3.4.3 Which behavioural and contextual legal case factors have a significant effect on directors’ liability in cases not involving directors’ ‘subjective bad faith’?

In paragraph 3.2.1, I discussed that, under established case law, courts are bound to apply an objective test when assessing if director conduct is subject to ‘serious reproach’. By no means do Dutch courts require a claimant to prove a director’s ‘subjective bad faith’. Moreover, courts do not need to infer a director’s ‘subjective bad faith’ to assume ‘serious reproach’ and find a director personally liable. It goes without saying that, when pleaded well, a director’s ‘subjective bad faith’ action may influence a court’s judgement. Consider for instance De Rouw v. Dingemans where a director acted fraudulently. The ‘subjective bad faith’ action on its own caused the court to assume that the director was personally liable, without regard to other factors. In paragraph 3.4.2, I demonstrated that, in 59 of the 158 sample cases, a director’s ‘subjective bad faith’ action led a court to rule that a director bore personal liability. Moreover, I observed no variation in case outcome among the 59 ‘subjective bad faith’ cases. This empirical finding bears an important consequence. Within the group of cases not involving director’s ‘subjective bad faith’ (99 cases), I did observe variation in case outcome. To predict the outcome of these 99 cases not involving directors’ ‘subjective bad faith’ requires a separate analysis of this group of cases.1 To pursue this line of research, I conducted a bivariate analysis on the 99 cases not involving issues of ‘subjective bad faith’, the results of which are presented in Table 6.

The research results indicate a strong association with directors’ liability for 2 legal case factors (V ≥ 0.5): ‘mismanagement’ (V = 0.54) and ‘norm violation’ (V = 0.51); and a medium strong association (0.3 ≤ V ≤ 0.5) for 5 legal case factors: ‘dereliction of duty’ (V = 0.48), ‘foreseeability of damage’ (V = 0.46), ‘misrepresentation of information’ (V = 0.43), ‘limitation of liability’ (V = 0.39) and ‘fraud’ (V = 0.34).

As I have explained in paragraph 3.3.4, bivariate analysis only provides insight into the independent effect of each of the predictor variables on directors’ liability. It does not provide insight into how certain predictor variables relate to the case outcome as a group. The central focus of this research is to analyse the effect of multiple legal case factors on the case outcome (whether the director was deemed liable or not). Moreover, I wish to investigate whether the factors of ‘norm violation’ and ‘foreseeability of damage’, which I identified as important factors in the court’s simple legal decision model (paragraph 3.2.5), may find empirical support for their importance. The results are shown in Table 7.2

All predictor variables are highly significant (sig. ≤ 0.05) except for ‘dereliction of duty’. Analysing the predictor variables as a group shows that the legal case factors of ‘foreseeability of damage’ (Wald = 13.617) and ‘norm violation’ (Wald = 12.808) are the strongest predictors in the model in comparison to the other factors. In terms of effect size of the model, Nagelkerke R square of 0.80 was found and an overall prediction rate of 88.9%.3 These research results indicate that the Supreme Court’s simple legal decision model functions effectively. Courts apply the factors ‘norm violation’ and ‘foreseeability of damage’ fairly consistently. Arguably, there is empirical support for the conclusion that these two predictor variables are the most influential legal case factors adjudicating directors’ liability.

Based on the B-values in Table 7, it is now possible to predict the outcome of a hypothetical case. Let us imagine that in a given case there was ‘mismanagement’ – for instance, the company’s administrative system was failing – and that the director acted in conflict with a norm (‘norm violation’) and other factors did not occur. Applying Formula 1, there is a 99% chance that the case would end with the director bearing personal liability.4

Table 8 presents several more hypothetical cases. The chance of finding a director liable increases when more legal case factors are considered.