Dutch ruling reminds managing directors serving as proxy holders that their authority is limited

Last week, the Dutch Subdistrict Court in Gelderland confirmed the dismissal of a managing director serving as a proxy holder for a Netherlands-based company due to serious culpable actions and ruled that the director is not entitled to compensation.

This decision confirms that the authority of a proxy holder to independently make decisions is limited by internal company regulations and the proxy-holder agreement.

Applicable rules

In this case, the managing director was appointed proxy holder of its employer company. Specifically, the power of attorney gave the director the following authority: "To appoint the Managing Director as a proxy holder of the Company and to grant him with the title Proxy Holder (gevolmachtigde), and in connection thereto to grant him a special power of attorney to represent the Company, acting individually in all matters and transactions, with the exception of the following acts/matters: Recruiting, making redundant or changing the remuneration, bonus scheme and/or benefits in kind of any individual on their management team (…).”

In addition, a Delegation of Authority was in place, which granted certain authorities for certain functions. A Code of Conduct was also in force.

What happened?

In 2018, the managing director sealed a side-letter agreement with the company's logistics manager (a member of the management team), which stated among other things that after a maximum of 12 months as logistics manager, this manager would have overall responsibility of the company's logistics department and its facilities.

According to the side letter, if the company did not execute this agreement in accordance with the 12-month deadline, the logistics manager retained the right to make certain claims, such as ending the employment agreement with a settlement that gives the logistics manager a severance payment equal to his annual income and additional emoluments such as a bonus.

The managing director was the only person in the company to sign this side letter. All other members of the management team were not aware of its existence.

In addition, the managing director allowed the logistics manager to take a 2019 winter sports vacation on the company's expense. This decision was also made without the knowledge of any other member of the management team.

When settlement agreement negotiations were started with the logistics manager, the management team discovered the side letter and the terms of the 2019 winter-sports vacation. In line with the side letter, the parties agreed upon a gross severance payment of EUR 117,000, while the gross statutory transition payment was only EUR 23,000.

As a result of its opposition to the terms of this side letter, the company started a court procedure to terminate the employment agreement of the managing director on the grounds of serious culpable actions (i.e. dismissal based on "e-ground"). Since actions agreed upon in a side letter and the offer of paid vacations required the approval of the management team, the managing director's decision was considered a violation of his power of attorney, the Delegation of Authority and the Code of Conduct.

In addition, the company accused the managing director of secretly drafting the side letter and acting without transparently or integrity by attempting to conceal the side letter's existence to the management team during negotiations over ending the logistics manager's employment contract.

Decision of the Court

The Court fully agreed with the company's arguments and terminated the managing director's employment agreement for serious culpable actions, ruling that the managing director was not authorised to make the decisions described above on his own. The managing director should have discussed the side-letter agreement and vacation with those persons in the company authorised to make such decisions collectively.

Lessons learned

This court ruling can be considered a caveat for managing directors serving as proxy holders and a reminder that it is important for proxy holders to note that if there are decisions to be taken jointly within the company, in this case a management team, the management team members regularly ask each other to confirm that no action has been taken outside the powers.

For more information on how this ruling could affect your business in the Netherlands, contact your regular CMS advisor or local CMS experts.