The Company Director Checklist The Netherlands

Transcription

1 The Company Director Checklist The Netherlands Van Doorne Jachthavenweg KM Amsterdam The Netherlands Contact: 1

2 INTRODUCTION This Company Director Check List has been designed as a practical guide to the main obligations and procedures of an executive director of a listed public company under the Dutch Civil Code (DCC), the Dutch Corporate Governance Code (CGC) and the Dutch Financial Supervision Act (FSA). This Checklist was updated as at April 2014 and is tailored to a listed public company that is a disclosing entity under the FSA. Disclaimer: This Checklist is a general guide that is not intended to be a substitute for professional advice. It will, however, highlight to an executive company director those situations where professional advice may be required. Van Doorne and the authors disclaim any liability in respect of anything done or omitted to be done on the basis of or in relation to this Checklist. 2

3 Before Appointment 1. Understand You should understand: 2. Meet You should meet: why you have been approached and what you are expected to contribute; the remuneration package on offer; and existing corporate governance procedures. other directors (including recently retired directors); senior management team; auditor; company lawyer/secretary; supervisory board; possibly chairman of works council. Prerequisites to accepting an appointment should be: that you have something worthwhile to contribute; that you can meet the expectations for your contribution; that adequate corporate governance procedures are in place to ensure you can perform and are protected. In these meetings you should: obtain a briefing on the history and strategy of the company; understand major drivers of performance and key performance indicators; get a SWOT analysis of the company; get background/resume on other directors and key members of management team; understand relationships and roles within management team; understand who are the key suppliers or customers; understand status of relationships with employees and unions; obtain an industry briefing; get auditor s input and perceptions on historical accounts and disclosure issues; and understand key legal relationships, any past or current litigation and issues with compliance and regulators. 3

4 3. Review You should at least review: Ongoing Duties 4. Think Think about: past five years annual reports; management letters of the company's auditor; company s articles of association; board papers and minutes of prior three years; announcements public and regulator for prior year; press clippings for prior year. the information that has been provided to you by the company, and the quality of that information; the information that you have obtained from independent sources, and how it compares with the information provided by the company; whether there are any gaps in the information you have been provided or you have obtained; and your impressions of the company s other directors, the supervisory board, team of officers and advisers. In such review, you should: have any abnormal losses and profits explained; review accounts for trends; ask whether valuations of intangible assets are realistic; check the articles of association for any restrictions on your power as a director or any supervisory board or shareholder specific provisions (such as a power to veto board decisions); read board papers and minutes to get a feel for current issues; read company announcements to ensure the company has made full and timely disclosure to the market. In particular, watch out for: your co-directors do any of the directors (or officers) exercise undue control over the company s assets or affairs, are they capable and experienced, is the composition of the board as a whole up to standard; lack of independence for example, does the company have independent directors, an audit committee and/or an independent auditor; inadequate internal controls for example, does the board function effectively, are reporting procedures adequate, are each of the directors and the company s shareholders sufficiently informed about the company s operations and financial status; 4

5 are concerns dealt with in a timely and effective manner? 5. To whom are your duties owed? (sections 2:8 DCC, 2:129 DCC, recitals 7 and 8 CGC, II.1 CGC) As a director, you have to serve the interest of the company and its enterprise. The interests of all those involved with the company and its enterprise - such as (minority) shareholders, employees, creditors and the group to which the company belongs - should be taken into account when managing the company. The company aims for the creation of long term shareholder value and the outcome of the appraisal of all relevant interests should serve the continuity of the company's enterprise. The circumstances of the case will determine which interests should prevail in any given situation, also having regard to the nature of the enterprise. In case the company belongs to a group, the group's interest should be taken into account when determining the company's interest. However, in the end the company's interest is decisive. 6. Duty of proper management (sections 2:8 and 2:9 DCC) You are required to properly manage the company. Improper - clearly negligent and insufficient - management may lead to liability vis-à-vis the company. Whether you will be liable, will depend on all circumstances of the case at hand. Case law has made it clear that: a relatively high degree of culpability is required : directors should not be afraid to take wellconsidered risks and may make mistakes as you cannot make an omelette without breaking eggs; in general, the foreseeability of the company incurring damages due to the directors acts or omissions is an important element of a claim for liability; you may be liable even when having acted in good faith. This type of liability does not purport to sanction each act and omission that turns out less advantageous or even disadvantageous for the company. Case law provides for plenty examples of what might constitute improper management pursuant to this open norm. When trying to translate these examples from case law into practical guidelines, the director mainly has to be aware of his key duties of care and to act loyal (see 8 and 9). The duty to perform his function with sufficient skill (see 7) is considered to be part of a director s duty of care. By meeting these duties a director significantly decreases the chances of being held liable, since courts may only marginally evaluate business 5

6 decisions (i.e. may only hold a director liable when such decisions were evidently wrong). 7. Duty of skill A director is to act in accordance with the insight and care that may be expected from a director who is up to his task as director and who performs his task conscientiously. Your "peer" will be a director of a similar company in similar circumstances as the company. The business judgment rule as such does not exist in Dutch law. An action for improper management on the basis of section 2:9 DCC can be brought by the company (supervisory board, or successive directors or trustee in bankruptcy). No derivative action is available under Dutch law. This means among others that inexperience or unsuitability might lead to liability and are, in any event, no defence. 8. Duty to act loyal (section 2:8 DCC) You are to serve the interests of the company and give priority to the company's interests over your own. So not make use of its corporate opportunities for your own purposes, act as a competitor etc. This duty is derived formfrom the general duty of the company and all those involved with the company pursuant to law or its articles of association to act in accordance with the principles of reasonableness and fairness. 9. Duty of care The board's decisions should be the result of a thorough preparation, a valid appraisal of the different interests involved and be based on sound grounds. When appropriate due to the complexity of the case at hand or lack of internal knowledge, external advisors need to be instructed. The board should also make sure that the company is compliant with all applicable laws, regulations, provisions in the articles of association, principles of good governance etc. (section II.1 CGC) As noted above, it will depend on all circumstances of the case whether or not a director is liable for improper management. This means as well that in matersmatters of urgency, this duty will be met sooner. 6

7 It follows from case law that a director is in principle liable vis-à-vis the company, in case he violates statutory provisions or provisions in the company's articles of association which protect the company's interest, for example pursuing a transaction without the prior approval of the supervisory board as required by the articles of association. 10. How much can you delegate and rely on others The board of a listed company usually consists of several directors, with different areas of expertise and/or attention. They are, however, collectively responsible for the management of the company. Having regard to this collective responsibility, each and every director is jointly liable towards the company in case of improper management by one of the managing directors (section 2:9 DCC). A director will also in principle be liable towards a shareholder, if the company violates a provision in the articles of association which protects such shareholders interest. In theory it is possible to defend oneself against a liability claim of the company by arguing that the act or omission in question did not belong to your tasks, cannot be attributed to you and that you have not been negligent in taking measures to avert the consequences of such acts/ omissions. However, in practice it is difficult to succeed in such defence as the key areas of the board - such as the company's financial situation - are deemed to be the responsibility of all board members and not just the CFO. 11. What is the position on conflicts of interests? (section 2:129 DCC, II.3 CGC) You must inform the other directors and the chairman of the supervisory board of any material conflict of interests you have in a matter that relates to the affairs of the company. Your conflicting interests can either be personal or result from your involvement in another company. 7

8 You should not be present at board meetings, participate in discussions and vote on the matter in which you have an interest, unless the supervisory board resolved that it does not consider you to be conflicted. Transactions in which you have an interest, are subject to the prior approval of the supervisory board and must be published in the annual accounts. 12. What are your other key duties? The board is responsible for keeping the accounts of the company (section 2:10 DCC). The directors have to prepare and sign the annual accounts section 2:101 DCC). Section 2:139 DCC provides for a joint and several liability of directors towards third parties, in practice mostly shareholders, in case of publication of a misleading annual report and/or interim numbers. The board informs the supervisory board at least once a year in writing about the main lines of the company's strategy, its general and financial risks and the risk management system of the company (section 2:141 DCC). The board is responsible for meeting the company's obligations under the Works Council Act. Directors may be liable in case certain statutory provisions relating to the company's share capital are not met. 8

9 13. Risk of fines Several regulatory authorities may fine directors (and managers) in case of violation of certain statutory provisions by the company. The Dutch Authority for Consumers & Markets (ACM) is an example of such authority. Although these decisions are subject to appeal, the authorities may decide to publish their decision pending appeal (naming and shaming). Absent case law, there is an academic debate in the Netherlands as to the question whether these fines may be covered by insurance or an indemnity. Most authors nowadays tend to agree that it is allowed to pay for defence costs under an insurance or indemnity until a court decides that the director was fined on valid grounds. 14. Understanding your disclosure obligations as a director of a listed company (sections 5:38, 5:39, 5:40, 5:48 FSA) Subject to certain exceptions, you must disclose to the AFM (the Dutch Financial Markets Supervisory Authority) your shareholding and voting rights in the company (or its affiliates) if your company is listed on NYSE Euronext Amsterdam or if your company is a Dutch public company (N.V. or naamloze vennootschap) listed elsewhere, when your company lists, or on your appointment or resignation as a director of the company. You should seek specific legal advice in relation to your disclosure obligations. 15. Understanding what the company must do to comply with its statutory obligations You also have an ongoing obligation to disclose any new interest or change in the existing interest in shares or voting rights in the company (or its affiliates), forthwith after that interest arises or change occurs. There are various statutory disclosure obligations that you should understand, such as: maintaining company registers and record You may be civilly liable for a breach by your company of these disclosure obligations, under certain circumstances. 9

10 (section 5.1a FSA) Action/Issue keeping; publishing annual and half-yearly financial reports; publishing half-yearly directors' reports; audit of annual and half-yearly reports; publishing quarterly (Q1 and Q3) financial reports; annual reporting to the shareholders at the AGM; ad hoc disclosures of information that may have a significant influence on the price of the company's listed securities; disclosure obligations in specific circumstances, e.g. when your company offers securities, prepares a takeover bid; filing appropriate forms and reports with the AFM. Disclosures should be made in such a way that any (potential) investor avails over the disclosed information simultaneously, in order to avoid market abuse (e.g. in the form of insider trading). You may also be criminally liable for a breach if you aided, abetted, or were in any way knowingly involved in the breach. For more information on your company's disclosure obligations, you should seek specific legal advice. 16. What is the position if the company may be insolvent? In case it is highly uncertain that the company can avoid bankruptcy, you should be aware of the risk of third parties holding you liable for unpaid debts of the company. Liability may be triggered by entering into obligations knowing that the company cannot pay and will not offer recourse. Preferential treatment of group companies without a valid legal or contractual ground also increases the risk of liability in case of insolvency. As soon as the company is no longer in a position to pay corporate tax and certain other taxes and/or social premiums, this should be reported in writing to In case the company faces serious financial trouble, you should immediately take legal advice. Please note that most cases on directors liability in the Netherlands are related to insolvent companies and started by trustees in bankruptcy. Any claims of third parties will have to be based in tort (section 6:162 DCC; section 2:139 DCC being the sole exception; see 12 above). This provision does not provide for joint and several liability so the third party has to prove the personal involvement of the defendant director when 10

11 the relevant authorities. Absence of such timely notification may be sanctioned by director's liability. In case of bankruptcy of the company, a trustee may pursue claims against directors for reason of obvious improper management. In case of a violation of the duty to keep the company's books or the statutory provisions in relation to the publication of annual accounts, obvious improper management is a fact and the director may only escape liability by proving that other external causes than such improper management may have caused the bankruptcy. pursuing a claim for damages. The mere fact that an act of a director causes financial harm to a creditor of the company does not create liability based on tort. Such liability requires clearly negligent behaviour of the managing director, causing foreseeable harm to the interests of these third parties. 17. What special responsibilities and liabilities are associated with a float? You may be liable if the prospectus for the float does not contain all information investors and their advisers reasonably require to make an informed assessment as to the rights and liabilities attaching to the securities offered and of the company's assets and liabilities, profits and losses, financial position and performance and prospects. You may also be liable if the prospectus contains misleading or deceptive information. Furthermore, you may also be liable if you engage in misleading or deceptive conduct in relation to the issue of shares or when you are in breach of the statutory disclosure obligations (see 14 above). To minimize liability risk, a company which is about to be listed usually conducts a due diligence process, which is an exhaustive review of its operations usually carried out by professional advisors, such as accountants and lawyers. You do not need to be involved in the detail of the due diligence or prospectus drafting, but, at a minimum, you should: ensure that reputable professional advisors are engaged to carry out the due diligence process and the prospectus drafting; understand the methodology being applied for the due diligence; read a draft of the prospectus early enough to ensure that your comments can be taken into account; read the final prospectus before approving it; get sign-offs addressed to you from the accountants, lawyers and other advisors the company may have engaged, stating how the 11

12 due diligence was conducted and signing-off on the prospectus. You should also seek specific legal advice on your position. 18. What special responsibilities and liabilities are associated with a takeover? Takeovers of public companies are subject to complex rules which impose obligations on the bidder and the target companies and their directors. Some key issues for directors are likely to include the following: If you are a director of a bidder company: A potential bidder should seek legal advice at an early stage in considering any takeover, and a target company should seek legal advice immediately upon becoming aware of a potential takeover. whether the bid is in the best interest of the company and its stakeholders; whether the bidder's statements contain all information that is required, including all information that is material to a shareholder of the target to make a decision whether to accept the bid, and whether the information contained therein is not misleading or deceptive. If you are a director of a target company: whether to recommend acceptance of the bid; whether you have considered alternative offers or transactions; whether to enter into break fee arrangements with a bidder; and whether the target company statements include all information that shareholders and their advisors reasonably require to make an informed assessment of whether to accept the offer, and whether the information included is not 12

13 misleading or deceptive. 19. What special responsibilities and liabilities are associated with a joint venture? Self Defence 20. Good corporate governance practices Particularly in a joint venture you should be aware of your duty to act in the best interest of the company and its stakeholders as a whole. Therefore, you: should refrain from representing particular interests (such as the interest of the shareholder who nominated you for appointment); should not be accountable to any interest group (such as a nominating shareholder or union). The risk of liability arising for you as a director is minimised if you have good corporate governance procedures in place. At a minimum: the structure and the composition of the board should be appropriate; the functions, the roles and the focus of the board and its members should be clear; the information systems should be adequate; and the processes and practices should be appropriate. Be aware of situations which may give rise to conflicts of interests (see 10 above). Be aware of your duty not to act in a away which is oppressive or unfairly discriminatory to or constitutes a fraud on a (minority) shareholder. Structure and composition: consider issues such as the size of the board, its mix of skills, the proportion of executives and independents and committee structures (for example: is it appropriate to have an audit committee, a compliance or due diligence committee, a remuneration committee?) Functions and roles: the principle tasks of the board, the level of the board's involvement (as opposed to management involvement), appropriate (time) allocations for tasks, and the relationship with the management team should be clearly understood and responsibility for due diligence recorded. Processes and practices: meeting practices, decision-making mechanisms, reporting lines and processes for directors' performance evaluation should be clearly understood. 13

14 Information systems: format for monthly reports and minutes, mechanisms for directors access to information and key performance indicators should be clearly defined. 21. Insurance Make sure the company has taken out D&O liability insurance, with an appropriate insured amount and state of the art terms and conditions. Review the policy and make sure it covers you for all the positions you hold in the group and for liability after you have retired. Understand the exclusions and the level of cover available. Keep a copy of the policy at home. D&O liability insurance in general offers the best protection against the financial consequences of (claims alleging) director's liability. D&O insurance policies are usually on a claims made basis which means that you will obtain cover if the policy is in force when the claim giving rise to the liability is actually made as opposed to when the act giving rise to the liability occurred. This means it is important to ensure that insurance remains in place after you have resigned. You should also be alert to the probable necessity to buy an extended reporting period after termination of the policy, for instance in case of a bankruptcy A change of control in respect of the company will usually limit coverage to the period prior to the change of control. 22. Exoneration and indemnity It is increasingly common for the company to: (i) agree upon not holding you liable for any damages in connection with acts or omissions in your capacity as director (exoneration), and (ii) to provide an indemnity in respect of claims of third parties against you for acts or omissions in your capacity as director, which also covers defence costs. It is still unclear to what extent an exoneration and indemnity are valid under Dutch law. It is commonly agreed that an exoneration or indemnity for wilful misconduct and/or gross negligence is void. Legal scholars differ as to the question whether an indemnity is valid in respect of acts which qualify as improper management leading to liability (but not as wilful misconduct or gross negligence). Most scholars agree that (as 14

15 long as no judgment or arbitral award is available that establishes improper management) payments can be made under the indemnity, in particular for defence costs. Make sure that the wording of the exoneration/ indemnity and D&O liability insurance are aligned. 23. How do I resign? Review the requirements for resignation as may be laid down in the company's articles of association or otherwise deliver your resignation letter to the company. Your resignation will be effective at the end of the day stated in your resignation letter (albeit that your resignation cannot be effective retroactively) or, if such effective date is not given, the day the notice is given. It does not need to be accepted and cannot be rejected. 24. Can I structure my assets to minimise losses? Should you wish to take such measures, it should be done at a stage in which no claims are known or expected. If you are also employed by the company, your employments ends on the effective date of your resignation. Professional advice is required because of the possible tax and other implications. Any measures taken with a view to a specific risk, may be challenged and avoided. 15