There are many different ways to encourage and reward the employees by the Company. Common forms of participation are the issuance of (non-voting) shares and the issue of depositary receipts of shares. There is also the option to issue profit certificates. The issuance of profit certificates is an interesting instrument that is rarely used in practice.

Intro
There is no legal definition of a profit certificate in the Dutch Civil Code.

A profit certificate is an agreement between the company and the holder of the profit certificate, pursuant to which a holder is entitled to the distribution of a part of the corporate profit and / or a part of the liquidation balance.

It is an agreement that can be entered without any formalities (and therefore does not have to be issued as a proof, although the name might suggest otherwise).

The rights and obligations of the company and the holder of the profit certificate can be laid down in two places: in the articles of association and/or in a separate agreement.

It is often assumed in the literature that the issue of profit certificates require a statutory ground. Reference is made to the articles 2:105 and 2:216 of the Dutch Civil Code, from which it appears that the profit is for the benefit of the shareholders if nothing is arranged in the articles of association. The legislator also seems to prefer to incorporate profit certificates in the articles of association. For more information about this subject we refer to our earlier blog.  

Profit certificates in practice issue

Issue
As described earlier, a profit certificate is created by entering into an agreement between the company and the holder of the profit certificate. It is argued in the literature that a resolution to issue is required before the agreement can be concluded. Further conditions may be set in the articles of association or prior approval may be required for the adoption of the resolution to issue.

transfer of the profit certificate
In principle, the transfer of profit certificates is subject to the rules of contract transfer (article 6:159 of the Dutch Civil Code), i.e. a deed between the holder of the profit certificate and the acquirer thereof, and the cooperation of the company. Additional rules regarding the transfer of the profit certificate may also be included in the articles of association and / or profit agreement. An offer or approval arrangement may apply, possibly similar to the arrangement applicable to shares in the company concerned.

pledge
If the transferability of the claims arising from the profit agreement is not excluded, the profit certificates are also subject to pledge. In the articles of association and / or the profit agreement, a regulation can be included with regard to the enforcement of the right of pledge and the termination of the right of pledge.

termination
The profit certificate is an unnamed agreement. The general rules of property law therefore apply with regard to their extinction. In the articles of association or in the profit agreement, it can be further specified when and under what conditions a profit certificate ceases to exist. If, under one profit agreement, several profit certificates have been issued, this agreement will partially continue to exist if only some and not all profit certificates to which the agreement relates cease to exist.

Conclusion
A profit certificate is very flexible and can be used to grant profit rights to an employee in an alternative way. In order to be able to issue profit certificates, it is advisable to include a minimum provision in the articles of association. Furthermore, there is a great deal of freedom to design profit certificates in more detail.

For more information about this subject, please contact us!