2.4.4.3 Directors’ liability legislation

There was a common shared feeling among the participants that Dutch law and the Dutch judiciary are reasonable. I observed a shared confidence in the Dutch judiciary among the participants. When faced with the option of settling or litigating, participants tended to choose to litigate in order to seek justice.2 In general, the participants in this research placed great value on a fair trial. The participants attached major importance to the possibility of explaining and defending their professional decisions. This was important not only to restore their reputation but also to restore their self-confidence.

Nonetheless, the research findings also revealed that, regardless of whether court proceedings generally are fair and judgements are reasonable, there are reasons to believe that the root of the problem underlying defensive behaviour lies not in the fear of a public trial, but in the fact that the actual and perceived liability exposure of directors may not be aligned. In particular, those participants who have been confronted with court proceedings felt that they were highly vulnerable to norms of which they were not aware of beforehand. To illustrate, one of the participants-defendants pronounced the following:

It can be argued that those directors who are being threatened with a claim or are uncertain with regard to a future claim, may also experience concern about unknown norms. As the negative consequences of litigation may be severe, it is not unlikely that directors, uncertain about liability norms, may act unnecessarily defensively in order not be held personally liable.

While court proceedings are perceived to be highly unpredictable and directors are relatively uninformed about liability norms, the asymmetry between perceived and actual liability risks may be attributable to how Dutch courts undertake reviews of directors’ actions. Under Dutch law on directors’ liability, courts apply the liability standard of ‘serious reproach’ when determining if a director is personally liable. Serious reproach involves an open norm and its application heavily relies on specific contextual factors. It is in fact established case-law that each individual case requires that courts review ‘all relevant circumstances’.4 Such a review of all circumstances may provide a court with the capacity to arrive at a reasonable outcome in a case. However, it can also be argued that the use of the open liability norm does not enhance the predictability of directors’ liability litigation. If the use of such an open norm renders legal decisions unpredictable and thereby generates legal uncertainty, it may contribute to the problematic asymmetry of directors’ perceived and actual liability risk.5 Should the courts fail in providing a clear, understandable and consistent guide of what is acceptable and unacceptable behaviour to directors, the impact of case law may be limited and inadequate in reducing defensive practices.6

There is however a great potential for judges to provide directors with guidance on which actions may be beneficial, wasteful, or damaging to the company and to third parties. An important finding in the present study is that company directors seem generally attentive to Supreme Court judgments, particularly when they affect the directors of the larger listed companies. Generally these directors are highly vulnerable to public exposure. The directors interviewed were genuinely interested in the court’s determinations regarding appropriate and inappropriate courses of directorial action.

In this respect, there is a ready desire to further formalise ‘serious reproach’. One important step forward is to analyse the scope and meaning of the open norm of ‘serious reproach’ using a representative sample of court decisions involving directors’ liability. Such an analysis would be informative about the factors that are determinative in establishing directors’ liability and identifying less relevant elements. Formalising the open norm of serious reproach may therefore serve to clarify standards of liability and, accordingly, reduce defensive behaviour.7