Hoofdstuk 8 Summary

Relying on information in fulfilling directors' duties1

Due to the size of corporations and the complexity of corporate matters, corporate directors do not always have enough time and expertise to fulfill their duties in a well-inforrned manner. They continuously have to rely on others to inform them. This research concerns the question whether and under which circumstances directors can rely on information from others in fulfilling their duties. Central in this respect is their personal liability position under Dutch law.

In this research, `reliance defense' (vertrouwensverweer) is understood as a director's defense that a business decision was taken in justified reliance on information from others which turned out to be incorrect. I examine the advisability of and conditions for accepting the doctrine of the reliance defense on the basis of insights from law and economics and a legai analysis of German corporate law, U.S. corporate law and Dutch criminal law. The distinction between the reliability of information and the information base of decisions takes a central place in this research. Reliability refers solely to the quality of information, whereas the information base refers also to the quantity. The distinction between the reliability and the information base serves as a tooi to make the analysis of the reliance defense more comprehensible. The distinction is not clear-cut, and there is a strong interaction between the two. The more reliable the information used in making a decision, the better the information base will be; the more similar information is in terras of content, the more likely it is that this information is reliable.

The reliance defense has received little attention in Dutch corporate law. The Dutch system of directors' liability does however offer the opportunity for application of the reliance defense. Most provisions of directors' liability do not provide for liability other than in the case of negligence (verwijtbaarheid). The defense could be applied to liability provisions in which negligence is a necessary condition for liability.

I examine the desirability of the defense on the basis of a law and economics approach. I find, due to reasons of economie efficiency, that the doctrine of the reliance defense should be acknowledged in directors' liability law. I am drawn to this conclusion on the basis of the principle that directors should not invest more in information services than these are expected to result in. If directors could be held personally liable for inadequacies in information they use in fulfilling their duties, they would have an incentive to over-invest in information. Over-investment will allow them to reduce their own liability risk on the costs of the corporation. This incentive can probably not be fully removed by a liability insurance, since being liable for damages is not the only risk directors face. Liability could also diminish their reputation as experts in making business decisions. Evidence suggests that this may result in a decrease of future board seats. Furthermore, being held liable for a breach of director duties may result in loss of prestige. For these reasons, directors should be liable only for damages caused by decisions that were taken on significantly less than optimal information.

Subsequently, I consider causality. The inadequate information must have had a decisive influence on the decision that was made. This assessment can be particularly complex when conflicting information was used in the decisionmaking process. In judging whether the causality requirement is fulfilled two variables play a role, namely the content and the reliability of the information. The combination of these two variables in the inadequate information relative to all other information used should be able to justify the decision taken. I use the Bayes' theorem to provide insight into the process of weighing these factors against each other.

After concluding that the reliance defense doctrine should be acknowledged, I discuss the conditions under which this is the case. This is done on the basis of a legal analysis of German and U.S. corporate law and Dutch criminal law. The managerial way of dealing with information has received quite some attention in German and particularly U.S. law. The business judgment rule has played an important role in this development. The business judgment rule protects directors under certain conditions from personal liability for business decision made. One of those conditions is that the business decision was made on an informed base. The information base of decisions can also be relevant in Dutch criminal law. Criminal liability is ruled out when an offender has done everything that can reasonably be expected from him to prevent the criminal act. This could mean that a director cannot be held criminally liable for breaking the law if he was informed to this extent. In the examined legal systems, several circumstances have been brought up to assess the amount of information that is sufficient for the set requirements. These are amongst others the importance of the decision, the risk of the decision, the (financial) situation of the corporation, the amount of time available for gathering and assessing information, the costs of gathering and assessing information and the personal knowledge and expertise of the acting director. The examined legal systems also provide useful insights to evaluate the reliability of information. In this evaluation, a judge needs to take into account the reliability of the adviser, which can be divided into his competence and intentions, and circumstances concerning the information itself, namely in what way the information was realized, its form and its content. I examine the interpretation of these elements in all three legal systems.

One possible explanation why the reliance defense has received little attention in the Netherlands is that a directorship of a large (stock market listed) corporation in the Netherlands is usually a full-time job. Dutch directors are closer to the shop floor than non-executive directors in the United States. They do not need to rely so often and so intensively on information from others. A bill currently before the Dutch parliament (wetsvoorstel bestuur en toezicht) opens the possibility for a one tier board with non-executive directors in the Netherlands. Adoption of this bill could lead to a greater importance of the reliance defense in Dutch corporate law. I make recommendations as to how the reliance defense should be judicially reviewed onder Dutch law. First and foremost, the director should have been acting in good faith. This means that he should have believed reliance was warranted. Besides that, a reliance defense should be subjected to three objective requirements: the decision must have been made (1) on an informed basis, (2) on the basis of reliable information, and there should be (3) a causal relation between the information used and the decision taken. These criteria should be the subject of a limited judicial review, meaning that the judge should not scrutinize director conduct intensively.