As per January 1, 2012 the amended Corporate Code (Book 2 Civil Code) of Curacao entered into force. The new legislation introduces a so-called inquiry procedure for, amongst others, limited liability companies. The inquiry procedure (a.k.a. investigation proceedings) can result in a court ordered investigation into the affairs of a corporation.

Shareholders of such a corporation (i.e. an NV or BV) may file a petition with the Joint Court of Justice of Aruba, Curacao and St. Maarten, and of Bonaire, St. Eustatius and Saba (the ‘Joint Court’). Pursuant to Article 2:272 of the Corporate Code, the authority to initiate an investigation into the policy and affairs of a limited liability company is held (amongst others) by one or more share holders who represent at least ten percent of the company’s equity, or who may cast at least ten percent of the votes with respect to all matters. Also authorized to file such a petition are (a) the public prosecutor, in the general interest of, or upon the request of, an interested party, provided the request is based on urgent grounds; (b) the trustee in bankruptcy and (c) any person to whom this authority has been granted by the articles of corporation or in an agreement with the corporation.

The Joint Court can order an investigation into the affairs of the corporation (‘enquête’) if there are justified reasons to doubt the soundness or correctness of the corporation’s policies, and may take provisional measures as well, for example, the temporary transfer of (certain) shares to a nominee or the suspension of board members. Examples of justified reasons include allegations of violations of law, irregularities, conflicts of interest, deadlocks at board or shareholder level, disputes between board members and/or shareholders, and insufficient provision of information to shareholders.

If the Joint Court grants the request it will appoint one or more investigators who are authorized to access the corporation’s administration, books and premises. Current and former managing and supervisory directors as well as shareholders and employees are legally required to co-operate fully with the investigation (Article 2:277 of the Corporate Code of Curacao). The court appointed investigators will present their findings in a report submitted to the Joint Court.

If the Joint Court, upon request and based on the report, establishes a case of corporate misuse, it can, once again if so requested, order measures (most of them of a permanent nature), such as nullifying (board or shareholder) resolutions, suspending or dismissing board members, or the dissolution or division (either a split-up or a split-off) of the corporation (Articles 2:282 and 2:283 of the Corporate Code).

In the years to come the Joint Court will deal with many corporate governance issues and will play an important role in the resolution of various disputes concerning corporations. The Joint Court will become the forum of choice for litigating shareholders’ disputes, mismanagement matters, disputes between (managing and supervisory) directors and contests for corporate control. Hopefully, Aruba, St. Maarten and the BES Islands will introduce similar legislation soon.

Karel Frielink
Attorney (Lawyer) / Partner

(27 January 2012)
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Dear Editor,

According to Leroy de Weever (DP), he doesn’t need a Corporate Governance Council to come tell him how to do his job. He wants to disband the Corporate Governance Council as soon as possible.

Corporate governance rules were designed to protect companies from politicians, in particular from the government. Government-owned companies should be kept out of the political sphere as much as possible, so that they may benefit from commercial, businesslike and market-oriented management. In doing so, they also run less of a risk of being milked or used as political toys.

One would expect the St. Maarten government and Members of Parliament to adhere to the principles of good corporate governance as laid down in the St. Maarten legislation and as promoted by the Organisation for Economic Cooperation and Development (OECD). In 2005, the OECD issued the “Guidelines on Corporate Governance of State owned Enterprises.” According to the OECD:

“The State should act as an informed and active owner and establish a clear and consistent ownership policy, ensuring that the governance of the state-owned enterprises is carried out in a transparent and accountable manner, with the necessary degree of professionalism and effectiveness.“

Not much to my surprise, several politicians announced that they are in favour of entirely disbanding the Corporate Governance Council (and related legislation), in order to be able to gain political control again. They want more, rather than less, political influence on state-owned entities. These politicians want to continue appointing their friends or other persons they consider loyal to their party instead of loyal to the public at large, without being supervised any longer. Bye-bye good corporate governance and hello to opportunities for misuse.

If the Council is to be disbanded, the people at least should demand full transparency and independent supervisory directors. The St. Maarten Corporate Code provides for two different kinds of boards of supervisory directors: a “regular” board of supervisory directors and the so-called “independent” board of supervisory directors (Section 2:139 Civil Code). Within this context, the word independent means that the supervisory directors are independent of the shareholders, interest groups and to a certain extent from the shareholders’ meeting.

An independent board of supervisory directors has its own responsibility and function without a mandate and/or without having to consult those who appointed them. They are appointed in the interest of the company, as such, and the associated companies, thus for the stakeholders in general.

According to the Explanatory Memorandum to the St. Maarten Corporate Code, an independent board of supervisory directors is well suited for application in the financial sector. An independent supervisory board is also usually opted for by large companies. It goes without saying that such an independent board should be mandatory for government-owned or government-controlled entities.

One of the central challenges is how to restore the government’s integrity. It has become a bad habit to replace managing directors and supervisory directors each time the island government changes party. That bad habit still exists. It must be changed!

Karel Frielink

(December 22, 2011)

See also Roeland Zwanikken (BZSE) on the same subject.

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The acquisition of a business enterprise may take place through the purchase of shares (take-over), the purchase of assets and liabilities or a legal / statutory merger. The Curacao Legal Code on corporate and other legal persons contains detailed provisions for mergers of companies limited by shares (NV) and private limited companies (BV).

Basically, a legal merger entails the absorption of one legal entity by another in exchange for shares, or even without such exchange. The absorbed entity ceases to exist. A legal merger requires a notarial deed. Legal mergers may take place between legal entities like NV’s and BV’s. Under Curacao law, a cross-border legal merger is only possible if the acquiring entity is a Curacao legal entity and the law governing the foreign legal entity does not prohibit the merger.

Article 2:333 Sub 3 of the Curacao Civil Code provides for the possibility to limit the formalities. If all shareholders (who have voting rights) have voted in favor of a merger, certain formalities can be dispensed with. If they have thus voted for a legal merger, there is no need for a merger proposal containing:

1. a share converting ratio;
2. a start date as of when, and the extent to which, the shareholders of the company or companies which will cease to exist, will share in the profit of the acquiring company; and
3. a merger balance sheet of the acquiring entity.

There is no need for explanatory notes regarding the method of conversion and the result of such valuation. There is no need for a fairness opinion regarding the merger proposal, conversion rate and merger balance.

The simplified merger procedure is also applicable in the case of an ‘up-stream’ merger, i.e. a parent company acquiring (absorbing) a subsidiary, and in the case of a legal merger between affiliated companies, provided that all the shares in both companies are held by one person and the acquiring company shall not allot shares.

Karel Frielink
Attorney (lawyer) / Partner

(21 November 2011)

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Until March 1, 2004 only manager managed companies were known. According to the current Curacao Civil Code, the articles of a company may provide that such company be a member managed company, which is a company without a board of directors. The shareholders (members) are then in charge of the company, including its day-to-day affairs. A member managed company is suitable for smaller companies, e.g. family businesses, with only one or a few shareholders.

If such designation is absent in the articles of a company, the company will be a manager managed company. The designation of a limited liability company as either member managed or manager-managed is important because it defines who the agents are and therefore have the apparent authority to bind the company. In a member managed company, the members have the authority to bind the company. Members possess actual authority by implication unless the actual authority is restricted in the Curacao Civil Code, the articles of association or the shareholders’ agreement. The designation of a company as a member managed company requires the express consent of all shareholders entitled to vote.

In a shareholders’ agreement, the shareholders (members) and the company may further lay down the manner in which they will manage the company, the allotment of duties in respect thereof, levels of remuneration and the manner in which decisions will be taken. Such an agreement requires the consent of all shareholders and the company. Each member has equal rights in the management and conduct of the company’s business unless otherwise provided in a shareholders’ agreement.

A member’s duty of care for the company in conducting the company’s business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or knowingly violating the law, a standard actually used in most corporations. Liability shall be joint and several for all members, although a member shall not be liable if he can prove that the improper performance of duties is not attributable to him and that he has not been negligent in taking steps to prevent the consequences thereof.

Recognizing the informality of a member managed limited liability company, the Curacao Civil Code provides for the right of each member to inspect and, at his own expense, copy, any administrative records kept. This right is not dependent on a member’s purpose or motive.

Karel Frielink
Attorney (Lawyer) / Partner

(9 November 2011)

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A Private Foundation can be used for tax planning and asset protection

The Curacao Private Foundation was introduced by the National Ordinance Regarding Foundations as published on October 31, 1998. Since March 1st, 2004, these rules are laid down in Book 2 of the Curacao Civil Code.

The Private Foundation possesses corporate personality but does not have share capital. The Private Foundation is incorporated by deed executed before a Curacao public notary and is registered in the Register of Foundations at the Curacao Chamber of Commerce.

The object of the Private Foundation may include a number of activities, and is therefore not limited to charitable purposes, provided however that the Private Foundation does not conduct a real business or run an enterprise for profit. As laid down in Book 2 of the Curacao Civil Code, the Private Foundation does not run an enterprise if it is engaged in investment activities or holding activities (within certain limits) or is operating as a silent partner in a limited partnership.

Karel Frielink
Attorney (Lawyer) / Partner

(28 October 2011)

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Under Curacao law the annual accounts of limited liability companies which do not qualify as so called large companies, need to be prepared in accordance with generally accepted standards and shall provide sufficient insight as to enable a sound judgment to be formed regarding the assets and the results and, to the extent the nature of the annual accounts so permit, regarding the solvency and liquidity of the company (article 2:116 (4) Curacao Civil Code). This is comparable to the principles of good business practice (goed koopmansgebruik).

For large companies the legislator chose a tighter annual accounts regime. Annual accounts for large companies need to be prepared in accordance with the principles of the International Accounting Standards Board (IASB) and shall provide such insight as to enable a sound judgment to be formed regarding the assets and results and, insofar as the nature of the annual accounts so permit, on the solvency and liquidity of the company.

In order to qualify as a large company under Curacao corporate law a company has to meet certain criteria. One of the requirements that has to be met is that it has at least twenty employees in Curacao who all work at least twenty man-days, at any time in the period one month prior to and one month after the date of the balance sheet, pursuant to an employment contract with the company, a group company of the company, a temporary employment agency or a similar institution.

Karel Frielink
Attorney (Lawyer) / Partner

(18 July 2011)

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The Civil Codes of Curaçao, Sint Maarten and Bonaire do not contain provisions specifically dealing with discharging managing directors from liability. Neither is there conclusive Dutch Caribbean case law available yet.

Managing directors of a limited liability company (NV or BV) can be discharged from their liability towards the company. Managers can be discharged of liability by an express shareholders’ resolution, however the articles of many companies contain a provision stating that approval of the annual accounts by the shareholders’ meeting discharges the managing director from his/her liability towards the company with regards to the performance of his duties during that fiscal year. However, even without any explicit basis in the company’s articles and without an express shareholders’ resolution, it is held in legal literature that when the shareholders (unconditionally) approve the annual accounts, discharge is also given to the managing director thus effectively waiving their internal liability (i.e. towards the company).

Abovementioned discharge granted to managing directors is limited to the facts disclosed to the shareholders’ meeting (as such) in the annual accounts and the annual report or otherwise. Managing directors are not discharged from legal acts unknown to the shareholders’ meeting if those actions are intentionally withheld by the managing director and the shareholders had no reason to suspect such.

This discharge does not release managing directors from their liability for unlawful acts towards third parties, which includes individual shareholders and, in the case of the NV or BV having been declared bankrupt, includes the trustee in bankruptcy claiming a shortfall (Section 2:14 Par. 5 Civil Code).

The Supreme Court, in a Dutch case, held that, as a general rule, a discharge does not release anyone from liability for acts which the shareholders could not reasonably have known (HR 10 January 1997, NJ 1997, 360 re Staleman vs Van de Ven Automobielbedrijf). However, if legal acts which could be harmful to the company were known by the shareholders’ meeting and the managing directors were discharged from liability for those acts, they can invoke this discharge on the grounds of the requirements of good faith.

Karel Frielink
Attorney (Lawyer) / Partner

(21 June 2011)

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It has been my opinion for many years already that government-owned companies should be kept out of the political sphere as much as possible, so that they may benefit from a commercial, businesslike and market-oriented management. In doing so they also run less of a risk of being milked or used as political toys.

Recently, I commented on the model articles of association (statuten) drawn up for government companies by order of the country Curacao. They grant the shareholders meeting (i.e. the government) and the board of supervisory directors of the companies in question far-reaching powers. The most important power is that empowering the shareholders meeting to give specific instructions to the managing board, which the board must, in principle, observe.

Also, the politicians keep appointing their friends or other persons they consider loyal to their party instead of loyal to the public at large. As far as supervisory boards of government-owned enterprises are concerned, political appointees now even seem to run these enterprises.

Under the laws of Curacao, the main task of a board of supervisory directors is to supervise the board of managing directors of a limited liability company (NV or BV).

The Corporate Code provides for two different kinds of boards of supervisory directors, a “regular” board of supervisory directors and the so-called “independent” board of supervisory directors (Section 2:139 Curacao Civil Code). Within this context the word independent means that the supervisory directors are independent of the shareholders, interest groups (“belangengroepen”) and to a certain extent from the shareholders’ meeting.

An independent board of supervisory directors has its own responsibility and function without a mandate and/or without having to consult those who appointed them. They are appointed in the interest of the company, as such, and the associated companies, thus for the stakeholders in general.

According to the Explanatory Memorandum to the Curacao Corporate Code an independent board of supervisory directors is well suited for application in the financial sector. An independent supervisory board is also usually opted for for large companies. It goes without saying that such an independent board should be mandatory for government-owned or government-controlled entities.

An independent board of supervisory directors is subject to several strict statutory requirements while a “regular” board is more flexible in some respects. The requirement for having an independent board of supervisory directors is that it be mentioned as such in the articles of the company, with reference to the article of law, Article 2:139 Curacao Civil Code.

One final note. In 2005 the OECD issued the ‘Guidelines on Corporate Governance of State owned Enterprises’. According to the OECD:

“The State should act as an informed and active owner and establish a clear and consistent ownership policy, ensuring that the governance of the state owned enterprises is carried out in a transparent and accountable manner, with the necessary degree of professionalism and effectiveness”.

It is time for the government to act responsibly.

Karel Frielink
Attorney (Lawyer) / Partner

(13 June 2011)

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According to Frielink, who is also President of the Bar Association, these extra authorities increase the chance of ‘political influencing, favoritism and other forms of abuse’ within government institutions.

In an opinion paper, published in the Antilliaans Dagblad, Frielink comments on the model articles of association (statuten) recently drawn up for government companies by order of the country Curacao. According to the government’s explanatory notes, the new model articles of association particularly dwell on the exceptional position of government NV’s in the local community. One argument that the government mentions, refers amongst other things to the fact that these NV’s owe their existence and capital mostly to the input of money or means by the country Curacao or its predecessors. In addition, the government points out the monopoly position of several NV’s. For the greater part, government companies are also entrusted with performing a public task, and therefore collect public monies directly or indirectly. The government further points out that these companies actually act as an administrative organ or act in a form comparable to a government body.

The conclusion of all this is, according to the government, that the government companies have an exceptional responsibility towards the society. Therefore, such companies must not only pursue commercial targets, but also the proper social-economic development of Curacao and for that matter, serve the general interests of Curacao.

However, according to Karel Frielink, the issue at hand has been constituted in the model articles of association by granting the shareholders meeting (i.e. the government) and the Board of  Supervisory Directors of the companies in question far-reaching powers. The most important power is that empowering the shareholders meeting to give specific instructions to the board, which the board must, in principle, observe. As Frielink explains, this boils down in practice to the fact that by order of the shareholder (i.e. the government), the board can be compelled to conclude certain legal transactions.

“Based on the model articles of association, the management board of a government company could be compelled to employ certain people, to purchase or sell certain assets, to enter into or break certain co-operations, etc., and subsequently they increase the influence of (the government of) the country Curacao as shareholder on the daily state of affairs within the government companies considerably. That is a very undesirable development which increases the chance of political influence, favoritism and (other forms of) abuse,” says Frielink. He points out that one must govern and steer government companies from a professional perspective, and therefore from a commercial viewpoint.

Source: Curacao Legal Portal

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The shareholders have the authority to determine the general policy of a Dutch Caribbean NV or BV. The shareholders may give instructions to the management board with respect to the general direction of the financial, social, economic and personnel policies of the corporation.

However, the shareholders cannot give detailed instructions to the management board unless (in the general view of legal practitioners, myself included) the articles of association so permit. Although not explicitly provided for in Book 2 of the Dutch Caribbean Civil Code (CC), it is considered a general rule of corporate law that the management board must act in the best interests of the NV or BV in the performance of its duties, even when acting upon instructions from others (e.g. shareholders).

The shareholders of a Dutch Caribbean NV or BV do not wield supreme authority in the company. The management board is not hierarchically subordinate to the shareholders. Generally, the shareholders have a very limited role in the management and operations of the company. The shareholders cannot operate as the executives of the corporation (which is the exclusive power of the management board).

A shareholder (or supervisory director) who is not part of the management board yet for a specific period or under certain circumstances, whether or not pursuant to a provision either in the articles of association or in Book 2 of the Dutch Caribbean Civil Code, determines or co-determines the policy of the corporation as if he were a managing director, shall with regard to such conduct, insofar as his obligations as regards the corporation and third parties are concerned, be considered a managing director (Article 2:138/238 CC). Such a policy-maker (”de facto managing director” or “quasi managing director“) also falls within the scope of the provisions on directors’ liability (Articles 2:14 and 2:16 par. 9 CC) and may be held liable on the same grounds as a managing director.

Karel Frielink
Attorney (Lawyer) / Partner

(3 May 2011)

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