3.5.1.2 ‘Foreseeability of damage’ and ‘norm violation’

As noted above, courts tend to use a simple legal decision model to assess directors’ liability. Based on the legal analysis (paragraph 3.2), I assumed that, within a simplified legal decision model, a court will likely judge a director personally liable in the event of ‘norm violation’ or ‘foreseeable damage’. My research reveals that such a practice has empirical support. Applying logistic regression to the sample of cases not involving ‘subjective bad faith’ (N=99), I found that the factors of ‘foreseeability of damage’ and ‘norm violation’ were the two most influential predictor variables.

The model indicates that if a director violates a norm that was specifically addressed to him or her or if a director acts despite being aware of ‘foreseeable damage’, the court will generally find the director liable. ‘Foreseeability of damage’ is identified as the most influential case factor. This result is interesting for three reasons. First, despite the finding of a statistical significant relationship between ‘foreseeable damage’ and ‘subjective bad faith’ (see paragraph 3.5.1), ‘foreseeability of damage’ and ‘subjective bad faith’ should be regarded as two distinct factors in their relationship to case outcome.1 ‘Foreseeability of damage’ does not require ‘subjective bad faith’ and ‘subjective bad faith’ cannot be equated to ‘foreseeability of damage’. Hence, based on this research, the factor ‘foreseeability of damage’ yields a distinctive predictive value with regards to case outcome.

Second, the Wald statistic indicates that the influence of ‘foreseeability of damage’ on case outcome is stronger than the influence of ‘norm violation’ (Table 7). Applying Formula 1, there is an 82% chance that the assumption of ‘foreseeability of damage’ will result in a director being held liable, compared to a 73% chance in cases involving a ‘norm violation’ (disregarding other factors in the case). This research result may suggest that when a court discerns ‘norm violation’, a director enjoys more scope to refute his or her liability than in cases where ‘foreseeability of damage’ is established.

Third, from a legal point of view, ‘foreseeability of damage’ plays a central role in determining external directors’ liability, while its role in determining internal directors’ liability or liability in bankruptcy remains less explicit. This point was also emphasised by Assink et al.2 Empirically, I observed that when ‘foreseeable damage’ does occur in the context of a 2:9 or 2:138/248 DCC claim, it strongly influences the case outcome, making it more likely for the director to be found liable. Moreover, claimants may successfully bring multiple claims and/or base their claims on more than one legal ground. A good example was provided in Ceteco3 where the trustee in bankruptcy successfully based the liability claim on art. 2:9, 6:162 and 2:138 DCC. For example, it was judged that the directors had violated internal rules and that the damage to the company was foreseeable in the face of an aggressive acquisition policy and inadequate internal management.