5.3 Bona fide directors should not fear directors’ liability

I was fortunate to be able to speak with bona fide directors for the purpose of this research. As my research showed, directors’ liability is a concern for bona fide directors. On the basis of the research, it cannot be excluded that directors’ liability risks may place these directors in a defensive mode of behaviour. I have argued however that this mode of behaviour is not necessarily undesirable. Delaying decisions, avoiding high risk markets or industries, requiring additional research, decentralising decision-making, being attentive, minutely documenting board decisions and discussions, firing executive directors prematurely to avoid further escalations, wanting to learn every detail about a fellow director, in particular the CEO and the board’s president, requiring a company to provide the best protection possible and more, are perhaps useful and prudential practices. One needs a level of control to be able to trust and to tolerate threats of liability with a view to risk taking.

Among others, bankruptcy was considered a source of threat. In this research, the large portion of directors’ liability litigation involved bankrupt companies (85% of the 158 cases). Thus, directors’ liability threat perceptions were not unjustified. I like to reassure bona fide directors somewhat with the following: in the research I found that bankruptcy was not a significant factor for courts to assign or reject directors’ liability. This brings me to the view that it is important for courts to provide clear and transparent communications about the circumstances in which a director does and does not incur liability. This is particularly important when considering that, in the majority of the cases, directors were found liable by reason of subjective bad faith (see Chapter 3, Figure 1).

One particular issue of poor transparency and lack of clarity involves the treatment of discharge in Dutch case law. In this research, I viewed discharge in the light of corporate governance. Although I recognised that discharge may effectively function to allocate the economic risks of a director’s action to the company, in this research I was primarily interested in exploring discharge as an instrument for controlling director’s behaviour. This led me to concentrate on the limited scope of discharge and its ability to exempt directors from the consequences of their bad faith actions. The empirical findings showed that there was no single case in which a director was not held liable for acting in ‘subjective bad faith’. This finding stands in contrast with existing doctrine and literature, which suggest that a director may be discharged of personal liability for intentional harmful actions towards the company as long as these litigious actions were ‘known actions’ to a company’s general shareholders’ meeting.

Supported with insights from Delaware case law, I have noted the benefit of placing the Dutch concept of discharge within the broader framework of directors’ liability in which ‘subjective good faith’ constitutes a basic condition. I have advocated that requiring the ‘subjective good faith’ of directors in the context of discharge constitutes good corporate governance. Moreover, the ‘subjective good faith’ of directors when undertaking action in the interest of the company may form a better foundation on which to base court decisions when a court is inclined to invalidate discharge because it pertains to actions in ‘subjective bad faith’.

Finally, the interviews with bona fide directors also provided indications that directors are generally receptive to norms and duties requiring that they act in good faith. In this respect, I also believe that it is poor corporate governance for a legal system to communicate ex-ante that its courts will respect discharge provisions shielding actions in ‘subjective bad faith’, provided that these bad faith actions were ‘known’ to shareholders. Such communication is not good marketing for bona fide directors or good corporate governance. If ‘subjective good faith’ is assumed to be the baseline, ‘known action’ may be a means by which, under exceptional circumstances, a discharge regarding a director’s actions in ‘subjective bad faith’ may be upheld on the basis of art. 2:8 DCC. In the end and without being overly naïve, the best protection a director may have is to act in good faith and in the best interest of the company, and not to indulge in excessive self-protection.