Regulating Distributions to Shareholders: The Low Countries’ Experiences with the Design and Enforcement of Solvency Tests

Abstract

SUMMARY This contribution intends to explore the optimal design of rules on distributions to shareholders. To this end, we commence by examining why and in what scenarios rules on shareholder distributions might be useful from a creditor protection perspective. Against this backdrop, we proceed by assessing the traditional continental approach and its net assets and retained earnings test. More specifically, we map out the benefits and drawbacks of the continental approach. Subsequently, we examine how the Dutch legislator has aimed to mitigate the downfalls of the traditional continental European approach by fundamentally altering its approach to shareholder distributions in closed companies. In a very similar way, we analyse the recent changes to the Belgian rules on distributions to shareholders. Finally, we assess to what extent the Dutch and Belgian approaches come close to an optimal regime for distributions to shareholders in closed companies. KEYWORDS Distributions; Dividends; Balance sheet test; Liquidity test; Solvency test INTRODUCTION In this contribution, we intend to explore the optimal design of rules on distributions to shareholders. To this end, we commence by examining why and in what scenarios rules on shareholder distributions might be useful from a creditor protection perspective. Against this backdrop, we proceed by assessing the traditional continental approach and its net assets and retained earnings test. More specifically, we map out the benefits and drawbacks of the continental approach. Subsequently, we examine how the Dutch legislator has aimed to mitigate the downfalls of the traditional continental European approach by fundamentally altering its approach to shareholder distributions in closed companies. In a very similar way, we analyse the recent changes to the Belgian rules on distributions to shareholders. Finally, we assess to what extent the Dutch and Belgian approaches come close to an optimal regime for distributions to shareholders in closed companies. THE NECESSITY OF RULES ON DISTRIBUTIONS TO SHAREHOLDERS COMPANY LAW AND RULES ON CREDITOR PROTECTION IN GENERAL Over the last fifty years, the predominant view in continental Europe has been that company law should play an important role in the protection of limited liability companies’ creditors. In most EU Member States, the legal framework is in line with this paradigm. More specifically, based on the model advanced in the Second Company Law Directive (Second CLD), most Member States have opted for a comprehensive framework construed around the concept of “legal capital”.