NETHERLANDS Law and Practice Contributed by: Marc Habermehl, Jeroen Smits, David de Groot and Max de Heer, Stibbe
3.6 Corporate Governance Two-Tier Board Versus One-Tier Board Each Dutch limited liability company has a man - agement board that is responsible for (among other things) managing the company’s day-to- day business and strategy, and for representing the company before third parties. In addition to a management board, a com - pany may have a supervisory board that super - vises and advises the management board. This is not required (unless the so-called large company regime, or other specific regulatory requirements, apply). It is also possible to have a one-tier board with the management board consisting of both executive and non-executive directors. It is uncommon for start-ups to have a supervisory or one-tier board, though when a company matures this may become appropriate. Given the strong presence of foreign investors in the Netherlands (in particular from the US) and their familiarity with one-tier boards, such inves - tors often show a preference for one-tier board set-ups. Board Representative If a supervisory board or a one-tier board is pre - sent, it is common for VC funds to require one or more seats on a supervisory board, or a non- executive director on a one-tier board. Through these board positions, the VC fund is in a posi - tion to closely monitor the company and super - vise the management board members, although the statutory rights for such supervisory direc - tors are limited under Dutch law (most notably, information rights and the right to suspend the managing directors). Specific rights (eg, approv - al rights) are typically agreed upon in a share - holders’ agreement (and sometimes also in the articles of association).
The broad-based weighted average formula is the most commonly used form of anti-dilution protection in the Netherlands. The down-round protection is sometimes subject to “pay to play” condition, meaning that the investor only has the benefit of the protection if it participates in the new funding round. Drag-along protection VC funds may seek protection not only against down rounds but also against being dragged into an exit at a lower valuation than that at which the VC fund invested in the company. Shareholders’ agreements typically provide for the right that shareholders representing a cer - tain percentage of the shares (for instance, more than 50% or a qualified majority) can require the other shareholders (on a pro rata basis) to co-sell their shares to a third party. The reasoning here is that, if a majority of the share capital agrees to an exit, the minority should not be able to block such an exit. In addition, VC funds require an exit horizon in view of their fund conditions, and therefore a drag-along right may even be agreed at a lower percentage. However, if investors have invested in the com - pany at different valuation levels, the late inves - tors will generally wish to avoid early-stage investors dragging them into an exit at a valu - ation below the valuation at which they had invested. In practice, conditions are seen being attached to the exercise of these drag-along rights, in par - ticular regarding the use of a qualified majority before a drag-along right can be exercised and/ or a minimum valuation level for a certain period of time before the drag-along right can be exer - cised.
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