The role of the supervisory board in times of crisis

In a crisis the supervisory board of a Dutch NV or BV is expected to do more than review decisions after the event. Article 2:140 of the Dutch Civil Code for the NV, and article 2:250 for the BV, require the supervisory board to supervise the policy of the management board and the general course of affairs, to advise the management board, and to be guided in doing so by the interest of the company and the enterprise connected with it. Case law of the Ondernemingskamer (Enterprise Chamber) shows what that means once circumstances leave the ordinary course of business: the supervisory board must actively seek information, must set its own moments of control, and may in the last resort intervene, provided it does so in cooperation with the management board and stays out of the management domain.

The statutory duty, and what it does not say

The statutory text is short. The supervisory board supervises, advises, and is guided by the interest of the company and its enterprise. That last phrase, the vennootschappelijk belang, is the reference point for everything else: not the interest of the shareholders alone, and not the interest of the management board that the supervisory directors work with day to day, but the interest of the enterprise as a going concern and of the stakeholders connected to it.

What the provision does not say is when supervision must be intensified. The statute sets one standard for calm weather and rough weather alike, and the level of engagement required is worked out in the literature and, above all, in the decisions of the Enterprise Chamber. A supervisory director who wants to know what is expected of them in a crisis will not find it in the Civil Code; they will find it in the cases discussed below and in the Dutch Corporate Governance Code, which applies to listed companies and functions as a point of reference for others. How the supervisory board fits into the wider governance structure is set out in our general article on the supervisory board.

When supervision has to be intensified

The circumstances that call for a higher level of engagement are recognisable. A deteriorating financial position, particularly where liquidity rather than profitability is the problem. A restructuring or reorganisation. A change of strategy that carries materially more risk than the strategy it replaces. A takeover process or a sale of the company. New legislation with which the company must comply on a short timetable. The prolonged absence of a director through illness, or a management board that has become one person short. And, less often discussed but at least as important, signals from within the organisation that reach the supervisory board through the works council, the external auditor, a whistleblower or the press.

The common feature is that the company has left the ordinary course of business. Where that is so, the supervisory board can no longer discharge its duty by receiving the reports the management board chooses to give it in the rhythm the management board chooses to give them.

What enhanced supervision looks like in practice

Enhanced supervision is mostly a matter of information and timing. The supervisory board asks for information rather than waiting for it, and asks again when the answer is thin. It shortens the reporting cycle, so that liquidity is reported weekly rather than monthly when cash is the constraint. It fixes its own control moments in the execution of a plan, rather than accepting a single presentation at the outset and a report at the end. It obtains its own advice where the subject is outside its expertise, and it speaks to the external auditor and, where appropriate, to management below board level.

Supervision and advice run into each other here, and that is intended. A supervisory board that reviews a strategy inevitably forms a view about it, and article 2:140 obliges it to share that view. Advice does not have to wait for a request from the management board. The supervisory board should also test whether the plan is consistent with the financial position the company is actually in and with the legal obligations it is actually under, and should be willing to say plainly that a plan is too ambitious for the resources available.

The wider interest belongs in the same assessment. Employees, customers, suppliers and creditors are affected by the decisions taken in a crisis, and the interest of the enterprise that the supervisory board must serve is not reducible to the balance sheet. Where insolvency comes into view the emphasis shifts further: from a certain point the interests of creditors weigh heavily, and the supervisory board should be asking whether a restructuring instrument such as the WHOA scheme ought to be on the table rather than whether it can be avoided.

Where the limits lie: four decisions of the Enterprise Chamber

Four cases mark out the field. Two show what passivity costs; one shows that an over-active supervisory board can be just as much of a problem; the fourth shows the point at which decisive action is permissible.

Ogem: signals that were not followed up

The Ogem case concerned a large energy and construction group that went bankrupt. In the inquiry proceedings the Enterprise Chamber found mismanagement, and the Supreme Court upheld the approach in its judgment of 10 January 1990 (ECLI:NL:HR:1990:AC1234). The finding on the supervisory board is the one that has been quoted ever since: despite signals that reached it in various forms and that should have given it cause to ask for further information, the supervisory board took no initiative and did not intervene. Because of that omission a decision-making process was able to run its course within Ogem that produced very substantial annual losses on the construction projects.

The lesson is not that the supervisory board should have known the outcome. It is that it received signals, and that receiving a signal creates a duty to ask.

Laurus: an ambitious plan with no control moments

Laurus was a supermarket group that attempted to convert some eight hundred shops to a single formula in a project known as Operation Greenland. The project was largely externally financed on the assumption that non-core activities could be sold to fund it. The sales did not materialise and the group had to be sold after coming close to bankruptcy. In its decision of 16 October 2003 (ECLI:NL:GHAMS:2003:AM1450) the Enterprise Chamber held that the supervisory board should have been considerably more active, because this was an ambitious and risky project rather than the continuation of an established policy. It had appointed a chairman of the management board without retail experience, and it had failed to schedule control moments for the execution of the business plan.

Laurus is the case to read before approving a transformation programme. The level of supervision has to match the risk profile of the plan, and control moments have to be fixed at the moment the plan is approved, not improvised when it starts to go wrong.

Eneco: acting outside the management domain

Eneco shows the other side. In the run-up to a possible sale of the company by its municipal shareholders, serious differences arose between the supervisory board, the management board and the shareholders committee. The supervisory board negotiated with the shareholders committee and reached an arrangement without properly involving the management board, and the tension within the company increased rather than diminished. The inquiry was requested by the central works council. In its decision of 18 July 2018 (ECLI:NL:GHAMS:2018:2488) the Enterprise Chamber ordered an investigation into the policy and course of affairs and, by way of immediate relief, suspended the chairman of the supervisory board and appointed a temporary chairman.

The reproach here was not passivity but the opposite. The supervisory board had moved into a domain that belonged to the management board, on a subject on which the governing documents required the two bodies and the shareholders to act together.

Telegraaf Media Groep: decisive action that was permitted

The TMG case concerned a contested takeover with two competing bidders. The process was slow and the information provided was incomplete, and the management board was seen as focusing on one bidder at the expense of a level playing field. Shareholders complained to the supervisory board, which passed the complaints on. A strategic committee was formed, its chairman had a casting vote, and negotiations continued with the consortium. When the management board refused to sign the merger protocol, the supervisory board suspended the directors and the protocol was signed.

Talpa asked the Enterprise Chamber for an investigation and immediate relief. In its decision of 21 March 2017 (ECLI:NL:GHAMS:2017:930) the Enterprise Chamber refused the request. It understood why the patience of the supervisory board had run out, and found no ground to doubt correct policy. Decisive in that assessment was that the supervisory board had continued to communicate with the management board throughout and had acted to serve the interest of the company.

Read together, Eneco and TMG give the working rule. A supervisory board may take a decisive role where the interest of the company is genuinely at stake, but it must keep the management board involved, must stay within the boundaries set by the articles of association and any shareholder arrangements, and must be able to show that it acted for the company rather than for one faction within it. Proceedings of this kind run before the Enterprise Chamber, and our article on the Enterprise Chamber explains how an inquiry is started and what relief it can grant.

What supervisory directors risk personally

A finding of mismanagement in an inquiry is not in itself a finding of liability, but it is frequently the starting point for one. Three routes matter.

Internally, a supervisory director owes the company a duty of proper performance of their task under article 2:9 of the Civil Code, applied to the supervisory board through article 2:149 for the NV and article 2:259 for the BV. Liability requires a serious personal reproach, judged on all the circumstances, including the information available at the time and the division of tasks within the board. Hindsight is not the test; the question is what a reasonably competent supervisory director should have done with what was in front of them. Our article on internal liability under article 2:9 works through that standard.

In bankruptcy, the same referring provisions bring the supervisory board within the scope of article 2:138 for the NV and article 2:248 for the BV: where the board manifestly performed its task improperly and that is an important cause of the bankruptcy, each member is jointly and severally liable for the deficit in the estate. There is an important nuance for supervisory directors, in that the statutory presumptions attached to failures in the accounts and in the filing of the annual accounts do not apply to them automatically in the way they do to directors. The claim is brought by the trustee in bankruptcy, and it is the trustee who will read the minutes of the supervisory board looking for the moment at which the signals arrived.

Externally, a supervisory director can be liable in tort under article 6:162 towards a creditor or another third party, for example where they allowed the company to take on obligations they knew it could not meet. That route is used less often against supervisory directors than against directors, but it exists.

Two practical points follow. Discharge granted by the general meeting covers only what the meeting knew or could reasonably have known at the time, so it is worth less as protection than boards tend to assume, and it gives no protection at all against a trustee in bankruptcy or a third party. And directors and officers insurance is worth reading before the crisis rather than during it, in particular the notification requirements and the exclusions for deliberate acts and for known circumstances.

What a supervisory board should do when a crisis begins

Record the moment the supervisory board became aware of the problem, and record what it asked for in response. Minutes are the single most important protection a supervisory board has, and minutes that show questions asked, answers received and decisions taken with reasons are worth more than any amount of later explanation. Increase the reporting frequency and specify the figures you want, with liquidity and covenant headroom at the front. Fix control moments in any recovery or restructuring plan at the time you approve it. Obtain independent advice where the subject sits outside the expertise of the board, and record why.

Keep the management board involved even where you disagree with it, and resolve a disagreement through the powers the articles actually give you rather than by acting around the board. Where the situation is severe enough that insolvency is realistic, take advice on the point at which the interest of creditors becomes decisive and on whether a restructuring under the WHOA should be prepared. And in a takeover or sale process, keep a level playing field between bidders and document how you did it, because that is what an inquiry will test.

Law & More advises supervisory boards, management boards and shareholders on governance in crisis situations, on the boundaries between supervision and management, on inquiry proceedings before the Enterprise Chamber and on the liability of supervisory directors. We are frequently asked to attend at the moment a board realises the situation has left the ordinary course of business, which is the right moment to call. Contact our corporate lawyers, or read further in our Dutch corporate law guides, our article on the tension between shareholder interest and corporate interest, and our explanation of the statutory two-tier company, in which the supervisory board holds a still wider set of powers.