Karel’s Legal Blog

The obligation to repay still ranks pari passu

If a lender takes over the shares in a borrower, the ranking of the borrower’s obligation to repay the loan does not change. Such obligations will continue to rank pari passu with the other creditors.

Let me give you an example. In the event of dissolution of the borrower, assuming the borrower is a company, all creditors must be satisfied as far as possible. A shareholder is, however, not considered to be a creditor of the company.

Under Article 2:30(1) of the Netherlands Antilles Civil Code, the liquidator must realize the assets of the company and settle all liabilities of the company with its creditors. Any surplus after payment of the creditors shall be distributed to the shareholders or other parties who are entitled thereto pursuant to the provisions of the articles of association.

Again, if a shareholder is also a lender, than he is also a creditor. One should, however, make a clear distinction between those two capacities.

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: Corporate by Karel.Frielink
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Such covenants are null and void

A non-competition clause, a.k.a. a covenant not to compete, is a stipulation between the employer and the employee whereby the latter is restricted in his right to work in a given way upon termination of the latter’s contract of employment. Typically, a non-competition clause will prohibit an employee from seeking employment, or being directly or indirectly involved in the same type of industry or business conducted by another employer. According to the laws of the Netherlands Antilles, any non-competition clause related to an employment contract is null and void and thus not enforceable. This means that the former employee is at liberty to compete with his former employer.

However, it is generally held that non-solicitation clauses are valid. Such clauses restrict the employee in approaching customers or other employees of his employer after the termination of his or her contract. Therefore, a former employee may not, for instance, systematically approach and coax away his former employer’s customers, or his former employer’s employees. Even in the absence of such a clause, the former employee may nevertheless be committing a wrongful act (tort) by approaching such customers.

Confidentiality clauses are also frequently included in employment contracts. It is a criminal offence for an employee to intentionally divulge confidential information of an active company if he has been instructed and is required to keep such information confidential. In practice, however, it is very difficult to ascertain whether any confidential information has actually been passed on to a third party by a former employee.

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: legal by Karel.Frielink
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That remains to be seen 

‘Blaming others is a sign of low self-esteem because in doing so we are not taking responsibility‘

On Monday 29 September 2008, the US House of Representatives rejected a $700 billion bailout plan aimed at stabilizing the financial system, triggering the largest point drop in Wall Street’s history.

The bill was trounced by a 228-205 vote, with “no votes” from both the Democratic and Republican sides. The fact is that of the Democrats, 141 voted for the bill and 94, or 40%, voted against it. Of the Republicans 65 voted for the bill and 133, or 67%, voted against it. What message does this send to both Presidential candidates? How can either candidate blame the other party for the failure of the bill? If someone can be blamed at all, the blame is bipartisan!

Blaming others is, however, a technique used by people and parties that are clueless and is a large part of the problem. It is often just used as a smoke screen to conceal ones own responsibility.

What I simply do not understand is how Barack Obama can only blame the Republicans for the current economic crisis. He is blaming the Republican economic philosophy … which has also been the economic philosophy of most Democrats. How can one blame Ronald Reagan and George W. Bush for the crisis now shaking Wall Street, while between their precidencies, a Democratic President, Bill Clinton, adhered to more or less the same philosophy? What happened in those eight years? A presidential candidate should not believe that everything is simply a question of good versus evil, however, if he does, we might have another problem to deal with.

Karel Frielink

Updates on the Plan:

30 September 2008: Timeline Banking crisis

1 October 2008: stocks rise on hopes of revised plan and revisions to the bill (for draft bill click here)

 2 October 2008: U.S. Senate votes in favor of bailout but markets won’t rally

 3 October 2008: US$700 billion bailout bill passed

 6 October 2008: World markets are falling

Filed under: Uncategorized by Karel.Frielink
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Central Bank monitors compliance

The regulatory rules and regulations in the Netherlands Antilles deal with credit institutions, investment institutions and administrators, insurers and insurance brokers, company pension funds, trust service providers, capital markets, anti-money laundering and identification, and foreign exchange control and license fees.

The Netherlands Antilles have one regulator: the Central Bank of the Netherlands Antilles (Bank van de Nederlandse Antillen). The Central Bank is a separate legal entity (rechtspersoon) having its seat in Curacao. The Central Bank is also an independent administrative body (zelfstandig bestuursorgaan) and does therefore not fall under the political responsibility of the Minister of Finance.

The supervisory authority is delegated to the Central Bank in Article 11 of the Central Bank’s Statute of 1985 (Centrale Bank-Statuut). Article 11 is amended each time a new, relevant supervisory regulation comes into force, in order to allocate the new supervisory tasks to the Central Bank. The supervisory regulation sets out the specific tasks and authorities of the Central Bank in relation to the areas of supervision. The Central Bank’s supervisory role varies, inter alia, from (i) monitoring compliance with supervisory laws and issuing licenses and exemptions as prescribed therein, to (ii) formulating rules, directives and guidelines based on discretionary powers granted to the Central Bank by the relevant supervisory laws (and monitoring compliance with such rules, directives and guidelines).

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: Securities by Karel.Frielink
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Resolutions only marginally examined by the court

Directly connected to the approval of annual accounts, the general meeting of the NV (or BV, as the case may be) or any other body designated in the articles of incorporation, shall resolve the distribution or reservation of profits according to aforementioned annual accounts and the payment of any other distributions flowing from the equity capital as apparent from the annual accounts. The general meeting, or any other body designated in the articles, may resolve to pay interim distributions for the account of the current financial year or for the account of a closed financial year for which the annual accounts have not yet been approved.

However, distributions to shareholders, and other parties entitled to distributions, may not be made if the company’s equity capital is negative or would become negative due to said distribution. A resolution for any such distribution shall have no legal effect whatsoever (Section 2:118 (5) Netherlands Antilles Civil Code; NACC).

Any minority shareholder may request that a decision by a corporate body be annulled (Section 2:21 Par. 3 NACC), for example, if the decision is in conflict with the principles of reasonableness and fairness (Section 2:7 NACC). It is possible that, without any real justification, the general meeting of shareholders adopts a resolution that is not in the interest of the minority shareholders.

For example, the general meeting of shareholders may decide not to pay dividend but to reserve the profits of the preceding financial year, without any further justification. Whether or not such a resolution is justified depends on the facts and circumstances of the particular case. For instance, a resolution to the effect that no dividend be paid in a particular year can be based on a sound business decision, e.g. that the company actually needs the money for necessary investment purposes. Basically, the court will review whether such a decision is reasonable and fair given the facts and circumstances. The decision by a majority of shareholders will only be marginally examined by the court.

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: Corporate by Karel.Frielink
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Records must be kept for 10 years

Pursuant to article 43 of the Netherlands Antilles State Ordinance on National Taxes (Algemene Landsverordening Landsbelastingen, “GONT”) an entity is obliged to keep the records (‘administratie’) of its assets and liabilities that clearly show the rights and obligations at all times and that provide the data relevant to the levying of taxes. These records and the associated data carriers must be kept for a period of 10 years. The GONT does not define what “records” are. The word records is therefore a grey area. 

It is important to know that these obligations are also similarly applicable to the levying of taxes on third parties or persons. An entity is therefore also obliged to keep data that could be of relevance for levying taxes on a person or company with whom they have dealings. For example not all data about a loan might be relevant for an entity’s own records but they might be for the tax position of the third party concerned.

If a company either owns, directly or indirectly, at least 50% of the shares of another company, or has a say therein, the former is also obliged to make data, information and all data carriers that may be significant for levying taxes from the latter available on request by the Tax Inspector. The aforementioned is also applicable in cases where two or more natural persons or companies enter into a collaborative arrangement and together hold at least 50% of the shares, or say, in a company.

A levy based on an additional tax assessment may be imposed during a maximum period of 10 years being therefore the period that a company is obliged to keep its records. The aforementioned maximum period of 10 years that an additional levy may be imposed may be extended to 15 years if insufficient tax has been levied on a taxable element that is kept or has occurred abroad. One should be well aware that although the legal obligation is to keep documents for 10 years an assessment could be send after 15 years. If the documents, on which arguments are based for the nullification of the additional levy, are no longer available then the issue could be difficult to win.

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: legal by Karel.Frielink
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Digital information is not sufficient

In general every company is obliged to supply the Tax Inspector with data and information that is or can be significant for levying taxes from that company. Regarding the aforementioned all data carriers or their content have to be made available at the request (and discretion) of the Tax Inspector.

Digital versions of the data and information do not represent sufficient compliance with this obligation. If there are only digital documents available (like e-mails), then the taxpayer must ensure that the Tax Inspector is able to read such data during the legal period that the documents must be kept and maintained. In other words if computer systems change such that old e-mail can no longer be read  then the onus is upon the company to keep them in some legible form, for example by printing them.

If the location of the data carriers is at a third party or person then the third party or person is also obliged, upon request, to make all data carriers that may have some significance for levying taxes, available to the Tax Inspector.

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: legal by Karel.Frielink
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Identity of ultimate beneficiary must be known

According to the Order on Sound Operational Management (the Order)(‘Regeling integere bedrijfsvoering Wet toezicht trustkantoren’) pursuant to the ASTO, a trust office shall know the identity of the ultimate beneficial owner (‘UBO’) of an object company and keep the evidence used to determine who qualifies as the ultimate beneficial owner and from which the identity of the ultimate beneficial owner has been established, available (Article 12 (1) of the Order).

The trust office shall keep a client acceptance file for every object company, for every sale of a legal entity, and for each trust for which the trust office acts as trustee. A client acceptance file shall contain at least the following documents: (a) the written contracts between the trust office and the object company and other contracts that the trust office has concluded on the services provided by the trust office covered by the client acceptance file, and (b) a list of the services provided by the trust office covered by the client acceptance file and the information listed in, a.o., Article 12 of the Order. The trust office shall keep the client acceptance files available for the Dutch Central Bank (Article 18 of the Order).

Effective 1 August 2008, the Dutch Identification (Financial Services) Act (‘Wet identificatie bij financiële dienstverlening’: WID) and the Disclosure of Unusual Transactions (Financial Services) Act (‘Wet melding ongebruikelijke transacties’: MOT) have been replaced by one single act: the Money Laundering and Terrorist Financing Prevention Act.

The Dutch Money Laundering and Terrorist Financing Prevention Act (MTPA) (‘Wet ter voorkoming van witwassen en financieren van terrorisme’) requires not only the client (referred to as the ultimate beneficial owner) but also their representatives to be identified before any service is provided. The MPTA not only applies to trust offices, but to other financial services providers as well, including civil law notaries, attorneys and tax advisers.

With respect to trust offices, this means that anyone who acts on behalf of a client must be identified, including so-called ‘outside directors’ (directors of the object company who are not linked to the trust office). Representatives are usually identified on the strength of a copy of their passport or other valid proof of identity. Identification under the MPTA must be recorded by the trust office.

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: legal by Karel.Frielink
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Policy rule on integrity testing

The integrity of those having a certain interest in, or control over, a trust office (such as managers, supervisory directors and persons who determine or help determine policy) will be tested and their antecedents investigated (Article 3 of the Dutch Act on the Supervision of Trust Offices; ‘ASTO’). The test is set out in detail in the Policy Rule on Integrity Testing, which contains rules regarding the testing of the integrity of persons who (co-)determine, or are to be appointed to (co-)determine, the policy of supervised institutions, and of holders and prospective holders of qualifying holdings in supervised institutions (the so-called Policy Rule)(‘Beleidsregel Betrouwbaarheidstoetsing’). The current Policy Rule is in force since 28 January 2005.

According to Article 1 (1) of the Policy Rule, ‘integrity’ shall mean, for the purposes of, amongst other things, the ASTO, the “refrainment from one or more actions that, in the opinion of the DCB, are incompatible with a person fulfilling the function of (co-)determining policy or holding a qualifying holding”.

Further, in Article 1 (2) of the Policy Rules it is stated:

“The actions referred to shall include actions that give evidence of the person concerned not possessing qualities such as truthfulness, a sense of responsibility, law-abidingness, openness, sincerity, prudence, punctuality, honesty, discretion, and uprightness.”

Following Article 2 (1), the assessment of integrity shall take place by “testing, on the basis of intentions, actions and antecedents (collectively referred to as ‘Antecedents’), whether the person concerned gives or has given evidence of such actions that, in the opinion of the DCB, his or her integrity is not, or is no longer, beyond doubt”. ‘Antecedents’ should be understood to include financial and criminal history.

If the Dutch Central Bank has concluded that the integrity of a person is not, or is no longer, beyond doubt, and if no direct consequences arise from the ASTO itself, the DCB may exercise the powers assigned to it pursuant to the ASTO (Article 4 of the Policy Rule). This includes, for example, giving an order that such person shall no longer be allowed to determine or co-determine the trust office’s policy.

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: legal by Karel.Frielink
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Regulatory framework aims at sound operational management

Section 10 (1) of the Dutch Act on the Supervision of Trust Offices (the ‘ASTO’) states that rules may be issued for trust offices, pursuant to an order in council, i.e. a governmental decree, with the intention of ensuring sound operational management. Such rules were issued in the Order on Sound Operational Management Relating to The ASTO (‘Regeling integere bedrijfsvoering Wet toezicht trustkantoren’; the ‘Order’). The Order is in effect from 1st March 2004.

According to Article 2 (c) of the Order, sound operational management means:

“the management of the organization of the trust office and the structure of the processes, of and relating to the trust office, such that integrity risks are controlled.”

Article 2 (d) of the Order contains a definition of aforementioned integrity risks:

“integrity risk: the risk of damaging the reputation of the trust office or the financial markets in general as a result of inadequate compliance with obligations under private law, administrative law, tax law or criminal law.”

The definition of this term relates to compliance with statutory obligations, creating a specific and auditable standard. The damage to the reputation of a trust office or the financial markets in general as a result of inadequate compliance with these obligations is not restricted to actions or omissions by the trust office itself. The definition also covers the conduct of employees of the trust office, object companies and third parties which could damage this reputation.

Further, the Order defines an ‘incident’ as:

“an event that poses a serious danger to the sound operational management of the trust office, including an action or omission by: the managers or supervisory directors of the trust office; other persons who determine or co-determine the policy of the trust office; persons who have a qualifying holding in the trust office; an employee of the trust office; a third party; or an object company” (Article 2 (f) of the Order).

A trust office shall immediately notify the DCB of an incident, if the incident, for instance, has been or will be reported to the judicial authorities and/or if in view of the seriousness, scope and other circumstances of the incident, it can reasonably be assumed that the DCB should be informed because of its supervisory role (Article 11 (3) under a. and e. of the Order).

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: legal by Karel.Frielink
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