A Community Interest Company in the Netherlands
Handelingen Nederlandse Juristen-Vereniging, Vol. 140, 2010
64 Pages Posted: 19 May 2010 Last revised: 21 May 2010
Date Written: May 19, 2010
A community interest company is a private company, which conducts a business or other activity for a community benefit, and not purely for private advantage. Community interest companies engage in a wide range of activities. They explore airports, manage hospitals, run a housing corporation. Community interest companies also engage in local social entrepreneurship by running day centers for elderly people or a restaurant whose guests are served by disabled people suffering from the Down’s syndrome. They can also run an ‘ordinary’ business to generate profits to support activities which benefit the community.
In 2009, the Dutch government has proposed to introduce a new legal form (the “maatschappelijke onderneming”) for community interest companies. This bill has been widely criticized as being unnecessary and inflexible. According to the bill, a “maatschappelijke onderneming” shall be incorporated as a foundation or an association with special additional features in order to guarantee that the enterprise is conducted for the benefit of the community. These features include a mandatory supervisory board and a council in which interested parties can raise their voice and have certain control rights. The bill proposes that third parties may invest in social enterprises, but it limits their control and dividend rights.
On its annual meeting of 2010, the Dutch Lawyers Association will discuss whether a legal form for community interest companies is desirable, and, if so, how it should be designed. The discussion will be conducted on the basis of this paper.
The paper is structured as follows. Part I discusses two inherently conflicting elements of social enterprises: its community purpose and its commercial character. This internal conflict of interest can threaten the community purpose and may result in a lack of internal control of the board and, consequently, in significant agency costs. A new bill needs to tackle these issues, while remaining attractive for investors. Part II deals with the pending bill and its history and gives an overview of critics. Part III compares different community interest companies abroad: the Low-profit Limited Liability Company (L3C), which has been recently introduced in several States of the USA, the British Community Interest Company (CIC) and the Belgian Company with a Social Purpose (Vennootschap met Sociaal Oogmerk).
In Part IV, the authors argue that there is a case for community interest companies in the Netherlands. They endorse the statement by Nobel Prize winner Muhammad Yunus that we must make social business entrepreneurs and social business investors visible in the market place. A legal form which distinguishes social enterprises from ordinary businesses, which is sufficiently attractive for investors while assuring the advancement of the social purpose, may well promote social entrepreneurship in The Netherlands.
However, their proposal significantly differs from the pending bill. Rather, the authors gain inspiration from the British CIC. They argue that not only associations and foundations should be able to organize as a community interest company, but also private and public limited liability companies, as well as cooperatives. Unlike the pending bill, they do not favor a limitation of investor control rights, nor a mandatory supervisory nor a council of interested parties. To the extent possible, community interest companies should be organized as normal companies.
In order to ensure that the company is set up for the community and that its assets and profits are dedicated to the community, they propose that a community interest company should be approved by a public regulator. Like the British CIC Regulator, the supervisor’s role should normally be a passive one and limited to the approval of community interest companies. It should not envisage pro-active supervision of individual companies. In case of abuse, however, the supervisor should be able to take a more active approach in order to ensure that the company will take into account its community purpose. The authors argue that a form of light touch supervision will enable a more flexible legal form, rather than the current one size fits all-bill, which is not suitable for small social entrepreneurs.
Like the British CIC, they also propose a mandatory asset lock in order to ensure that the company’s assets are used for the benefit of the community. Amongst others, the asset lock should set a maximum for dividend payments to shareholders, while ensuring that the company remains sufficiently attractive for investors. For instance, the current dividend cap for British CIC’s is set on 20% of the paid-up value of a share and the maximum aggregate dividend limit of the total dividend declared is 35% of the distributable profits.
The authors conclude that the public interest may benefit from a new brand for community interest companies which not only provides sufficient warranties against abuse, but is also flexible and attractive for investors.
Note: Downloadable document is in Dutch.
Keywords: Community Interest Company, Social Entrepreneurship, L3C, The Netherlands, Low-profit Limited Liability Company, CIC
JEL Classification: K22, L21, L30, L31, L32, L33, M13, M14
Suggested Citation: Suggested Citation