Our guest author Jaap Barneveld took a moment in post No. 132 to explain developments re private company law reform in the Netherlands. In post No. 193, Jaap discussed a hick-up in the legislation process centering around the payment of dividends to the company's shareholders. Some nuggets from his observations.
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.
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.
The February 2009 amendment was received with mixed feelings among scholars. I argued in my recent book (no. 3.1.3) that the amendment was seriously flawed and needed reconsideration pronto. So did Jaap in his post. The legislation process seems to be back on track, in view of this amendment introduced by three members of parliament who are part of a committee that is doing the groundwork for the plenary discussion (that has been postponed for some time). The committee is convening today. The amendment attempts to take the regulation of dividend payment back to square one, back to the requirement of formal board approval.
Problem solved? No, not yet. But it's a start.
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