Belgium partially annuls its internal rules provision for companies and associations

Written on 1 Dec 2020

The Belgian Constitutional Court has addressed matters surrounding internal rules and the mention of the number of shares in the articles of association of a cooperative company in the Belgian Code on Companies and Associations (CCA), which have arisen since the code came into effect 18 months ago and after it has had the opportunity to examine its compatibility with other regimes.

 

The code entered into force on 1 May 2019 and has major implications for legal entities, including not-for-profit organisations and cooperatives companies, in Belgium. (For a more comprehensive overview of the CCA, please consult our dedicated website here.)

The court earlier ruled (15 October 2020) for the partial annulment of the CCA, which included the annulment of a series of provisions and Article 119 of the Law of 17 March 2019 adapting federal tax provisions to the new code.

The issue centred on the question of whether the CCA allowed cooperative companies to benefit to a greater degree of flexibility than other legal persons, and, if so, whether this preferential treatment would be unconstitutional.

The Constitutional Court in its decision published on 19 November 2020 annulled Article 2:59, paragraph 1, 3° of the CCA, which concerns the internal rules, and Article 6:13, paragraph 1, 4°, which sets out the information (such as the number of shares) to be included in the articles of association of a cooperative company. In regards to all remaining provisions, the court rejected the actions and upheld the code.

Internal rules

The Constitutional Court decision stated that Article 2:59, paragraph 1, 3° of the CCA violates the principles of equality and non-discrimination enshrined in Articles 10 and 11 of the Constitution by imposing strict conditions for the enactment of internal rules on some legal persons while at the same time providing a more flexible regime exclusively to cooperative companies.

Article 2:59 is part of Book 2 of the CCA, which sets out common provisions to all legal persons governed by the code. The consequence of annulling Article 2:59, paragraph 1, 3° is that internal rules may now contain provisions "affecting the rights of the partners, shareholders or members, the powers of the bodies or the organisation and mode of operation of the general meeting". However, this can only be allowed on the condition that the internal rules are approved by a decision taken in accordance with the applicable quorum and majority requirements for an amendment of the articles of association of the concerned legal person.

The partial annulment of this provision has an impact not only for companies but also for other legal persons governed by the CCA, such as (international) not-for-profit organisation and foundations. In particular, not-for-profits and foundations have struggled with the difference in treatment by the code of cooperative companies as well as the application and interpretation of Article 2:59, paragraph 1,  3°. Article 2:59, paragraph 1, 3° required that certain provisions that were under the Law of 27 June 1921 typically included in their internal rules must be transferred to and included in the articles of association, resulting in needlessly burdensome and long articles of association. In that respect, the court's decision to annul Article 2:59, 3° CCA is a welcomed and useful clarification.

Number of shares

The decision of the Constitutional Court recognised that Article 6:13 of the CCA violates Articles 10 and 11 of the Constitution in that no amendment of the articles of association is required for a cooperative company upon the issue of new shares or upon the resignation or exclusion of a shareholder, whereas the contested provision carries the obligation to record the number of shares in the articles of association.

The provisions have been annulled as of the date of the publication (19 November 2020) of the decision in the Belgian State Gazette. An annulment has retroactive effect, meaning that the annulled standard must be deemed never to have existed in the legal system. The Constitutional Court could have chosen to mitigate the retroactive effect of the annulment by maintaining the effects of the annulled provisions, but did not choose to do so in the case at hand.

It will now be up to Vincent Van Quickenborne, Belgium's minister of justice, to decide to amend the provisions of the CCA. It remains to be seen whether the minister will choose to reintroduce Article 2:59, paragraph 1, 3° of the CCA and delete Article 6:69, §2 of the CCA, which provides for the more flexible regime applicable to cooperative companies, or opt for another implementation.

Osborne Clarke comment

Companies and (international) not-for-profit organisations and foundations can benefit from a more flexible legal framework for the creation and maintenance of their internal rules. We will continue to closely monitor the situation and update this insight accordingly.