Dutch limited liability companies are used to a two-tier board system for monitoring the policy of the executive directors and the general course of events in the company and its business. This means that a supervisory board exists alongside the executive board. Many foreign shareholders are not familiar with the two-tier board structure of the Netherlands. In the US and the UK it is more common to have the supervisory directors and the executive directors in one board. To align with these other jurisdictions it is now also possible to use the so-called “one-tier board”.
In a one-tier board, the executive directors and the supervisory directors are mutually established as the “Board of directors”. The supervisory directors are “non-executive directors” in a one-tier board. The different functions of the executive and non-executive directors of a one-tier board have to be described in the company’s articles of association. Non-executive directors perform a monitoring role, determine the remuneration of the executive members and one of them holds the position of chairman of the Board.
This alternative governance structure is an interesting option for international companies to limit the differences in governance between the Dutch company and the foreign shareholding company. But there are more advantages when choosing the one-tier board over the two-tier board:
A disadvantage for the company when using the one-tier board structure is that non-Executive directors are less independent towards the executive directors because they are a part of it.
In practice the non-executive directors themselves experience the potential directors’ liability as an important disadvantage. Every single board member, executive as well as non-executive, is responsible for the performance of the board’s duties. Dutch law indicates several directors’ liability risks that are applicable for the Board as collegiate body. Not all legislation is adjusted to the one-tier board is such a way that the non-executive director has a defense based on his monitoring task. One of the most common basis however for a directors’ liability claim is serious improper administration (article 2:9 of the Dutch Civil Code). This article already has been aligned with the one-tier board; a board member will not be held liable if the board member cannot be blamed for serious mismanagement and if he cannot be found negligent in taking measures to counteract the consequences of improper administration.
The increased liability risks for non-executive directors in a one-tier board compared to supervisory directors in a two-tier board is the reason why the one-tier board is not commonly used since it’s introduction in 2013. In my opinion the disadvantage often compensates for the advantages the shareholders and the company have when using a one-tier board system. Especially international companies shouldn’t hesitate but take the opportunity that has been created for them.