The new Administration and Supervision of Legal Entities Act: key changes at a glance

The new Law on Governance and Supervision of Legal Persons (WBTR) will come into force on July 1, 2021. The WBTR regulates governance and supervision for various legal entities including; foundations, associations, cooperatives and mutual insurance companies. Although regulations for these legal entities are largely based on existing rules in Book 2 of the Dutch Civil Code (BW), the arrival of the WBTR provides further rules specifically for foundations, associations, cooperatives and mutual insurance companies. These rules are implemented by expanding and adapting existing rules in Book 2 of the Civil Code and subsequently apply to all legal entities in the Netherlands. This will further unify and clarify the law of legal persons.  

The main changes are as follows:

• The WBTR creates a legal basis for a supervisory body in the aforementioned legal entities such as a supervisory board (often called a supervisory board in the case of foundations and associations);
• With the advent of the WBTR, foundations, associations, cooperatives and mutual associations can opt for a monistic management system (also known as a "one tier board");
• The WBTR regulates how the duties and powers of the board of directors and supervisory board should be carried out, and the consequences of improper management (or supervision);
• The WBTR unifies the conflict of interest rules for all legal entities in Book 2 of the Civil Code;
• The rules on directors' and supervisory directors' liability in bankruptcy are also being unified;
• The WBTR modernizes the criteria for dismissal of foundation directors and supervisory board members;
• The WBTR creates a restriction on multiple voting rights for directors and supervisory directors;
• Under the WBTR, it becomes mandatory to include a provision in the articles of association regarding the absence and inability to act of directors and supervisory directors.

Below I discuss some of these changes in more detail.

Monistic governance model (aka one tier board)

The enactment of the WBTR provides a legal basis for the choice of a one-tier board for foundations, associations, cooperatives and mutual societies. Since 2013, the law has already given public limited liability companies (NV) and private limited companies (BV) the option to choose a one-tier board model. The law does not (yet) provide this option for other legal entities, and in practice this was felt to be a shortcoming. In a one-tier board model, there is no separate supervisory body (supervisory board or supervisory board) that monitors the board. In a monistic board model, this supervisory function is performed by non-executive directors who are part of the board. The board has essentially two types of directors, namely: non-executive directors and executive directors. The executive directors are in charge of the day-to-day management of the legal entity, while the non-executive directors supervise the executive directors. The main advantage of this system of governance is that non-executive directors are more involved in the day-to-day management and can therefore supervise the board more closely, which ultimately benefits the affairs of the legal entity.

Uniform guideline for directors and auditors

The WBTR creates a uniform guideline on the basis of which management board members and supervisory board members must perform their duties. Such a guideline already exists in Book 2 of the Dutch Civil Code for the NV and the BV, which provides that management board members and supervisory board members must act in accordance with the interests of the company and its affiliated enterprise. The law did not have this guideline explicitly for directors or supervisory directors of other legal entities. The WBTR creates a uniform guideline for all legal entities, with the result that all directors and supervisory directors of legal entities must act in accordance with the interest of the legal entity and its affiliated enterprise or organization. By unifying this guideline, the existing case law regarding the NV and the BV on this subject also becomes applicable to the association, the cooperative, the mutual insurance company and the foundation. Despite the fact that many other interests may play an important role within a foundation or association (think of those of members of an association, donors or, for example, creditors), the law is clear; in principle, the interests of the legal entity and the business or organization affiliated with it must take precedence in management and supervision.

New conflict of interest rule

With the arrival of the WBTR, it will be explicitly laid down what a management board member or supervisory board member must do in the event of a conflict of interest in decision-making. Since there are currently unnecessary differences between different legal entities regarding the conflict of interest rule, this rule will be brought into line with the rule that currently applies to NVs and BVs. This means that all management board and supervisory board members will soon be prohibited from participating in the deliberations and decision-making on the relevant subjects if they have a conflict of interest. If all directors have a conflict of interest, they cannot take a decision. In that case, the decision-making power shifts to the supervisory board. If there is no supervisory board, the power shifts to the general meeting. Similar rules apply to supervisory directors: supervisory directors with a conflict of interest may not participate in deliberations and decision-making. If all supervisory directors have a conflict of interest, the power of decision lies with the general meeting. If there is no general meeting (as in the case of a foundation) or no supervisory board, the decision may still be taken by the management board (even though there is a conflict of interest). However, the considerations underlying the decision must be recorded in writing. The articles of association may provide otherwise. For example, a provision can be included in the articles of association to the effect that the board may still make decisions in the event of a conflict of interest.  

Uniform rules on liability in bankruptcy

The rules regarding liability of directors and supervisory directors in bankruptcy are currently scattered through Book 2 of the Dutch Civil Code. With the arrival of the WBTR, a clear and general regulation concerning the liability of directors and supervisory directors in bankruptcy is intended. More concretely, this means that the regulations for improper administration (for example, failure to comply with administrative obligations or the obligation to publish annual accounts) in bankruptcy also apply to directors and supervisory directors of informal associations and of associations and foundations that are not subject to the levy of corporate income tax. Unpaid directors or supervisory directors are given greater protection under the WBTR so that volunteers are not prevented from holding such positions. For example, the aforementioned presumption of proof that there is improper management if the administration obligations or the obligation to publish the annual accounts have not been met does not apply to unpaid directors of non-commercial associations, informal associations (associations whose articles of association are not included in a notarial deed) or foundations. Such an exception also applies to unpaid supervisory directors of these legal entities.

Modernization of criteria for dismissal of foundation directors and supervisory board members

The WBTR introduces a modified scheme for dismissal of a foundation director by the court. This extensively expands the possibilities of having a foundation director dismissed by a judge. Previously, the court could only dismiss a foundation director if there was no reasonable doubt that the director's actions were unlawful or if there was financial mismanagement. Under the WBTR, a court may dismiss a director for neglect of his duties, for a drastic change of circumstances on the basis of which the continuation of the directorship cannot reasonably be tolerated, for failure to comply or to comply properly with an order of the interim relief judge, or for other weighty reasons. These regulations also apply to the auditor.

Mandatory statutory rules regarding absence or inability to act

A legal entity without a director is an undesirable situation. Hence, the WBTR establishes the obligation that the articles of association must contain rules in cases of absence (a director ceases to be a director) or inability (a director is temporarily unable or not allowed to perform his duties) of all directors. Furthermore, the articles of association may also contain rules in the event of the absence or inability to act of one or more directors. What is meant by inability to act may be specified in the articles of association. The person who, in the event of the absence or inability to act of directors, is designated by the articles of association to perform management acts, shall be treated by law as a director with respect to these management acts. The obligation to include a provision in the articles of association regarding the absence or inability to act of all directors will only apply as of the next amendment of the articles of association after the entry into force of the WBTR. Therefore, if there is no statutory provision regarding absence or inability to act, this can be provided for in the next amendment of the articles of association.

Do you have questions about the impact of the WBTR on your foundation or association? Please contact one of our attorneys Emile Sahhar or Joost van Dongen.