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The new Companies and Associations Code (CAC) - Book 2 – Common provisions for legal persons

 
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The new Companies and Associations Code (CAC) - Book 2 – Common provisions for legal persons

Natalie Ulburghs

Book 2 of the Companies and Associations Code (‘CAC’) contains provisions that apply to all legal persons, unless provided otherwise in this or the subsequent Books of the Code. The dispute settlement rules apply only to BVs (private limited companies) and – unlisted – NVs (public limited companies).

Book 2 covers very important topics, some of which until now were spread haphazardly across the Belgian Companies Code (‘BCC’), for instance the reformed rules concerning directors' and officers' liability. The reforms on the management of legal persons introduced in Title 6 are one of the crown jewels of the CAC.

The following is a non-exhaustive review of some of the reforms.

Title 3: The name and registered office of legal persons

Identical or confusing names may be changed at the request of any interested party and may give rise to damages payable by the legal person, for which the founders or members of the management body are jointly and severally liable. This special liability is not extended to associations and foundations (however, these may face legal action based on section 1382 of the Civil Code).

Legal persons may not include any other legal form in their name than the one validly adopted. In the event this rule is breached, any interested party may bring an action to change the indication of the legal form.

Section 2:4 aims at simplifying the relocation of a company's registered office that does not involve a change of linguistic regime (within one and the same region or to and from the Brussels bilingual region). The articles of association of a legal person now just need to include the region where the registered office is located. Relocating a company's registered office to another language area requires a traditional amendment of the articles of association. From now on the address need no longer be included in the articles of association; however, it must be included in the deed of incorporation/formation. The management body may decide to relocate the registered office, insofar as the articles of association do not provide otherwise and the relocation does not imply a change of linguistic regime. If the address is included in the articles of association nonetheless, the other rules concerning amendment of the articles of association must be observed also (notary and publication). The authority granted to the management may be defined in the articles of association.

Title 4: Formation/incorporation and publication formalities

Articles of association must be available electronically. The first edition of the articles of association and, after any amendment to it, the coordinated edition (full text including amendments), must be stored in an electronic database system that is accessible for public consultation and that forms part of the legal person’s file. This provision will be further specified in a Royal Decree.

New in the CAC is that each founder, partner, shareholder, member of a management body, executive, statutory auditor, liquidator or interim administrator may choose domicile at the place where they carry out their professional activity. Only this address (hence not their personal address) will show upon consultation of the company records.

The time for publication in the appendices to the Belgian Official Gazette is reduced to 10 days for all legal persons. (The BCC provided for 15 days, and even 30 days for associations and foundations.)

In recent years, companies and associations have switched en masse from regular mail to email and website messages for communication with their shareholders and members. Each legal person may (and each listed company must) include an email address in the notarial deed of incorporation or any later deed, which then becomes the official email address of the company or association. Shareholders, security holders and members writing to said official address may assume that the legal person has effectively received the message.

A website included in said notarial deed thus becomes the company’s or association’s website. This is mandatory only for listed companies.

The management body has the authority to adopt a website or email address for companies that failed to do so in the deed of incorporation, and it may also modify the website or email address. However, the shareholders, security holders or members must be informed accordingly.

On their part, each shareholder, security holder or member may provide to the company or association an email address which these may then use for communication purposes until further notice.

Managing directors, directors and statutory auditors also have the option of providing an email address to the legal person.

‘Communication’ does not refer to documents in the scope of legal proceedings. The provision does not affect mandatory rules prescribed by other legislation.

Title 5: Nullity

Section 2:42 regarding the grounds of nullity of resolutions largely copies section 64 of the BCC, with a few meaningful changes and nuances. The new provision applies to any resolution passed by bodies of legal persons, not just to resolutions of the general meeting, and also to resolutions of any interim administrator or board of liquidators, for instance. Although the general meeting of debenture holders is not a body, the rules concerning nullity of resolutions and votes have been declared applicable to this general meeting also.

The BCC does not contain any provision concerning the nullity of votes. Section 2:43 of the CAC provides that a vote may be declared null and void on the same grounds as any other juridical act. The nullity of a vote implies the nullity of the resolution in question if the petitioner demonstrates that the null and void vote has influenced the deliberations or voting. If a minority of persons entitled to vote abuse their voting rights in such a way that the meeting is unable to pass resolutions by a required majority of votes, the court may rule that its judgment counts as a vote cast by that minority. This refers to the hypothesis of abuse of minority. In that case the nullity of votes does not always provide an appropriate judicial remedy, since the abuse commonly consists of a minority (with the power to stop a resolution) preventing a resolution to materialise.

Title 6: Governance

Chapter 1: Governance and representation

The general meeting is authorised to determine the financial and other conditions under which members of the management body exercise their mandate and the conditions under which said mandate ends (compensation/notice period). (Further to this we can state here that the CAC changes the rules of the ad nutum termination of board members, allowing derogation from it. This will be discussed in more detail in the scope of the relevant books.)

The CAC introduces the first positive description of the duty of proper performance for management bodies: any member of a management body and any executive manager has an obligation towards the legal person of proper performance of the task entrusted to them.

In accordance with section 138 of the BCC, in the event of impending discontinuity the management body must deliberate on measures to safeguard the continuity of the economic activity for a minimum period of 12 months. The 'reasonable period’ is now established at twelve months.

Section 2:54 allows members of management bodies to choose the legal person’s registered office as their address for service for all matters concerning the exercise of their mandate; this ensures protection of their private address. Summonses may be duly served at the chosen address.

If a legal person assumes a mandate as a member of a management body or as an executive board member, it must appoint a permanent representative. Contrary to the provision under the BCC, the representation by a permanent representative now also applies to the executive board.

The new law also clearly states that the permanent representative must be a natural person – not another company. Said natural person may no longer be a shareholder, director, management committee member or employee.

New is also the clarification that the rules concerning conflicts of interest for directors apply to the permanent representative with a personal conflict of interest, regardless of whether or not the legal person–director has a conflict of interest.

According to the new law, natural persons may sit on a management body only once. Under the current legislation it can happen that, say, John Johnson sits on a board of directors as the permanent representative of a director/company X, and simultaneously has a seat as a natural person. This will no longer be possible under the CAC.

If the director/legal person is the only director of the governed legal person, they may nominate a deputy permanent representative, who may act if the permanent representative is indisposed.

Chapter 2: Directors' liability

The directors’ liability rules now apply in general to actual directors, whereas in the BCC, they were subject to said rules only in the scope of special liability in the case of bankruptcy.

The new law introduces a legal description of the ‘test of reasonableness’:  these individuals are liable only for resolutions, acts or behaviour that are obviously outside the margin within which normally careful and prudent directors, placed in identical circumstances, may reasonably differ of opinion.

According to the BCC, liability for common management errors is individual, except in the case of joint or concurring errors (in solidum) or of breach of the articles of association of the company or of the BCC (joint and several liability, i.e. each director can be held liable for the entire amount[US1] ). However, directors may provide counter-evidence of joint and several liability if they had no part in the infringement (hence are not to blame) and have reported the infringement at the next general meeting. This means that directors are expected to report at the next general meeting that it is not they, but their fellow directors who are guilty of infringing the articles of association or the BCC. This threshold proved to be too high in practice. The option was hardly ever used.

The rule changes under the new law. The assumption of joint and several liability now applies to decisions or negligence of the board. If the management body is not a board, its members are jointly and severally liable for damage arising from infringement of the CAC or the articles of association. The rule for opposing the assumption changes. Directors now have to prove that they did not commit an error (e.g. they opposed the decision or were justifiably present). Furthermore, directors must report the infringement to their fellow directors or the joint management body (hence not the general meeting) and, if a supervisory board exists (more on this in the scope of Book 7), to this board. The report and debate must be recorded in the minutes.

The directors’ liability is limited to a maximum amount proportionate to the size of the legal person. The law distinguishes five categories based on turnover/balance sheet total:

(i)    EUR 125,000 for an average turnover < EUR 350,000 and an average balance sheet total ≤ EUR 175,000;

(ii)   EUR 250,000 for legal persons other than under (i) and for a turnover < EUR 700,000 and a balance sheet total ≤ EUR 350,000;

(iii)   EUR 1,000,000 for legal persons other than under (i) and (ii) and for an average turnover ≤ EUR 9,000,000 or a balance sheet total ≤ EUR 4,500,000;

(iv)  EUR 3,000,000 for legal persons other than under (i), (ii) or (iii) if the previous limits have been exceeded but none of the limits under (v) have been reached or exceeded;

(v)   EUR 12,000,000 for public interest organisations and legal persons other than under (i), (ii), (iii) and (iv) and for an average turnover ≥ EUR 50,000,000 or a balance sheet total ≥  EUR 43,000,000.

These criteria relate to average amounts of the three financial years prior to institution of the liability action, or less if fewer than three years have passed since the incorporation.

The limit of liability is the result of several findings: an unjustified difference between the limited liability of directors and managers and an increased liability risk; the goal of obtaining insurance coverage at acceptable conditions. Furthermore, directors’ third-party liability is subject to tougher regulations in Belgium than in the neighbouring countries.

The limit of liability applies towards the legal person and towards third parties, regardless of the contractual or non-contractual ground of the action for liability. The maximum amounts apply to the joint directors and for each fact or set of facts that may give rise to liability, regardless of the number of claimants or claims. Hence the limit of liability applies both to liability for common management errors and infringement of the CAC, and to liability arising from special acts such as sections XX.225 and XX.227 of the Belgian Code of Economic Law. Section XX.225 of the Belgian Code of Economic Law provides for liability in case of a manifest major error resulting in bankruptcy, equivalent to section 530 of the BCC. Section XX.227, in force since May 1st, 2018, introduces new liability for continuation of activities when the person knew or should have known that no reasonable outlook on maintaining the company/activities or preventing bankruptcy existed – so-called wrongful trading.

This limitation of liability is one of the aspects that has caused most discussion in the run-up to the voting on the CAC. The last text draft provides the following exceptions:

(i)    a minor error that is common rather than random, a major error, fraudulent intention or intention to harm on the part of the person who is held liable;

(ii)   a number of guarantee obligations (situations in which a director has to guarantee someone else’s obligation, e.g. subscription in a capital increase);

(iii)   a number of fiscal liabilities (sections 442 quater and 458 of the 1992 Income Tax Act and sections 73 sexies and 93 undecies C of the VAT Act);

(iv)  the joint and several liability under section XX.226 of the Belgian Code of Economic Law (liability for social security contributions, under certain conditions).

The addition ‘minor error that is common rather than random, and major error’ was added to the last text version, among other things on the ground that the liability of employees is more extensive than the liability that was going to be introduced for directors. The directors’ liability was to be limited, whereas the employee’s liability was not, which meant that an excessive part of the claim could be landing on the shoulders of the employee. It also implied the risk that the damage or part thereof would not be compensated.

These additions (unfortunately) eroded the limitation of liability to a large extent, in that it now no longer applies to minor errors that are common rather than random, nor to major errors. So now it applies only in cases of minor errors that occur at random?

The option of introducing further limitation of liability in contracts or articles of association is excluded in the CAC. Also prohibited are exoneration and indemnity clauses entered into by the company, subsidiaries or controlled entities for the benefit of directors. However, parent companies, controlling entities and shareholders are allowed to indemnify directors. Under the new code the legal person is still allowed to take out and pay for insurance for the benefit of directors.

Title 7: Dispute settlement regulation

The dispute settlement regulation involves the exclusion and the retirement of shareholders for valid reasons. In the case of exclusion, one or more shareholders who jointly possess shares that represent 30% of the votes, are associated with 30% of the profit rights or represent 30% of the capital (depending on whether the company is a private or a public limited company), demand that a shareholder transfer their shares to the petitioners and hence, is excluded. In the case of retirement, a shareholder demands that their shares are being taken over by the other shareholders to whom these valid grounds apply. In this scenario, the shareholder wishes to leave the company.

The dispute settlement regulation remains applicable to private and public limited companies, save for listed companies. This type of exclusion and retirement should not be confused with the exclusion and retirement at the cost of the company, which under the BCC can only apply to the CVBA (cooperative society with limited liability), but under the new CAC can apply to both the BV (public limited company) and the CV (cooperative society). More on this topic later.

The competence of the president of the Business Court, deciding in fast-track proceedings on the action for exclusion and retirement, is now extended to enable them to resolve certain disputes closely related to exclusion or retirement. The extension of competence is subject to two conditions: it must involve related disputes (section 30 of the Judicial Code) and the dispute must concern the financial relations – such as loans, current account or securities – between parties and the company or affiliated companies or persons, or non-competition clauses. Thus, the president could be asked to impose a non-competition clause on the excluded shareholder. Liability claims still do not fall under this right to bring an action.

The principle that the right to payment of the price arises at the time of the transfer of ownership, is now confirmed. The court may impose the creation of security to guarantee payment of the outstanding amount.

Furthermore, the new code provides an answer to the controversial question whether or not the court is bound by the take-over price stipulated in the shareholders’ agreement or a provision in the articles of association. The court is bound by the contractual provisions or those in the articles of association concerning the determination of the value, insofar as those provisions relate specifically to the hypothesis of judicial exclusion/retirement and do not lead to a manifestly unreasonable price. The court may take the place of any party or third party designated by the articles of association or agreement to determine the price.

The value of the securities is estimated at the time of the transfer, unless this would lead to a manifestly unreasonable result. In that case the court, taking into account all the relevant circumstances, may decide a fair increase or decrease of the price.

New is also that the court may make part of the price dependent on the acceptance of a non-competition clause. The court is also competent to judge on the fate of existing non-competition clauses.

The court is granted competence to force the buying shareholder or company to lift any security provided by the selling shareholder to the company, or to impose a counter-guarantee. After all: it cannot be that the selling shareholder would remain bound by any such security after termination of their share ownership.

Ergo: the court now has wide discretionary power, both in the case of exclusion and in the case of retirement.

Title 8: Dissolution and liquidation

Dissolution and liquidation of companies on the one hand and associations and foundations on the other are dealt with in separate chapters.

The president of the Business Court, deciding in fast-track proceedings, now has competence to decide on claims for dissolution of a company for legal reasons. Legal reasons exist when a shareholder fails seriously in meeting their obligations or is incapable of performing them. They also exist in other cases that impede normal continuation of business, such as fundamental and lasting disagreement between shareholders.

The scope of the procedure of dissolving and winding up a company with just one single notarial deed has been widened. This means that the ‘one deed procedure’ is allowed under the following conditions:

(i)    No liquidator is appointed.

(ii)   All the debts have been paid or the necessary monies consigned, both of which need to be confirmed by an accounting professional. However, payment or consignment is not required for debts included in the statement of assets and liabilities submitted to the general meeting if the creditors have consented [US2] in writing. The scope is thus widened to include companies that neither paid nor consigned all third-party debts, subject to agreement from the unpaid creditors.

(iii)   The general meeting passes a resolution for dissolution and closure of the liquidation in one deed subject to unanimous consent of all the partners in a vennootschap onder firma (commercial partnership) or commanditaire vennootschap (limited partnership), or subject to unanimity among the attendees or represented shareholders representing at least half of the issued shares or capital.

No longer is the appointment of the liquidator subject in all cases to the requirement of confirmation or approval from the court. The requirement applies only in a liquidation situation wherein liabilities exceed the assets and in which the company has debts not just towards its shareholders. Furthermore, all the shareholders-creditors must agree to the appointment in writing.

A similar relaxation of the rules was introduced for the asset distribution plan among the different classes of creditors, which must be submitted for approval to the competent court. This requirement is now limited to liquidations in which the liabilities exceed the assets and does not apply when the creditors that are not paid in full, are shareholders, agree in writing to the distribution plan and waive the requirement of submission of the distribution plan.

Furthermore, the new Code introduces a few changes for the purpose of eliminating certain technical gaps and ambiguities, and to provide a solution for a number of fundamental questions that until now, the legislator had not clearly addressed.

Separate chapters address the dissolution and liquidation of associations and foundations.

Title 9: Legal action and prescription

The five-year prescription period for members of management bodies is extended to include substitute members of the executive board. The law specifies that the same shortened prescription period also applies to permanent representatives of legal persons.

The period of six months for nullification of resolutions of the general meeting is specifically declared applicable to resolutions from other bodies of the company. The six-month period is calculated from the day on which the resolutions can be enforced against the person invoking the nullity or from the day that person has taken knowledge of the resolution. This creates clarity as to the prescription period for an action for nullification of a resolution of the management body: also six months.

Title 10: International private-law provisions

The CAC specifies explicitly that it applies to legal persons that have their registered office in Belgium. This section is totally new and refers to the switch towards the ‘registered office doctrine’. From now on, under Belgian law the nationality of a company coincides with the address of its registered office, hence no longer with its actual head office. The registered office may be located in Belgium from the moment of incorporation, but it may also be moved to Belgium at a later stage.

 

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