The role of the supervisory board in times of crisis

In a crisis, a supervisory board has to do more than review decisions after the fact. Under article 2:140 of the Dutch Civil Code (NV) and article 2:250 (BV), the supervisory board must supervise the management board’s policy and the general course of affairs, advise the management board, and let itself be guided by the interest of the company and the enterprise connected with it. Case law of the Enterprise Chamber (Ondernemingskamer) spells out what that means once the company leaves the ordinary course of business: you must actively seek information, set your own control moments, and, if it comes to that, intervene, provided you do so together with the management board and stay out of its domain.

What does the law actually require from you?

The statutory text is short: you supervise, you advise, and you are guided by the interest of the company and its enterprise. That last phrase, the vennootschappelijk belang, is the reference point for everything else, ahead of the shareholders’ interest alone and ahead of the management board’s day-to-day view: it is the interest of the enterprise as a going concern and of the people connected to it.

What the statute does not say is when supervision must be intensified. The same wording covers calm weather and rough weather alike, and the required level of engagement has been worked out in the literature and, above all, in the decisions of the Enterprise Chamber discussed below. The Dutch Corporate Governance Code applies formally to listed companies and serves 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 do you need to raise your level of supervision?

A number of situations 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 one it replaces; a takeover process or a sale of the company; new legislation the company must meet on a short timetable; and the prolonged absence of a director through illness or a management board left one person short. Less often discussed, but just as important, are signals that reach you through the works council, the external auditor, a whistleblower or the press.

What these situations have in common is that the company has left the ordinary course of business. Once that is so, you can no longer discharge your duty by receiving the reports the management board chooses to give you, at the pace it chooses to give them.

What does enhanced supervision look like in practice?

Enhanced supervision is mainly a matter of information and timing. You ask for information rather than wait for it, and ask again when the answer is thin. You shorten the reporting cycle, so that liquidity is reported weekly rather than monthly once cash is the constraint. You fix your own control moments in the execution of a plan, instead of accepting a single presentation at the outset and a report at the end. You take independent advice where a subject sits outside the board’s expertise, and you speak to the external auditor and, where appropriate, to management below board level.

Supervision and advice run into each other here, and that is by design. A supervisory board that reviews a strategy inevitably forms a view of it, and article 2:140 requires that view to be shared; advice does not have to wait for a request from the management board. You should also test whether a plan is realistic given the company’s actual financial position and its actual legal obligations, and be willing to say plainly that a plan asks more of the company’s resources than it has.

The wider interest belongs in the same assessment. Employees, customers, suppliers and creditors are affected by decisions taken in a crisis, and the interest of the enterprise you 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 you should be asking whether a restructuring instrument such as the WHOA scheme belongs on the table, rather than whether it can be avoided.

What do four Enterprise Chamber decisions tell us about the limits?

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, and the fourth shows the point at which decisive action is permitted.

Ogem: what happens when warning signals go unanswered?

Ogem was a large energy and construction group that went bankrupt. In the inquiry proceedings the Enterprise Chamber found mismanagement, and the Supreme Court upheld that finding in its judgment of 10 January 1990 (ECLI:NL:HR:1990:AC1234). The finding on the supervisory board 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. As a result, a decision-making process was able to run its course within Ogem that produced very substantial losses on the construction projects.

The lesson is not that the supervisory board should have predicted the outcome. It is that receiving a signal creates a duty to ask.

Laurus: what happens when an ambitious plan has no control moments?

Laurus was a supermarket group that tried to convert around eight hundred shops to a single formula in a project known as Operation Greenland, largely funded on the assumption that non-core activities could be sold off to finance 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, risky project rather than a continuation of established policy. It had appointed a chairman of the management board without retail experience, and it had not scheduled 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 when the plan is approved, not improvised once it starts to go wrong.

Eneco: what happens when the supervisory board moves into the management board’s 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 tension within the company increased rather than eased. The central works council requested an inquiry, and 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, as 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 where the governing documents required the two bodies and the shareholders to act together.

Telegraaf Media Groep: when is decisive action permitted?

The TMG case concerned a contested takeover with two competing bidders. The process was slow, the information provided was incomplete, and the management board was seen as favouring one bidder over a level playing field. Shareholders complained to the supervisory board, which passed the complaints on; a strategic committee was formed, its chairman held 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 supervisory board’s patience had run out, and found no ground to doubt that its policy had been correct. Decisive in that assessment was that the supervisory board had kept communicating with the management board throughout and had acted in 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, stay within the boundaries set by the articles of association and any shareholder arrangements, and 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; our article on the Enterprise Chamber explains how an inquiry is started and what relief it can grant.

What is at stake for you personally?

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

Internally, a supervisory director owes the company a duty to perform their task properly under article 2:9 of the Civil Code, applied to the supervisory board through article 2:149 (NV) and article 2:259 (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 the information 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 (NV) and article 2:248 (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 shortfall in the estate. There is an important nuance for supervisory directors: the statutory presumptions attached to failures in bookkeeping and in filing 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 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 offers no protection at all against a trustee in bankruptcy or a third party. And directors’ and officers’ insurance is worth reading before a crisis rather than during one, in particular the notification requirements and the exclusions for deliberate acts and for known circumstances.

What should you 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: minutes that show questions asked, answers received and decisions taken with reasons are worth more than any explanation given later. 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. Take independent advice where a subject sits outside the board’s expertise, and record why.

Keep the management board involved even where you disagree with it, and resolve disagreement through the powers the articles actually give you, rather than by acting around the board. Where the situation is serious enough that insolvency is a real possibility, take advice on the point at which the interests of creditors become 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.

In summary

• The supervisory board’s statutory duty to supervise and advise, guided by the interest of the company, does not change in a crisis, but the level of engagement required does.
• Deteriorating liquidity, a restructuring, a change of strategy, a takeover, or signals from the works council or auditor are all reasons to shorten reporting cycles and fix your own control moments.
• Ogem and Laurus show the cost of passivity; Eneco shows that stepping into the management board’s domain is just as risky; TMG shows that decisive action is permitted if the management board stays involved throughout.
• Personal liability can follow internally (article 2:9 BW), in bankruptcy (articles 2:138/2:248 BW), or in tort towards third parties (article 6:162 BW); discharge and D&O insurance offer only limited protection.
• Good minutes, a shorter reporting cycle and fixed control moments are the practical steps that make the difference once a company leaves the ordinary course of business.

Related reading: 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.

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