Preventing another winter weather crisis: FERC and NERC issue final report on winter storm Uri
The FERC and NERC reported on the energy system impacts of Winter Storm Uri.
Further to the contribution of May 2015 on the adoption of the annual accounts of a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands (a ”BV”), below we will provide some important points to bear in mind when making distributions of profits out of a BV.
Under the Dutch legislation applicable to a BV (”BV laws”) prior to 1 October 2012, it was in principle only possible to distribute those profits out of a BV that appeared from the adopted annual accounts of the then last lapsed financial year of the BV. Although the articles of association (statuten) of the BV could provide for interim distributions, this was the default system. Distributions could furthermore only be made in as far as the BV’s equity exceeded the mandatory reserves that had to be maintained by virtue of the articles of association or law, which included the minimum nominal share capital of EUR 18,000.
With the flexibilisation of the BV laws coming into effect on 1 October 2012, the provisions in BV laws regarding distributions significantly changed. The changes inter alia entailed that the requirement of maintaining a minimum share capital was dropped and that certain rules governing the liability of managing directors (bestuurders) that already followed from case law, have been recorded in statutory provisions.
Pursuant to section 2:216 paragraph 1 of the Dutch Civil Code (Burgerlijk Wetboek) (”DCC”), the general meeting (algemene vergadering) is in principle exclusively authorised to resolve to distribute (or otherwise appropriate) the profits that have been determined by the adoption of the annual accounts, as well as to resolve to other distributions of assets. The general meeting is the corporate body (orgaan) of a BV formed by all persons entitled to exercise voting rights in the general meeting (i.e. the actual assembly) of the BV. As such, this corporate body is usually formed by all shareholders of a BV.
It is possible to deviate from the abovementioned default system in the articles of association of a BV by limiting the aforementioned powers and/or attributing these powers to another corporate body of a BV. As an example, the articles of association may provide that the management board (bestuur) or the supervisory board (raad van commissarissen) has the powers described in the previous paragraph, or that a certain part of the profits will have to be allocated to a reserve. It is very important to duly review the articles of association of a BV when documenting distributions, to avoid running the risk of the distribution being void (nietig) due to the resolution being adopted by an unauthorised corporate body.
For the purposes of this contribution, we will adopt as a starting point that the general meeting is authorised to resolve to make a distribution.
Under current BV laws, a minimum share capital of a BV is no longer a point of concern when making distributions (as this requirement has been dropped). Nevertheless, the general meeting can still only resolve to make a distribution in as far as the BV’s equity exceeds the reserves that have to be maintained by virtue of law and/or the articles of association.
In determining the amount of the BVs equity and reserves, the BV is not bound to the adopted annual accounts of the then last lapsed financial year. The deciding factor is the actual financial situation of the BV at the moment of the distribution (payment) being made. It is advisable to duly document the relating assessment.
Most of the reserves that have to be maintained by virtue of law can be removed fairly easily from the balance sheet by converting the relevant reserve into share capital, following which the ‘reserve’ can be distributed.
Reserves that have to be maintained by virtue of the articles of association within the meaning of section 2:216 DCC are rare and can, if desired, in almost all cases be removed by means of amending the articles of association of a BV (provided that any requisite approvals and consents are granted).
Although it remains important to duly review if mandatory reserves exist when making distributions, they usually do not have to form an obstacle.
If a BV nevertheless does have to maintain reserves by virtue of law and/or its articles of association and the general meeting resolves to distribute an amount which would result in the BV’s equity no longer exceeding its relevant reserves, the resolution would in principle be void in as far as the distribution affects such reserves. For that part, the following actual payment would also be undue and could be reclaimed by the BV (or by a bankruptcy trustee (curator) on its behalf in case of a bankruptcy (faillissement)).
If a BV does not have to maintain any reserves by virtue of law and/or its articles of association, it would be possible to make a distribution as a result of which the equity of the BV would become negative (e.g. by distributing all equity as well as certain borrowed capital).
Once the general meeting has resolved to make a distribution in accordance with Dutch law, such resolution will not have any effect and payment cannot be made as long as the BV’s management board (bestuur) has not approved it in a separate resolution.
The management board of a BV may only refuse to approve a proposed distribution if it knows or should reasonably know that the BV cannot pursue the payment of its due and payable (short-term) debts after making the proposed distribution. Again, the deciding factor is the actual financial situation of the BV at the moment of the distribution (payment) being made.
The management board may in its sole discretion determine on which documentation its assessment will be based. The distribution test entails that the management board will have to assess the liquidity, solvability and profitability of the BV in light of the proposed distribution, taking into account all relevant facts and circumstances. Although special circumstances may occur, it should be sufficient to look one year ahead.
The distribution test is an exclusive authority/duty of the management board as well as the only ground for the management board to refuse its approval of a proposed distribution in accordance with section 2:216 paragraph 2 DCC.
If a BV would nonetheless not be able to pursue the payment of its due and payable (short-term) debts after making the proposed distribution, the managing directors who at the time of the distribution (payment) knew or should have reasonably foreseen this situation, are jointly and severally liable towards the BV to make up the deficit caused by the relevant distribution (including statutory interest). If a managing director can prove that he cannot be blamed for the BV making the distribution and that he/she was not negligent in taking measures to avoid the adverse effects, it is possible to exculpate oneself from this liability.
The shareholder (as beneficiary of the distribution) who knew or should have reasonably foreseen that the BV would get into payment problems, is also jointly and severally liable to make up the deficit so caused, including statutory interest. This liability runs up to a maximum amount of the distribution received by such beneficiary, including statutory interest. If any managing director has already made payments to the BV to make up for any deficit, the beneficiary will have to make its relevant payment to (reimburse) this managing director.
Therefore, it is of importance for managing directors to keep their shareholders duly informed of the financial health of a BV in this respect. Although the risk of this liability in principle also existed prior to October 2012 pursuant to case law, it could be wise for a managing director of a BV to review to what extent such liability is covered by his/her D&O insurance (if taken out).
Once a distribution resolution has been duly adopted and approved and as such the total amount to be distributed has been determined, the BV can carry out the corresponding payment. By default, only the nominal amount that has actually been paid on each share will be taken into account in calculating the amount that will be paid as a distribution on each share (in case of multiple shareholders).
As a practical example of how this works out, say there would be two shareholders in a BV: shareholder A and shareholder X. Shareholder A holds 5 shares with a nominal value of EUR 1 each, which have been fully paid up. Shareholder X holds 100 shares with a nominal value of EUR 1 each, which have not been paid up. If EUR 100 were to be distributed, the payment of this EUR 100 would have to be fully made (allocated) to shareholder A, since he holds 100% of the paid up share capital. Any other allocation of the payment would in principle be void in as far as it deviates from the aforementioned allocation, as a result of which such payment would be undue and could be reclaimed by the BV (or by a bankruptcy trustee on its behalf in case of a bankruptcy).
It is however possible to deviate from the above mentioned statutory allocation by providing for a different allocation in the articles of association of the BV. Furthermore, all shareholders can in each case unanimously consent to (instemmen met) a different allocation of the payment for a specific distribution. For the avoidance of doubt, this consent has to be granted by all shareholders individually and does not necessarily require a (written) resolution of the general meeting.
In case of a joint venture BV, laying down a general provision in this respect in a shareholders agreement to cover such consent for the lifetime of the joint venture is in principle not possible; the shareholders need to consent to an alternative allocation (if desired) on a case-by-case basis and/or provide for a different allocation in the articles of association of the BV.
In practice, we see that a significant number of BVs has not yet updated its articles of association to reflect current BV laws. Amending the articles of association requires, among other things, the intervention of a Dutch civil law notary (notaris).
One needs to keep in mind that almost all of the regulations governing the distribution of profits out of a BV as set out above, follow from mandatory Dutch law. Therefore, it could be possible that the articles of association of a BV contain certain provisions that are no longer in force because they are overruled by the mandatory ‘new’ BV laws. Relying on the wording of the articles of association of a BV drawn up before 1 October 2012 for the purposes of corporate housekeeping, may therefore pose risks in certain cases; it is advisable to have the articles of association updated to reflect current BV laws.
The FERC and NERC reported on the energy system impacts of Winter Storm Uri.
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The Crichel Down Rules (CDR) are “non-statutory arrangements” (Rule 1) published by the Department for Levelling Up, Housing & Communities, these are contained in “Guidance on Compulsory purchase process and The Crichel Down Rules” (July 2019).
© Norton Rose Fulbright LLP 2021