What you need to know about the Dutch Flex-BV (flexible legal entity)
What you need to know about the Dutch Flex-BV (flexible legal entity)
Since 1 October 2012 it has become more accessible to found a ‘besloten vennootschap’ (legal entity, BV). It has become simpler, cheaper and more flexible. By relaxing the rules the government wants to make the BV, as a legal form, more interesting for (starting) entrepreneurs. But are the rules clear for the directors and their accountants?
There are a number of reasons for the choice of founding a BV. Namely, with possible debts of the company the BV is liable and not the entrepreneur. The direction and the other shareholder(s) are only liable for the amount that they invested in the company. Furthermore, the corporation tax is only more advantageous than the income tax of an ‘eenmanszaak’(sole proprietor) in the case of high profits. Lastly, you will have a simple business transfer when selling the shares.
Since 1 October 2012 some things have changed. In short, these are the changes.
-The minimal (starting) capital of €18.000 has been abolished.
-It is no longer necessary to have an obligated bank statement and accountant statement.
-There is more flexibility in arranging the articles of association. What is mandatory in the articles of association are: name, place of registration, purpose of the BV, the share capital and an arrangement for executives and/or commissioners who are suddenly unavailable (by sickness or suspension, for example). You cannot deviate from the legal minimum requirements.
-It is possible to issue shares without voting right or without right to a profit distribution (dividend). This can, for example, come in handy when issuing shares to employees, family members or financers.
-Decisions can be made outside of the general shareholders’ meeting. In this way the BV can act quicker, especially if there is only one executive-majority shareholder.
-The general shareholders’ meeting may be held outside of The Netherlands.
-The transfer of shares can be limited. Before, the BV had to offer the shares to the shareholders. These share transfer restriction have now been abolished.
Now that this law has already entered into force the pitfalls are becoming more apparent. Much has been written about the balance –and distribution test. The distribution test replaces the current balance test for the restricted capital (a minimum of €18.000). The distribution test has been introduced to protect possible creditors from the BV. This distribution test is there to prevent shareholders to distribute capital to themselves if possible creditors are being wronged by this. The new distribution test consist of a continuity assumption and an indication of the maximum distribution of the dividend.
The director has to minimally lay down the following aspects:
-Has no more dividend been distributed than the size of the free reserves, in other words: are the own funds after distribution larger than the legal and statutory reserves?
-What are the consequences of distribution for the solvency of the enterprise?
-Have events occurred after establishment of the annual report that can possibly influence the continuity? Examples are the loss of an important sales market, considerable negative operating results or indications that debtors cannot fulfil their obligations.
-If, for example, dividends have been distributed wrongfully, the directors can be held accountable. Accountants, therefore, will have to operate with caution in their advisement of the directors of the BV. Otherwise the accountants will also risk claims.
In addition it has shown that the law Flex-BV contains other risks for executives and accountants. The deadline in which the annual report needs to be published has been shortened from 13 months to 11 months and 8 days. This only applies to Flex-BV’s of which all the shareholders are also executives. The law states that within 8 days after setting the annual report, this needs to be published in the trade register. This is because the law Flex-BV dictates that for these Flex-BV’s the moment of preparation and adaption of the annual report needs to be simultaneous.
In addition, the law offers the possibility to deviate from this shorter deadline in the statutory, but a lot of executives and accountants will not be aware of this. The consequences can show themselves especially in bankruptcy situations.
The curator can, in this case, hold executives accountable who did not publish the annual report in time. Executives will be tempted to point their finger at the accountant, because the accountant did not warn them of the expiration of this short term.
What influence do these new rules have on the flex-BV’s certification of shares? And can this certification be replaced by issuing non-voting shares?
STAK (foundation administration office in shares)
A Stichting Administratiekantoor in Aandelen (STAK) is a foundation with a special purpose. The purpose of the foundation is to control and separate the rights to dividend and the voting right of the shares. By separating the rights to dividend and the voting right by a STAK the shareholder transfers his shares to the STAK, then the STAK transfers the right to dividend to the ex-shareholder. The separation of the rights to dividend and the voting right means that the control rights and profit distribution are split up.
The STAK becomes a shareholder of the underlying BV(‘s) after the separation of the rights to dividend and the voting right and therefore has the right to vote in the General shareholders’ meeting. The right to vote on the shares will be executed by the directors of the foundation.
The right to dividend holders (ex-shareholders) will be entitled to the financial rights of the shares, despite no longer having the right to vote. This is called the right to dividend and entails that the certificate holder will receive the dividend and not the foundation or the directors of the foundation. This also applies for possible sale or the ceasing of the underlying enterprise. The directors are responsible for managing the foundation, in other words: She has the control concerning all affairs within the foundation.
The separation of the rights to dividend and the voting right
The separation of the rights to dividend and the voting right of shares from a flex-BV entails that the legal control of a share (the right to vote) and the economic benefit (rights to dividend) is split up. The share is taking into safekeeping by a (still to be founded) STAK. The STAK provides, In principle, for every share in safekeeping the right to dividend to the shareholder. The terms for this right to dividend, will be recorded in the administrative terms. In these administrative terms, among others, the rules are set concerning the distribution of bonus shares, and unification of the rights to dividend and the voting right.
The separation of the right to dividend and the voting right therefore entails that the shares are transferred to an administration office for the return of the corresponding right to dividend. This entitles the holder to the right to dividend of the shares, while the right to vote remains with the administration office.
With the introduction of the Flex-BV law nothing changes to the manner of the separation of the right to dividend and the right to vote. However, because of the new law it now has to be recorded in the statutory if the holders of the right to dividend are holders of participation or not. To be a holder of participation entails that a holder of a right to dividend in person or in the form of a proxy with written authorisation can attend the general shareholders’ meeting and speak there. He is explicitly not entitled to vote, but can, however, speak and try to influence the vote.
For existing holders of the right to dividend applies that it if is not stated in the statutory whether or not they are holders of participation, they are considered holders of participation, if the separation of the right to dividend and the right to vote has been issued with the cooperation of the BV. Whether or not the separation of the right to dividend and the right to vote has been issued with the cooperation of the BV depends on the circumstances of that case. If the directors of the BV do not recognize the holder of the right to dividend as holders of participation then a legal procedure can be started.
Reasons to separate the right to dividend and the right to vote
-In the case of corporate succession: when parents wants to transfer the wealth to their child(ren) without losing the control of the enterprise.
-In the case of employee participation where the entrepreneur wishes to retain the control and/or the right to vote.
-In the case of attracting funding without losing the control.
With the introduction of the Flex-BV also comes the non-voting share. Non-voting shares are shares that do not give the right to vote in the general shareholders’ meeting, but do give the right to dividend. The non-voting shares are part of the share capital and therefore form the own capital of the BV. Because of this, non-voting shares can be interesting when setting up an employee participation and/or funding by a third party without them influencing the policy of the BV.
The omission of the right to vote does not mean that this share cannot have effects within the Flex-BV. Non-voting shares always have the right to participation. Even if the BV only wants to give the shareholder a right to a specific decision, the non-voting share is well suited. It is, therefore, not possible to withhold these rights of the non-voting shares.
Why do we still need the separation of the right to dividend and the right to share if the possibility of non-voting shares exist?
The differences between non-voting shares and the separation of the right to dividend and the right to vote are mostly in the structure. For the separation of the right to dividend and the right to vote an administration office is required, which brings extra expenses. Furthermore with the separation of the right to dividend and the right to vote, voting rights are issued to the administration office. For the remaining shareholders this can have consequences, because they are confronted with an administration office that could vote in the general shareholders’ meeting. The importance of their vote can be diluted because of this. With non-voting shares this does not apply. In addition non-voting rights are excluded of the pre-emptive right of newly issued shares.
Non-voting shares can be issued after a decision of the general shareholders’ meeting. Before these shares are issued however, the statutory of the concerned company needs to be altered, the separation of the right to dividend and the right to vote, however can be changed without such an alteration.
The sale and delivery of the separation of the right to dividend and the right to vote can however happen over-the-counter, while non-voting shares always have to happen with a notary deed. A choice based on expenses depends on the number of predicted future deliveries to the owners. If, for example, the employees receive the rights to dividend or the shares in several portions, the expenses of the deliveries can rise high quite fast.
Other differences between non-voting shares and the separation of the right to dividend and the right to vote are that the holders of non-voting shares are always entitled to participate in the shareholder meetings. This right of participation is not always wanted in the case of employee participation.
The similarities are great between holders of non-voting shares and right to dividend holders, if the latter have the right to participation. If they represent (indirectly) more than 1% of the issued capital, they can call a meeting with lawful entitlement and place items on the agenda. Without mutual consent, deviation of the formal decision-making for such matters as taking decisions outside of the meeting is not possible.
Both systems have advantages and disadvantages that first need to be reviewed before a correct consideration and choice between both options can be made.
In short, the new flex-law offers advantages and possibilities. However, an important disadvantage is that the liability of executives and shareholders increases.
The separation of the right to dividend and the right to vote will surely retains its value in practice. It has, due to the possibility of issuing non-voting rights, become easier to choose for customisation. The right instrument can be chosen depending on the specific circumstances and desires , in which remaining fiscal aspect play an important role. For example in the case of ‘bedrijfsopvolgingsregeling’ (corporate succession regulation, BOR)
Article of Het Financiële Dagblad.
- Elsevier fiscaal advies 2013.