Netherlands regulates governance structure for associations and foundations

The Netherlands Legal Entities Governance and Supervision Act will enter into force on 1 July 2021, bringing the governance structure for these organisations into line with existing rules for public limited companies (NVs) and private limited companies (BVs) in the Dutch Civil Code.

The new law is intended to prevent mismanagement, irresponsible financial management, abuse of position and other undesirable activities within boards.

The act will enable associations and foundations to set up a supervisory board or one-tier board.

The legislation also provides more clarity on the principles that directors and supervisory directors of associations, cooperatives and foundations must observe in the performance of their duties.

It clarifies that a director or supervisory board member with a conflict of interest cannot participate in deliberation and decision-making on the relevant topic. If, as a result, the decision cannot be made by the board, then the supervisory board can make the decision instead.

If no supervisory board is installed, then the decision can be made by a general meeting for associations or cooperative associations. For a foundation, the board can make the decision in question but must keep a proper record of its decision-making process.

Directors and supervisory directors of commercial foundations and associations, cooperatives, mutual societies and semi-public legal entities will be personally liable in the event of bankruptcy if the organisation’s financial statements have not been published in a timely manner or if records have not been properly kept.

The legislation also confirms that a single director or supervisory directors cannot cast more votes than their co-directors or supervisory directors combined.

Corporate law expert Frits Burg of Pinsent Masons, the law firm behind Out-Law, said: “Rules on supervision and management for private and public companies are sufficiently covered by Dutch law. For foundations, associations and cooperatives the governance structure is equally important and this act meets the needs of legal practice.”

The new law will have direct effect. If an organisation’s current articles of association do not contain any rules for directors’ absences or inability to act, it should amend its articles accordingly.

Organisations have longer to amend any current rules in their articles relating to the number of votes which can be cast by directors – these can be amended up to five years after the legislation comes into force, or when the articles are next amended.

The conflict of interest rules will be effective immediately, regardless of the content of the current articles of association.