Vol 7 (2010) - Issue 2

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Repeal of the Dutch Financial Assistance Prohibition for BVs: Are We Just Dressing Old Worlds New?

1. Introduction

Since its introduction, the scope and nature of the financial assistance prohibition applicable to Dutch BVs (private limited liability companies) and NVs (limited liability companies which can be listed companies) has been the subject of fierce debate in legal literature, while there has been limited guidance from case law by the Dutch Supreme Court.
For NVs, new capital maintenance rules entered into effect on 11 June 2008, in the course of the implementation of European Directive 2006/68/EC amending the Second Company Law Directive. The new rules introduce more flexibility on various aspects of the capital maintenance requirements for NVs.
A legislative proposal aimed at amending certain provisions of Dutch company law relating to BVs, including the financial assistance prohibition, was first published in April 2006 by the Dutch Ministry of Justice. On 15 December 2009, the bill for the 'Private Company Law (Simplification and Flexibilisation) Act' (the 'Bill') was passed by the lower chamber of the Dutch Parliament, and it provides for a complete repeal of the prohibition. The Bill, which was first submitted on 31 May 2007, is yet to be approved by the upper chamber and is expected to enter into force on 1 July 2010.
The repeal as provided for by the Bill does not mean that the provision of financial assistance by a BV will be without issues in the future. Rather, the responsibility of determining whether a BV may give financial assistance will shift further to the company’s managing board, which will need to assess the possible implications on the same basis as in any other transaction. A board not acting with due care in making its assessment may risk personal liability. In addition, a transaction involving the provision of financial assistance may be challenged where it is considered to be ultra vires. Consequently, even after the prohibition will have been abolished, some uncertainty will remain; albeit originating in other areas of Dutch corporate law.
This article briefly outlines the financial assistance prohibition applicable to NVs and BVs as currently in place, and subsequently sets out the new impediments which may replace the issues previously associated with the financial assistance prohibition for BVs.

2. Current legislation on financial assistance

Financial assistance for BVs
The current financial assistance prohibition prohibits a BV from providing security, giving a price guarantee or otherwise binding itself with a view to the acquisition by a third party of shares in its share capital or depository receipts. This prohibition also applies to the BV's Dutch and foreign subsidiaries. A BV may grant loans with a view to the acquisition by a third party of its shares, but only to the extent of its freely distributable reserves and unless it is prohibited by its articles of association. In addition, a non-distributable reserve must be maintained for the outstanding amount of any such loans.
It is generally assumed that a transaction which violates the financial assistance prohibition is null and void. In addition, the managing directors of the target BV or of its subsidiaries may be personally liable to the company or its creditors on the basis of tort if, as a result of the granting of the security (in rem or contractual), the company is unable to meet its other obligations, since the prohibition is partly aimed at protecting the creditors of the company.