Introductory Business Guide: Netherlands’ Legal Overview
First published in 2019 - Updated from time to time.
In 2019, Interlegal published its first joint book called Legal and Tax Issues Around the World - Starting and Growing a Business. It is the result of collective work with the accountants' firms network EuraAudit. This article aims to introduce the legal environment of Netherlands for entrepreneurs who are interested in forming and financing their business in this country. Note that it is not equivalent to a complete professional analysis. Through this introductory guide, the network intends to help entrepreneurs to craft the questions they need to ask themselves in order to start, operate, and see their business thrive on the global stage. Therefore, Interlegal encourages entrepreneurs to obtain legal advice with Voorvaart Advocaten's firm on the issues arising from starting and running a business in Netherlands.
The Netherlands consistently ranks among the world’s most competitive industrialized economies, offering an attractive business and investment climate.
The most commonly used entities for setting up a business in The Netherlands are the public limited liability company (naamloze vennootschap or ‘NV’) and the private limited liability company (besloten vennootschap met beperkte aansprakelijkheid or ‘BV’).
The incorporation of the NV or BV is, in general, a swift procedure that requires the involvement of a civil law notary.
Contrary to the BV, which is privately owned, the NV is primarily designed as a public company (comparable to the ‘public limited company’ (plc) in the United Kingdom or ‘Aktiengesellschaft’ (AG) in Germany) the shares of which can be listed on a stock exchange.
A NV is subject to capital protection rules, such as the requirement of minimum capital (EUR 45,000) and formalities on the payment of shares, share buybacks, financial assistance and the distribution of dividends and reserves.
By law, certain matters are solely within the authority of the General Meeting, such as the appointment, suspension and removal of Managing Directors and Supervisory Directors, amendments to the Articles of Association, the adoption of the annual accounts, and the voluntary liquidation of the company.
Large companies may be subject to the ‘Large Company regime’ in which case a Supervisory Board is mandatory which shall have special powers to appoint the Managing Directors. For some groups of companies for example, holding companies or companies with a majority of the employees working outside the Netherlands the Large Company regime provides less restrictive rules.
A BV is privately owned (i.e. with a closed circle of shareholders) and is frequently used for tax structuring and financing purposes and for setting up group holdings and joint ventures.
A BV is designed to be a flexible instrument with very limited rules on capital protection (no minimum capital is required) and with the possibility to incorporate detailed shareholders’ arrangements in the Articles of Association. Different classes of shares are possible to vary the voting rights of shareholders and their dividend rights. It is also possible to issue non-voting shares to shareholders.
The General Meeting decides on profit distribution, based on the company’s accounts drafted by the Management Board. Dependent on the outcome of a balance and liquidity test, the Management Board may refuse approval to the distribution of profit, if this contribution might threaten the continuity of the company.
Financing of a Company
Companies are financed in a number of ways:
- equity: capital contribution from shareholders to the company against issuance of shares or by contributing capital by way of share premium (agio)
- debt: loan and bank finance; and
- hybrid securities: combining both equity and debt characteristics (for instance a convertible loan/bond).
Any company can be declared bankrupt by the district court, as long as the company has the center of its interests in the Netherlands. Applications for bankruptcy can be filed by: (i) the company itself, (ii) a creditor, (iii) or the public prosecutor.
If the petition is granted, the district court will declare the debtor bankrupt and appoint one or more trustees (in Dutch: curator). The trustee is charged with the administration and liquidation of the bankruptcy estate.
As a general rule, the district court will only declare a debtor in state of bankruptcy if the debtor has ceased to pay. This is generally the case if various creditors have difficulty in collecting the debts owed by the company.
As a general principle of Dutch bankruptcy law all creditors have an equal right to payment and that the proceeds of the bankrupt party’s estate will be distributed in proportion to the size of their claims (paritas creditorum). There are however two groups of preferred creditors to whom this principle does not apply:
- creditors who hold a secured interest (i.e. a mortgage or right of pledge); and
- creditors who have a preference by virtue of bankruptcy and other laws.
These preferred creditors may exclude the collateral from the bankrupt party’s estate and foreclose their security.
Director’s Liability in Bankruptcy
Each Managing Director is jointly and severally liable for the shortfall of the bankrupt estate of the company if the Management Board has evidently improperly performed its duties and the improper management was a contributing factor to bankruptcy.
An individual Managing Director can exculpate himself, if he proves that he has not been negligent insofar as the improper management is concerned and he has not acted negligently with regard to taking measures to prevent the consequences thereof.
In this regard the obligations of maintaining a proper administration and the obligation to prepare, adopt and publish annual accounts are quite important: if one of these obligations is neglected, two statutory presumptions apply: (i) an irrefutable presumption that the Managing Director has improperly performed his duties (ii) and a refutable presumption that the violation of these obligations was an important contributing factor to the bankruptcy. In order to defend himself against this refutable presumption, the Managing Director must give prima facie evidence that external factors other than improper management importantly contributed to the bankruptcy. Unless the trustee in bankruptcy can give prima facie evidence that the improper management was also an important cause of bankruptcy, the management is exonerated.
For more details, please contact Ruud Voorvaart, Voorvaart Advokaten, firstname.lastname@example.org