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Legislation on claw back of bonuses

Sept/Oct 2013

After three years of debate, a bill on the revision and claw back of executive bonuses and profit-sharing of directors (the Bill) was examined by the Senate on 10 September 2013. Although the Bill has not yet been adopted by the Senate, it is not a question of “if” but “when” the Bill will enter into force. The provisions of the Bill fit well in the current international debate on remuneration, and the Bill is a response to the social unrest regarding the granting of excessive bonuses, especially those in the financial sector.

The Bill

The Bill, which will be implemented in Article 2:135 of the Dutch Civil Code (the DCC) and Article 1:111 of the Financial Supervision Act (the FSA), increases a supervisory board’s powers over management board members’ bonuses. Consequently, a supervisory board may:

  • revise a bonus prior to payment, if payment of the bonus were to be unacceptable pursuant to the criteria of "reasonableness and fairness";
  • claw back (part of) a paid bonus, if payment took place on the basis of incorrect information on the fulfilment of the bonus targets or conditions for payment of the bonus; and
  • in the event of a "change of control" situation, such as a public offer, where the management board members of a listed company benefit from the increase of value of their equity in the company, revise the proceeds of such value increase of equity to an appropriate level, if such proceeds would be unacceptable pursuant to the criteria of "reasonableness and fairness".

The Bill applies to management board members of a public company (naamloze vennootschap), and to financial institutions as defined in the FSA which includes banks and insurers that have been incorporated in the form of a private limited liability company (besloten vennootschap met beperkte aansprakelijkheid), a cooperative (coöperatie) or a mutual benefit association (onderlinge waarborgmaatschappij). For financial institutions, the scope of the Bill is not limited to bonuses of management board members but also for those who are in charge of day-to-day management (dagelijks beleidsbepalers).

Existing legislation

One of the purposes of the Bill is to clarify and reconfirm the circumstances pursuant to which a supervisory board has the power to revise and claw back bonuses.

Dutch law already provides for the possibility to revise and claw back bonuses. Revision of a contractually agreed bonus may be possible, but only in certain exceptional cases, i.e. if payment of the bonus were to be unacceptable according to the criteria of "reasonableness and fairness" or by invoking unforeseen circumstances (Article 6:248(2) DCC and Article 6:258 DCC. The claw back of bonuses paid without any legal basis may be possible on the basis of the concept of undue payment (Article 6:203 DCC).

A second purpose of the Bill is to provide a justification for the revision of potential proceeds from equity held by management board members following a public offer. According to the explanatory memorandum, due to the value increase of equity in anticipation of the completion of the public offer, the management board will have a personal interest in achieving completion of the offer. The Bill envisages neutralising this personal interest by providing for the possible revision of such proceeds from equity held by the management board member.

Other regulations on remuneration

In addition to the Bill, there are a number of regulations, such as the Corporate Governance Code, Banking Code and Insurer Governance Principles, which already provide for the possibility to claw back and revise bonuses (malus) that are very similar to the criteria provided in the Bill. However, these provisions are not mandatory and the government has considered that self-regulation, by way of "comply or explain" as provided for in the aforementioned codes, is insufficient for revising and clawing back bonuses. In addition, the Dutch Central Bank Regulation on Sound Remuneration Policies sets out fairly detailed rules for the remuneration principles and policies of financial institutions, including revision and claw back of bonuses.

Reasonableness and fairness

According to the explanatory memorandum, in applying the criteria of reasonableness and fairness to bonuses of management board members, one must assess whether a bonus should be considered to be "excessive". Whether this will be the case will depend on several factors, ie the size of a company , the sector, and also the factors mentioned by the Dutch Supreme Court in the Mammoet/Stoof case,1 which are: (i) are there valid reasons for the employer to propose (as a good employer) an amendment of the terms of employment; (ii) is the proposal reasonable, and (iii) can the employee reasonably be required to accept the proposal. All circumstances of the case need to be taken in consideration, such as the nature of the altered circumstances which led to the proposal, the (drastic) nature of the proposal itself and – apart from the company’s interest– the employee’s interests in the unaltered employment terms.

The criteria for "reasonableness and fairness" and "unforeseen circumstances" under Articles 6:248(2) DCC and 6:258(1) DCC, which would make revision or claw back of bonuses possible, are very difficult to meet. In 2010, the Amsterdam Court of Appeal ruled in this respect that an employer (ABN AMRO Bank)

could not revise a severance payment and bonus that had already been promised to the employee before he was made redundant. The court ruled that, although unforeseen circumstances had occurred (ie the financial crisis, state intervention and public criticism), those were not of such a nature that the contractual severance and bonus arrangements should not be observed. The financial institution’s arguments that the criteria of reasonableness and fairness and unforeseen circumstances were met were not upheld in court. This judgment has confirmed the strong concept of pacta sunt servanda (ie agreements must be kept) and that only exceptional circumstances will suffice to challenge this concept. It remains to be seen whether the new revision and claw back legislation provided for in the Bill will change this.

Impact of the Bill

The impact of the Bill on the powers of supervisory boards to claw back and revise management board members’ bonuses in listed companies and financial institutions seems to be limited. As mentioned above, Dutch law and several regulations already provide for such powers.


1. Hoge Raad 11 July 2008, LJN BD1847.

Northern Europe