News Update Corporate M&A

28 January 2020

On 28 January 2020, the Dutch House of Representatives adopted the Bill on the Management and Supervision of Legal Entities (the “Bill”), which may soon change the rules for foundations, associations (including mutual benefit associations) and cooperatives.

The Bill was submitted in 2016 following incidents regarding management and supervision at foundations in the semi-public sector (such as government-funded healthcare institutions, housing corporations and educational establishments). According to Minister Dekker, the Minister for Legal Protection, the Bill is relevant now because there has not been sufficient progress made in professionalising management and internal supervision. In his view, the current legal framework is not very helpful because there is still uncertainty about the exact duties and responsibilities of directors and internal supervisors and the extent of their liability.

Two amendments have been adopted simultaneously with the Bill: one on 'incapacity and absence arrangements' in articles and one on multiple voting rights for management and supervisory board members. Existing foundations, associations and cooperatives that have not included such absence arrangement in their articles must amend their articles at the earliest opportunity. A multiple voting rights arrangement in the articles that deviates from the Bill will become invalid five years after the Bill has entered into force or, if the articles are amended by a notarial deed executed before this date, after that date. See more about this under the heading ‘Is it necessary to amend the articles of an existing foundation, association or cooperative?’ below.

Which topics are covered by the Bill?

Four main themes run through the Bill:

1. Rules governing how supervisory boards and ‘one-tier boards’ (made up of executive and non-executive directors) are established and perform their duties. The Bill offers a choice between a one-tier or two-tier board for foundations, associations and cooperatives.
2. Rules specifying when management and supervisory board members have a conflict of interest and must refrain from making decisions. As a result, the current conflict-of-interest rules for foundations, associations and cooperatives that interfere with representative authority will cease to apply.
3. Rules governing the liability of management and supervisory board members for foundations, associations and cooperatives who fail to properly perform their duties.
4. Greater judicial discretion to dismiss the management or supervisory board member of a foundation at the request of the Public Prosecution Service or another interested party.

What are the liability risks of management and supervisory board members of foundations, associations and cooperatives, and are these being increased?

Under both the current law and the Bill, directors of all types of legal entities, including foundations, associations and cooperatives, must properly perform their duties to the legal entities. If they fail to do so, they may be sued, for example by the board that succeeds them. The current law does not regulate the proper performance of duties by supervisory directors of foundations, associations and cooperatives, although case law has sometimes assumed internal liability if improper supervision occurs.

The current law contains a separate article for bankruptcy situations. Only management and supervisory board members of a cooperative or a commercial foundation or association (subject to corporation tax) may be sued by the bankruptcy trustee for improperly performing their duties. The current law has an evidentiary presumption in this respect: for example, if the management board is late in filing the annual financial statements, it has failed to perform its duties properly which is presumed to be a significant cause of the bankruptcy.

The Bill provides that management and supervisory board members of all types of foundations, associations and cooperatives can be held liable for improperly performing their duties both in and outside bankruptcy. Compared to the current law, this mainly means an extra risk for management and supervisory board members of non-commercial foundations and associations in bankruptcy situations. The legislator has somewhat mitigated this risk because the above evidentiary presumption will not apply to management and supervisory board members of non-commercial foundations and associations. However, the evidentiary presumptions will apply to commercial foundations and associations, cooperatives and semi-public institutions.

Is it necessary to amend the articles of an existing foundation, association or cooperative?

Once the Bill is enacted into law, the articles of an existing foundation, association or cooperative must at least be adapted in these two cases when the articles of that entity are next amended:

• If the articles do not yet contain any rules on how duties and powers are to be exercised if all management board and/or all supervisory board members are absent (e.g. due to resignation or dismissal) or incapable of acting (e.g. due to long-term illness or suspension).
• If the articles contain an arrangement under which a management and/or supervisory board member designated by name or in office may cast more votes than the other management and/or supervisory board members combined (for example, in the case of a two-member board, one director may cast two votes and the other director may cast one vote).

The articles may also be amended in these cases:

• If there is a conflict-of-interest rule that deviates from the statutory text, this does not need to be adapted immediately. However, since the statutory rule applies after the Bill enters into force, the statutory deviation cannot then be invoked. For this reason, an amendment will be advisable on occasion.
• A structure with a general and day-to-day management board does not need to be adapted immediately. Even so, it is important to determine whether this qualifies as a one-tier board or whether the general management board is in fact a supervisory board. In those cases, it may be advisable to clarify and adapt this.

When will the Bill enter into force?

It is not yet known when the Bill will enter into force. The Bill has now been adopted by the House of Representatives and must still be adopted by the Senate. The Minister has promised to actively communicate the consequences to existing foundations, associations and cooperatives when the Bill becomes law.