As is the case under the current rules, it will be possible to allocate the management board's duties among its members. In the event of mismanagement an individual management board member can avoid liability if he proves that the mismanagement was not attributable to him – taking into account, among other things, the duties allocated to him – and, in addition, that he was not negligent in acting to prevent its consequences. As pointed out in the parliamentary documents, it may be assumed that the non-executive board members in the one-tier scenario will receive more information, and at an earlier stage, than supervisory board members do in the two-tier scenario. This difference in position may, in practice, be expected to affect their respective liability.
Under the Act, an allocation of duties between the board's executive and non-executive members (where the company has a one-tier system) must be laid down in the articles of association. In all other cases, the allocation can be made in a separate document if permitted under the articles of association.
Certain duties which under the current rules are the exclusive domain of the supervisory board – such as supervising the management board and determining the remuneration of its members – may, in the one-tier scenario, only be performed by the non-executive board members. Further development of the possibilities for allocating duties has been left to practice.
In companies with a one-tier system, both the executive and non-executive board members are appointed by the general meeting of shareholders, except where the company is subject to the full "structure regime" (such companies may also opt for the one-tier system). In the latter case, the executive members are appointed by the non-executive members. In all companies with a one-tier system, the chairman of the board must be a non-executive member.
A binding nomination for the appointment of a management board member of a non structure-regime company may, under the new rules, consist of one candidate. This applies irrespective of the company's board system.
In principle, the One-Tier Board Act will apply in full to banks and insurance companies, but under the Financial Supervision Act such institutions are required to have a separate supervisory board. In practice, however, they can apply to the Dutch Central Bank for an exemption from this requirement.
Limitations on the holding of "supervisory positions"
The One-Tier Board Act contains rules limiting the number of "supervisory positions" that may be held by:
- management board members (which includes both executive and non-executive board members in the one-tier scenario)
- supervisory board members
- members of another type of supervisory body (instituted pursuant to the articles of association)
of "large" Dutch NVs, BVs and foundations.
A supervisory position is a position as (i) supervisory board member, (ii) non-executive member of the board of a company with a one-tier system, or (iii) member of another type of supervisory body (instituted pursuant to the articles of association).
During the parliamentary debates on the One-Tier Board Act it became apparent that technical improvements were necessary and that an exception had to be made for cultural, religious and charitable foundations. The necessary changes were incorporated in a bill containing proposed remedial legislation. In response to criticism of that proposed legislation, on 9 December 2011 the Minister of Security and Justice submitted a memorandum of amendment in which various points were clarified. The rules described below are derived from the One-Tier Board Act in combination with the proposed remedial legislation, including the memorandum of amendment.
Under the new rules, a management board member of a large Dutch NV, BV or foundation will be prohibited from holding more than two supervisory positions (as described above) at another large Dutch NV, BV or foundation. In no event may the management board member occupy the position of chairman of the relevant board (in the one-tier scenario), supervisory board or supervisory body.
It will also be prohibited for any person to hold more than five supervisory positions at large Dutch NVs, BVs or foundations. Chairmanship of the relevant board or supervisory body will count as two supervisory positions.
A Dutch NV or BV will be regarded as large if, according to its consolidated balance sheet, it meets at least two of the following three criteria on two successive balance sheet dates:
- 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.
In order for a foundation to be regarded as large, it must not only meet two of the above criteria but also be under a statutory obligation to draw up annual accounts or an equivalent financial report. What comes to mind in this regard are big commercial foundations as well as pension funds, investment funds, health care institutions, housing corporations and educational institutions. As a result of the additional criterion, the limitations on multiple board memberships will not apply to management board members or members of a supervisory body of non-commercial foundations, such as most cultural, religious or charitable foundations. Nor will they apply in the case of small commercial foundations. Conversely, as a result of the memorandum of amendment supervisory positions at such foundations will not count towards the maximum number of such positions that may be held by management board members, supervisory board members and members of a supervisory body of large NVs, BVs and commercial foundations.
Supervisory positions in group companies, Dutch legal entities other than large NVs, BVs and foundations (such as co-operatives, associations and mutual insurance societies) and foreign legal entities fall outside the scope of the new rules and will not count toward the maximum number of supervisory positions permitted.
The test under the new rules is to be applied at the time of an appointment. A subsequent change of circumstances therefore does not affect an appointment that was valid when made. Accordingly, if a legal entity later becomes a "large" legal entity or ceases to be a member of a group, that does not affect previous appointments of persons holding more than the maximum number of supervisory positions. It can, however, affect their reappointment.
A far-reaching sanction – nullity – is imposed on an appointment in violation of the rules, irrespective of whether the violation was known to the relevant legal entity at the time of the appointment. However, the memorandum of amendment limits the impact of that nullity: decisions in which the person holding too many supervisory positions participated will remain valid.
Since the rules are not retroactive, they will first apply to appointments as from the date on which the Act enters into effect.
New conflict of interest rules
Under the current rules, a management board member of an NV or a BV may not represent the company if he has a conflict of interest with the company (in the absence of a provision to the contrary in the articles of association). The One-Tier Board Act abandons this approach: a conflict of interest will in principle only affect the company's internal decision-making.
Under the new rules, neither a management board member (which includes both executive and non-executive board members in a company with a one-tier system) nor a supervisory board member may participate in any deliberations or decision-making involving a subject or transaction in relation to which he has a direct or indirect interest which conflicts with the interest of the company and its enterprise. If the management board is unable to take a decision due to a conflict of interest on the part of one or more of its members, the decision must be taken by the supervisory board. If there is no supervisory board, the decision must be taken by the general meeting of shareholders, unless the articles of association provide otherwise.
Transactions entered into before the date of the Act's entry into effect will, even after that date, be assessed under the current rules. If such transactions were entered into by one or more management board members having a conflict of interest, they can still be ratified after the above date through a resolution by the general meeting of shareholders. After the above date it will no longer be possible to rely on any existing provisions in the articles of association under which the company is to be represented by a party other than a management board member in all cases in which there is a conflict of interest.
Gender diversity targets for management and supervisory boards
The One-Tier Board Act indicates that a management board or supervisory board will be deemed to have a balanced gender distribution if, of the seats occupied by individuals, at least 30% are occupied by women and at least 30% by men.
"Large" NVs and BVs (see above for the definition of this term) must take these targets into account upon the appointment/reappointment, recommendation or nomination of management board members (which includes both executive and non-executive board members in the one-tier scenario) and supervisory board members. The targets must also be taken into account when drawing up the profiles of supervisory board members and non-executive board members. The company will not be penalised if it fails to meet these targets, but must explain in its annual report why it has failed to meet them, how it attempted to meet them and what it intends to do in future in order to meet them ("comply or explain").
The application of the above set of rules will terminate on 1 January 2016. The idea is that the impact of the rules will have been evaluated by then, after which it will be decided whether or not they should apply for a further period.
Employment-law status of management board members of listed companies
Following the entry into effect of the One-Tier Board Act, management board members of listed companies will no longer be allowed to enter into an employment contract with the relevant company. Employment contracts that are already in existence on the date of the Act's entry into effect will continue to be respected. According to the Minister of Security and Justice, the above new rule will not have any direct consequences for the relevant individuals from a tax or social security law point of view.
The background to this rule is as follows: under the Corporate Governance Code, as well as the Banking Code, a departing management board member may not receive a severance payment in excess of one year's salary. At present, the application of this principle is sometimes thwarted due to the existence of an employment contract, as the application of rules on employment contracts can result in a higher severance payment. The rationale is that this will no longer occur in the case of listed companies once the Act has entered into effect.
However, it can be questioned whether the new rule will have the desired result in all cases. Following the Act's entry into effect, the relationship between a listed company and a management board member will in many cases be capable of being characterised as a contract for services (overeenkomst van opdracht). In that event, it will still be possible to agree on a specific – possibly higher – severance payment. Furthermore, the Act does not prohibit management board members from entering into an employment contract with a group company of the relevant listed company.
Two bills should be mentioned in this regard. The first of them, known as the Claw-Back Bill, will make it possible for bonuses granted to management board members to be adjusted or clawed back if – in brief – the bonus (or the amount thereof) is unreasonable, unfair or based on incorrect information. The Claw-Back Bill is not expected to enter into effect before 1 January 2013. A second bill will ban the payment of variable remuneration to the management board members of financial institutions receiving State aid and freeze their fixed remuneration. This bill was recently adopted and is expected to enter into force on 1 July 2012.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.