New governance rules for Dutch semi-public organisations
June 2014 | PROFESSIONAL INSIGHT | CORPORATE GOVERNANCE
Financier Worldwide Magazine
A new legal package is introduced by the Dutch government to strengthen the governance of foundations and associations. The announced measures are a response to recent cases of misconduct by directors of semi-public organisations, which are often incorporated as a foundation or association. In their efforts to hold the directors and supervisory directors in question personally liable for the damages caused the Dutch government noted that the legal framework concerning the fulfilment of their duties of care is fragmented and incomplete.
Dutch corporate law contains relatively few provisions on the governance of foundations and associations. There exists no legal basis for a supervisory board. A supervisory board may be introduced in the articles of association of the foundation or association. Furthermore, a distinction between profit and non-profit organisations exists, whereby several duty of care standards (e.g., in the case of publishing misleading financial statements or insolvency) only apply to commercial foundations and associations. A draft bill has now been published by the Dutch government to correct this hiatus in Dutch legalisation.
Semi-public organisations form a special niche in the Dutch legal landscape. They are privately incorporated entities, in most cases as a foundation or association, responsible for carrying out a public task often with public funds. Because of the aforementioned regulatory gap, additional governance rules sometimes apply through specific governmental legislation targeting a specific sector (e.g., health care, social housing and education). Another recent development is self-regulatory governance codes, which are a collection of ‘best practices’ to provide substance to the fulfilment by directors and supervisory directors of their duties of care. Although Dutch courts seem to use these codes more and more to determine whether a duty of care is violated, these codes are soft law and have no direct legal force.
As a result of this complex and fragmented legal landscape, the legislator assumes that directors and supervisory directors do not know what is expected of them and may be afraid to act when the circumstances require them to do so. For this reason the Dutch government aims for a uniform governance framework by applying the standards which are already in use for limited liability companies (i.e., BVs/NVs) to all other legal entities as well. The most relevant changes to be introduced are: (i) a legal basis for a supervisory board; (ii) elimination of the distinction between so called ‘commercial’ (i.e., obligated to pay corporate income tax) and non-commercial organisations (i.e., one set of duties of care applicable to directors and supervisory directors of any type of organisation); and (iii) new termination grounds for directors and supervisory directors of foundations.
The Dutch government notes that the new governance rules are not aimed to create greater liability risks for directors and supervisory directors, but to establish a clearer understanding of what is expected from them so that they are confident to act when the situation calls for it. In our opinion, however, this is not true with respect to semi-public organisations, which as non-profit entities will be faced with new duties of care and an expansion of the grounds on which directors and supervisory directors may be held liable.
This is especially so for supervisory directors of foundations and associations. Currently, they can only be held liable on the grounds of tort. In order to successfully claim damages on the grounds of tort, a claimant needs to establish that each supervisory director individually committed an act of tort against the claimant. The liability is not a joint one. By introducing the standard of care that is currently included in the laws for supervisory directors of limited liability companies, the liability will become a joint and several one. A supervisory director may try to seek exculpation, when he or she can establish that the unlawful lack of supervision was not attributable to him or her personally, but this will not be an easy task as the supervisory director also needs to establish that he or she has taken all measures possible to prevent the flawed supervision.
It appears that the courts in the Netherlands may already be anticipating the new laws. In a recent case the court ruled that the duties of care that apply with respect to limited liability companies already apply to directors and supervisory directors of non-profit organisations. The housing association filed a tort claim against its former supervisory directors for their insufficient supervision of the managing director’s misconduct. The court judged that the duty of care for supervisory directors of limited companies should be taken into account when answering the question whether the supervisory directors acted wrongfully towards the association.
Of course, the question arises whether this intended legislation will lead to more directors and supervisory directors of institutions in the sectors of health care, social housing and education being held liable for mismanagement or flawed supervision. And a more important question to ask is whether the assumption of, amongst others, the Minister of Health, Welfare and Sport is justified that more stringent rules and the threat of liability of supervisory directors will lead to better management of health care institutions.
In our opinion, the new legislation will give rise to more claims being filed but not necessarily more claims being awarded, i.e., more managing directors or supervisory directors being held liable. The threshold for establishing unlawful mismanagement or unlawfully insufficient supervision is still high. A managing director and supervisory director taking prudent care and making conscious choices will not easily be faced with a claim. This does imply, however, that managing directors welcome the critical questions posed by the supervisory directors and accept them as sparring-partners in making conscious decisions. And for supervisory directors this means that they have to take their position seriously, not take information for granted and dig deeper in the proposal put before them in seeking the best proposition for the foundation or association and its stakeholders.
Fenna van Dijk is an associate partner and Maarten van der Voort is an attorney at law at Kennedy Van der Laan. Ms van Dijk can be contacted on +31 20 5506 680 or by email: email@example.com. Mr van der Voort can be contacted on +31 20 5506 602 or by email: firstname.lastname@example.org.
© Financier Worldwide
Fenna van Dijk and Maarten van der Voort
Kennedy Van der Laan