Director’s advisory vote; even a ritual dance must be performed carefully

Until the introduction of the Wet werk en zekerheid (Work and Security Act), a director was regularly presented with the ‘great winds blow on high hills’ argument in court: a director shouldn’t whine, but should simply accept the risk inherent in the position. The introduction of the Work and Security Act made this a thing of the past. It is apparent from the legislative history of the Act that the same requirements must be imposed on the ‘reasonable cause test’ in the case of a director as in the case of an ‘ordinary employee’. This means that in the case of an economic ground for removal, the possibilities of reassignment must be investigated. If the employer fails to do so, the removal is nevertheless an established fact. This is fundamentally different in the case of an ordinary employee, where a court does review the dismissal. Moreover, reinstatement of the employment contract is not possible in the case of a director, but is possible in the case of an ordinary employee. The director may, however, claim damages in the form of fair compensation (under Article 7:682(3) of the Dutch Civil Code).

The Court of Midden-Nederland recently awarded such fair compensation to a director. The company wanted to change its management structure. The CEO therefore had to step down, even though he had been employed for only a few months. The company drew attention to the principle that an employer has the right to organise its company in such a way as to safeguard its continued existence in the long term. In that light, a certain degree of restraint in the judicial test is also appropriate. But the court held it against the employer (or its shareholders) that the director had not been warned about these consequences and no talks had even taken place, let alone an investigation as to whether reassignment for a longer period was possible. The removal had been far too abrupt.

In order for a director’s employment contract to be validly terminated, he must be given the opportunity to cast his advisory vote before the termination already. This follows from Article 2:227(7) of the Dutch Civil Code. That casting of the advisory vote must furthermore be meaningful; that follows from the standard set out in Article 2:8 of the Dutch Civil Code. Shareholders and directors must behave reasonably and fairly towards each other. This provision can offer protection to directors, who should in no event fall victim to procedural carelessness on the part of the company. All the more so in a situation such as this, involving anything but a clear body of facts, even after the investigation. Nor does the director appear to have attempted to get the decision overturned. But it did earn the director fair compensation in the amount of EUR 74,000 gross (based on the assumption that the employment contract would have continued for another six months if proper notice of termination had been given). The weight that the court attached to the lapses on the part of the employer is remarkable, since all the formal rules for the convening of the meeting had been followed. But the court looked beyond the requirements in the articles of association: it took into account that the reasons had not been communicated to the director in writing until 4 October 2022, even though the company knew that he was on holiday abroad with his family at that time and would not return until 10 October 2022. This made it impossible for the director to properly prepare for the general meeting. He informed the company accordingly on 10 October 2022 and did not attend the general meeting. His absence could not be held against him, in the court’s opinion. But the court’s reasoning did not stop there: also if the director had cast his advisory vote, it is clear that the employer was not open to reconsidering his removal. The director had been granted gardening leave on 29 September 2022 already and was prohibited from having any contact with colleagues from that date on. Several members of the management team had also already been informed of his departure.

It is more rule than exception that a company does the very minimum that can be expected of it: call a timely general meeting with the director’s removal on the agenda and then politely hear the director’s advisory vote. But the chair then quickly conjures up a prepared written resolution. This transparent prejudice was punished in this ruling – which is a good thing. In light of this ruling, companies should guard themselves against too much nonchalance in its ritualised general meeting dance.

Please contact Michiel van Haelst (+31-6-553 944 87 ) or Lusine Shahbazyan (+31-6-128 715 76) for more information on this subject.

This article was published in the Newsletter Vestius of June 2023