The statutory two-tier company is a special form of company that can apply to the NV and BV (as well as the cooperative). It is often thought that this only applies to internationally operating groups with part of their activities in the Netherlands. However, this does not necessarily have to be the case; the structure regime can become applicable sooner than one would expect. Is this something that should be avoided or does it also have its advantages? This article discusses the ins and outs of the statutory two-tier company and enables you to make a proper assessment of its effects.
Introduction
The two-tier board structure is a legal requirement for large companies in the Netherlands, such as public limited companies (NVs) and private limited companies (BVs). Once a company meets certain criteria, it is obliged to establish a Supervisory Board (RvC). This board supervises the management and ensures that the company represents not only the interests of shareholders, but also those of employees and other stakeholders. The two-tier structure is intended to maintain balance within large companies and ensure professional supervision. In this article, we discuss the administrative and legal aspects of the two-tier structure, the consequences for companies that fall under this obligation, and the role of the Supervisory Board in ensuring good governance and supervision.
The purpose of the two-tier company
The two-tier company was introduced into our legal system due to changes in share ownership in the middle of the last century. Whereas in the past there was long-term (major) share ownership, it became increasingly common to invest for the short term, even by pension funds. This shorter involvement meant that the general meeting of shareholders (GMS) was less effective in supervising the management.
The main difference between a structured public limited company and a structured private limited company is the presence of a mandatory supervisory board, which plays a central role in the control and governance of the company.
This led the legislator to introduce the structured company in the 1970s: a special form of company aimed at tightening supervision and maintaining a balance between labour and capital. This balance is pursued by tightening the tasks and powers of the Supervisory Board (RvC) and by introducing a Works Council (OR), at the expense of the power of the AGM. The structured company thus restores the balance between capital and labour by giving employee representatives more influence.
This development is still ongoing today. In large companies, many shareholders play a passive role, allowing a small group of shareholders to take the lead in the AGM and exert considerable influence on the board. The short duration of share ownership encourages a short-term vision in which shares must increase in value as quickly as possible.
This short-term vision is limited, because stakeholders such as employees actually benefit from a long-term vision. In this context, the Corporate Governance Code refers to ‘long-term value creation’. In growing family businesses, the larger structure can lead to greater employee participation through the works council. The strengthened role of the Supervisory Board contributes to a longer-term vision and balanced development of the company. That is why the two-tier company remains an important form of company that strives to balance the interests of different stakeholders.
To achieve this goal, the Supervisory Board of a two-tier company is given extensive powers that go beyond those of a normal company. For example, the Supervisory Board supervises the management and has the right to appoint and dismiss directors. Each member of the Supervisory Board has a specific supervisory task within the body. This ensures professional and independent supervision, which benefits the continuity and policy of the company. In addition, the works council has a strengthened right of recommendation in the appointment of one third of the supervisory directors, which increases the influence of employees on the management.
Which companies are eligible for the two-tier board system?
The two-tier structure regime is not immediately mandatory. The law sets conditions that a company must meet before its application becomes mandatory after a certain period (unless there is an exemption, which is discussed below). These conditions are set out in Section 2:263 of the Civil Code (BW):
- The company’s issued capital, including reserves on the balance sheet and notes, must be at least an amount set by royal decree (currently €16 million). This also includes repurchased (but not cancelled) shares and hidden reserves from the notes.
- The company or one of its dependent companies has established a Works Council (OR) on the basis of a legal obligation.
- There are at least 100 employees working in the Netherlands for the company and its subsidiaries, regardless of whether they are full-time or part-time.
A large public limited company (NV) is obliged to establish a Supervisory Board (RvC) under the structural regime and to follow specific governance structures.
In the case of family companies, the weakened structure regime may apply in situations where one person or several persons together own the entire capital of the company and therefore exert influence on its policy.
An example of a situation in which a company no longer meets these conditions is when the number of employees falls below 100; in that case, the company is no longer a structured company.
What is a dependent company?
An important concept in these conditions is the dependent company. There is often a misconception that the structural regime does not apply to the parent company if, for example, it is not the parent but the subsidiary that has established a works council. It is therefore important to check whether certain conditions are met for other companies within the group, which are classified as dependent companies under Article 2:152/262 of the Dutch Civil Code if:
- A legal entity to which the company or one or more dependent companies, either alone or jointly, provide at least half of the issued capital for their own account.
- A company whose business is registered in the commercial register and for which the company or a dependent company is fully liable to third parties for all debts as a partner.
If a company no longer meets the conditions after three years, its registration as a structured company must be cancelled.
Management and supervision
The Supervisory Board (RvC) plays a central role in the structural regime. The RvC consists of at least three members, who are appointed by the general meeting of shareholders (AVA). The SC supervises the management of the company and has important powers, such as appointing and dismissing directors. In addition, the SC must approve important management decisions, for example when issuing shares or amending the articles of association. The works council (OR) plays an active role in this: it has a strengthened right of recommendation in the appointment of supervisory directors, which allows employees to influence the composition of the Supervisory Board. This structure strengthens the supervision of the management and makes decision-making within the company more balanced and transparent.
Voluntary application
It is also possible to apply the (full or mitigated) structure regime voluntarily. In that case, only the requirement concerning the works council applies. The structure regime then applies as soon as it is included in the company’s articles of association.
The establishment of a two-tier company
If a company meets the above requirements, it is legally considered a ‘large company’. A structured company must comply with legal obligations, such as establishing a supervisory board and amending the articles of association. This must be reported to the commercial register within two months of the annual accounts being adopted by the general meeting of shareholders. Failure to report this constitutes an economic offence. Interested parties may request the court to have the registration carried out. If the notification has been in the commercial register for three consecutive years, the structural regime will apply.
At that point, the articles of association must be amended to enable the regime to apply. The period for application of the structural regime only starts to run after the notification has been made, even if the notification has been omitted. The notification may be withdrawn in the meantime if the company no longer meets the conditions. If it is later reported that the company does meet the conditions, the period starts to run again (unless the previous termination was unjustified).
(Partial) exemption
The notification requirement does not apply in the case of full exemption. If the structural regime applies, it will continue to apply without a transition period. The law provides for the following exemptions:
- The company is a dependent company of a legal entity to which the full or mitigated structure regime applies. In other words, the subsidiary is exempt if the (mitigated) structure regime applies to the parent company, but the reverse does not apply. This could also be, for example, a cooperative or a mutual insurance company to which the structure regime applies.
- The company acts as a management and financing company in an international group, with the majority of the group’s employees working outside the Netherlands.
- A company in which at least half of the issued capital is held by at least two legal entities subject to the structure regime in accordance with a joint venture.
- The service company is part of an international group.
In addition, there is a mitigated or weakened structure regime for international groups, in which the supervisory board is not authorised to appoint or dismiss directors. The full structure regime applies as the standard framework for governance within companies, in which the supervisory board has full control over the appointment and dismissal of directors. The weakened two-tier system applies to companies in which the shareholders retain the power to appoint and dismiss directors. This is the case for:
- Structural companies in which at least half of the issued capital is held by a (Dutch or foreign) parent company or dependent company and the majority of the employees work outside the Netherlands.
- Structural companies in which at least half of the issued capital is held by two or more companies under a mutual agreement (joint venture), with the majority of employees within their group working outside the Netherlands.
- Structured companies in which at least half of the issued capital is held by a parent company or dependent company that is itself a structured company under a mutual agreement.
The consequences of the two-tier board system
After the expiry of the term, the company must amend its articles of association in accordance with the legal provisions of the structural regime (for public limited companies, Articles 2:158-164 of the Dutch Civil Code and for private limited companies, Articles 2:268-274 of the Dutch Civil Code). The structural company then differs from the ordinary company in the following respects:
- The establishment of a Supervisory Board (RvC) is mandatory (or a one-tier board structure pursuant to Sections 2:164a/274a of the Dutch Civil Code). The number of supervisory directors on the Supervisory Board is at least three, but this number may vary depending on the situation.
- The SC is given more extensive powers at the expense of the GMS, such as approval rights for important management decisions and (under the full regime) the appointment and dismissal of directors. The incumbent SC has influence over appointments and decisions, which limits the power of the shareholders once the SC is active.
- The supervisory directors are appointed by the AGM on the recommendation of the Supervisory Board, with one third of the members being nominated by the Works Council. The procedure for appointing new supervisory directors means that both the shareholders and the Works Council have influence over the composition of the Supervisory Board. Rejection is only possible with an absolute majority representing at least one third of the issued capital.
- If confidence in the entire Supervisory Board is withdrawn, the Enterprise Chamber may appoint a new Supervisory Board, which the shareholders cannot dismiss.
Two-tier structure objectionable?
The two-tier structure can limit the power of small, activist and exclusively profit-oriented shareholders. The supervisory board can focus on a broader range of interests within the company, which benefits the stakeholders and the continuity of the company. Shareholders lose a lot of influence over the appointment of directors once the Supervisory Board has been established. The two-tier company thus protects the interests of all stakeholders, not just those of the shareholders. Employees also gain more influence, as the Works Council appoints one third of the Supervisory Board.
Restriction of shareholder control
The two-tier structure can be disadvantageous in situations that deviate from short-term shareholder practice. Major shareholders, such as those in family businesses, may find their control restricted by the two-tier structure. Family businesses may consider setting up a supervisory board to exercise oversight, especially if the management consists of external specialists. This may make the company less attractive to foreign investors.
It is no longer possible for shareholders to appoint and dismiss directors, and even in the mitigated regime, the right of veto on important management decisions is limited. Shareholders can dismiss supervisory directors, but this is difficult and requires court approval. The other recommendation or objection rights and the possibility of interim dismissal are limited. The desirability of the structural regime therefore depends on the shareholder culture.
Advantages and disadvantages
The two-tier regime offers several advantages for large companies. For example, it provides better protection for the interests of all stakeholders, including shareholders, employees and other interested parties. The presence of an independent supervisory board contributes to greater stability and continuity within the company, as important decisions are carefully considered. At the same time, the two-tier regime also has disadvantages. Shareholders’ influence on management is limited because the supervisory board plays a central role in the appointment and dismissal of directors. This can lead to less direct control for shareholders. In addition, the two-tier board system entails additional administrative burdens and costs because the company must comply with stricter requirements in the areas of supervision and governance.
Implementation and management
The introduction of the dual-tier board system requires careful preparation and a structured approach. The company must amend its articles of association to enable the dual-tier board system and officially establish the supervisory board. It is then important for the supervisory board to develop an effective supervisory system so that the company’s management is monitored in a professional manner. Good communication with all stakeholders, such as shareholders, employees and creditors, is essential to create support and ensure confidence in the management and the supervisory board. By making clear agreements and acting transparently, the company can successfully implement and manage the structural regime.
A tailor-made two-tier structure
Nevertheless, it is possible to make adjustments within the legal limits to accommodate shareholders. Although it is not possible to statutorily restrict the approval of important management decisions by the supervisory board, the approval of another corporate body, such as the general meeting of shareholders, may be required. It is advisable for family businesses to consider the composition of the supervisory board in good time.
In addition to amendments to the articles of association, contractual agreements are also possible, but these are less enforceable under company law. The supervisory board in a family business can provide valuable input on sensitive issues. Legally permitted amendments to the articles of association make it possible to create an appropriate structural regime that suits the company.
Conclusion
The two-tier structure is an essential part of corporate governance for large companies in the Netherlands. It provides a legal and administrative framework that protects the interests of all stakeholders and contributes to the stability and continuity of the company. The implementation of the two-tier board system requires careful preparation, a well-functioning supervisory system and clear communication with all parties involved. For companies that fall under the two-tier board system, it is very important to take these aspects seriously and to ensure balanced and transparent business operations.
Do you still have questions about the structure regime after reading this article, or would you like customised advice on a structure regime? Then please contact Law & More. Our lawyers are specialised in corporate law and will be pleased to help you!