What you need to know about the new Dutch Limited Company (Flex-B.V.)
On 1 October 2012, the “flex B.V.”-act has entered into force. This act made drastic changes in Dutch company law. In this blog, we have outlined some of the most important changes. Incorporation of a Dutch limited company (“besloten vennootschap, or “B.V.”) the company now is much easier as there is no longer a requirement of a minimum paid up share capital, and it no longer is required to obtain a confirmation of the bank regarding the issued and paid up share capital. A new B.V can now be set up in very short notice (one or two days). Dutch corporate lawyer Hidde Reitsma explains.
Many other financial rules will lapse of become less stringent. As most rules on financial assistance will completely lapse, it will be much easier to finance an acquisition through the company or its subsidiaries itself. The rules on the (re)purchase by the company of share sand depository receipts in its own capital will also become less tight. The same goes for the acquisition of shares in the capital of a parent company.
Reduction of issued share capital
A B.V. existing before 1 October 2012 must have an issued and paid-up share capital of at least € 18.000,–. As soon as the Flex-BV act has entered into force, the general meeting of shareholders can decide to reduce the issued share capital to, say, €1,- and to distribute the equity that subsequently be available subsequently (as the previous share capital will now be deemed to be reserves). For such reduction of share capital, there will no more filing, publication, and waiting restrictions (as applicable under Dutch law before 1 October 2012.
Distribution of profit or (distributable) reserves
Distribution of profit and of distributable reserves are subject to a decision by the general meeting. The new rules allow the companies’ articles to grant this authority to another corporate body. The distribution is allowed to the extent that the companies’ equity exceeds its mandatory reserves. Furthermore, under the new rules the company share capital will no longer form a part of this capital requirement. An important new rule, however, is that all distributions require the consent of the companies’ management board. The board must give its consent, unless it expects that the company will no longer be able to remain capable of paying its due and payable debts after the distribution. As a consequence of this, the management board must, prior to the execution of a decision of the general meeting to distribute profit or reserves, perform a “distribution test”.
Distribution test under new Dutch company law
These new rules aim to prevent that the company no longer will be solvent. The management board must test whether it reasonably expects that the company will remain solvent. In this respect, also the liquidity of the company must be tested.
First a continuity test, then a liquidity test
First, the management board must asses whether the company will be able to continue its business after the distribution. If the company has been profitable and the board expects equal or better results in the current year, the directors may proceed to a liquidity test, unless there are reasons to believe that the company will nevertheless will not be able to continue its business anyway. In other circumstances, the board should perform a very detailed and complex continuity test, making sure that there no indications that the company will not be able to continue its business.
The liquidity test requires that the management board assesses the availability of cash for the company to satisfy its payment obligations, including the aimed distribution of equity. The board should take the maximum payment capacity into consideration, as well as the operating cash flow.
For more information on the distribution test, please contact one of our corporate lawyers.
Director’s liability as a result of a distribution
A very important new rule, that may have major consequences for the relation between the shareholders and the board, is that the management board will be personally liable if the company cannot continue paying its due debts, and the board knew or should have known that this would be the result of a distribution. The board will be liable for the deficit that is a result of the distribution. The distribution test therefore is a very important new duty for the board, which may lead to tension between the shareholders and the management board if the shareholders decide to make a distribution, but the management board refuses to do so considering the outcome of a liquidity and continuity test. It may be wise to involve a legal and/or financial expert to advise the management board in making decisions to approve a distribution.
Changes in Dutch Company law
A summary of the most important changes can be found here.