The Dutch large company regime may be closer than you think
Many companies satisfy the criteria for the Dutch large company regime (structuurregime) without realising it. When applicable in full, the regime fundamentally changes the corporate governance of a company on a mandatory basis, leaving no room for deviation. The regime, among other things, shifts the right of appointing the management board to the supervisory board, governs the composition of the supervisory board and prescribes which management decisions require supervisory board approval, and as such limits the corporate powers of the general meeting of shareholders. This is particularly relevant in the context of acquisitions, investments, and group restructurings, where predefined governance arrangements often form an important part of the investment thesis.
This article explains when the regime applies, how the filing and run-in process works, what the governance consequences are, when the mitigated regime, exemptions or voluntary application are relevant, what the consequences of non-compliance are, how and when the regime ends, and what to consider in practice and in a transaction context.
When does the large company regime apply?
The large company regime applies to a Dutch NV (naamloze vennootschap, a public limited company) or BV (besloten vennootschap, a private limited company) if three cumulative criteria are met:
- the issued share capital and reserves amount to at least EUR 16 million;
- the company or one of its dependent companies has established a works council pursuant to a legal obligation; and
- the company and its dependent companies jointly employ at least 100 employees in the Netherlands.
A dependent company (afhankelijke maatschappij) is comparable to a group company (groepsmaatschappij), but instead of control through voting rights, the test is whether the company (alone or together with its other dependent companies) provides at least half of the dependent entity’s issued share capital.
These thresholds are often reached sooner than expected. Rapidly growing businesses as well as companies that have operated on a similar scale for years may unexpectedly meet the criteria through the accumulation of retained earnings, acquisitions, or changes in the group structure. Particularly in group structures, companies sometimes discover that the works council or employee threshold has already been met elsewhere within the group.
A two-step process: filing obligation and run-in period
An important practical nuance of the large company regime is that it does not apply immediately once the thresholds are met. A company that satisfies the statutory criteria must file a statement with the Dutch Trade Register within two months after adoption of the annual accounts showing that the criteria have been met. The company must also mention the filing in the management report that is part of the annual accounts, and in each subsequent management report for as long as the company continues to meet the thresholds, until the articles of association have been amended in line with the regime.
The regime becomes applicable by operation of law only after the aforementioned statement has remained filed for three consecutive years (the so-called “run-in period”). At that point the company must amend its articles of association to reflect the regime, but the amendment is not a condition precedent for the regime to take effect. In such a case, the regime becomes directly applicable and overrides the then existing governance arrangements of the company. For example, if the company has not established a supervisory board and the regime becomes applicable, it creates the anomalous situation where the law confers far-reaching powers on a supervisory board that does not exist in practice. If, during the run-in period, the company ceases to satisfy the criteria, it can withdraw the filing, and the regime will not become applicable.
Why does it matter?
The large company regime significantly alters a company’s governance structure. The full regime applies by default where the statutory criteria are met and no exemption or mitigated regime applies. Under the full regime, the main consequences are as follows:
- a supervisory board must be established, consisting of at least three members, with certain persons excluded from appointment;
- certain material management board decisions require prior supervisory board approval, including significant investments, major acquisitions and disposals, substantial reorganisations and amendments to the articles of association;
- the works council obtains enhanced participation rights, including an enhanced recommendation right for one third of the members of the supervisory board;
- the remaining members of the supervisory board are appointed by the general meeting on the nomination of the supervisory board itself, which limits the general meeting’s ability to determine the person of the supervisory board member;
- the supervisory board is authorised to appoint, suspend and dismiss management board members; and
- the general meeting cannot dismiss individual supervisory board members, it can only withdraw its confidence in the supervisory board as a whole, resulting in the immediate dismissal of all members. Individual supervisory board members can only be dismissed by the Enterprise Chamber (Ondernemingskamer).
The combined effect of these changes is that shareholders are placed at a considerably greater distance from both the management of the company, because shareholders lose direct control over who manages the company and can no longer use appointment or dismissal rights as a means of influencing the company’s strategic direction. In addition, shareholders have limited ability to shape the supervisory board’s composition and, by extension, the oversight of management.
Mitigated regime, exemptions and voluntary application
Mitigated regime
Certain large companies may be able to benefit from the mitigated regime. Under the mitigated regime, the general meeting retains the authority to appoint, suspend and dismiss management board members. The obligation to establish a supervisory board and the enhanced rights of the works council remain in place.
Most commonly, the mitigated regime applies where at least 50% of the company’s issued share capital is directly or indirectly held by a legal entity whose workforce, including that of its group companies, is predominantly located outside the Netherlands, or by a joint venture of such entities. The mitigated regime also applies where the entire issued share capital is held by one or more natural persons acting pursuant to a mutual cooperation arrangement, for example in a family-owned business, or by one or more foundations (stichtingen), associations (verenigingen) or public legal entities (publiekrechtelijke rechtspersonen) acting pursuant to a mutual cooperation arrangement.
The rationale behind the mitigated regime is that the full transfer of appointment rights to the supervisory board is considered less appropriate in certain ownership structures. In international groups, such a transfer may interfere with the unity of management where the group’s centre of gravity lies outside the Netherlands. In the other categories described above, the shareholders are identifiable persons or entities with a direct involvement in the company, rather than dispersed or anonymous investors, which means that the rationale for distancing shareholders from management appointments through the full regime is less compelling. However, the mitigated regime based on an international shareholding structure does not apply where the majority of the combined workforce of the company and the relevant shareholders, including their group companies, is located in the Netherlands.
Exemptions
Certain companies are exempt from the large company regime altogether. In practice, the most relevant exemption is the so-called “subsidiary exemption”, which applies where a company is a dependent company of another company that is already subject to the regime (whether in full or in mitigated form). For this reason, the company subject to the regime is in practice often positioned as high as possible within the corporate group, so that the other group companies can rely on this exemption. Another important exemption is the “international holding exemption”, which applies to holding companies whose activities are almost exclusively limited to managing and financing group companies and whose workforce is predominantly located outside the Netherlands. Closely related is the “service company exemption”, which applies to companies that almost exclusively provide management and financing services to such international holding companies and their group companies, subject to the same international workforce requirement. Finally, the “joint venture exemption” applies where at least half of the issued share capital is held, pursuant to a mutual cooperation arrangement, by two or more companies that are themselves subject to the large company regime or are dependent companies of a company that is. Determining whether an exemption applies requires a careful assessment of the relevant group structure and activities.
Voluntary application
Companies that are not required to apply to the large company regime may choose to adopt it voluntarily, provided a works council has been established at the level of the company or a dependent company. Voluntary application is implemented through the articles of association and does not require a filing with the Trade Register. A company applying the mitigated regime may also choose to apply the full regime voluntarily. Voluntary application is sometimes used within group structures to achieve a preferred governance framework or to provide additional employee participation.
Consequences of non-compliance
Non-compliance with the filing obligation upon meeting the large company criteria or with the governance requirements of the large company regime can have significant consequences. Failure to comply constitutes an economic offence under Dutch law for which both the company and its directors can be prosecuted, although prosecution in practice is rare. Non-compliance can also lead to governance disputes, uncertainty about decision-making authority, and potential liability risks. Appointments or dismissals are vulnerable to challenge where the applicable governance framework has not been properly implemented. In addition, non-compliance can harm the relationship with the works council, particularly where employee participation rights cannot be exercised in practice as intended by the large company regime.
End of the regime: the run-out period
If a company no longer satisfies the statutory large company criteria, it can file a statement to that effect with the Dutch Trade Register. The large company regime does not immediately fall away, however. It continues to apply for a further three years (the so-called “run-out period”). By contrast, if a full exemption becomes applicable, the regime ends immediately upon cancellation of the filing, and no run-out period applies. This distinction can be relevant in the context of acquisitions, group restructurings and carve-outs, where a company may qualify for an exemption because of the transaction.
What we see in practice
In our experience, the large company regime is one of the most frequently overlooked aspects of Dutch corporate governance.
We regularly encounter situations where a company has satisfied the statutory criteria for some time without having made the required filing, or where the regime already applies and the governance structure does not reflect this. This can create real risks: appointment rights assumed by shareholders may no longer exist, contractually agreed approval mechanisms may conflict with the supervisory board’s statutory authority, management board decisions taken without the required supervisory board approval may be challenged, and there is a risk that the works council is unable to exercise participation rights to which it may be entitled by law. In such circumstances, a question may also arise as to whether the directors have fulfilled their duty of proper performance of their tasks (behoorlijke taakvervulling), which could, depending on the circumstances, expose them to potential liability risks, in particular where the non-compliance has adversely affected the company or its stakeholders.
Special attention in an M&A context
The large company regime is of particular relevance in acquisitions, investments and restructurings. It is important to assess as part of the legal due diligence whether the large company regime applies, whether an exemption is available, or whether the transaction itself may trigger the regime in the future. In legal mergers, demergers and carve-outs, an entity previously subject to the regime may cease to exist or lose its status following the restructuring. The acquiring, surviving or newly formed entity may then satisfy the statutory criteria and be required to make a new filing, triggering a fresh three-year run-in period. As a result, even where the regime applied before the transaction, a restructuring may give rise to an interim period in which the regime does not yet apply to the new structure. This is a relevant consideration in transaction planning and governance design, as it may provide the parties with additional flexibility during the run-in period, while also requiring careful attention to ensure that the company’s governance arrangements remain appropriate throughout that period.
Attention should be paid to the statutory supervisory board approval list, as transactions and strategic initiatives that would ordinarily fall within management’s authority, or that were subject to general meeting approval, may instead become subject to supervisory board approval. In addition, in acquisitions and investments it is common for the acquiring party or investor to negotiate the right to appoint and dismiss one or more supervisory board members. The large company regime may frustrate such arrangements, as supervisory board members are appointed by the general meeting on the nomination of the supervisory board itself, limiting the investor’s influence over the person of the supervisory board member, and the general meeting cannot dismiss individual supervisory board members and can only withdraw its confidence in the supervisory board as a whole. More broadly, governance arrangements agreed between shareholders may not be fully enforceable once the regime applies, as the statutory powers of the supervisory board and the works council take precedence. This is particularly relevant where governance arrangements are heavily negotiated and form a key part of the investment rationale, and where the regime does not align with the parties’ original investment thesis.
Avoiding surprises
In summary, the impact of the large company regime on a company’s governance should not be underestimated, and where the regime does not align with the governance arrangements agreed between parties to a transaction, it may override those arrangements. Timely identification of the regime is essential to avoid unexpected governance changes, safeguard the integrity of negotiated arrangements, and prevent the need for costly remedial action once the regime has taken effect. Whether a company is growing, preparing for an investment round, or involved in an acquisition or restructuring, it is worth assessing at an early stage whether the large company regime may apply and whether any exemptions or alternative regimes are available.
Van Doorne’s Corporate/M&A team regularly advises Dutch and international companies, shareholders and investors on the large company regime, corporate governance and transaction structuring. If you would like to discuss the potential impact on your organisation or transaction, please contact Jeantine Swagerman and Matthijs Driedonks at Van Doorne.
