The statutory two-tier company in the Netherlands

The statutory two-tier company (structuurvennootschap) is a Dutch NV or BV that, because of its size, must set up a supervisory board with powers that would otherwise belong to the shareholders. The regime applies automatically once three conditions in article 2:153 of the Dutch Civil Code for the NV, and article 2:263 for the BV, have been met for three consecutive years: the issued capital plus reserves reach the amount fixed by royal decree, the company or a dependent company has a works council it was legally obliged to establish, and the company and its dependent companies together employ at least one hundred people in the Netherlands. It is not a choice, and it is not reserved for listed multinationals.

What the regime is for

The two-tier regime was introduced in the 1970s in response to a change in share ownership. Long-term holdings by identifiable owners had given way to shorter, more anonymous ownership, and the general meeting had become a weak supervisor of the board. The legislature answered by shifting a block of shareholder power to a mandatory supervisory board and by giving the works council influence over who sits on it. The stated aim was to restore a balance between capital and labour and to secure professional, independent supervision of a company whose decisions affect a large workforce.

That rationale still describes how the regime works in practice. Where a dispersed shareholder base allows a small activist group to dominate the general meeting, the supervisory board is the body that has to weigh continuity, employment and the long-term interest of the enterprise alongside return on capital. The Dutch Corporate Governance Code, which applies to listed companies, expresses the same idea in the language of long-term value creation. The two-tier regime is the statutory, mandatory version of it, and it binds companies that never come near a stock exchange.

The regime exists for the NV and the BV and, in an equivalent form, for the cooperative and the mutual insurance association. The substantive rules for the BV are in articles 2:262 to 2:274a of the Civil Code; the parallel provisions for the NV are in articles 2:152 to 2:164a. The two sets run in step, which is why practitioners cite them as a pair.

When the regime applies

The three conditions

All three conditions must be satisfied at the same time. The first is financial: the issued capital together with the reserves shown in the balance sheet and the notes must reach at least the amount fixed by royal decree. That figure has stood at sixteen million euros, it is not indexed automatically, and it should be checked against the decree in force before any conclusion is drawn from it. Repurchased but not cancelled shares count towards the total, as do reserves disclosed in the notes.

The second is that the company, or one of its dependent companies, has a works council that it was under a statutory duty to establish. A voluntary works council does not trigger the regime. The third is that the company together with its dependent companies employs at least one hundred people in the Netherlands, counted by head and not by full-time equivalent, so a workforce of part-timers counts in full.

The second and third conditions explain why the regime catches companies that do not expect it. A holding company with three employees of its own can meet the employee threshold and the works council condition through its subsidiaries, and a company that has grown steadily can cross the capital threshold through retained earnings rather than through any capital transaction.

Dependent companies

The concept of the dependent company (afhankelijke maatschappij) is defined in article 2:262 for the BV and article 2:152 for the NV. A legal entity is a dependent company where the company, alone or together with other dependent companies, provides at least half of the issued capital for its own account. So is a partnership registered in the commercial register in which the company or a dependent company is fully liable to third parties for all the debts as a partner.

This is where the common misconception sits. Boards frequently assume that because the works council was established at the operating subsidiary rather than at the holding company, the holding company falls outside the regime. It does not: the conditions are tested at group level through the dependent company definition, and it is the holding company, not the subsidiary with the works council, that becomes the two-tier company.

The notification and the three-year clock

A company that meets the conditions must file a statement to that effect with the commercial register within two months of the adoption of its annual accounts by the general meeting. Failure to file is an economic offence, and an interested party can ask the court to order the registration. The regime itself does not apply immediately. It applies once the statement has stood in the register for three consecutive years, which is the point at which the articles of association must be brought into line with the statutory provisions.

Two details matter. The three-year period runs only from the moment the statement is actually filed, so a company that neglected to file does not thereby accelerate the regime, but it does postpone a clock that will start on filing. And the statement can be withdrawn in the meantime if the conditions cease to be met, for example because the workforce in the Netherlands drops below one hundred. If the conditions are met again later, the period starts to run afresh, unless the earlier withdrawal was unjustified.

Exemptions and the weakened regime

Full exemption

Article 2:263 paragraph 3, and its counterpart article 2:153 paragraph 3, exempt four categories of company entirely, and an exempt company does not even have to file the statement. The first is a company that is itself a dependent company of a legal entity to which the full or weakened regime already applies; the exemption runs downwards only, so the subsidiary of a two-tier parent is exempt but a parent is never exempted by the position of its subsidiary. The second is a company that acts as a management and finance company within an international group in which the majority of the employees work outside the Netherlands. The third is a company in which at least half of the issued capital is held, under a joint arrangement, by two or more legal entities that are themselves subject to the regime. The fourth concerns service companies within an international group.

Where a full exemption applies, it applies without any transitional period. Where it falls away, the ordinary route through notification and the three-year clock begins.

The weakened regime

The weakened or mitigated regime (verzwakt structuurregime) is not an exemption but a variant. Article 2:265 of the Civil Code, and article 2:155 for the NV, disapply the provision under which the supervisory board appoints and dismisses the directors where at least half of the issued capital is held by a legal entity whose employees, counted together with those of its group companies, work in the majority outside the Netherlands, or by dependent companies of such an entity, or under a joint arrangement between them. Article 2:265a extends the same treatment to certain joint-venture arrangements.

The effect is precise and worth stating plainly: under the weakened regime the shareholders keep the power to appoint and dismiss directors, while everything else about the regime, including the mandatory supervisory board, the appointment procedure for supervisory directors and the catalogue of approval rights, continues to apply. The weakened regime does not apply where the employees of the company and its group are, on balance, working in the Netherlands.

What changes once the regime applies

Composition and appointment of the supervisory board

A supervisory board becomes mandatory and must have at least three members; a board with fewer members is incomplete and the statute provides for that situation. Supervisory directors are appointed by the general meeting on the nomination of the supervisory board itself, and the general meeting can reject a nomination only by an absolute majority of the votes cast representing at least one third of the issued capital. For one third of the seats the works council has an enhanced right of recommendation: the supervisory board must follow the recommendation unless it objects on statutory grounds, and a dispute goes to the Enterprise Chamber.

The practical consequence is that a shareholder cannot simply place its own people on the supervisory board, and cannot remove an individual supervisory director at will. An individual supervisory director is dismissed by the Enterprise Chamber of the Amsterdam Court of Appeal on the application of the company, the general meeting or the works council, on grounds of neglect of duty, other weighty reasons or a fundamental change of circumstances.

Appointment of directors and approval rights

Under the full regime the supervisory board appoints and dismisses the directors; under the weakened regime that power stays with the general meeting. In both versions the supervisory board holds a statutory catalogue of approval rights over major management decisions, set out in article 2:274 for the BV and article 2:164 for the NV. It covers, among other things, the issue of shares, significant investments, the acquisition or disposal of a participating interest above a statutory threshold, a proposal to amend the articles of association or to dissolve the company, an application for bankruptcy, and a major reduction of the workforce or a far-reaching change in conditions of employment.

The absence of the required approval does not affect the authority of the board to represent the company towards third parties. That is a deliberate choice: a counterparty acting in good faith is protected, and the consequences of proceeding without approval are internal, in the form of possible liability of the directors. Boards that treat the catalogue as a formality misread it, because it is the mechanism through which the supervisory board actually steers.

Withdrawal of confidence in the supervisory board

The counterweight for shareholders is collective rather than individual. Under article 2:161a of the Civil Code, and article 2:271a for the BV, the general meeting can withdraw its confidence in the supervisory board by an absolute majority of the votes cast representing at least one third of the issued capital. The resolution dismisses every supervisory director with immediate effect. The works council must first be given the opportunity to state its position, and the resolution cannot be taken until the board has been heard on the reasons given.

What follows is the reason this instrument is used sparingly. The management board must then apply to the Enterprise Chamber for the temporary appointment of supervisory directors, and the Enterprise Chamber determines the consequences of that appointment. The shareholders cannot dismiss the supervisory directors it appoints. Withdrawing confidence therefore hands the composition of the supervisory board to the court rather than to the meeting that voted. Our article on the Enterprise Chamber explains how those proceedings run.

The one-tier alternative and voluntary application

A two-tier company is not obliged to have a separate supervisory board at all. Articles 2:274a and 2:164a of the Civil Code allow the statutory tasks and powers to be exercised within a one-tier board, in which non-executive directors sit on the same board as the executives and carry the supervisory function. The choice is made in the articles of association. It suits groups that already work with an Anglo-American board model and want a single decision-making body, but it does not soften the regime: the non-executive directors inherit the same appointment procedure, the same works council recommendation right and the same approval catalogue.

The regime can also be adopted voluntarily, in whole or in the weakened form, by including it in the articles of association. In that case only the works council condition applies, and the regime takes effect as soon as the articles say so. Companies do this for a reason: a professional supervisory board with statutory powers can be a way of separating ownership from management in a business where the family shareholders no longer run the company day to day, and it signals to lenders and counterparties that supervision is not merely nominal.

What it means for shareholders, family businesses and investors

For a controlling shareholder the regime is a genuine loss of power. Under the full regime the shareholder can no longer appoint or dismiss the directors, cannot put its own candidates on the supervisory board without a nomination from that board, and faces a supervisory board that must weigh the interests of the enterprise as a whole rather than the interests of the shareholder that produced the profit. Removing an individual supervisory director requires proceedings before the Enterprise Chamber; removing all of them hands the appointment to the same court.

Family businesses feel this most sharply, because they often cross the thresholds while ownership remains concentrated and involved. Growth through retained earnings, a works council established at an operating company and a headcount creeping past one hundred can bring the regime into view years before anyone in the family has considered it. The right time to think about it is when the second of the three conditions comes into range, not when the notification is due. A supervisory board can be a real asset in a family business, particularly where the executive team is external, but it should be composed deliberately rather than assembled under time pressure. What such a board is worth when things go wrong is set out in our article on the role of supervisory boards in a crisis.

For foreign investors the regime is often a point of negotiation in a transaction. A buyer that assumed it would control the board of a Dutch target may find that it controls only the general meeting. Whether the weakened regime applies, and whether any of the exemptions can be relied on after the transaction, therefore belongs in the due diligence rather than in the post-completion clean-up. The same applies to minority positions: the regime changes what a shareholding is actually worth in governance terms, a point our article on the position of minority shareholders develops further.

Where there is room to tailor the structure

The regime is mandatory in its core, but not every element is closed. The statutory approval rights of the supervisory board cannot be reduced by the articles of association; they can, however, be supplemented, so that certain decisions require the approval of another corporate body such as the general meeting in addition to that of the supervisory board. That is the usual way of preserving a say for shareholders on the decisions they care most about, and it is enforceable because it is anchored in the articles rather than in a contract.

The profile of the supervisory board, the number of its members above the statutory minimum, the arrangements for its committees and the way the works council recommendation right is operated in practice can all be shaped. Shareholders agreements can add commitments between the shareholders themselves, but they bind only the parties to them and cannot override the statutory powers of the corporate bodies, which is why they are a weaker instrument here than a well-drafted set of articles. Directors of a two-tier company should also keep in mind that the ordinary rules on proper performance of duties and on directors liability continue to apply unchanged alongside the regime.

What to do now

Test the three conditions against your most recent balance sheet and your actual headcount in the Netherlands, at group level and not only at the level of the entity you are looking at. If the conditions are met, establish whether one of the four exemptions applies, and if not, file the statement with the commercial register within two months of the adoption of the annual accounts and use the three-year period to prepare rather than to wait. If the weakened regime is available, confirm that on the employee figures rather than on an assumption about where the parent is established. And if you are approaching the thresholds, decide deliberately whether to grow into the regime, to restructure so that an exemption applies, or to adopt it voluntarily on your own terms.

Law & More advises boards, supervisory boards, shareholders and works councils on the statutory two-tier regime: whether it applies, whether an exemption or the weakened variant is available, how to amend the articles of association, and how to handle disputes about appointments and approval rights before the Enterprise Chamber. Contact our corporate lawyers to have your position assessed, or read further in our Dutch corporate law guides and on shareholder disputes.