Netherlands: How to successfully navigate distributions out of a Dutch BV
We encounter distributions (in cash and in kind, eg, a transfer of shares by title of distribution) out of a Dutch private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid or BV) in all types of international corporate reorganizations, such as (pre-sale) carveouts and spinoffs, post-acquisition integrations, legal entity rationalizations and expansions. Here, we look at the pitfalls that may be encountered when calculating distributable reserves, as well as the role of the management board.
General provision
Pursuant to Dutch law, a BV’s general meeting is authorized to determine the destination of the company's profits (appearing from the annual accounts) and to resolve, upon the distribution thereof or upon other distributions, the extent to which the net assets of the BV exceed the legal reserves which must be maintained under Dutch law or the articles of association of the BV. Such test is performed to determine the amount that can be distributed.
"A resolution upon a distribution adopted by the general meeting has no effect until the management board of the BV has approved it."
A resolution upon a distribution adopted by the general meeting has no effect until the management board of the BV has approved it. Dutch law provides that the management board must refuse its approval to a distribution in case the management board knows or should reasonably foresee that the BV will not be able to continue to pay its due and payable debts after the distribution is made (taking into account approximately one calendar year ahead).
Following the above, a distribution is always subject to two types of tests:
- The balance sheet test (balanstest) to be performed by the BV’s general meeting in order to determine whether the net assets exceed the legal reserves which must be maintained under Dutch law (eg, a revaluation reserve or a currency translation reserve) or the BV's articles of association (ie, whether there are sufficient freely distributable profits/reserves) and
- The distribution test (uitkeringstest) to be performed by the BV’s management board in order to determine whether the BV will be able to continue paying its due and payable debts after the distribution is made in the coming calendar year (and thus whether the board is to withhold consent to the shareholders' resolution upon distribution).
Responsibility management board
The management board has no discretionary powers relating to the performance of the distribution test and the consequent approval or rejection of the distribution. Under Dutch law, the only ground on which the management board can – and moreover must – refuse its approval to the proposed distribution is when the BV will not be able to continue to pay its due and payable debts after the distribution. The term payable debts in this paragraph includes both existing debts and future debts which can become due under existing legal relationships (such as a lease agreement).
As follows from the above, it is permitted to approve a distribution pursuant to which the equity of the BV will end up negative. This is only permitted if the BV (i) does not have any legal reserves which must be maintained by law or pursuant to its articles of association and (ii) is still able to pay its due and payable debts after the distribution notwithstanding its negative equity position (eg, there is a comfort letter from the shareholder for coverage, there is a running bank facility from which the BV can draw, the BV expects distributions from subsidiaries or the BV has access to an intra-group cash pool). The liquidity position of the BV must therefore at all times be adequate. The mentioned backups (eg, the comfort letter from the shareholder for coverage, a running bank facility, expected distributions from subsidiaries or access to an intra-group cash pool) may also help the board to more easily approve a distribution that does not necessarily go into negative distributable reserves.
Consequences in case of breach
Managing directors
Following Dutch law, a managing director who granted approval to a distribution while knowing or being able to reasonably foresee that the BV would not be able to pay its due and payable debts after the approved distribution (looking approximately one calendar year ahead) is jointly and severally liable to the BV for compensation of the deficit arising from to the distribution (plus statutory interest as of the day of the distribution).
If the BV is declared bankrupt within the calendar year after the distribution is made, it is considered that the managing directors had such knowledge at the time the distribution was approved. Dutch law contains a possibility for managing directors to be released from the aforementioned joint and several liability if it can be proved that (i) it is not due to the managing director that the BV has made the distribution and (ii) that the managing director has not been negligent in taking measures to avert the (negative) consequences of the distribution.
Shareholders
Dutch law provides that the person who has received a distribution (the shareholder), while knowing or reasonably being able to foresee that the BV would no longer be able to pay its due and payable debts after the distribution, can also be held liable to the BV for compensation of the deficit arisen due to the (unpermitted) distribution.
The scope of such liability is confined to the amount or value of the distribution which the shareholder received, plus the statutory interest as of the day of the distribution. The shareholder can therefore be forced to pay back the amount of the distribution to the BV.
The burden of proof that the shareholder was not aware of the financial position of the BV (and can therefore be considered to have acted in good faith) is on the shareholder. It depends on whether a shareholder can be deemed to have had such knowledge of the BV’s financial position, including whether the shareholder knew the BV could not possibly pay its due and payable debts after the distribution. Relevant in such cases is the extent to which the shareholder is kept up to date by the management board.
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Crossroads – ICR Insights is our series of short-read articles designed to assist organizations considering an international corporate reorganization (ICR). Each country-specific, solutions-based brief will answer a key consideration during a global transaction such as carveouts, spinoffs, acquisitions and dispositions, pre- and post-acquisition integration, or legal entity rationalization. Visit Crossroads – ICR Insights to view the entire collection or sign up to be notified of new postings. Have an idea of a topic or interested in discussing further? Email ICRCrossroads@dlapiper.com.
