Netherlands: Simplification And Flexibilisation Of Rules Governing Dutch BVs

On 1 March 2012 the Dutch Minister of Security and Justice confirmed that his target date for the entry into force of the legislation simplifying the rules applicable to private limited liability companies is 1 July 2012. The bills are currently before the upper house of the Dutch parliament. This newsletter summarises the most important changes under the proposed new rules.

The Private Company Law (Simplification and Flexibilisation) Bill – the "Flex BV Bill" – has been before the upper house of the Dutch parliament since 15 December 2009. An accompanying bill relating to the implementation of the Flex BV Bill – the "Implementation Bill" – was submitted to the upper house about a year later. The Minister of Security and Justice (the "Minister") expects both bills to enter into force on 1 July 2012, on the same date as the Management and Supervision Act, also known as the One-Tier Board Act ( See our newsletter of 21 December 2011).

The Flex BV Bill will simplify the statutory rules governing Dutch private limited liability companies (besloten vennootschappen met beperkte aansprakelijkheid, "BVs") and offer a large degree of flexibility in the governance structure of this type of company. The Implementation Bill deals with a number of related topics such as the tax consequences of the new rules, the transitional rules and amendments to the statutory dispute resolution procedure. The latter amendments will also apply for Dutch public limited liability companies (naamloze vennootschappen, "NVs").

The main changes under the new rules are, in short, as follows:

  • The rules on capital protection and the protection of creditors – including the rules on share buybacks, financial assistance and distributions to shareholders – will become more flexible.
  • The distribution of dividends and reserves will be made dependent on a test to be applied in advance; management board members and the recipients of a distribution may be liable for compensation if they do not act in good faith.
  • The rules on decision making within BVs will be relaxed (more freedom in the allocation of voting rights, introduction of shares without voting rights and shares without a right to participate in the profits).
  • The private character of the BV will become less strict (share transfer restrictions will no longer be mandatory).
  • The statutory dispute resolution procedure will become more flexible, also for NVs.

In addition to elaborating on the above changes, we will also discuss the transitional rules set out in the Implementation Bill and the answers given by the Minister to questions regarding the tax consequences of the new rules.

Capital protection and protection of creditors

The rules on capital protection and the protection of creditors will become more flexible:

  • The requirement of a minimum share capital of EUR 18,000 will be abolished. It will be sufficient if at least one share with voting rights is held by a party other than the BV or (if any) a subsidiary of the BV.
  • The requirement that a bank statement be submitted when shares are paid for in cash upon a BV's incorporation will be abolished.
  • In the event of a non-cash contribution for shares, it will no longer be necessary to submit an auditor's statement. However, where such a contribution is made by a founder or management board member of the BV, a description of the contribution will still have to be provided. Management board members will still be obliged, under Article 2:9 of the Netherlands Civil Code (NCC), to ascertain that the value of the contribution is at least equal to the payment obligation.
  • BVs will be allowed to denominate their share capital in a currency other than the euro.
  • It will no longer be necessary to specify the company's authorised capital in the articles of association (there will be no limitation on the amount of share capital that may be issued without amending the articles of association). The requirement that at least one-fifth of the authorised capital be issued will also be abolished.
  • There will be more freedom to make agreements on when the share capital must be paid up.
  • The "nachgründungsregeling" in Article 2:204c NCC (which imposes additional requirements on transactions entered into between a BV and a founder or shareholder within two years of the BV's initial registration in the trade register) will disappear.
  • The current rules on the provision by a BV of financial assistance to third parties for the purchase of shares in the company's own capital (Art. 2:207c NCC) will be abolished.
  • Various restrictions on a BV's ability to buy back its own shares will be abolished.
  • The procedural requirements that must now be met to reduce a BV's capital (and which take more than two months to complete) will be abolished.
  • Certain restrictions on the payment of dividends and the distribution of reserves will be lifted.

Distributions by a BV

While the current statutory restrictions on the purchase by a BV of its own shares, the reduction of its capital and the payment of dividends or distribution of reserves will be repealed, the new rules also introduce a distribution test and an obligation on the part of management board members and the recipients of a distribution to pay compensation if they act in bad faith.

The new rules on distributions to shareholders will be as follows:

  • The basic principle is that decisions to make a distribution must be approved by the management board, which must refuse to grant its approval if it knows or should reasonably foresee that, after making the distribution, the BV will be unable to continue paying its due and payable debts. During the parliamentary debates on the Implementation Bill, the Minister stated that the period over which the management board can be expected to foresee the effect of a distribution is a maximum of 12 months. The Minister also confirmed that under normal circumstances it will not be necessary for a corporate group to engage experts, such as auditors, to provide extra assurance that the distribution is not prohibited.
  • If, after making a distribution, the BV is unable to continue paying its due and payable debts, the management board members who at the time of the distribution knew or should reasonably have foreseen this will be jointly and severally liable towards the BV for compensation of the shortfall resulting from the distribution, plus interest at the statutory rate calculated as from the date of the distribution.
  • A party that receives a distribution when he/it knows or should foresee that the BV will be unable to continue paying its due and payable debts after making the distribution will be liable towards the BV for compensation of the shortfall resulting from the distribution. The maximum compensation payable by the recipient will be the amount or value of the distribution received by him/it, plus interest at the statutory rate calculated as from the date of the distribution.
  • If the management board members have already compensated the BV for a shortfall, the compensation paid by the recipients of the distribution will be given to those board members in proportion to the amount of compensation paid by each of them.
  • Distribution will only be permitted to the extent that the shareholders' equity exceeds the reserves that must be maintained by law or under the articles of association.

Similar rules apply to share buybacks and capital reductions.   

Decision making

The rules on decision making within a BV will be relaxed:

  • It will be possible to pass resolutions without a meeting being held, provided that all persons with meeting rights have consented (electronically or otherwise).
  • It will be possible to hold shareholder meetings outside the Netherlands.
  • It will be considerably easier to tailor the allocation of voting rights to individual shareholders. The company will be able to issue shares bearing multiple votes, which could be particularly useful in the case of joint ventures and family-owned companies.
  • It will be possible to issue shares without voting rights.
  • It will also be possible to issue shares without a right to share in the profits.

Transfer of shares

The private character of the BV will become less strict:

  • It will no longer be mandatory to include share transfer restrictions in the articles of association.
  • If a BV opts to include such restrictions in its articles of association, it will also be able to include detailed rules on how the price of the shares will be determined.
  • The articles of association may include a lock-up clause prohibiting the transfer of shares for a specific period.
  • There will be greater scope to include provisions in the articles of association imposing additional obligations on shareholders, e.g. the obligation to extend a loan to the BV or to supply products to it.

Tax consequences

For the time being, the legislator foresees that the new legislation will have very few tax consequences. However, many of the tax rules were written for the traditional forms of legal entity and it is far from clear how well they will fit the BV in its new, more flexible form. For example, how will the concept of an "interest" be interpreted and, more specifically, will it be possible under the new rules for an interest to exceed 100%? Another area of uncertainty is how the introduction of shares without voting rights and shares without a right to participate in the profits will affect the participation exemption. Issues of concern in the international context include the effect of the new liability rules on the characterisation for tax purposes of foreign entities (in connection with the equal treatment of foreign and Dutch entities) and the absence of a statutory right to obtain a refund of dividend withholding tax in the event of an improper corporate distribution (the proposed Article 2:216 NCC).

In the explanatory memorandum submitted to the upper house the Minister has clarified these and other issues. The Minister has confirmed that an "interest" in a company can exceed 100% in certain cases and that, for the purposes of levying dividend withholding tax, the mandatory repayment of dividends under the proposed Article 2:216 NCC will not be taken into account.

A few additional points that deserve attention are as follows:

  • In order to form a fiscal unit for corporate income tax purposes, the parent company must be the legal and economic owner of at least 95% of the shares in the nominal, paid-up capital of the relevant subsidiaries. This is because the rules on fiscal units are intended to apply only where the parent company completely controls the subsidiaries. After the entry into effect of the new rules, it will be possible for a parent company to be the economic and legal owner of the shares in a subsidiary, without holding the voting rights. Consequently, the rules regarding fiscal units will have to be amended to require that the parent company also holds 95% of the voting rights in the relevant subsidiaries.
  • If an individual, whether or not together with a related other individual, holds at least 5% of a company's outstanding share capital, he/she will have what is called a substantial interest. The income (including capital gains) from a substantial interest is, after the deduction of costs, taxed for income tax purposes in box 2 at a rate of 25%. A substantial interest also exists if a taxpayer holds at least 5% of the outstanding capital of a particular class of shares. After the entry into effect of the new rules, non-voting shares or shares with limited voting or profit-sharing rights will have to be regarded as separate classes of shares, and a holding of 5% of such shares will therefore constitute a substantial interest. For employees who participate in an employee share ownership plan through which non-voting shares are acquired, this can mean that they are taxed in box 2 (at a rate of 25%) instead of in box 3 (at a rate of 1.2%). Although the Minister was urged to amend the proposed rules in order to avoid the above result, he declined to do so. He has indicated that corrective measures may be taken if the rules prove in practice to be problematic, but did not make any firm commitments in this regard.

The existence or non-existence of a substantial interest is relevant for other tax provisions as well.

Dispute Resolution

There will be greater flexibility with regard to the statutory mechanism for the resolution of disputes. In contrast to the other new rules, these will also apply to NVs.

  • Under the current rules, it is possible for a shareholder who prejudices the company's interests to be expelled and for an aggrieved shareholder to demand that he/it be bought out of the company. This will continue to apply. The new rules introduce additional grounds for the initiation of expulsion proceedings: it will be possible to expel a shareholder by reason of his/its past conduct.
  • A company and its shareholders will be given greater scope to depart from the statutory rules, although the mechanism chosen may not make the transfer of shares impossible or extremely onerous.
  • It will be possible to opt to have the dispute settled by the Enterprise Chamber of the Amsterdam Court of Appeal or by arbitration.
  • The statutory procedure itself, which is now very time-consuming, will be faster and more efficient for all parties concerned. For example, if the court orders that a shareholder be expelled or bought out, it will also appoint experts to determine the price of the shares to be transferred as result of the expulsion or exit. An appeal against the order that a shareholder be expelled or bought out can only be made together with an appeal against the price. The judgment can be declared immediately enforceable: it will no longer be necessary to wait until it becomes irrevocable to transfer the shares. If the judgment is set aside on appeal, the transfer must be reversed; if that is too onerous, the damage must be compensated.
  • Furthermore, the court will not have to appoint experts to determine the price for the shares if it feels it can do so itself, either because the parties agree on the price of the shares or because clear criteria for determining the shares' value are laid down in the articles of association or in an agreement.
  • While the proceedings are ongoing, any of the parties will be entitled to request interim relief until such time as the shares have been transferred.
  • A shareholder will have greater scope to initiate exit proceedings (i.e. to demand that he/it be bought out of the company). It will be possible to initiate such proceedings not only against other shareholders of the company but also against the company itself, although a transfer to the company is only possible within the scope of the distribution test. A shareholder that is a defendant in exit proceedings will be entitled to implead the BV if he/it is of the opinion that the company should be a joint defendant or the sole defendant in the proceedings.
  • An exiting shareholder will be entitled to request the court to take into account a depreciation in the value of the shares if it is the result of the actions of the other shareholders or of the company itself. In such a case, the shareholder will be able secure a higher price for his/its shares.
  • New, separate, proceedings will be introduced for situations in which the shareholders and/or the company have agreed on the transfer of shares but not on the price. The court can be requested by petition to set the price.

These amendments go a long way towards meeting the needs of current practice.

Transitional rules

  • The Implementation Bill does not require BVs to adopt a separate amendment to their articles of association in order to comply with the new rules. (It goes without saying that in order to take advantage of the new flexibility, the company's existing articles may have to be amended.)
  • If a BV's articles of association provide for a supervisory board, on the first occasion on which the articles are amended the amendments must include the addition of provisions on how the board's duties and authority will be exercised if one or more board members are unable to perform their duties or cease to hold office.
  • The first amendments to the BV's articles of association must also include, if it co-operated in the issue of depositary receipts before the entry into effect of the new rules, the addition of provisions granting meeting rights to the holders of these receipts. In addition, within one year from the entry into effect of the new rules such BVs must enter the names and addresses of the receipt holders, as well as the dates on which the meeting rights were granted and the dates of acknowledgement or service, in (what is now) the shareholders' register.

The flex B.V. legislation will bring about fundamental changes to Dutch company law and offer far greater freedom to structure companies in accordance with individual wishes. We will keep you updated on any new developments in this area.&

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.

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