Several questions arise when your Dutch subsidiary distributes dividends. Below we set out numerous issues, on a non-exhaustive basis, that have to be addressed in the process of distributing dividends.
General
Dutch law provides great freedom regarding appropriation of profit. In principle, the profits of a company are at the disposal of the shareholders. A company is allowed to deviate from this principle in its articles of association provided that a shareholder may never be completely excluded from the profits of a company. The articles of association of a company shall include specific rules regarding the distribution of profit.
Distribution of profit in the form of dividends takes place after adopting the annual accounts from which it appears that the profit distribution is permitted. Dutch companies are obliged to draw up and file their annual accounts within 13 months of completing a financial year. After adopting the annual accounts, a subsequent shareholders’ resolution needs to be taken regarding the profit appropriation.
Profit distributions are permitted in as far as the equity of a company is greater than the paid-up and called part of the capital increased by the reserves that are to be maintained pursuant to statute or articles of association of a company. Dividend distributions take place at the proposal of the board of directors (bestuur) of a Dutch company. The shareholders may also decide to allocate the profits of a given financial year to the reserves of a company.
Decision-making process
The shareholders of Dutch private liability (BV) companies are usually more involved in the decision-making process of distributing the profit and a higher percentage of shareholders is usually present at the shareholders’ meetings than in the case of Dutch public limited liability (NV) companies. As opposed to shareholder meetings for Dutch NV companies, at Dutch BV companies’ shareholder meetings there will probably be a discussion regarding the appropriation of profit. In the case of a Dutch NV company, the appropriation of profit will form an integral part of the information provided to the shareholders at the general meeting of shareholders.
Interim dividend
Interim distributions, ie distributions that take place pending the adoption of annual accounts, are only permitted if the articles of association provide for interim dividend distributions. Distributions in breach of this requirement are void and payments received by the shareholders are subject to restitution to the company. To avoid any future surprises in this respect, it is advisable to assess whether your company’s articles of association allow for interim distribution.
Excessive amounts
Payments that are made in breach of the statutory capital requirements are subject to being recovered by the company on grounds of undue payment (onverschuldigde betaling) in respect of Dutch BV companies. The closed company structure of Dutch BV companies implies that the shareholder has knowledge of whether a distribution was permitted or not. Since the shares in Dutch BV companies are registered, it is not difficult to trace the shareholder(s) and require them to return the excessive dividend. In the case of Dutch NV companies, the shareholders are less easily traceable and, therefore, a different provision is applicable. The shareholders of Dutch NV companies are only obliged to return the distributed profit in cases where the shareholder knew, or should have known, that the distribution was not permitted.
Unlawful distributions
A distribution may be deemed to be unlawful and may be set aside if it is to the detriment of the creditors of a company, notwithstanding the fact that the distribution meets the statutory capital requirements. Diligence should be exercised when considering whether to distribute the profits of a target company prior to the sale of its shares to facilitate the finance requirements for the buyer to complete the transaction.
Form of dividend payment
Essentially, dividend distributions may take place in the following forms:
i) Cash payment
Dividend distributions may be paid out by application of the cash position of a company. Case law confirms that a company may also borrow money to apply towards profit distributions provided that the company can meet its obligations and that the statutory capital requirements are met.
ii) Payment in kind
Dividend distribution can also wholly or partly take the form of payment in kind by declaring stock dividends or payment in kind through other forms, such as shares held in other group companies or receivables or assets that are assigned to the shareholder. Dividend distribution is often used as a restructuring aid. However, it is essential that the underlying value of assets being applied towards dividend payments is assessed objectively should the permissibility of the distribution be called into question at a future date. Objective valuation may be achieved by valuation reports or fairness opinions issued by auditors that may demonstrate the arm’s length nature of the distribution.
iii) Stock dividends and bonus shares
Stock dividends relate to dividends in the form of shares. An explicit statutory provision that allows a distribution in shares is not required. The general meeting of shareholders can decide to distribute the profit completely or partly in shares.
A bonus share is a share that is distributed through the reserves, without the requirement of a cash payment by the shareholder(s). Shares distributed to shareholders without the payment of at least the nominal value are considered profit by the tax authorities, unless the issuance of shares is paid by the still existing share premium reserve. The issuing of shares is a combination of two simultaneous actions: the issuing of reserves and depositing these reserves on newly issued shares. It is not possible to issue bonus shares chargeable to the statutory reserves prescribed by law.
Tort
The adoption of the annual accounts usually takes place a couple of months after the balance sheet date. Case law (Nimox) suggests that at the moment the profit is actually going to be distributed, it should be reassessed whether distribution of profit is still permitted. It is conceivable that, due to losses that were made in the new financial year, the distribution is no longer permitted based on the minimum equity requirements. A distribution that was made in accordance with the equity requirements can be deemed to constitute a wrongful act of the shareholder(s) against the creditors of the company if the creditors, as a result of the distribution, do not get paid for all the debts owed by the company. Therefore, if the shareholder(s) of a company decides to distribute dividends when the equity requirements are no longer met due to losses in the new financial year, distribution of dividends should not take place because in the event of the company’s bankruptcy the shareholder(s) may be held liable for tort.
Course of action
It is essential that all precautions and prescribed steps are taken when distributing dividends so as to avoid the distributions being declared null and void at a future date and to avoid the obligation for the shareholders to reimburse the company for unlawfully received dividend payments.
It is of equal importance to assess past dividend distributions in respect of compliance with capital requirements and statutory permissibility, particularly when considering a disposal or restructuring of your Dutch subsidiaries.
By Aravind Ramanna, lawyer, and Minke Loeb, lawyer, corporate/M&A department, Boekel de Nerée.
E-mail: aravind.ramanna@boekeldeneree.com;
Nimox, HR 8 November 1991, NJ 1992, 174
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