I blogged a few months ago about draft legislation that was introduced in Belgium that included a cap on directors’ liability save in cases of fraud and deliberate misconduct. That legislation is now in force. With rates hardening for directors and officers (D&O) insurance across the board, will this be a sign of things to come? Will other countries — vying to attract inwards towards investment — copy this new Belgian legislation?
The new company law
On February 28, 2019, Belgian legislators adopted the new Code on Companies and Associations, replacing the existing code entirely. It came into effect on May 1, 2019. Under transition arrangements, from January 2020 on, companies may avail themselves of the new legislation and from January 2024, they must abide by the new code. The new laws are wide-ranging and, apart from the director liability cap, contain some eye-catching provisions, including:
- Flexibility as to the choice of the governance structure. It will be possible under Belgian company law either to adopt a single one-tier board structure as in the U.K., or a two-tier management system such as in Germany, where management is split into a board of directors responsible for operational matters and a supervisory board, responsible for taking decisions.
- The ability to incorporate a private company without any capital requirement. This means that there will no longer necessarily be a link between the amount of capital subscribed by a shareholder and the rights attached to its share. There will also be no limitation on the issuance of financial instruments making it possible to issue convertible bonds or subscription rights. The private company will offer a lot of flexibility both for founders and investors.
These measures underline the intention of the Belgian government to make the country a “more competitive and attractive place of establishment for companies.” I’m not aware of any other country that allows companies to choose governance structures in this way. As for the degree of flexibility offered to founders and investors in private companies, this is also likely to prove attractive.
The Director Liability Cap
The statutory cap on directors’ liability is especially striking. The size of the cap depends on the size and turnover of the company. For larger companies with a balance sheet exceeding 43 million euros or with a turnover exceeding €50 million, the cap is €12 million. This is still a comparatively small sum given the amounts potentially involved where there has been a large scale corporate failure. And that is particularly so when you consider that the cap is per director for each set of facts that caused the damage and not per claimant.
It also applies to liabilities owed to the company but also to liabilities to third parties. Moreover, in both cases, the basis for liability does not matter (e.g. breach of statute or the general duty of care and good management). Only in cases of willful misconduct or fraudulent intent will the liability cap not apply, with a further exception for VAT and unpaid wages and withholding taxes.
For smaller companies with a turnover below €350,000 and a balance sheet total below €175,000, the capped liability is set considerably lower, at just €125,000. Both caps are subject to automatic indexation on the basis of the Belgian consumer index.
Implications for D&O Insurance
It’s difficult to see how these liability caps won’t have some impact on rates for companies based in Belgium once the transitional arrangements for the new law take effect. But for cautious underwriters there may remain some areas of residual concern:
- What is the impact of the cap on a multi-national group of companies based in Belgium with operations in many different companies? The assumption must be that Belgian company law will not have extra-territorial effect. In other words, directors of operating subsidiaries outside the country will still be subject to the company laws applicable to the country in which the relevant subsidiary is incorporated rather than Belgian law.
- It must also be assumed that individual insured persons may still incur liabilities abroad and otherwise under other legal regimes in respect of which no cap would apply.
- There is also the statutory exception to the cap for claims within Belgium in the case of “willful misconduct.”
- In addition, there are the defense and investigation costs for the directors, which would have to be paid in any event.
Nevertheless, there is no doubt that this is a bold step by the Belgian government in a direction quite different. Elsewhere, many other governments and regulators are moving in the opposite direction towards greater personal accountability at board level.