The times in which we are living show that national legal systems have become each other’s competitors when it comes to the creation of an adaptive legal infrastructure for business entities. This phenomenon is usually referred to as “regulatory competition”. In the United States, where the doctrine of incorporation1Source 1: This doctrine provides that a company is governred by the law of the State in which the company has its registered office according to incorporation law. is generally accepted, this phenomenon has taken root. The spirit of competition existent in the State of Delaware has led to more than half of the Fortune 500 companies being incorporated under the laws of Delaware. In addition to reinforcing the dispositional nature of legislation, the measures adopted in Delaware provide for swift and efficient procedures in respect of formation, merger and dissolution of business entities.
Initially, this phenomenon was referred to by critics, in line with Prof. W.L. Cary2Source 2: William L. Carry, Federalism and Corporate Law: Reflections upon Delaware, Yale Law Journal 1974, p. 663-707., as a “race to the bottom”. Nowadays, there is general agreement that the Delaware Law on business forms is one of the main sources of current American Company Law. It is even referred to as a “race to the top”.3Source 3: See recently: E.P.M. Vermeulen, The Evolution of Legal Business Forms in Europe and the United States (dissertation Tilburg University, UvT), Deventer: Kluwer Law International 2003, pp. 75-88. The underlying idea is that regulatory competition will lead to the creation of better law.
Meanwhile, in the Überseering judgment4Source 4: ECJ 5 November 2002, C-208/00, Jur. 2002, pp. I-9919.; NJ 2003, 58 with note PV; Ondernemingsrecht 2002, pp. 528-532 with note J.N. Schutte-Veenstra ; JOR 2003/4 with note G. van Solinge; W.J.N. van Veen, Het recht op vrije vestiging en de leer van de werkelijke zetel, Bb 2003, pp. 1-5; M.Zilinsky, Einde van de siège réel?, SV&V 2003, pp. 60-65., the European Court of Justice (ECJ) ruled that pursuant to Articles 43 and 48 of the EC Treaty (including but not limited to: the freedom of establishment of companies) the legal capacity and the capacity to be a party to legal proceedings of a company5Source 5: This case concerned the company incorporated under Dutch law Überseering BV, which moved its centre of administration to Germany. German international private law is based on the doctrine of the real seat*, which means that the question concerning legal capacity and the capacity to be a party to the legal proceedings of a company, is adjudicated on the basis of the law of the country where the company has its centre of administration. The strict application of this doctrine entails that Überseering BV could only obtain such capacity by (re)incorporation according to German Company Law. that has validly been incorporated under the law of a Member State, must be recognized by the other Member State to which the company has transferred its actual centre of administration. In line with this judgment, it has become an established fact that the doctrine of the real seat is not consistent with Articles 43 and 48 EC Treaty.There had been previous indications that the ECJ was taking steps in the direction of the doctrine of incorporation. In the Centros case6Source 6: ECJ 9 March 1999, C-212/97, Jur. 1999, pp. I-1459; NJ 2000, 48 with note PV., the ECJ ruled on the freedom of establishing a branch in a Member State other than the Member State in which the registered office is located. In an attempt to escape the Danish rules regarding minimum capital, the Danish couple, Bryde, bought the shares in Centros Ltd, a company incorporated under English Law. As Centros Ltd was carrying out business activities in Denmark, the couple attempted to have a branch of Centros Ltd registered in the Danish Commercial Register, which registration was refused, the argument being that the capital requirement as prescribed by Danish Company Law had not been met. The ECJ deemed that the refusal to register the branch violated the freedom of establishment as laid down in the EC Treaty. Finally, the recent Inspire Art judgment7Source 7: ECJ 30 September 2003, C-167/01, Pb EU 2003, C 275/17, JOR 2003/249 with note G.J. Vossestein. has provided us with the long-awaited answer to the question whether the Dutch Companies Formally Registered Abroad Act (“WFBV”)8Source 8: Act of 17 December 1997, Bulletin of Acts and Decrees 1997, 697. should be deemed discriminatory in this connection. The facts are the following.
Inspire Art was incorporated under English Law on 28 July 2000 as a private company limited by shares with its registered office at Folkstone, UK. Following incorporation, Inspire Art Ltd was registered in the Dutch Commercial Register. The Commercial Register held the view that the company was subject to the WFBV as the company was established exclusively for the performance of business activities in the Netherlands. However, the Board of Inspire Art Ltd refused to comply with the obligations imposed by that Act. In brief9Source 9: To be more precise: any obligations to disclose included in the Companies Formally Registered Abroad Act that are not based on the Eleventh EU Directive, are invalid, as pursuant to Article 2 of said Directive and Articles 43 and 48 EC Treaty are incompatible with the provisions that make the freedom of establishment dependent on conditions regarding minimum capital and directors’ liability., the bottom line of the ECJ’s decision was that the ECJ considered that the application of the WFBV to the formally foreign company, Inspire Art Ltd, was contrary to European Law on freedom of establishment. The fact that Inspire Art Ltd was established in accordance with English Company Law, in order to evade the effect of the more stringent Dutch Company Law regulations is, according to the ECJ, irrelevant.
These developments give rise to competition between the various European company systems. In this connection it is well worth taking a look at the American interstate competition
A typical characteristic of the classic partnership is the personal liability with respect to any debts and deficits of the partnership.10Source 10: An exception to this rule is the limited partner whose share in the loss of the limited partnership does not exceed the amount he contributed or is obliged to contribute. Even if the partnership has legal personality, this liability applies unimpaired.11Source 11: The new partnership law in the Netherlands (Bill for the enactment* of Section 7.13 (company) of the Civil Code, Parliamentary Documents 28 746) does not distinguish between the “public” partnership with and the “public” partnership without legal personality, as far as the partners are jointly and severally liable for the obligations of the partnership. By way of comparison: the partners of a French Société en nom collectif (SNC) are “only” alternatively jointly and severally liable and this is in the event that the SNC should fail to fulfil its obligations. Other characteristics are the partner-related nature, which means that the share in the partnership is, in principle, only transferable with the permission of all other partners, and the unanimity rule for decision-making. Moreover, the contractual nature of the partnership guarantees substantial freedom of organization.
The classic company limited by shares, on the other hand, combines legal personality with limited liability; in principle, the shareholders are not liable for the debts and deficits of the company limited by shares. The exclusive liability of the company limited by shares enables the entrepreneur to establish a clear separation between his private capital and the capital carrying a business risk within the framework of the company limited by shares. This company limited by shares was originally a vehicle for the larger corporate sector. Small and medium-sized entrepreneurs must accept, if they wish to use the classic company limited by shares for their business activities, the limited organizational freedom that this corporate form implies. In this sense, the party autonomy of the incorporators is violated.
In the United States, this situation existed up until approximately 1950. American corporate lawyers saw the increasing risk of tort liability as a reason to make the case for a new business form, which would combine the limited liability of the classic company limited by shares with the organizational flexibility and pass-through taxation12Source 12: If the results of the enterprise are not taxed at the level of the company, but directly allocated to the shareholders or partners, there is pass-through taxation. As far as the taxation of the results is concerned, the company is looked through, as it were. of the classic partnership. Legal scholars evocatively describe this phenomenon as “partneration”.13Source 13: Larry A. Ribstein, LLCs: Is the future here? A history and prognosis, Business Law Today, Volume 13, Number 2 (November/December 2003). On 4 March 1977, the American State of Wyoming was the first to introduce a regulation for the LLC. It was meant to create a company form with limited liability that the American federal tax authorities (IRS) would regard as a pass-through business entity. Initially this was not to be, because on 17 November 1980 the IRS proposed to treat the LLC as a corporation for tax purposes.14Source 14: Cf. the Country Status Report on Delaware in this issue of ECL. Although the IRS formally repealed this proposal in 1983, it had already been determined in 1982 that the LLC would be qualified as a corporation for tax purposes.15Source 15: PLR 8304138. For a long time, the LLC was not an attractive legal form because of this tax qualification.
This situation changed on 2 September 1988 when the IRS issued Revenue Ruling 88-76, which stipulated that a Wyoming LLC could be taxed in the same way as a partnership. At the time this was very remarkable, as the IRS had previously always taken the position that pass-through taxation was only possible for business entities where members were personally liable for the debts of the business. This meant a breakthrough for the LLC. In order to actually qualify as a pass-through company, it was necessary at that time to determine, on the basis of four corporate characteristics, whether the business was a partnership or a corporation for tax purposes.16Source 16: Cf. the Country Status Report on Delaware in this issue of ECL.
Initially, in addition to these tax problems, many legal questions were raised by the hybrid nature of the LLC, which essentially is a qualified form of partnership but has full limited liability. The Uniform Limited Liability Company Act (ULLCA)17Source 17: See Ribstein and Keatinge on Limited Liability Companies, Vol 2, Appendix C (ULLCA)., prepared by the American Law Institute and the National Conference of Commissioners on Uniform State Laws, aimed for the unification of the LLC rules in the various States, initially with little success. Nowadays, however, some American States have indeed based their laws on the ULLCA.18Source 18: See Ribstein and Keatinge on Limited Liability Companies, Vol 1, § 108.
On 22 July 1992, the Delaware Limited Liability Company (LLC) Act19Source 19: 6 Delaware Code § 18-101 through 18-1109. was adopted and it entered into force on 1 October of the same year. Because of the interstate competition, the American States are inclined to be guided by the needs of the corporate sector in their legislations. In this respect, the State of Delaware leads the field. In Delaware, freedom of contract is traditionally held in high esteem. This approach can be discerned in the Delaware LLC Act.20Source 20: Cf. the Country Status Report on Delaware in this issue of ECL.
Meanwhile, the IRS encountered more and more problems when qualifying hybrid business entities according to the system of corporate characteristics. In addition, foreign entities also had to be qualified according to this system. This gave rise to complicated questions of interpretation and qualification. In 1995, the IRS announced changes regarding the qualification of hybrid business entities. The necessity for these changes was specified by, inter alia, pointing out that the four-factor test was flawed in practice as a result of the innovation which had taken place in the corporate sector and in the field of business entities. Thus, the process of qualification had become a problematic, time and money consuming process.21Source 21: Notice 95-14, 1995-1 C.B. 297.
Eventually, the four-factor test was abolished on 1 January 1997. Instead, a simplified system of choices was introduced known as the Check-the-Box Regulations.22Source 22: T.P. van Duuren, The joint venture company, a partner-related company with limited liability, (dissertation Tilburg University, UvT), Editions of the Schoordijk Institute in the series Center for Company law, The Hague: Boom Legal Publishers 2002, pp. 212-215. In brief, since 1 January 1997, the qualification of business entities takes place in two phases. In the first phase, it is determined which business entities should be qualified as corporations for taxation purposes, the so-called per se corporations. In the second phase, and subject to certain prerequisites, a system of choice is introduced with regard to the other business entities. It is possible to choose to be designated as a partnership (pass-through taxation) or as a corporation (taxation on income at the entity level and then further taxation on distributions at the membership or shareholder level).
Implementation of the Check-the-Box Regulations has caused an explosive growth in the number of LLCs. In the years following implementation, the LLCs appear to be replacing the corporations and limited partnerships as the most commonly used legal form.23Source 23: Cf. the Country Status Report on Delaware in this issue of ECL.
What are the specific characteristics of the LLC under the law of the State of Delaware? The LLC can be entered into for any lawful purpose or activity except for banking or insurance. Formation is effected by registration of a Certificate of Formation with the Delaware Secretary of State. Simultaneously, the LLC shall acquire its legal personality.24Source 24: § 18-201. The Certificate of Formation must contain the name of the LLC, the address of its registered office and the name and address of its registered agent.25Source 25: Delaware law requires an LLC to have a registered agent in Delaware when the LLC is first formed and throughout the life of the LLC. A registered agent is responsible for receiving and forwarding government and legal documents to the members and management of the LLC. The names of the members and the management board of an LLC can therefore remain anonymous in Delaware.26Source 26: Cf. the Country Status Report on Delaware in this issue of ECL. In addition to the Certificate of Formation, the members of an LLC must prepare a so-called limited liability company agreement (LLC agreement). This agreement may be oral or written. The LLC agreement does not need to be filed. A Delaware LLC may only have one member.
The contribution of the members may consist of money, goods, services or a promissory note contributing such things in the future. Since the LLC, as a legal entity, is exclusively liable towards its debtors, the members are, in principle, not liable for such debts.27Source 27: § 18-303. The freedom relating to corporate governance is extensive. The LLC is not obliged to have a separate management body. Should there be no such separate management body, the management is in the members’ hands. This is generally referred to as a member-managed LLC. However, it is possible to opt for a manager-managed LLC. In that case, the members elect managers from their midst or otherwise to take on the management of the LLC. If a member involves himself in the management of the LLC, he eo ipso does not risk personal liability. Different categories of members and managers with different tasks and powers may also be created.28Source 28: § 18-215j. Unless the LLC agreement provides otherwise, each member is independently authorised to represent the LLC. The accession of a member is subject to the consent of all sitting members of the board.29Source 29: § 18-301. The members and managers may pass resolutions “by written consent” outside a meeting, unless this is expressly prohibited by the LLC agreement. They may also vote by proxy, even if the LLC agreement does not provide for any such possibility.30Source 30: § 18-302 and 18-404 respectively.
Profits and losses are divided amongst the members pro rata to each member’s contribution, unless the LLC agreement provides otherwise.31Source 31: § 18-504. Furthermore, the members in the LLC agreement may freely introduce classes of membership and differentiate, at their discretion, on voting rights and voting methods.
The distributions to members may not result in a situation where the debt burden exceeds the fair value of the assets of the LLC.32Source 32: § 18-607 In cases where the limited liability provided by the LLC is abused33Source 33: For example the withdrawal of monies for private purposes, fraud, etcetera., the members may be held liable by way of piercing actions (piercing the LLC veil). However, some American States have included an explicit prohibition against piercing actions with regard to LLCs in this legislation.
It is possible under Delaware Law to relocate the registered office of an LLC to another State.34Source 34: § 18-213. Legislation makes it possible for other business forms and even for foreign limited liability companies to be converted into an LLC in accordance with the laws of the State of Delaware. This conversion does not mean that the legal entity ceases to exist; it simply continues to exist in the legal form of an LLC.35Source 35: § 18-214. The Delaware LLC Act also contains a rule on mergers.36Source 36: § 18-209. As in Europe, rights, obligations and capital are transferred to the acquiring legal entities under universal title.
An LLC is incorporated for a fixed or indefinite period of time. If no stipulation to this effect has been included in LLC agreement, it shall be assumed that the agreement has been entered into for an indefinite period of time.37Source 37: § 18-801.
The LLC is dissolved under the same circumstances in which a partnership is also dissolved (death, retirement, resignation, bankruptcy and so on) unless the LLC agreement provides otherwise. Judicial dissolution is possible if it is not reasonably practicable to carry on the business in conformity with the LLC agreement.38Source 38: § 18-802.
All in all, the question might be asked why we have no LLC in Europe yet39Source 39: See H. de Groot, Why don’t we get an LLC ? Ondernemingsrecht, 2001-9 pp. 254-261. The desired answer is irrelevant for it is a fact that the LLC is an extremely user-friendly legal form.
Let us now turn back to Europe. Below, I shall discuss the position of the Dutch BV in relation to a number of other European legal forms and the new Netherlands Antilles BV in relation to the following themes: preservation of capital, organizational flexibility, shares and transfer restrictions and rules for voting rights and decision-making. The purpose is to seek inspiration for the creation of a light vehicle. I shall conclude with a few remarks on the initiative with regard to the European private company and the role that, in my view, should be played by the European Legislator.
Which non-Dutch legal forms can be compared to the Dutch BV? I shall briefly discuss the French SARL (and occasionally also refer to the French SAS), the German GmbH, the Netherlands-Antilles BV (NA BV) and the English private company limited by shares. All these are private companies with limited liability with a comparable socio-economic function, primarily that of non-listed companies, in the various foreign national legal systems. Furthermore, their common characteristic is that the individual shareholder, rather than his contributions of capital, is paramount. Often, these companies are established intuitu personae (with a view to the personal capacity and expertise of partners-shareholders). In this respect, I would like to call them partner-related companies with limited liability.40Source 40: T.P. van Duuren, The joint venture company, a partner-related company with limited liability, (dissertation Tilburg University, UvT), Editions of the Schoordijk Institute in the series Center for Company law, The Hague: Boom Legal Publishers 2002, pp. 71-75.
In the so-called Marini report, entitled “La Modernisation du droit des sociétés” from 1996, proposals were made with respect to the reform of SARL Law. One of the proposals was to attach more weight to the principle of freedom of contract. Eventually, this proposal and other initiatives41Source 41: Mention is be made of: Rapport sur la simplification de la création d’enterprise, de la vie des createurs et de la gestion de leur enterprises of F.M. Bockel Ph. Rouvillois and L. De Groote Propositions (2001) and Propositions de la CCIP pour de PME – TPE performantes (2001). led to Loi 2001-420 du 15 Mai 2001 relatives aux nouvelles régulations économiques and Loi 2003-721 du 1er août 2003 pour l’initiative economique. An important reason for this new legislation was the position of mandatory French Law on companies limited by shares, which led to legal practitioners, as is also customary in the Netherlands, resorting to stipulating arrangements in contracts instead of in the Articles of Association, the legal validity of which is not always beyond doubt.
In Germany, another path was chosen. The German GmbH has of old held been a cross between the AG (public limited company) and the “offene Handelsgesellschaft” (general partnership). To the outside world, the GmbH presents itself as a company limited by shares with clear-cut regulations stipulated by mandatory law relating to creditor protection. The shareholders are, to a great extent, free to set up the internal organization (“Satzungsautonomie”).
On the Netherlands Antilles, a private company was introduced by Landsverordening (LBV, Act of the Netherlands Antilles) on 1 January 2000. Previously, Netherlands Antilles Company Law knew only the public limited company. According to the general part of the Explanatory Memorandum, the decision not to link-up to the Dutch BV regulations was a conscious choice. It has been established that the Dutch regulation is to a great extent geared to the German and French requirements that have become generally accepted in Europe via the Company Law Directives. This has facilitated a certain rigidity and excessive detail, particularly in the field of capital preservation, and the Legislator did not wish to burden the NA BV with this. Netherlands Antilles BV Law has been further modernized in a completely new Book 2 of the Civil Code (“BW”) (on legal entities), which was implemented on 1 March 2004.
Under English Company Law, the relationship between the shareholders of a private company is, in essence, regarded as a contractual relationship. The organizational flexibility of a private company is, therefore, relatively broad. Moreover, during the past years continuous efforts have been made in order to achieve deregulation and flexibilization of company law as it is believed that the English Legislator, with regard to the company limited by shares42Source 42: N. Grier, UK Company Law, 1998 p. 44 ff., has, in the past, focused on companies that have many shareholders who are not involved in the business of the company. This had led to an excess of complicated and detailed statutory arrangements that are not suitable to the private company and its owners.43Source 43: J. Freedman, Small Businesses and the Corporate Form: Burden or Privilege?, 57 Modern Law Review, p. 555–584. This phenomenon has been much criticized over the last decades.44Source 44: C. Jordan, Modern company law for a competitive economy, 1998 p. 7. ff. and J. Rickford, Review and Beyond, ondernemingsrecht 2002-11 (Part I) pp. 325 through 332 and 2002-12 pp. 369 through 375 (Part II) The current motto therefore is: think small first.45Source 45: Final report of the British Company Law Review of 26 July 2001. Even more recent developments include the provisions relating to the director’s and the auditor’s liability within the framework of the Companies (Audit, Investigations and Community Enterprise) Bill and the consultative document by the Department of Trade and Industry (DTI) in relation to the flexibility and accessibility of the existing English company law regime.46Source 46: Cf. the Country Status Report on the United Kingdom in this issue of ECL.
Is it a sensible idea to drastically deregulate the provisions on preservation of capital with respect to the Dutch BV? The French Legislator has already abolished the minimum capital requirement for the SARL. Since August 2003, the applicable rule stipulates that the level of the capital can be freely laid down in the Articles of Association of the SARL.47Source 47: Art. L. 223-2 Code de Commerce. The German GmbH, on the other hand, has a minimum capital requirement of 25,000 euros.48Source 48: § 5 Abs. GmbHG.On incorporation, the shareholder of a GmbH may subscribe for only one share (Geschaftsanteil) with a minimum nominal value of 100 euros. Since the nominal value of the Geschaftsanteil is equal to the total amount of the contribution that the shareholder has undertaken to make (Stammeinlage), the size of the Geschaftsanteil may differ per shareholder. For contributions in kind, an auditor’s report must be drawn up and it must be enclosed with the registration made in the Commercial Register. Registration is refused if the valuation is too high.49Source 49: § 9c GmbHG.
Under Netherlands Antilles Law on private companies, however, the concept of authorized capital, issued capital and paid-up capital does not exist at all. Not even a minimum capital is required for the NA BV.50Source 50: Art. 2:201 under b. in conjunction with paragraph 2 NACC. However, there is a requirement that the equity capital of the NA BV may not be negative on incorporation, and that it may not become negative as a result of distributions or repayments to shareholders.51Source 51: Article 22 paragraph 1, and 25 paragraph 5 LBV, respectively With the introduction of the new Book 2 (legal entities), the liability rule for directors in the event of bankruptcy (the so-called Überschuldungs regulation52Source 52: Art. 42 LBV (old)), was repealed and replaced by a lighter variation of the corresponding Dutch regulation.53Source 53: See Art. 2:16 NACC
In the current Anglo-American approach, the minimum capital is ‘just a number’. Consequently, no minimum capital is required for the private company limited by shares.54Source 54: Cf. the Country Status Report on the United Kingdom in this issue of ECL. However, English Law knows the doctrine of wrongful trading55Source 55: See L. Timmerman, From a digital to an analogue company law, and the consequences for the competition of company systems, Ondernemingsrecht 2003, p. 40., which compels directors, on pain of liability, to take action if the company finds itself in an awkward financial situation. In addition, there is the rule that a person, previously involved in a bankruptcy or previously convicted for mismanagement pursuant to the Company Directors Disqualification Act 1980, may no longer become a director of any other company.
Coming back to the question of whether it is sensible to drastically simplify the capital preservation law, I must confess I am rather for it. Meanwhile, the group of experts installed by the Dutch Ministry of Justice and the State Secretary of Economic Affairs, under supervision of Prof. H.J. de Kluiver (the “Expert Group”), has drawn up the report “Simplification and flexibilization of Dutch BV Law”. This report proposes that a great number of rules on capital preservation be cancelled, including the minimum capital requirement.56Source 56: See also High Level Group of Company Law Experts, A Modern Regulatory Framework for Company Law in Europe: A consultative Document, published on the website of the European Commission. An ancillary and compensating measure is the rule that the board of managing directors (the Board), whenever it makes distributions to shareholders, must always decide on the liquidity of the BV. If, in the opinion of the Board, it cannot be reasonably expected that the company, after the intended distribution, can still meet its exigible debts, the Board should then defer the intended distributions. If not, all directors will be jointly and severally liable for the damage caused by the distributions.
The history of the development of the American LLC above shows that the freedom to adopt management structures at one’s own discretion may contribute considerably to the usefulness and popularity of a legal form. What is the state of affairs with regard to the organizational flexibility in our neighbouring countries and in the Netherlands Antilles?
The SARL is managed by one or more ‘gerants‘, who must be individuals.57Source 57: Art. L-223-18 Code de Commerce. They need not originate from the circles of the ‘associés‘.
The Gesellschafters (shareholders) of a GmbH are ‘the highest power’ of corporate governance. The shareholders have a far-reaching ‘Weisungsrecht‘ (right to instruct).58Source 58: § 37 Abs. 1 GmbHG. Such instruction right can even mean that the shareholders hold nearly all managerial powers so that the Geschäftsführung (the Board) is left with, more or less, executive duties.
On 1 March 2004 the shareholder-managed BV was introduced in the Netherlands Antilles.59Source 59: Artt. 2:239 through 242 NACC. This variant of the BV will facilitate the waiving of a separate management body. In such event, for the application of the law, a shareholder will also be regarded as a board member and the joint shareholders will be regarded as the Board. The shareholders may decide on how the company should be managed by them, the applicable segregation of duties and they may stipulate how board decisions should be reached in a shareholders’ agreement to which all shareholders and the company shall be party. The Explanatory Memorandum60Source 60: See page 4. states that the American member-managed LLC has served as an example to the shareholder-managed BV to a certain extent.
The English private company limited by shares may, on the other hand, not be organized without a separate management body.61Source 61: Section 282 Companies Act 1985: “Every private company shall have at least one director”. In addition, a company secretary is required. He fulfils an administrative role and has no board vote.62Source 62: Cf. the Country Status Report on the United Kingdom in this issue of ECL. As the primary task of the board members of a company limited by shares is to represent the shareholders’ interests,63Source 63: J.B.K. Rickford, ‘Which requirements should a modern competitive company law meet?’ in: Nederlands ondernemingsrecht in grensoverschrijdend perspectief, IVO series no. 40, Deventer: Kluwer 2003, pp. 162-163. the managerial powers of the shareholders may also be limited accordingly.64Source 64: See Table A 1985, art 70, first sentence: Subject to the Act, the memorandum and the articles and to any directions given by special resolution, the business of the company shall be managed by the directors who may exercise all the powers of the company”.
This brief overview shows that some foreign legislators do not, by definition, start from a separation of ownership (shareholders’ function) and control (management function). In many cases, the shareholders are, in fact, the actual entrepreneurs who carry out the management duties. They are the ones who have the necessary expertise for that purpose. In actual practice, there is often little or no difference between the composition of the Board and the shareholders’ meeting of a private company with limited liability.
How can the Dutch Legislator take this social reality into account whilst simultaneously keeping pace with the foreign equivalents of the BV? I see three options. The most far-reaching form of simplification would be to include a BV without a Board65Source 65: L. Timmerman, Een BV zonder bestuur en zonder aandeelhoudersvergadering, Ondernemingsrecht 2004, pp. 27-30. in the Act. In particular, as far as joint ventures and other partner-related companies are concerned, this would be a welcome facility. In such event the managing shareholder should be equated with a board member for the application of the laws on director’s liability. On the other hand, the Legislator should be able to opt for a less drastic solution as a result of which only the shareholders’ right to instruct will be reinforced. This facility would then result in the ability to include a concrete right to instruct in the BV’s Articles of Association.66Source 66: On this point, Art. 2:239 par. 4 could be amended as follows: “The Articles of Association may provide that the board should act in accordance with the instructions given by the shareholders “. To a certain extent this may be seen as the codification of a doctrine developed in case law.67Source 67: L. Timmerman, ‘Instructierecht’, Ondernemingsrecht 2001, p. 477 and H.J. de Kluiver and M. Meinema, ‘Mandatory company law following the Act on Revision of Preventive Supervision and the possibilities of derogations and additions in the Articles of Association or in contracts’, WPNR 2002 5603, p. 645. Cf. also F.J.P. van den Ingh, ‘The Instruction Structure in the Company’, in: Concernverhoudingen, Series by Van der Heijden Instituut, part 69, 2002, pp. 13-27. The third variant is to allow the possibility to choose between the two systems. I would prefer the latter option. The expert group, however, does not wish to go that far. They recommend that the statutory obligation to set up a separate management body be maintained. The expert group does, however, see possibilities for reinforcement of the right to instruct if, and to the extent that, the interest of the company (“vennootschappelijke belang”) is not harmed.
In my opinion, a partner-related company with limited liability should primarily meet the needs of entrepreneurs who wish to set up an active collaboration between themselves within the context of the company. Entering into a partner-related company implies that for the duration of the company the position of the partner may, in principle, not be transferred without the consent of all other partners. This means that shares in a partner-related BV may only be transferred if all other partner-shareholders agree. This fact is at odds with Article 2:195, paragraph 8, of the Dutch Civil Code, which provides that the transfer restrictions to which the transfer of shares are subject, may not make such transfer impossible or extremely difficult. Therefore, the statutory provisions are based on the fundamental transferability of BV shares. At the time of the introduction of the BV in 1971, the Minister noted in the Memorandum of Reply68Source 68: Annexes Proceedings Lower House, 1969-1970, 10 689 no.7. to Questions posed by the Dutch Lower House, that the statutory provisions of the BV are in line with those of the NV, but that the particular characteristics of the BV are expressed in the transfer restrictions prescribed by law. Foreign legislators often appear to have dealt with this matter differently.According to the Articles of Association, shares in a GmbH may be subjected to transfer restrictions (Vinkulierung), but this is not mandatory.69Source 69: § 15 Abs. 5 GmbHG The Articles of Association of a GmbH may also completely exclude the transfer of shares.70Source 70: Case law has established, however, that an “Austrittsrecht” is vested in the transfer-restricted shareholder having a ‘wichtige Grund‘.
No mandatory transfer restriction clause is applicable to the transfer of shares in an NA BV, even though the transfer of shares may be limited or excluded in the Articles of Association.71Source 71: Art. 17 LBV (old). Such exclusion or limitation may, however, not go so far so as to render a transfer, approved by all shareholders, invalid.72Source 72: Art. 2:211 par. 2 NACC
Until 1980, a private company limited by shares was obliged to include any form of transfer restriction of shares in its Articles of Association.73Source 73: L.S. Sealy, Cases and Materials in Company Law, London: Butterworths, 7th edition 2001, p. 459. The principle that shares may be transferred freely has applied ever since, whilst the Articles of Association may include some form of transfer restriction.
I propose that Article 2:195 Dutch Civil Code be deleted from BV legislation entirely. This article contains rules interfering with the inclusion of ordinary exit regulations in the Articles of association. The termination of a 50/50 collaboration between partners in a company almost always implies that one of the partners buys out the resigning partner and takes over the latter’s shareholding. Naturally, the determination of the purchase price plays an important role. The company’s own price determination mechanisms are usually preferred. The collaborating partners usually wish to determine the value of their shareholding themselves. They have absolutely no need for the mandatory BV rule that the transferring shareholder is entitled to the actual value of the shares as established by one or more independent experts (Article 2:195 paragraph 6 Dutch Civil Code) or for a mandatory “cash” payment of the purchase price (Article 2:195 paragraph 4 and paragraph 5 Dutch Civil Code). In the past abolishment of these statutory transfer restrictions was advocated more than once.74Source 74: See for instance P. van Schilfgaarde, ‘Contractual structuring of management and supervision’, in: Ondernemingsrechtelijke contracten, IVO series no. 14, 1991, p. 128, speaks clearly about an entirely pointless transfer restriction, a ”useless thing” which had better be abolished. The expert group also recommends that the transfer of BV shares remains unrestricted, unless the Articles of Association limit their transferability. According to the expert group, the exclusion in the Articles of Association of the transferability of shares during a certain period should also be recognized by law.
Many jurisdictions have liberal rules on voting rights and decision-making. With respect to the rules regarding the voting rights of the shareholders, however, French Law includes various mandatory provisions with respect to the required majority and the quorum for SARL. For the SAS, however, there is great freedom.75Source 75: Cf. C.W. de Monchy, ‘NV, BV or EV?’, Ondernemingsrecht 2002, pp. 463/464 Many variations are conceivable: restriction of voting rights, multiple voting rights, different voting rights depending on the subject of the vote, rights of veto and so on. With respect to the decision-making process there is a great deal of legislative freedom
Although the main rule for the GmbH is that the nominal value of the Geschäftsanteil is normative for the scope of the voting right vested in the shareholder,76Source 76: § 47 Abs. 2 GmbHG.this rule may be deviated from without restriction. The same holds true for the rule that shareholders’ resolutions are passed by a simple majority of the votes cast.77Source 77: § 47 Abs. 1 GmbHG. It is even possible to create shares without voting rights.78Source 78: Lutter-Hommelhoff, GmbH-Gesetz kommentar, Köln: Verlag Dr. Otto Schmidt 14th edition 1995, p. 579. Contrary to AG Law, the German Legislator has not deemed it necessary, with respect to the GmbH, to protect minority shareholders by providing mandatory rules on voting rights and decision-making. This was a deliberate choice.79Source 79: U. Immenga, Die personalistische Kapitalgesellschaft. Eine rechtsvergleichende Untersuchung nach deutschem GmbH-Recht und dem Recht der Corporations in den Vereinigten Staaten, Wirtschaftrecht und Wirtschaftspolitik, band 15, Bad Homburg v.d.H.: Atheneumverlag 1970, p.89.
The provisions applicable to the NA BV also create great freedom in the area of allocating voting rights to shareholders.80Source 80: Art. 2:232 par. 1 NACC stipulates in this respect: “To the extent the Articles of Association do not provide otherwise, each share carries the right to cast one vote on all subjects.” The Explanatory Memorandum clarifies that, in addition to shares without voting rights, shares with more voting rights than other shares and shares with voting rights on a limited number of subjects are possible. It is also significant that the possibility to pass resolutions outside the meeting is broader than under the Dutch provisions, as Article 2:235 of the Netherlands Antilles Civil Code does not require all shareholders to cast their vote in favour of the proposal “in writing”.
Liberal rules also apply to the English private company. There are ample possibilities to vary the voting right on shares according to the type of shares. In addition to granting multiple voting rights, it is also possible to limit or entirely exclude the voting right on shares (multiple-voting shares and non-voting shares). Moreover, it has been possible since 1989, by means of a unanimous “elective resolution” 81Source 81: S. 379A Companies Act 1985., to waive certain formalities in the area of decision-making. It is possible, for instance, to do away with the annual meeting, the annual submission of the financial statements to the shareholders and the annual appointment of an auditor but this is subject to the agreement of all shareholders. In addition, it is widely accepted that the new Companies Bill will include, amongst others, relaxations of the laws applicable to private companies, simplification of the procedures for making decisions by written resolution.82Source 82: Cf. the Country Status Report on the United Kingdom in this issue of ECL.
To date, no such freedom exists in the Netherlands. The voting right attached to BV shares is determined based on a purely numerical criterion. If all shares have the same nominal value, the number of votes that may be cast by a shareholder equals the number of shares owned by such shareholder. If the shares have a different nominal value, the nominal amount of the smallest share is normative for the number of votes to be cast. Current law allows only two deviations from this “proportionate rule”: the degressive voting right pursuant to Article 2:228 paragraph 4 Dutch Civil Code and the absolute voting right restriction of Article 2:228 paragraph 5 Dutch Civil Code. Neither deviation possibility is used very often in practice. As regards the decision-making at shareholders’ level, the law lays down rules that fit the image of a company which relies on a multitude of, more or less anonymous shareholders, for its capital, e.g. the mandatory annual meeting (Article 2:218 Dutch Civil Code), the convocation requirements (Articles 2:223 and 224 Dutch Civil Code), the setting of the term for convocation (Article 2:225 Dutch Civil Code) and the place of the meeting (Article 2:226 Dutch Civil Code). The underlying idea is that these provisions allow the shareholders to represent their interests as providers of capital as best as possible, based upon the lack of knowledge of the business vis-à-vis the board attributed to the shareholders.
In my opinion, the new basic principle for partner-related companies with limited liability should, to the extent that the Articles of Association do not provide otherwise, stipulate that each share (irrespective of its nominal value) carries the right to cast one vote and that resolutions are passed in accordance with rules laid down in the Articles of Association. In my view, the Dutch BV will become more attractive if the mandatory nature of the above-mentioned decision-making rules were to be abolished, allowing the Articles of Association to deviate from these rules if so desired. Also the expert group tends to have less mandatory rules in the area of voting rights and decision-making.
In conclusion, I shall address the question on the role to be played by the European Legislator. It is common knowledge that an international project group consisting of representatives from trade and industry and specialists in the area of company law launched a proposal in September 1998 to draw up a regulation for a new legal form specifically aimed at the promotion of the collaboration between European enterprises. Although the draft regulation entitled ‘Société Privée Européene (SPE)’ does not originate from the European Commission, the latter does support the proposal.83Source 83: According to M. Monti, member of the European Commission, at the conference on the SPE in Brussels on 8 April 1999. Some time ago the Ondernemingsrecht trade journal dedicated a thematic issue to the European BV.84Source 84: Ondernemingsrecht 2001, pp. 317-335.
For the time being, the European Economic Interest Grouping (EEIG) is the only legal form of a supranational nature. On 8 October 2004 the regulations with regard to the Societas Europaea (SE) became effective in the Netherlands.85Source 85: Ondernemingsrecht 2003, p. 222.
The SPE has been shaped as a private company limited by shares of a supranational nature. A positive point of this facility is the organizational flexibility, which is expressed in the provision that the Articles of Association may freely stipulate the rights of shareholders, the organization of the company, the powers of the corporate bodies and the transferability of shares.86Source 86: Article 2 par. 3 provisional draft SPE regulation. Hence, there is no strong segregation of the shareholders’ function and the management function. The Achilles’ heel in this facility is the applicability of the “General principles of Community Company Law and the General principles common to national laws, provided they are not inconsistent with this Regulation”.87Source 87: Article 12 par. 2 provisional draft SPE regulation. How do these general principles of Community Company Law relate to private companies limited by shares.? There is no conclusive answer to this question as, to date, the harmonization guidelines have focused on public limited liability companies rather than private companies limited by shares. Therefore, I rather wonder whether the European BV will ever come about and, if so, whether it will not end up much the same as the SE. It will probably only be feasible from a political point of view, that national law is often referred to and that consequently, there is no real supranational legal form.88Source 88: Cf. J.N. Schutte-Veenstra, ‘The European BV: an illusion?’, in: Nederlands ondernemingsrecht in grensoverschrijdend perspectief, IVO series no. 40 2003, pp. 125-140.Now that we, in the meantime, have arrived in the post-Inspire Art era, it would seem more fruitful to me if the European Legislator were to focus on the harmonization of the rules for cross-border conversion89Source 89: Today, under Netherlands Antilles law, a foreign legal entity can convert into a Netherlands Antilles legal entity (Art. 2:303 par. 1 NACC). On the other hand, Netherlands Antilles BVs and NVs can convert into foreign legal entities (Art. 2:304 NACC)., legal mergers and the transfer of the seat of the BV and its foreign equivalents.90Source 90: Cf. M.G.J.C. Raaijmakers, ‘A European BV or the overhaul of national law for ‘forms of private limited liability companies’?’, Ondernemingsrecht 2001, p. 327, J.N. Schutte-Veenstra, ‘The European BV: an illusion?’ and E.D.G. Kiersch, ‘Grensoverschrijdende samenwerking en de noodzaak van een eenvoudig BV-recht’, both in: Nederlands ondernemingsrecht in grensoverschrijdend perspectief, IVO series no. 40 2003, pp. 134-140 and pp. 148-150, respectively, and L. Timmerman, ‘From a digital to an analogue company law, and the consequences for the competition of company systems, Ondernemingsrecht 2003, p. 42.
T.P. (Tom) van Duuren (1960) studied Dutch law (Free University of Amsterdam), notarial law (Free University of Amsterdam) and tax law (University of Amsterdam) and obtained his doctoral degree at the Tilburg University in November 2002 based on his thesis on ‘The joint venture company, a partner-related company with limited liability’.