While the liability of company directors in The Netherlands is frequently discussed, the liability of shareholders often receives less attention. However, shareholders can indeed be held personally liable for their actions within a company under Dutch law. Such personal liability can have significant consequences for a shareholder’s private life. The Dutch system provides strong protection for shareholders against personal liability for company debts, but this protection is not absolute. Therefore, it is crucial to understand the risks related to shareholder liability in the Netherlands, especially as they pertain to the legal and financial responsibilities of shareholders.
A basic principle of Dutch corporate law is that shareholders in a private company generally enjoy limited liability, meaning they are not personally responsible for the company’s debts beyond their investment. These rules apply in particular to shareholders in a private company, where the legal entity operates independently in legal transactions and debt obligations.
This article explores the various situations in which shareholders in The Netherlands may be held liable.
Introduction to Dutch Law
Dutch law provides the foundation for how companies operate in the Netherlands, particularly when it comes to the personal liability of directors and shareholders. The Dutch Civil Code stipulates the legal framework that governs the rights and obligations of all parties involved in a company, including directors, shareholders, and creditors. This comprehensive set of rules ensures that companies act within the boundaries of the law and that the interests of all stakeholders are protected. Understanding the Dutch Civil Code and its provisions is essential for anyone involved in Dutch companies, as it outlines the circumstances under which individuals may be held personally liable for company actions. By adhering to Dutch law, companies and their representatives can minimize legal risks and ensure compliance with their obligations under the civil code.
Corporate Structure
The corporate structure of a Dutch company is designed to promote effective governance and clear accountability. Under Dutch company law, the main bodies within a company typically include the board of directors, the supervisory board, and the shareholders. The board of directors is responsible for managing the day-to-day affairs of the company, making operational decisions, and representing the company externally. The supervisory board, where present, oversees the actions of the directors and ensures that the company is managed in accordance with the law and the company’s best interests. Shareholders, meanwhile, play a crucial role in decision making by exercising their voting rights on key issues such as the appointment and dismissal of directors. Dutch company law clearly defines the roles and responsibilities of each of these entities, ensuring that the company operates efficiently and that the interests of all parties are safeguarded.
1. Shareholders’ Obligations
A shareholder owns shares in a legal entity. Under the Dutch Civil Code, a legal entity is treated similarly to a natural person concerning property rights. This means a legal entity can hold rights and obligations and can engage in legal activities such as acquiring property, entering contracts, or initiating lawsuits. Since a legal entity exists only on paper, it must be represented by natural persons, namely the director(s). Generally, the legal entity is liable for any damages resulting from its actions, but directors can sometimes be held liable under directors’ liability rules. The limited liability principle, where a corporation is treated as a separate legal entity from its owners, is a common feature of company law in many other countries, such as those with similar corporate structures like the United States and the United Kingdom.
This raises the question: can shareholders be held liable for their actions related to the legal entity? To determine shareholder liability, it is necessary to establish their obligations. We can distinguish three types of specific obligations for shareholders: legal obligations, obligations arising from the articles of incorporation, and obligations stemming from the shareholders’ agreement. In particular, shareholders may be subject to certain obligations as outlined in the articles of incorporation, such as requirements for shareholders, conditions for share transfers, and potential liabilities. Shareholders are deemed to have accepted these obligations if they have consented to them.
The extent of shareholder liability is generally limited to the amount invested in their shares.
1.1 Legal Obligations of Shareholders
According to the Dutch Civil Code, shareholders have one key obligation: to pay the company for the shares they acquire. This obligation is set out in Article 2:191 of the Dutch Civil Code and represents the sole explicit legal obligation for shareholders. If a shareholder fails to make the required payment for their shares, they will be held liable. However, Article 2:191 also allows the articles of incorporation to specify that shares do not need to be fully paid immediately:
Upon subscription for a share, its nominal amount must be paid to the company. The articles of incorporation may stipulate that the nominal amount, or a portion thereof, is payable only after a certain time or upon the company’s call for payment.
In addition to these financial obligations, each share typically carries one vote in the general meeting, reflecting the principle of shareholder voting rights.
If such a provision is included in the articles of incorporation, protection exists for third parties in the event of bankruptcy. Should the company be declared bankrupt and shares remain unpaid—whether due to such a stipulation or otherwise—the appointed bankruptcy trustee is empowered to demand full payment from shareholders. This is stipulated in Article 2:193 of the Dutch Civil Code:
The curator of a company is authorized to call up and collect all outstanding mandatory payments related to shares, regardless of any provisions in the articles of incorporation or Article 2:191.
These legal obligations mean shareholders are generally only liable up to the amount of their shares. They cannot be held liable for the company’s actions. This principle is confirmed by Articles 2:64 and 2:175 of the Dutch Civil Code:
A shareholder is not personally liable for acts performed in the company’s name and is not obliged to contribute to company losses beyond what has been paid or is owed on their shares.
1.2 Obligations Arising from the Articles of Incorporation
Beyond the legal obligation to pay for shares, shareholders’ obligations can also be set out in the articles of incorporation. Article 2:192, paragraph 1 of the Dutch Civil Code provides:
The articles of incorporation may, with respect to all shares or certain types of shares:
Attach obligations to shareholdership to be performed towards the company, third parties, or between shareholders;
Impose requirements on shareholdership;
Determine that a shareholder must transfer shares or offer to transfer shares under specified circumstances.
These provisions can extend shareholder liability, for example by making shareholders personally liable for company debts or setting financing conditions. However, such obligations cannot be imposed against a shareholder’s will, as Article 2:192, paragraph 1 states:
An obligation or requirement as mentioned above cannot be imposed on a shareholder against their will, even conditionally or temporarily.
To impose additional obligations via the articles of incorporation, a shareholders’ resolution must be passed by the General Meeting of Shareholders. Shareholders who vote against such provisions cannot be held liable under them. Non compliance with these obligations outlined in the articles of incorporation can result in shareholder liability for damages.
1.3 Obligations Arising from the Shareholders’ Agreement
Shareholders may also enter into a shareholders’ agreement, which sets out additional rights and obligations among themselves. This agreement only binds the shareholders and does not affect third parties. If a shareholder fails to comply with the agreement, they may be liable for damages arising from this breach under Article 6:74 of the Dutch Civil Code. Shareholders may also be liable for actions taken on behalf of the company if such actions breach the shareholders’ agreement. Liability based on the 403 statement makes a shareholder jointly and severally liable for the debts of the legal person. However, if a company has a sole shareholder, a shareholders’ agreement is generally unnecessary.
General Meeting and Shareholder Resolutions
The general meeting is a central element of corporate governance in Dutch companies, providing shareholders with the opportunity to make important decisions about the company’s future. During the general meeting, shareholders can vote on a range of issues, including amendments to the articles of association, approval of the annual accounts, and the appointment or removal of directors. The Dutch Civil Code requires that certain decisions be made through a formal resolution, which must be properly documented and adopted by the general meeting. These formal resolutions are essential for ensuring transparency and legal compliance within the company. Shareholders have the right to propose resolutions and participate in the decision-making process, making the general meeting a vital forum for exercising shareholder rights and influencing the direction of the company. Adhering to the procedures set out in the civil code and the articles of association helps companies avoid disputes and ensures that all decisions are legally valid.
2. Liability for Unlawful Acts
In addition to specific obligations, shareholders may be liable for an unlawful act under Article 6:162 of the Dutch Civil Code. Shareholders must act lawfully toward creditors, investors, suppliers, and other third parties. Shareholders can be liable under tort law for acting carelessly. If a shareholder commits an unlawful act, they can be held personally liable.
Unlawful acts can include, for example, distributing profits when it is clear that the company cannot meet its creditor obligations afterward. Shareholders can be held liable if they received a dividend payment while knowing that the company could not pay its debts after the distribution. In such cases, shareholders may be liable for damages suffered by the company or its creditors as a result of their actions. Moreover, shareholders are expected to conduct due diligence when selling shares. If a shareholder sells shares to a third party who is unlikely to fulfill the company’s obligations, the shareholder may be liable for failing to consider creditors’ interests, and may be responsible for damages suffered.
A Dutch court may be involved in determining liability for unlawful acts committed by shareholders.
3. Liability of Policy-Makers
Finally, shareholders may incur liabilities if they act as policy-makers. In Dutch companies, which are legal entities, the executive board is responsible for the company’s day-to-day management. When the board consists of multiple members, collective liability may arise if duties are not properly performed. Normally, directors manage the company’s day-to-day operations, not shareholders. However, shareholders can instruct directors if this is allowed by the articles of incorporation. Article 2:239, paragraph 4 of the Dutch Civil Code states:
The articles of incorporation may require the board of directors to act according to instructions from another corporate body. The board must follow these instructions unless they conflict with the company’s interests.
Shareholders should only give general instructions and must not interfere in specific matters, such as directing the dismissal of employees. Sometimes, instructions or powers may be granted for a specific period only. Shareholders who effectively manage the company’s daily affairs assume the role of policy-makers and are treated like directors. Consequently, they may be held liable for damages resulting from their policies, including under director’s liability rules if the company becomes bankrupt. Improper performance of management duties can result in liability for damages. There is a high threshold for directors to escape liability under Dutch law, and individual directors may be held personally liable for their actions. Supervisory directors also have oversight responsibilities and may face liability if they fail in their duties. It is essential for all involved to act in the company’s interests and to take measures to prevent mismanagement or damage. This is supported by Articles 2:138, paragraph 7, and 2:248, paragraph 7 of the Dutch Civil Code:
Any person who has actually determined or co-determined the company’s policy as if they were a director is equated with a director.
Article 2:216, paragraph 4 further confirms that persons who determine or co-determine company policy are equated with directors and may be held liable accordingly.
Bankruptcy and Liability
Bankruptcy can have serious consequences for both directors and shareholders in the Netherlands. Under Dutch law, if a company is declared bankrupt, directors and shareholders may be held personally liable for the company’s debts if it is found that they have failed to fulfill their obligations or have acted improperly. In some cases, the law provides that directors and shareholders can be held severally liable, meaning each individual may be responsible for the full amount of the company’s debts. To avoid being held personally liable, it is essential for directors and shareholders to always act in the best interest of the company and to comply with all relevant legal requirements. This includes fulfilling their obligations under Dutch law and ensuring that their actions do not harm the company or its creditors. By understanding the risks associated with bankruptcy and liability, parties can take proactive steps to protect themselves and the company.
Avoiding Liability
Directors and shareholders can take several measures to avoid personal liability under Dutch law. The Dutch Civil Code emphasizes the importance of fulfilling all legal obligations, such as maintaining accurate accounting records, filing annual accounts on time, and making decisions that serve the company’s best interest. To further reduce the risk of being held personally liable, directors and shareholders should seek legal assistance when necessary and ensure they are fully informed about their responsibilities. Obtaining appropriate insurance coverage can also provide an additional layer of protection. By staying compliant with the civil code, acting transparently, and prioritizing the company’s interests, directors and shareholders can effectively avoid liability and contribute to the long-term success of the company.
4. Conclusion
Generally, the company is liable for damages arising from its actions, and directors may be liable in certain cases. However, shareholders liability is also a key concern, as shareholders can be held liable for damages in specific situations. Shareholders must comply with obligations arising from law, the articles of incorporation, and shareholders’ agreements. Failure to comply may result in liability for damages.
Additionally, shareholders must act lawfully. Unlawful conduct can lead to shareholders liability. Shareholders may be liable if they wrongfully improve their position compared to other creditors before bankruptcy. Lastly, shareholders should act within their role and avoid assuming directorial functions. Shareholders who manage the company’s daily affairs may be held liable under directors’ liability provisions. It is advisable for shareholders to be aware of these risks to avoid liability.
Contact
If you have questions or comments after reading this article, please contact Mr. Ruby van Kersbergen, lawyer at Law & More via [email protected], or Mr. Tom Meevis, lawyer at Law & More via [email protected], or call +31 (0)40-3690680.
[1] ECLI:NL:HR:1955:AG2033 (Forumbank).
[2] ECLI:NL:HR:2015:522 (Hollandse Glascentrale Beheer B.V.).