The Bill aims to drastically reform the law on private companies. One of the most important changes proposed, is the abolition of the system of legal capital. The core concept of this system is the restriction of corporate activity by reference to the shareholders’ capital investment, as shown on the balance sheet. The system consists of rules concerning the raising of the corporation’s capital (prescribing a minimum level of equity capital which has to be invested by its shareholders) and maintaining this capital (restricting transfers of assets to shareholders where the net assets fall below the value of the equity capital invested).
Nowadays, the system is considered to be cumbersome and archaic and it has been argued that it does not provide the intended protection to the corporation’s creditors. The legislature therefore abandons this ‘rule-based’ approach of creditor protection; the proposal gets rid of the requirement to provide a BV with a minimum of 18.000 euros of capital at incorporation. This departure of the system of minimum capital has not met much opposition. The Dutch legal community seems to agree that company law should remove the concept as soon as possible. (In Germany, a similar proposal did raise an intense debate. Although few German scholars or practitioners still believe that a minimum capital provides any protection to the company’s creditors, many of them argue that it constitutes a test of seriousness. ‘Wer kein Kapital einsetzen muss, handelt allzu oft nach dem Motto “erst gründen, dann nachdenken’.)
The Dutch proposal also amends the rules concerning the payment of dividends to the company’s shareholders. Contrary to the abolition of the minimum capital, this part of the proposal has met a considerable amount of criticism. Under current Dutch law, distributions have to satisfy a balance-sheet test; it is not allowed to distribute the company’s share capital. As the General Meeting of Shareholders (GMS) has the power to resolve on distributions, the responsibility of the Board of Directors for these payments is not clear. However, case-law indicates that this does not imply that the directors do not bear any responsibility at all: in several cases, directors that had paid dividends prior to the company’s bankruptcy, have been held liable.
The bill replaces the balance-sheet test with a solvency approach. Distribution of dividends will primarily be subject to a liquidity/solvency-test. The par value of the capital may be distributed. Initially, the bill required the Board of Directors to perform a solvency test before approving a distribution. This test implied that the directors were obligated to check whether, after the distribution has been made, the company would continue to be able to pay its debts as they fall due. If the Board approved a distribution knowing that the payment failed this test, the directors could be held liable for the deficit. This rule threw some light on the role and responsibility of the Board with regards to dividends, without introducing a new liability risk, as directors can already be held liable for such payments.
However, an amendment of the Proposal in February 2009 (Tweede Nota van Wijziging), deleted the boards’ right to approve the distribution and the formal requirement of a solvency test. The Confederation of Netherlands Industry and Employers (known as VNO-NCW and the largest employers’ organization in the Netherlands) strongly objected to the increased role of the Board with respect to dividends. It feared extra liability risks for directors and argued that directors would experience pressure from shareholders if they tried to block a distribution. Since the GMS decides on distributions, it would be incoherent to provide the directors with a right of veto, it argued. These arguments do not seem to have convinced many scholars. The sudden change of the Department of Justice has met criticism in many legal articles, including one by me. I strongly doubt the existence of the perceived increase of liability risks and believe that the initial proposal is actually more coherent with the general duty that Dutch law imposes on directors. (For more in-depth arguments, see: WPNR 2009/6809, Dutch only.) Hence, I suggested that the legislature would reconsider its change of course.
It looks like the parliament has picked up the vast amount of criticism. Many members of the committee on legal affairs have expressed their concerns regarding the amendment of the rules concerning distributions. (See the records of the recent consultation here, Dutch only.) As a result of the discussion, three Members of Parliament have proposed to amend the Bill; they suggest to undo the last amendment. In a reaction to this proposal, the Minister of Justice has declared to have “no strong objections” against this proposed change. It therefore seems likely that the boards’ right to approve distributions and the formal solvency test will be introduced again. This is, according to me, a step in the right direction.
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