Dividend distribution: the new rules of the “Flex BV’ (LTD)
In a recent ruling, the court in preliminary relief proceedings had to assess whether a dividend profit distribution had been lawfully distributed to a shareholder. In doing so, the court applied the new rules, pursuant to the so called ‘Flex BV‘. Based on this case, Dutch corporate lawyer Marco Guit explains what has changed since the introduction of the Flex BV.
Dispute about the legitimacy of the decision to distribute a dividend
In this case the claimant (the shareholder who had received the dividend) and the respondent (the company that had distributed the dividend) had a corporate dispute about the legitimacy of the dividend distribution to the claimant. The claimant stated that the dividend distribution did not comply with the legal requirements. In preliminary relief proceedings the court checked the dividend distribution against the new rules that were introduced in the Company (Simplification and Flexibilization) Act (the Flex-BV).
General Meeting of Shareholders determines profit appropriation
In 2012, Dutch limited company law was completely modernized. Under the new law the General Meeting of Shareholders is entitled to determine the profit appropriation. These profits first have to be adopted in the annual accounts. Profits can be distributed to the shareholders (dividend distribution) or be reserved. Dividends can only be distributed if the equity capital of the company exceeds the reserves to be held under the law or the articles of association. This test is also called the ‘restricted balance sheet test’.
Dividend payment test by the board of management of the company
If the General Meeting of Shareholders decides that there shall be a profit distribution, the board of management of the company shall have to approve this decision. The board can only disapprove of the decision if it is aware, of could be aware, that the company will have trouble, after distributing the dividend, to pay its due and claimable debts (going-concern requirement). If this is not the case, the board of management cannot refuse a distribution decision. The board of management can also approve the decision implicitly, by effecting the actual distribution.
Court: dividend distribution complies with requirements
In this case, the court found that there was a legitimate decision of the General Meeting of Shareholders to distribute a dividend to the claimant. Although it is not completely clear if the annual accounts had been adopted, there were various documents available in which the main parts of the annual accounts were included. The board of management also approved the decision of the General Meeting of Shareholders. The statement of the respondent, that after distribution of the dividend the equity capital of the distributing company became negative, was not accepted. The financial figures show that an amount of more than €336,000 was available for distribution. The distribution was only €250,000, so there was no negative balance. In brief, the court in preliminary relief proceedings concluded that the dividend distribution was not unlawful. The court ruled in favour of the claimant.
Dutch corporate lawyer
The introduction of the Flex BV changed the rules. This altered dividend payment test also has consequences for directors. For example, directors can be held liable if they approve a distribution decision that then results in an inability to pay the creditors. We therefore advise you to seek legal counsel in advance, if you intend to make a dividend distribution. If you have any questions, please contact our office.