Dismissal of directors in the Netherlands

In the Netherlands different rules apply to the dismissal of a statutory (managing) director than to the dismissal of a normal employee. A director has a special position within the company as an executive officer and therefore this warrants less stringent rules for terminating his or her employment under Dutch law.

In most cases directors are appointed to the board, but also suspended and dismissed by the general shareholders meeting. As soon as the shareholders have voted for dismissal, the director loses all powers to represent the company and therefore directorship under corporate law ends immediately.

Who is a statutory director?

A statutory director must be officially appointed by the general shareholders meeting. In general, the company register at companies house (in Dutch: “handelsregister”) also registers duly appointed directors. It is, however possible that a person carries the title of director, such as operations director or financial director, but without an official appointment by the shareholders, this type of functionary is just a normal salaried employee, with the usual rights to protection against dismissal.

Director and employee?

In some cases the director is not directly employed by the company, but via a management contract with a personal holding company. In such cases, the management agreement will usually prescribe how the agreement is terminated and after dismissal by the shareholders this agreement will have to be dissolved.

In many cases the director is directly employed by the company he or she manages and is therefore on the payroll. For many years it was unclear whether the employment contract terminated at the same time as the decision for dismissal by the shareholders. On the 15th of April 2005 the Dutch Supreme court ruled that both the corporate and employee relationship terminate at the same time, unless there is a specific prohibition in place at the time of termination. As soon as the shareholders decide to dismiss a director, this results in termination of the employment contract with immediate effect. Dutch employment law is, however, still applicable insofar as that termination of an employment contract is prohibited if an employee is ill or pregnant at the time of dismissal. In such cases the employment contract will continue until such time as the prohibition has ended.

If a director reports in sick after the intention to dismiss him or her has been communicated, then the prohibition on termination can be set aside to prevent abuse of the law to delay dismissal.

Legal formalities for dismissal

The general shareholders meeting must take the correct formal steps before taking a valid decision to dismiss a director. Should the shareholders skip these formalities, then the director can go to court and have the decision annulled.

The shareholders meeting must be convoked in accordance with the statutes and the articles of association must be checked for any special provisions regarding the dismissal of company directors, which must then be followed to the letter. Dutch corporate law states that the director must be informed about the goal of the meeting and must be given sufficient chance to react to the intention to dismiss him or her. The director must also be given the opportunity to speak during the meeting itself.

If any of these formalities are not taken into account, then the director can have the decision declared null and void, and thereby regain the position of director. It is therefore very important to follow all of the correct procedures, even if this may take longer than is to the shareholders liking.

Unfair dismissal

The shareholders must have a valid reason for dismissing a director. If the correct procedures have been followed, then a director cannot enforce reinstatement, but the company may be liable for damages for unfair dismissal. It is therefore important to prepare a full dossier of the reasons for dismissal to prove that there is no case for unfair dismissal.

Unfair dismissal cannot be filed for unless there is an employment agreement between the director and the company. In case of termination of a management agreement as mentioned above, the director can claim for compensation due to breach of contract or an unlawful act by the company.

There are no guidelines as to the amount of damages that may be awarded due to unfair dismissal. It could be that dismissal is grossly unfair leading to a large sum of damages, or the judge may feel that due to the circumstances, dismissal may be unfair, but not so unfair as to warrant more than a small award. Factors such as age and prospects of the director for future employment are also weighed, so each case is different and weighed on the merits. Some rulings take into account high salary and bonuses received, that are deemed to compensate the greater risk of termination.

It is to be recommended to agree on severance payment upon appointment of the director (exit-clause). That way all parties know beforehand what will be owed upon dismissal. In most cases this also prevents suits for unfair dismissal as compensation has already been agreed beforehand.

How can Bowmer & Nuiten help you?

Our office specialises in business and corporate law, so we have specialist lawyers both versed in corporate and employment law that can advise either companies wishing to dismiss a director or directors confronted with the intention to terminate their contract. We also regularly defend unfair dismissal cases and negotiate severance packages.
For further information or advice, please contact Jaap Wijnja or Pim Nuiten.

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