4.5.2 Directors’ subjective good faith as a baseline for the review of discharge claims

Delaware’s exculpatory statutory provision is a response to excessive litigation against directors throughout the United States. Section 102(b)(7) DGCL is therefore qualified by an exhaustive list of non-exculpable behaviours. The list functions to assist and instruct courts about instances when it is legitimate to dismiss a claim and effectively and efficiently terminate litigation. Director’s ‘subjective good faith’ serves as a baseline and obliges Delaware courts to infer director’s ‘bad faith’ when declaring a claim non-exculpable.

In contrast, as I have mentioned in paragraph 4.1.3, the litigation rate in the Netherlands is rather moderate and may not presumably need any legislative response. Dutch courts have the appropriate latitude to interpret discharge provisions in the light of the case at issue. Since a specific regime of company law is not available to review discharge claims, the Dutch Supreme Court based his review on the principles of general contract law and developed a doctrine of ‘limited scope’. This has resulted in the adoption of the rationale of ‘known’ action as a baseline for the review of a director’s claims to discharge. Under a doctrine of ‘limited scope’ strictly dependent on the rationale of ‘known’ action, a director’s ‘subjective good faith’ is an irrelevant factor. As I have concluded in paragraph 4.3.3, this narrow perspective of ‘limited scope’ should belong to the past. I have proposed an alternative review of discharge claims by rethinking the legal reasoning in Ellem Beheer 2.0 and De Rouw 2.0.Within the alternative judicial review of discharge claims, the doctrine regarding the ‘limited scope of discharge’ can be further developed so that the ‘subjective good faith’ of directors is made a further criterion. The conceptual framework is visualised in Figure 5.

In the alternative method of reviewing discharge claims, the ‘subjective good faith’ of directors is considered the essential criterion under article 3:40 DCC. The requirement of ‘subjective good faith’ may subsequently be corrected, given the circumstances of the specific case at hand, by means of article 2:8 DCC. Important circumstances may include the fact that, although the director defrauded the company with the full knowledge of the shareholders’ meeting, it was nonetheless in the interest of the company to discharge the director from directors’ liability against payment of a settlement amount. For some companies, discharge may, under certain circumstances, be one critical instrument to expeditiously be rid of a malfunctioning director and return the focus to business.

Accordingly, this alternative, a contextualised form of reviewing discharge claims assumes ‘known’ action and the company’s interest both to be important (but not exclusive) factors that, as exemplified in Ellem Beheer 2.0 and De Rouw 2.0., could further qualify the requirement of directors’ good faith.

In my view, the present judicial method of reviewing discharge claims should be subjected to critical discussion wherever doctrine and empirical findings stand in contrast. Taking due account of the limited number of discharge claims that may have influenced court decisions, the observation that Dutch courts shield directors from liabilities arising from ‘subjective bad faith’ would seem to have little basis. There is, evidently, little reason to keep Dutch courts hostage to a legal misapprehension about the acceptability of shielding directors from personal liability to the company when the directors act in ‘subjective bad faith’.

To correct the misapprehension, I advocate a statutory discharge provision within the boundaries of good morals and public order. Such a statutory provision would make ‘subjective good faith’ of directors an explicit condition for granting a director discharge from potential personal liabilities. Under the proposed statutory regime, ‘subjective bad faith’ actions are thus principally excluded from the scope of discharge. Only under exceptional circumstances may a court find the statutory provision inapplicable. One such situation may arise when a company’s general shareholders’ meeting is fully knowledgeable of the director’s deliberate harmful acts, yet the parties agree to a settlement and as part of the agreement discharged the director for the litigious actions. Under these conditions it seems conceivable and consistent with Ellem Beheer 2.0 and De Rouw 2.0 that the director concerned should be able to rely on the discharge granted to him or her pursuant to art. 2:8 DCC. Moreover, under the specific conditions, it would seem a wise policy to allow a company to use discharge to efficaciously part with the director in the interest of the company. Discharge may then serve a reasonable company interest.