3 February 2016

One-tier board under Dutch law

Category: Corporate law

Since January 1, 2013 Dutch corporate law allows for the implementation of a one-tier board, as opposed to the customary two-tier system where directors and the supervisory board are two separate bodies.

Executive and non-executive directors in The Netherlands

In the one-tier board, directors and supervisory board members are combined in one body. They are designated as “executive” and “non-executive” directors. The advantage of this system is that the non-executive directors are closer to the action and have more direct and up-to-date access to the information streams about the ups and downs of the company, important for the supervision.

Two-tier board in The Netherlands

The disadvantage of the two-tier system is that the supervisory board members are further from the current information stream. This is a disadvantage because the supervisory board members depend on the information supply of the board of directors for a proper supervision of that same board of directors. The role of this information paradox is less important with the one-tier board and for that reason alone the one-tier board is to be given preference to the two-tier board. More frequent meetings, with more information and more current information leads to better supervision.

Liability non-executive director under Dutch law

There are indeed a number of essential differences between the liability of a non-executive director of the one-tier board and the supervisory board members of the two-tier board. The non-executive director therefore has a larger liability risk.

Board of directors responsible for the policy, so also the non-executive directors

The basic principle is that the entire board of directors is responsible for managing the company. Unlike the supervisory board member, non-executive directors are also part of that board of directors. Up until now there has been one jurisprudence case where a one-tier board was under scrutiny and that is the Fortis case (Utrecht Court, February 15, 2012). In this case the non-executive directors were not to blame.

Joint and several liability under Dutch law of non-executive directors in the event of bankruptcy

Contrary to the ordinary supervisory board member, the non-executive director (in principle) is jointly and severally liable together with the executive directors if in the event of a bankruptcy the annual accounts were not published on time and (or) the accounting obligation was not complied with. Proving the improper performance of the supervisory duty, which has to be proven for the supervisory board member, is no longer at issue here. After all, the non-executive director is a director and it is the duty of the entire board of directors to ensure timely publication of the annual accounts and compliance with the accounting obligation.

Liability non-executive directors in the event of a late notice of inability to pay

The same is true for the consequences of a late notice of inability to pay. The consequences of this will be borne by the directors, including the non-executive directors, where the “ordinary” supervisory board member cannot be blamed.

Liability non-executive directors for the dividend payment test

The non-executive directors also participate in the so-called “dividend payment tests” as meant in Article 216, paragraph 2 and 3, Book 2, Dutch Civil Code. This entails that non-executive directors could also be liable if the company is not able to meet its obligations in the year following the dividend payments and it is established that the board of directors knew and (or) reasonably should have provided for this at the time of the payment.

Liability for policymakers under Dutch law, so also for non-executive directors

Finally, because the non-executive director is so close to the action, he runs the risk that he will get too involved in the policy and strategy of the company. In the event of bankruptcy he could then be jointly liable for the shortfall of assets as a de facto director.

In short, a non-executive director runs considerably larger liability risks than a supervisory board member.

Manual for the supervisory board member

Arjen Paardekooper is managing partner at Blenheim Advocaten and specializes in supervisory board member liability. He wrote the book “Manual for the supervisory board member and supervisors” that will be published in the spring of 2016.