5.1 Convergence in judicial review through the open norm of ‘serious reproach’

In studying directors’ liability as a system for controlling directors’ behaviour, I have emphasised the role of the civil courts in the corporate governance arena. Directors’ discretion and marginal judicial review are important issues of Dutch corporate governance. Within the domain of directors’ liability, these concepts are reflected in the liability standard of ‘serious reproach’. The functions of ‘serious reproach’ for Dutch corporate governance are threefold. ‘Serious reproach’ first contributes by informing directors and those having interests in the company and directors’ actions about the course of action by directors that is valued or should be avoided and provides a view of the enforcement mechanism. Unless actions are qualified as being subject to ‘serious reproach’, a director cannot be held liable. It follows from the foregoing that the second function of ‘serious reproach’ is to provide directors protection against excessive liability risks.

The protection provided can be found in the criterion of ‘serious reproach’ itself.1 Thirdly, the presence of ‘serious reproach’ induces the courts to reviewthe actions of directors marginally by providing them with relevant perspectives through which they may regard a director’s personal liability in a given case.

‘Serious reproach’ is a product developed, specified and maintained by case law and, as I have demonstrated inmy research, an important contributor to Dutch corporate governance. It is therefore not surprising that ‘serious reproach’ plays a key role in ongoing debates and academic reflections. Since the Supreme Court has explicitly extended the application of ‘serious reproach’ to the area of external directors’ liability, there has been a great deal of debate involving the usefulness, necessity and desirability of focusing the marginal judicial review through this lens.2 It is my impression that underlying these debates are concerns about legal uncertainty that such converging but variable practices of judicial review may bring about.3 On the basis of the empirical findings in this research, I aminclined to argue that these concerns should be and can be appeased by the reality of judicial decision-making.4 A substantive part of the litigation involving the liability of directors (37% of the 158 coded cases) ended with a court finding a director personally liable due to the ‘subjective bad faith’ of the director’s actions. ‘Subjective bad faith’ actions are evidently subject to serious reproach, and are therefore a basis for directors’ liability. Legal uncertainty was more at issue in the other (63% of the 158 coded) cases not involving directors’ ‘subjective bad faith’. Based on this research, it seems that the lens of ‘serious reproach’ mainly focuses on two factors, which appear to be influential and form a strong basis for judgment. They are: ‘violations of norms’ specifically addressed to the director and meant to protect the company or the company’s creditors and shareholders, and directors’ ‘foreseeability of damage’ to the company or the company’s creditors and shareholders. I have noted that the occurrence of these factors in a given case provides sufficient evidence that a director, at the very least, did not act in good faith.