A statutory ground for the issue of profit certificates?

19 December 2019

Considerations and recommendations in granting a statutory basis to the issue of profit certificates.
There is no legal definition of a profit certificate in the Dutch Civil Code. A profit certificate is an agreement between the company and the holder of the profit certificate, pursuant to which a holder is entitled to the distribution of a part of the corporate profit and / or a part of the liquidation balance. It is an agreement that can be entered form-free (and therefore does not have to be issued as a proof, although the name might suggest otherwise). Payments on profit certificates issued on a statutory ground are considered for tax purposes as a non-deductible profit distribution.
It is often assumed in the literature that the issue of profit certificates require a statutory ground. Reference is made to the articles 2:105 and 2:216 of the Dutch Civil Code, from which it appears that the profit is for the benefit of the shareholders if nothing is arranged in the articles of association. The legislator also seems to prefer to incorporate profit certificates in the articles of association.

The articles of association may further contain that the holders of profit certificates may appoint a member of the supervisory board (except for two-tier companies). It is also possible to grant the right to attend and speak at the general meeting, but the voting rights in the general meeting cannot be allocated to the holders of profit certificates. Holders of profit certificates do not form a separate corporate body and it is therefore not possible to grant them any binding instruction within the articles of association.

Under current law, shareholders can deviate from a statutory profit provision by unanimous consent and thus choose not to distribute the available profit on the profit certificates, without the holders having a direct influence on that decision. To prevent this, a statutory regulation can be included for this that makes this impossible.

However, there are also opinions in the literature that assume that a statutory basis is not required for the issue of profit certificates. This opinion (also) relies on the provisions of article 2:216 of the Dutch Civil Code. Based on this, it would be sufficient to define in the articles of association that shareholders may dispose on the profit. It is not necessary to explicitly state that profit certificates can be issued. Then a payment to a holder of profit certificates can take place without the need for a statutory exception to the statutory regulation.

It is advisable to assign a statutory basis to the issue of profit certificates. It is sufficient to simply include that profit certificates can be issued. It is advisable to include a more extensive statutory regulation, so that the holders  of profit certificates are not entirely dependent on the decisions made within the company. To strengthen the position of profit certificate holders, for example, a provision may be included in the articles of association that requires that with each profit distribution the holders of profit certificates communicate herein as if they were shareholders. It is also possible under certain conditions to grant the profit certificate holder determined participation under the articles of association.

 

 

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