Summary and conclusions

Dutch companies have traditionally had a two-tier board structure. A characteristic of this structure is that the management and supervisory duties are separated. The management board manages the company, whilst the supervisory board is tasked with supervising the company. In a one-tier board model, management and supervision take place in a single body: the board of directors. In such a one-tier board, the articles of association distinguish between two types of directors: executive and non-executive directors. This book contains a fundamental analysis of the non-executive director in public limited companies (NV’s) and private limited companies (BV’s).

The idea of a one-tier board model emerged as early as March 1623. Since then, several companies have had a board model in which the board of directors de facto consists of executive and non-executive directors by means of a far-reaching division of duties.1 In 2005, the first statutory regulation on the one-tier board model was introduced: the SE Implementation Act (Uitvoeringswet SE). In addition to the SE Council Regulation, the SE Implementation Act contains several regulations for Dutch SEs with a one-tier board model.2

The reason for this study is the entry into force of the Management and Supervision Regulations Act (Wet bestuur en toezicht) on 1 January 2013. The Act has provided a statutory basis for the one-tier board model for public limited companies and private limited companies in Book 2 of the Dutch Civil Code (DCC). Through the Management and Supervision Regulations Act, the legislator intended to enhance the legal certainty and the efficiency of the legal form of public limited companies and private limited companies in national and international relationships.3 Although the legislator has succeeded in doing so in a general sense, the Act did not entirely remove the legal uncertainty with respect to the non-executive director. In this book I have endeavoured to remove the legal ambiguities regarding the non-executive director.4

Implementation of the one-tier board must, pursuant to article 2:129a/239a(1) DCC, be specified in the articles of association. If the one-tier board model is not adopted at the time of incorporation, its implementation requires an amendment of the articles of association. As a result, the implementation of the one-tier board model falls within the domain of the general meeting.

Nevertheless, the general meeting should share its authority to establish the one-tier board model with the Enterprise Chamber of the Amsterdam Court of Appeal (Ondernemingskamer). In addition, the articles of association may make the implementation of the one-tier board model subject to a resolution to that effect by a body other than the general meeting.

Using the terms 'executive director' and 'non-executive director' is not mandatory. Nevertheless, it is advisable to use these terms in the articles of association. In that case, the answer to the question of whether the company applies the one-tier board model is not open to discussion.5

It is conceivable that a works council has been established. In that case, an amendment of the articles of association is not enough. Since the implementation of the one-tier board model falls within the scope of article 25(1)(e) of the Works Councils Act (Wet op de Ondernemingsraden, WOR), the company must seek timely advice from the works council.6

The steps described above should also be taken when the company moves from a two-tier board model to a one-tier board model. Furthermore, as the one-tier and two-tier board models cannot be combined pursuant to article 2:140/250(1) DCC, any provisions on and references to the supervisory board should be deleted from the articles of association. It would be preferable to have the supervisory board members formally resign so that they can be discharged from liability.7

The one-tier board model is only functional as soon as the executive and non-executive directors have been appointed. At incorporation, the directors are appointed by the founders. The latter are also authorised to decide whether a director is appointed as an executive or non-executive director. For public limited companies, however, this has not been laid down in article 2:132 DCC. It is unclear who is authorised to determine whether a director is appointed as an executive or non-executive director if a company without a supervisory board switches to the one-tier board model. Although in my opinion the general meeting has the best credentials, for the sake of legal certainty I would have preferred the law to provide a definitive answer on this point.

After incorporation, the non-executive directors are in principle appointed by the general meeting. In a private limited company, this authority may also be granted to a meeting of holders of shares of a certain type or specification. Although under applicable law this has not been laid down in Book 2 DCC, in that case the articles of association must specify whether such authority relates to the appointment of one or more executive directors or one or more non-executive directors. For structure companies (structuurvennootschappen), Book 2 DCC offers the possibility of providing for a custom-made method of appointment. Lastly, the court and the Enterprise Chamber are authorised to appoint a non-executive director in certain circumstances.

The person authorised to appoint a non-executive director does not enjoy full freedom. In fact, the law contains several restrictions. The articles of association of companies not governed by the structure regime may further restrict the scope of appointment.8

The non-executive director shall join the corporate organisation as soon as he has been lawfully appointed and has accepted his appointment. As a rule, acceptance of the appointment also relates to the agreements made within the framework of the contractual relationship. The contractual relationship generally qualifies as an agreement for services.

Book 2 DCC is silent on the amount and composition of the remuneration of the non-executive director. However, it is stipulated that his remuneration is determined by the general meeting. Article 2:134/245 DCC nevertheless opens the door to deviate from this principle in the articles of association. In my view, this is regrettable. As I consider it undesirable for the remuneration of the non-executive director to be determined by another (body), I propose to align with the rules governing the remuneration of the members of the supervisory board on this point.9

At the end of the term of appointment, the non-executive director will be relieved of his duties. Naturally, the non-executive director may resign prematurely or lose his position before expiration of the term of appointment in some other way. The court and the Enterprise Chamber, for example, have the power to suspend or dismiss the non-executive director in certain circumstances. The non-executive director may also be suspended or dismissed by the person who has appointed him. In the case of private limited companies, the power of dismissal may also be granted to another corporate body. In my opinion, it is not possible to delegate the alternative power of dismissal to the board of directors. I propose to clarify article 2:244(1) DCC on this point.

Book 2 DCC provides for a special suspension and dismissal scheme for structure companies. Pursuant to article 2:164a/274a(1) DCC in conjunction with article 2:161/271(3) DCC, the joint non-executive directors have the power to suspend a non-executive director. This power is also wrongly conferred on the body who has appointed the non-executive directors. The individual power to dismiss lies with the Enterprise Chamber. Lastly, the general meeting may pass a resolution of no confidence in the collective of non-executive directors.10

The works council's legal influence on the appointment, remuneration, suspension and dismissal of a non-executive director is insignificant.11

The division of duties between the executive directors on the one hand and the non-executive directors on the other is at the heart of the one-tier board model. The division of duties creates two types of directors: the executive directors who are responsible for the day-to-day management and the non-executive directors who mainly focus on supervision. The duties can also be divided at the level of the executive and non-executive directors. The division of duties at the level of the non-executive directors generally results in the formation of committees. Although there is no obligation to do so, for a proper functioning of the one-tier board model it is necessary that the duties are divided.12

The starting point of the division of duties is that, in accordance with article 2:9(1) DCC, the duties are divided by or pursuant to the law or the articles of association (bij of krachtens de wet of de statuten). The duties can also be divided informally. In any case, it is to be recommended that the division of duties be adequately recorded in writing. This not only promotes the recognisability of the division of duties but also improves the directors' position in any liability proceedings.13

Book 2 DCC contains some restrictions on the possibility of dividing duties. The most important restriction concerns article 2:129a/239a(1) DCC. Based on this provision, the duty to supervise the performance of duties by the directors cannot be taken away from a non-executive director. Furthermore, the chairmanship of the board of directors, the making of proposals for the appointment of a director and the determination of the remuneration of the executive directors may not be assigned to an executive director. Finally, the general course of affairs (algemene gang van zaken) cannot be removed from the duties of a non-executive director (article 2:9(2) DCC).

These restrictions are subject to certain reservations. For example, the provision that the supervisory task cannot be taken away from a non-executive director does not, in my view, go far enough. In order to speak of effective and independent supervision, it is important that the supervisory task is allocated to the non-executive directors. Furthermore, I believe that the rule that the chairmanship of the board of directors may not be assigned to an executive director should be qualified. In view of the need in practice for an executive chairman, I would advise the legislator to provide for a restriction of the derogation option under the articles of association. Lastly, the provision that an executive director may not make proposals for the appointment of a director is, in my opinion, formulated too broadly.14

Notwithstanding the division of duties, the responsibility for the performance of assigned duties remains with the joint directors. Nor does the division of duties affect the principle of collegiate or collective decision-making, although there are a few exceptions to this principle.15

The first exception concerns article 2:129a/239a(3) DCC. Based on this provision, it may be determined by or pursuant to the articles of association that one or more members of the board of directors may validly decide on matters falling within their respective duties. Unfortunately, article 2:129a/239a(3) DCC does not contain any restrictions. I find it advisable to stipulate in article 2:129a/239a(3) DCC that resolutions of the board of directors concerning matters relating to the general course of affairs are unsuitable for the purpose of mandating one or more directors. For the time being, the company would be wise to draw up a list of resolutions to be taken by the board as a collective.

The second exception concerns the conflict-of-interest rules. Pursuant to article 2:129/239(6) DCC, a director shall not participate in the deliberations and decision-making process on a subject where the director is found to have a conflict of interest. The second paragraph of article 2:129a/239a DCC contains more specific information on this rule. Pursuant to this provision, the executive directors may not take part in the deliberations and decision-making process regarding the determination of the remuneration of the executive directors. As far as I am concerned, this provision may be deleted.

The third exception can also be found in article 2:129a/239a(2) DCC. Pursuant to this provision, the executive directors may not participate in the deliberations and decision-making process on the appointment of an external auditor to audit the annual accounts. Unfortunately, article 2:129a/239a(2) DCC has devoted no attention to other cases in which it is undesirable for the executive directors to participate in the deliberations and decision-making process.

Fourthly, the structure regime contains several exceptions to the principle of collective decision-making. In structure companies, the duties and powers of the supervisory board shall rest with the joint non-executive directors. Book 2 DCC, however, does not specify the way the decision-making process should take place. Consideration should be given to linking the relevant sections of the law to article 2:129a/239a(2) DCC.

Lastly, preparatory, negative and (some) internal resolutions do not have to be taken by the board as a whole.16

The non-executive director has two core tasks: general management and supervision. The basis for the general management task can be found in article 2:9(2) DCC. Pursuant to this provision, each director is responsible for the general course of affairs. It is not known which matters fall under the general course of affairs. Nor is it clear what role the non-executive director should fulfil. I presume that the executive directors take the lead and prepare the decision-making process, while the non-executive directors constructively challenge and help develop proposals on matters regarding the general course of affairs. Since the law does not provide for a definition of the general course of affairs, I would recommend that companies include in their articles of association or board regulations which matters belong to the general management task. Furthermore, companies would do well to clarify the role of the non-executive directors in the general course of affairs.17

The other core task of the non-executive director is to supervise the performance of the directors' duties. Since the duty to exercise collegial supervision in a one-tier board lies with the non-executive directors to an accentuated and intensified degree and form, I refer to the supervision that the non-executive directors must exercise as enhanced collegial supervision (versterkt collegiaal toezicht). The wording of article 2:129a/239a(1) DCC suggests that the non-executive directors should not only exercise enhanced collegial supervision over the executive directors but should also keep a close eye on each other. That is not the intention in my view. I therefore propose to focus the supervisory task of the non-executive directors in article 2:129a/239a(1) DCC on the performance of duties by the executive directors.18

The non-executive directors are only able to exercise their supervisory task effectively if several preconditions are met. First, the composition of the one-tier board is crucial. In addition, it is important that the non-executive director receives good information in a timely fashion. If required, agreements on the provision of information can be made in the articles of association or the board regulations.

It is also important for effective supervision that the non-executive directors can take a stand if the situation so requires. Unlike the supervisory board, the joint non-executive directors of a company not governed by the structure regime are in principle not authorised to suspend an executive director. This power lies with the board of directors in accordance with article 2:134/244(1) DCC. I would advise companies to confer the power of suspension by or pursuant to the articles of association on the group of non-executive directors. Subsequently, by applying article 2:129a/239a(3) DCC it can be ensured that the non-executive directors are jointly authorised to pass a resolution to suspend an executive director. In my opinion, a change in the law would not be out of place. I propose, in line with article 2:129a/239a(2) DCC, to provide that none of the executive directors may participate in the deliberations and decision-making process on the suspension of one of them.

The supervisory task of the non-executive directors cannot be strengthened by a right of approval (goedkeuringsrecht) or a right to issue instructions (instructierecht) within the meaning of article 2:129/239(3)(4) DCC. In the case of structure companies and listed companies, approval of the non-executive directors is nevertheless required for certain resolutions. To enable the non-executive directors to exercise their supervisory task effectively, I recommend that companies specify in their articles of association or board regulations that for certain board resolutions, a majority of the non-executive directors must vote in favour of such resolution. Furthermore, I find it advisable to amend article 2:169(3) DCC so that material transactions with affiliated parties do not require the approval of the board but the approval of the non-executive directors.

Finally, in order to be able to carry out their supervisory task effectively, the joint non-executive directors are authorised to submit an application for an inquiry proceeding before the Enterprise Chamber on behalf of the company. In my opinion, this power is also vested in individual non-executive directors who are authorised to represent the company.19

The general management and supervisory duties are usually not the only duties of non-executive directors. For example, the non-executive directors may also be charged with making proposals for the appointment of a director. In addition, the determination of the remuneration of the executive directors may be entrusted to them. Furthermore, the joint non-executive directors of a public limited company and the individual non-executive directors who are authorised to represent the public limited company have the power to reclaim all or part of a bonus already paid to a director. Non-executive directors are also authorised to mediate in disputes concerning the company. In the case of structure companies, the non-executive directors are also authorised to appoint the executive directors. Finally, the non-executive directors must attend the consultative meetings with the works council. Since article 24(2) WOR is unclear on this point, I am in favour of amending this article.20

Book 2 DCC does not preclude the non-executive director from being entrusted with executive management tasks. For example, pursuant to article 2:130/240(2) DCC, the non-executive director is in principle authorised to represent the company independently. In order to enable the non-executive director to exercise his supervisory task effectively, I consider it undesirable that he should concentrate on executive tasks. Therefore, I advise companies to provide for an adequate division of duties and to exclude the power of representation of the non-executive director in the articles of association.21

Since the non-executive is a director, he is subject to the same liability regime as the executive director. After all, the law makes no distinction between the two types of directors. However, this does not mean that the liability risk for executive and non-executive directors is the same.22

The executive and non-executive directors are jointly and severally liable pursuant to article 2:9(2) DCC, article 2:69/180(2) DCC, article 2:138/248(1) DCC and article 2:139/249 DCC if at least one director has exceeded the liability standard. The non-executive director is therefore exposed to the same risk of incurring liability as an executive director. Because article 2:9 DCC, article 2:138/248 DCC and article 2:139/249 DCC do provide for the possibility of exculpation, the non-executive director is nevertheless exposed to a lower liability risk than the executive director based on these provisions.

For a successful exculpation, the non-executive director must, pursuant to article 2:9(2) DCC, article 2:138/248(3) DCC and article 2:139/249 DCC, demonstrate that the (manifestly) improper performance of duties is not attributable to him. In my opinion, the division of duties offers the non-executive director a helping hand in this respect, if he has fulfilled his duties properly and has not been involved in the (manifestly) improper performance of duties.

If the non-executive director is able to prove within the framework of article 2:139/249 DCC that he is not to blame, he shall be exculpated. If the liability is based on article 2:9 DCC or article 2:138/248 DCC, the non-executive director should, for the purposes of a successful exculpation, also put forward that as soon as he knew or should have known that a director was (manifestly) performing his duties improperly, he was not negligent in taking measures to prevent the consequences thereof. In my opinion, the non-executive director cannot and should not be subjected to the same requirements as an executive director.23

The non-executive director may also be held liable pursuant to article 6:162 DCC, article 2:216 DCC and article 2:93/203 DCC. The non-executive director will only be liable on these grounds if the claimant states and, if necessary, proves that he himself has exceeded the liability standard. As long as the non-executive director performs his supervisory duties properly, he has, in my view, little to fear. He runs a significantly lower liability risk than an executive director. The District Court of Utrecht has confirmed this in the Fortis case.24

In addition to the first-degree non-executive director, the second-degree nonexecutive director may under certain circumstances also be successfully held liable. Lastly, pursuant to article 2:11 DCC, the liability of the corporate director is jointly and severally attached to 'anyone who was a director of the legal person at the moment on which the liability arose'. In my opinion, the word 'director' does not only refer to the second-degree executive director but also to the second-degree non-executive director.25

If the non-executive director is liable, he may under circumstances still be successful when invoking the discharge granted to him. The discharge will only help the non-executive director if the company is the claimant. In addition, this only applies to what is apparent from the annual accounts or has otherwise become known to the general meeting.26

The non-executive director is a hybrid legal concept. He is a director and a supervisor at the same time. After all, he acts in the capacity of director, but his focus is (also) on supervision.

I consider the non-executive director primarily as a director. The reason is simple: in Book 2 DCC the non-executive director is deemed to be a director. This means that the regulations governing the appointment, determination of remuneration, suspension and dismissal of a director apply to him. The fact that the non-executive director acts in the capacity of director has consequences for the scope of his duties. For example, he must not only exercise the supervisory task but also the general management task. The fact that the non-executive director is a director also has consequences for the way in which he performs his duties. For example, he does not supervise the activities of the board as an outsider but from within the board of directors. Furthermore, the fact that the non-executive director is a member of the board of directors means that, in principle, the executive and non-executive directors decide jointly. Lastly, since Book 2 DCC does not provide for a separate liability regime for the non-executive director, he may be liable as a director. Nevertheless, the liability regimes provide sufficient scope to consider the special position of the non-executive director within the one-tier board.27

In case structure companies, the non-executive director is regarded as a supervisory director as far as possible. The mutatis mutandis clause of article 2:164a/274a(1) DCC declares the provisions regarding the supervisory board and the members of the supervisory board equally applicable to the non-executive directors of the company. Although I agree with this choice of the legislator, I believe that in the legal technical elaboration of the structure regime for companies with a one-tier board a few significant improvements can be made.28

For example, Book 2 DCC provides for a special appointment, suspension and dismissal scheme for the members of the supervisory board of companies governed by the structure regime. Article 2:164a/274a(1) DCC declares these regulations equally applicable to the non-executive directors. In addition, Book 2 DCC provides for a special appointment scheme for directors of structure companies with a two-tier board model. A variant of this regulation tailored to structure companies with a one-tier board model can be found in article 2:164a/274a(2) DCC. The regulations that apply to structure companies having a two-tier board as a whole form an exception to the main rule, as follows from article 2:132/242(1) DCC and article 2:144/254(1) DCC. This should be no different for structure companies with a one-tier board model. Furthermore, Book 2 DCC does unfortunately not contain exceptions to the provision that the board of directors may at any time suspend an executive director. Therefore, I argue in favour of amending article 2:132/242 DCC, article 2:133/243 DCC and article 2:134/244 DCC.29

The legislator is not consistent in qualifying the non-executive director of companies not governed by the structure regime as a director. For example, the statutory limitation rule is, mistakenly, not laid down in article 2:132a/242a DCC but in article 2:142a/252a DCC. The same applies to the provision that excludes the application of the right of making of proposals for the appointment of a non-executive director if the structure regime is applicable. This rule should not have been included in article 2:142(2) DCC but in article 2:133/243(4) DCC.30

Finally, the fact that the legislator is struggling with the hybrid nature of the non-executive director is reflected in the statutory decision-making provisions. The legislator recognises that the principle that resolutions are taken by the board as a whole may unnecessarily constrain companies with a one-tier board model. It also recognises that the principle of collective decision-making is difficult to reconcile with the rationale behind the structure regime.

In Book 2 DCC, various avenues are pursued to exclude executive directors from the deliberations and decision-making process. In my opinion, article 2:129a/239a(2) DCC offers the purest way forward. I therefore regret that the legislator has has not opted for the route of article 2:129a/239a(2) DCC for companies governed by the structure regime. I also regret that Book 2 DCC does not provide for a scheme for the suspension of an executive director and the making of proposals for the appointment of a non-executive director as set out in the second paragraph of article 2:129a/239a DCC. Although in these cases the executive directors may already be excluded from taking part in the deliberations and decision-making proces, a uniform regulation would in my opinion have been justified.

Thus, is the non-executive director in Book 2 DCC “a form without substance, a garment that anyone can wear but that fits no one”?31 I do not think so. First of all, Book 2 DCC not only outlines the contours of the non-executive director but also colours some parts. For example, article 2:9(2) DCC states that the non-executive director is charged with the general management task. Furthermore, the first paragraph of article 2:129a/239a DCC provides that his supervisory task cannot be taken away from him. Secondly, Book 2 DCC imposes several requirements on persons who may be appointed as non-executive directors. Of course, this does not mean that anyone who meets these requirements can fulfil the non-executive board position. I therefore regard the non-executive director in Book 2 DCC as “a form with some substance, a garment that virtually anyone can wear but that fits only a few”.