4.1.3.1 Delaware as a source of inspiration

Notwithstanding any discharge from liability granted by the general shareholders’ meeting on the basis of the existing legal doctrine, I observed empirically that it is very unlikely that Dutch courts will release directors from any liability to the company when they fail to act in ‘good faith’.1 However, Dutch courts do not explicitly use the term ‘good faith’ to distinguish ‘bona fide directors’ from those who are not. Only the latter category of directors is more likely to be held personally liable regardless of any discharge. This empirical finding has led me to use Delaware (case) law, specifically section 102(b)(7) of Delaware General Corporation Law (DGCL), as a source of inspiration. Delaware’s exculpatory provision as codified in section 102(b)(7) DGCL explicitly employs the term ‘good faith’ to distinguish ‘bona fide directors’ from those who should not be afforded the protection of an exculpatory charter provision. The ‘good faith’ of directors constitutes a baseline. In the absence of malicious intent, Delaware directors may effectively rely on their company’s exculpatory charter provisions to shield them from potential personal liabilities.2 Furthermore, directors’ liability litigation is more severe in Delaware; hence the function and rationale of section 102(b)(7) has been tested frequently. Importantly, Delaware courts review exculpatory claims in the light of corporate governance and director duties. The above-mentioned points make Delaware case law involving section 102(b)(7) an interesting study object for this research.

Still, it must be recognised that using section 102(b)(7) and its case law as comparative material involves some caveats. I will limit myself to discussing the three most important difficulties. First, exculpatory provisions in the certificates of incorporation of most Delaware corporations subject to section 102(b)(7) DGCL protecting directors – not officers3 – from monetary claims for breaches of fiduciary care apply to derivative claims. Such legal instruments which allow shareholders to instigate legal action in the name and on behalf of the company for alleged violation of fiduciary duties, do not exist in the Netherlands.4 The Dutch discharge applies to supervisory directors and executive directors in the context of internal directors’ liability. Under Dutch company law, the company itself is the proper authority to instigate a claim when it incurs damage due to a director’s action.5

Second, the question of whether a director can be held liable under Delaware’s legal framework is dependent on the fiduciary duty that has been allegedly breached (care or loyalty) and the test that a Delaware court employs to review the conduct at issue (the business judgement rule, the heightened standards of review or the entire fairness standard).6 Section 102(b)(7) DCC enables Delaware companies to exempt directors from liability for monetary damages arising out of duty-of-care claims.7 If, in other words, a director breaches his or her duty of loyalty (of which good faith forms an element), the director cannot rely on the protection provided by section 102(b)(7) as the charter provision excludes coverage for conduct that is disloyal.8 If, however, a claimant only asserts a duty-of-care claim, section 102(b)(7) may be properly invoked and may form the basis for dismissing the claim. Even where a claimant is able to rebut the business judgment presumption in the complaint ‘solely by successfully alleging a duty of care violation’, a director may properly invoke the exculpatory provision and block a trial on the issue of entire fairness, as section 102(b)(7) will exculpate a director defendant from paying monetary damages.9 In contrast, Dutch law does not make doctrinal distinction between directors’ duties of care and loyalty. Instead, art. 2:9 DCC prescribes a general norm of ‘proper performance of duties’. Consequently, it is quite alien to the Dutch legal system to exclude a director from liability for monetary damages regarding specific director duties owed to the company.

Third, section 102(b)(7) is an enabling provision, allowing companies to insert the protective shield into the companies’ articles of association and, in so doing, give directors the benefit of ex-ante protection against potential liability risks.10 Section 102(b)(7) DGCL is considered to represent and to carry out an important public policy purpose of ‘encouraging capable persons to serve as directors of corporations by providing them with the freedom to make risky, good faith business decisions without fear of personal liability.’11 Providing directors ex-ante protection has, it is argued, the benefit of preventing directors from being distracted, shirking their duties or even refusing to accept board positions out of fear of personal liability.12 The Dutch discharge has, in contrast , been justified as an instrument which typically is provided ex-post, closely connected to the approval of the financial statements [periodieke décharge] or to the resignation of a director [finale décharge]. The retrospective element of the discharge may therefore be one important explanation why Dutch courts require knowledge by the general shareholders’ meeting of potential litigious actions to allow a discharge to have legal effect.

Recognising the considerable difficulties that arise when comparing Delaware’s section 102(b)(7) with the Dutch concept of discharge, I found the empirical findings obtained in the previous Chapter 3 nonetheless sufficiently persuasive. It is my assumption in this research that, in both legal systems, discharge and exculpation, effectively function as a waiver of rights: a voluntarily relinquishment of the legal right of a company to claim monetary damages from its director in connection with potential directors’ liability. If the waiver is valid and is properly invoked, the waiver may function to protect a director against personal liability to the company and exempt a director from paying monetary damages. Moreover, supported by the aforementioned empirical finding, it is my assumption that, in both legal systems, Dutch and Delaware courts implicitly or explicitly use ‘good faith’ as a lens through which they review discharge or exculpatory claims.