Good governance: The advisory capacity of directors and members of the supervisory board

Directors and members of the supervisory board support shareholders in an advisory capacity. From 1 July 2021 this also applies to directors and supervisory board members of associations, foundations and cooperatives. What are the consequences if the shareholders make decisions disregarding this advisory role?

Directors and members of the supervisory board of companies have to be invited to of the general meeting of shareholders. These directors and members of the supervisory board will then not be able to act in their advisory capacity. Disregarding this advisory role can have major consequences.

On 1 July 2021, associations, foundations, cooperatives and mutual benefit associations will also be confronted with this risk. That is when the Management and Supervision of Legal Entities Act will come into force.

Notification requirement

To make use of their advisory vote, directors and members of the supervisory board of a BV or NV must always be notified of the general meeting of shareholders. There are no specific requirements for this notification. However, the notification must reach the directors and the members of the supervisory board. In connection with potential burden-of-proof issues, the notification can best be sent by registered letter.

Advisory capacity

The advisory capacity system cannot be bypassed by any provision in the articles of a BV or NV. The idea behind this regulation is that directors and members of the supervisory board must be able to present their views so that the shareholders can take account of these views in the decision-making process.

Right to be heard on planned dismissal of a director

In addition to the advisory vote of directors and supervisory board members, there is a duty to be heard. The duty to be heard means that a director or supervisory board member must be heard in a proposed decision of his suspension or dismissal. The reason for this right to be heard is that, according to reasonableness and fairness, the director must have been given the opportunity to defend himself and to present his view on the accusations.

Consequences of disregard of the advisory capacity

In case the directors or members of the supervisory board have not been able to act in their advisory capacity, a decision by the shareholders may be declared void. If the duty to be heard is not fulfilled, the decision to suspend or dismiss a director or supervisory director is voidable.

In practice, this mainly concerns directors. Some directors have successfully contested their dismissal as they had neither been heard nor invited by the shareholders. The dismissal decision was annulled and the employment contract revived. The company then had to continue paying the director’s salary.

If directors and members of the supervisory board are notified but do not act in their advisory capacity, they won’t be able to declare decisions voidable later. Therefore, it is advisable to always admit directors and members of the supervisory board to the meeting.

Action

• Check whether the directors and members of the supervisory board have been notified of the general meeting of shareholders.
• Put on the record whether or not they have acted in their advisory capacity.
• Record that a director or supervisory board member has been heard on a proposed decision on dismissal or suspension.

More information

Would you like to know more about the general meeting of the shareholders or do you have any other questions regarding the legal position of directors, members of the supervisory board, and shareholders? Please contact: