3.3.3 Coding dependent and independent variables

Making use of the selected court cases, I coded the legal case factors that, according to the legal decision, were involved in each case. The choice in this research to code the legal case factors involved in the court cases under study instead of ‘simple’ case factors means that the factors utilised for statistical analysis have already been legally interpreted by a court. For the sake of clarity, it should be noted that the intent of this research is not to investigate how courts perceive and interpret ‘simple’ case factors and perhaps qualify them as legally relevant, but to determine the legal case factors most relevant to a ruling in the attempt to better formalise ‘serious reproach’.

In accordance with the assumptions made in the legal analysis, I used the framework of ‘serious reproach’ as described in Staleman v. Van de Ven as the starting point and focused on coding the contextual and behavioural legal case factors that were implicated in this and other rulings.1 I coded contextual legal case factors involving the different types of corporate settings that may have been the breeding ground for the legal dispute, such as ‘bankruptcy’, ‘mismanagement’, ‘policy failure’ and ‘misrepresentation of information’.2 These factors are distinguished from behavioural legal case factors,3 which involve the court’s perception of the (mis)behaviour of a director in a given case, such as whether the director had violated a norm (‘norm violation’), could have foreseen damage to the company or to the company’s creditors (‘foreseeability of damage’), took unreasonable risks (‘unreasonable risk taking’), failed to make reasonable efforts to be informed (‘unreasonably informed’), was not competent for the tasks assigned to him as a director (‘incompetence’), neglected a known duty to act (‘dereliction of duty’), had a conflict of interest (‘conflict of interest’), had acted with the intent to do harm to the (stakeholders of the) company (including fraud and forgery) (‘subjective bad faith’). I also defined ‘limitation of personal liability’ as a behavioural legal case factor, as a director may invoke legal means to effectively limit his personal liability as part of a legal defence (e.g. relying on a discharge, an allocation of duties within the board of directors or exculpation). For a further overview and description of the factors used in this research, see the Appendix I.4

I would like to draw attention to two legal case factors: ‘subjective bad faith’ and ‘foreseeability of damage’. Courts do not generally use the term ‘subjective bad faith’ in their decisions. I use the term to refer to instances where a court stated in its decision that the director under review had committed a criminal offence such as fraud or forgery or had unjustly enriched him- or herself, had manipulated or concealed (financial) data or other relevant information, had intentionally or purposefully caused harm or damage to the company or the company’s stakeholders, or had carried out his or her actions for personal benefit while disregarding the interests of the company or the company’s stakeholders. I defined these types of director behaviours as actions intended to do harm to (the stakeholders of) the company.5 Furthermore, I regarded these acts of ‘subjective bad faith’ as distinct from director conduct in the knowledge of potential damage. A case involving foreseeable damage for which a director can be subject to ‘serious reproach’ may not mean that the case also involves a director’s ‘subjective bad faith’. A director may, for instance, issue what later proves to be inaccurate financial information on behalf of the company without the director’s action being necessarily fraudulent at the time of issue. Other circumstances, such as structural administrative failures, may be implicated, and it may furthermore be that a director is susceptible to ‘serious reproach’.

Existing case law does not, however, prescribe ‘foreseeability of damage’ as a criterion to be satisfied in order to establish a director’s liability to a company (art. 2:9 DCC) or, in the context of bankruptcy (art. 2:138/248 DCC), to the bankrupt estate.6 Nevertheless, this does not exclude the fact that the assumption of damage being ‘reasonably foreseeable’ to a director may influence a court’s determination of liability. For this reason I included foreseeability of damage when it involved damage to the company or the company’s creditors or shareholders.7

The contextual and behavioural legal case factors can be regarded as independent variables or predictor variables. Quantification for statistical analysis involved expressing these independent variables as a binary: 0 = the legal case factor did not occur in the case, 1 = the legal case factor occurred in the case. The case outcome to be predicted, whether a director was found personally liable (=1) or not found personally liable (=0), is regarded as the dependent variable.