A director under the articles of association (hereinafter: director) has two legal relationships with the company. Firstly, the director is appointed as the director by the competent body of the company under Dutch law. In addition, the company will usually conclude an employment agreement with the director. This particular legal construct could lead to confusion in case of taking leave from the director. Both positions have to be terminated by the company. In general the termination of the appointment as director will automatically result in termination of his employment agreement.
Termination of the appointment as director (corporate-law)
The body authorized to appoint the director is also authorized to take the decision to dismiss the director. In principle, this is the General Meeting of Shareholders (AGM). If the company has a two-tier board system, the Supervisory Board is competent.
The formalities concerning the content and term of the notice convening the AGM must be observed. The Works Council must also be consulted in advance regarding the proposed decision to dismiss the director. In addition the advisory vote, that the management board and supervisory board could have in the AGM, must be taken into account. The director must be heard as well. As soon as the decision has been taken, it has immediate external effect.
Prior to the AGM it is of great importance to speak about ‘the proposed’ dismissal decision. The advisory vote and the hearing of the director should still be able to influence the decision to be taken. If the director contests the termination under company law, this could be an important point. Legal proceedings by the director will only lead to nullity or compensation, except when the decision is contrary to the requirements of reasonableness and fairness.
Termination of the employment agreement (employment law)
The termination of the appointment as a director will in general result in the termination of the employment agreement without preventive dismissal assessment. The director will be entitled to a transition allowance in case the statutory requirements have been met. The notice period must be observed or the salary during the notice period must be paid instead.
Although the termination will not be assessed in advance, there must be a reasonable ground for termination of the employment agreement. These reasonable grounds are included in the Dutch Civil Code. These ground include for example the incapacity of performing duties, a damaged working relationship or business reasons. Also, the company must assess whether it is possible to redeploy the director in another suitable position.
Possible legal proceedings against the termination of the employment agreement
If the director states that there are no reasonable grounds for dismissal or that he should have been redeployed within the company, he could report the matter to the Subdistrict Court. The Subdistrict Court will assess if the requirements for dismissal have been met. If not, the Subdistrict Court could decide that the director is entitled to a fair payment. The amount of the fair payment will depend on all the circumstances of the case. The Subdistrict Court cannot restore the employment agreement with the director. This differs from the general rule for termination of the employment agreement.
The company must be able to demonstrate and substantiate that, based on the reasonable ground, it cannot be asked to continue the employment agreement. The lack of substance of the employment agreement after terminating the appointment as a director will not be considered as a reasonable ground. A substantiation of additional circumstances will be required. Although the assessment of the termination of a director differs from the termination of a ‘normal employee’ in some ways, most far-reaching requirements are applicable.
Exceptions to the general rule
The prohibition of termination during illness also applies to the director. The prohibition is only effective in case the sickness report has been done before the convening of the AGM. In that case , the competent body is still able the terminate the appointment as a director. Contrary to the general rule, this will not result in the termination of the employment agreement. A preventive dismissal assessment will be required. In case the company fails to assess the termination in advance, this could lead to the nullification of the termination. The termination will be deemed never to have taken place.
Also, the above mentioned only applies to the director of a private company with limited liability and the director of a public limited company. The employment agreement with a director of a company with another legal form, for example a foundation, cannot be terminated without preventive dismissal assessment.
In principle, the termination of the appointment as a director will result in the termination of the employment agreement. The formalities concerning the AGM are of great importance. Also, a reasonable ground for termination is required. It is recommendable to keep that in mind when considering the termination of the appointment of the director.
In case you have any questions about the director under the articles of association of about Dutch employment law in general, please do not hesitate to contact one of our lawyers of the Team Labour Law.