2.4.4.1 Exoneration

Two forms of exoneration are provided by the Dutch legal system: statutory exoneration (exculpation under the law) and contractual exoneration (discharge and exculpation by contractual agreement). The latter type of exoneration involves a decision of the company’s general shareholders’ meeting. At the core, exoneration is intended to exclude the liability of an individual director, with the caveat that the various forms of exoneration may vary in their scope of protection.1 To escape liability, an individual director may invoke statutory exoneration.2 Regardless of the grounds for the claimant’s liability claim, an individual director may successfully respond to it by demonstrating that no improper management or negligence in taking measures is attributable to him or her.

The value of a contractual exoneration depends on whether a participant in the study perceived it as a corporate governance instrument, an element in a potential legal defence or an immunity provision. In general, the directors in this study perceived contractual exonerations as corporate governance instruments. Exculpation provisions may attract candidates to board positions on companies in high risk industries. They may be a means to enable a temporary appointment of a supervisory director to the executive board in order to replace a departing member. They may also provide comfort to those candidates who are required to act promptly in the face of a company’s potential insolvency. At the same time, a majority of the participants also associated exculpation with ‘immunity’ and ‘poor corporate governance’ since it relinquishes an important remedy enabling the company to recover damages caused by its directors. The majority of the directors interviewed seem to generally believe in the deterrent function of directors’ liability, causing a director’s action to remain in alignment with company interests, or at least to circumvent deviations from a company’s key interests. Some of the directors indicated that they had used the threat of legal sanction to discipline subsidiary directors or former directors, or exposed subsidiary directors or former directors to liability risks by withholding discharge. These participants could not imagine themselves asking for or providing exoneration as a means to limit directors’ liability risks. Asking for exculpation was therefore associated with ‘asking for problems’.

In contrast, discharge was more widely perceived as a corporate governance instrument, ‘control mechanism’, than as legal immunity. Generally, the decision to provide discharge is taken by and ‘under the control’ of the annual shareholders’ meeting. As part of each year-end closing, shareholders base their discharge decision on the director’s past performance. Interestingly, since a discharge provision was perceived as providing verily limited protection, the participants in this study generally considered discharge as ‘good corporate governance’.3 Some of the participants in this research however have personally experienced that, under conflicting circumstances, the benefit of a discharge may not outweigh the costs. A general shareholders’ meeting that refuses discharge may inflict severe reputational damage on a director. As one interviewee noted: ‘Everyone wants to be discharged. It means that you’ve done yourwork well. If more than 35% of the shareholders decide to the contrary, I believeI should reconsider my activities. People will also see you as a loser.’4

The directors interviewed were also very realistic about the value of discharge and exculpation. There was a common understanding that discharge or exculpation does not reduce exposure to liability risks. To put it differently, legal immunity was recognised as an illusion: the company’s civil law options remain untouched. I was told that, even if a discharge was explicitly granted to a director, the proof of the pudding is in the eating. As some of the participants recalled, ‘a discharge provides only psychological reassurance, nothing more.’5

Any legal effect of contractual exonerations may only be established in court proceedings as part of a director’s defence. Accordingly, regardless of whether discharge or exculpation is understood as a corporate governance instrument, legal immunity or a director’s best defence, the question remains whether it may prevent company directors from acting defensively, as the threat of litigation remains intact. Moreover, if directors fear the prospect of a court trial, there is no indication that statutory or contractual exonerations may reduce defensive behaviour, since interference by the court will be necessary in order to activate any legal protection that they might provide.