Up Again Netherlands: Governance

Corporate

1. What are the key topics that boards should focus on to ensure proper discharge of their duties as directors, as their businesses return to work following a lockdown?

As a general principle, board members of a company are subject to statutory and fiduciary duties requiring them to consider the impact of their actions on the company's stakeholders.

Directors need to observe these stakeholder interests when managing the affairs of their company and will need to balance carefully the short-term needs of the company against the long-term impact of their decisions.

In this light, the board has an obligation to be reasonably informed and use good faith efforts in overseeing the company's operations. It is a critical responsibility of the board to assess, anticipate and where possible mitigate material risks to the company.

Specific attention should be paid to important metrics such as operating results and liquidity, supply chain disruptions, revenues, accounting aspects and material transactions.

In this regard, the board should implement and maintain adequate internal risk management and control systems, such as:

  • scheduling (additional) communications with the full board;
  • designating one or more directors to interface with management, reporting to the full board as appropriate;
  • creating and/or maintaining project teams addressing (potential) COVID-19 threats to the company;
  • preparing/amending and applying a continuity plan to ensure operational continuity and a safe return to the workplace;
  • keeping records of board meetings and decisions and of relevant communications and actions taken regarding (future outbreaks of) COVID-19 and their impact on the company and its business; and
  • taking appropriate actions when new outbreaks of COVID-19 occur or may occur.

If the company has a two-tier governance structure, the management board should ensure that the supervisory board is well informed about the management board's measures to manage COVID-19-related risks.

Listed companies must disclose relevant inside information (including about the impact of COVID-19 on the company's business) as soon as possible. Specific disclosure topics could be forecasts, guidance and other accounting considerations, financial reporting, and revisions to previously agreed compensation metrics for executives.

Boards should keep acting conservatively and assess the company's short and medium-term liquidity position, ability to pay its debt obligations, refinancing needs and costs incurred when taking a decision to make or cancel a dividend distribution or suspend a share buyback program.

A recently adopted emergency act allows the board of a company to postpone the preparation of the annual accounts by a maximum of five months, and also postpone the annual meeting of shareholders.

2. Should boards adopt particular governance practices in this context?

Dutch corporate law is strongly governed by the general principle that stakeholders of companies should act towards each other according to the standards of reasonableness and fairness (redelijkheid en billijkheid).

In practice, this means the board of company should align its governance practices as much as possible with the reasonable and fair interests of its stakeholders, for example by ensuring that physical meetings with shareholders are avoided, postponed or held virtually).

If a physical meeting is still convened, government guidelines (e.g. relating to social distancing of 1.5 m and a maximum number of participants depending on the nature of the meeting) must be complied with.

An emergency act came into force with retroactive effect on 16 March 2020 that allows boards to convene a fully virtual (annual) shareholders' meeting, subject to the following conditions:

  • a live stream (audio or video) must be available to the shareholders attending the meeting
  • people entitled to attend the meeting must have the ability to ask questions in advance or at the virtual meeting and the board of the company must answer such questions during the livestream to comply with fundamental shareholders' rights

This emergency act says that if a shareholder was unable to optimally participate in the virtual meeting, the resolutions passed during the meeting will remain legally valid.

The emergency act overrules Dutch governance rules and the company's articles of association and related governance documentation.

3. To what extent are boards being encouraged to take into account corporate purpose and values in the context of COVID-19 and a return to work?

Above all else, COVID-19 is a matter of public health, and companies should take the right actions to protect their stakeholders.

Companies should anticipate and respond to (future) COVID-19 outbreaks by prioritising the health, safety and welfare of their stakeholders.

For example, the management and board of a company should prioritise public health when scheduling physical meetings and use efforts to hold virtual meetings in lieu of physical meetings.

Restructuring

4. Your company is facing liquidity issues as a result of COVID-19:

a. What are the repercussions for continuing to operate your company?

Potential repercussions include personal liability for the directors. The threshold for liability is to be considered relatively high in those cases where the basis lies solely in the mere continuance of a business in financial distress.

Individual creditors or, in the event of bankruptcy of the company, the bankruptcy trustee representing the joint creditors could bring proceedings against the directors in tort for any action they performed (or omitted to perform but should have performed) where:

  • such action (or omission) concerned was wrongful and detrimental; and
  • there is a causal link between the action (or omission) and the damage suffered.

The burden of proof lies with the claimant.

The following acts could constitute a wrongful act by the directors:

  • selective payment (i.e. paying some creditors while leaving other creditors unpaid, particularly if group companies are paid to the detriment of other creditors)
  • entering into obligations on behalf of the company at a time when the director knows or reasonably should understand that the company will not be able to meet such obligation

b. Do you have to file for insolvency if your company cannot pay all its debts as they fall due?

There is no specific statutory obligation for directors to file for bankruptcy or seek a suspension of payments.

However, in certain circumstances, directors may be personally liable to creditors of the company if they entered the company into obligations that they knew (or ought to have known) the company could not fulfil.

Other than this personal liability of directors in certain circumstances, there are no consequences if a company carries on business while insolvent, save for a Dutch public limited liability company (N.V.), which is obligated to call a shareholders' meeting if it has negative equity.

In practice, however, directors may decide to file for a suspension of payments or bankruptcy to mitigate the risk of personal liability.

c. Are there any steps that should be taken to minimise the risk of your actions as director being challenged?

There are a number of steps directors may take in order to try and protect themselves from future challenge/scrutiny:

  • hold regular board meetings, given how fast matters are developing, and ensure decisions are documented with reference to all factors considered
  • ensure all directors have full information from the business (e.g. all accounts and financial statements, key contracts, pipeline)
  • consider ways of minimising losses (e.g. temporarily closing down non-core operations)
  • avoid making selective payments, unless there is a specific, objective business reason why a specific creditor should be paid while others are not
  • avoid entering into new obligations (of which the director know or ought to know) the company cannot fulfil
  • inform counterparties of multilateral agreements of the financial difficulties the company is in with a view to minimising losses of the counterparty
  • seek professional advice from financial and legal advisors 

d. Will your company be wound up if you fail to make payments when due?

Not necessarily. In the Netherlands, no specific measures have been taken or announced regarding the Dutch Bankruptcy Code. An application by a creditor will be heard and might result in a bankruptcy order.