5.2 Marginal judicial review and business judgement rule

Marginal review and the business judgment rule are methods limiting the substantive judicial review of directors’ actions. The methods differ significantly however. The business judgement rule, as it is known in Delaware case law, is rooted in a history in which courts generally avoid substituting the judgment of a court for that of a skilful board of directors.1 The business judgment rule therefore presupposes judicial ‘non-review’.2 Under the condition that the alleged director had no personal interest in the subject of the business decision, acted on an informed basis (demonstration of care) as well as in good faith and in the honest belief that the business decision was taken in the best interests of the company (demonstration of loyalty and good faith), directors enjoy the presumption of business judgment.3 If these conditions are satisfied, directors’ liability can only be assumed if the business decision lacks any rational business purpose (waste).4 It has been argued that this rationality test effectively enablescourts, in the absence of direct evidence of a director’s lack of subjective good faith, to judge whether the business decision objectively lacked any rational business purpose.5 When a business decision lacks rationality, the business judgment rule does not apply. On the other hand, if a claimant alleges and proves sufficient facts demonstrating that the duty of loyalty, care and/or good faith was violated, a breach of fiduciary duty removes a director’s decision from business judgment protection and requires the director to show that the decision was entirely fair towards the company and its shareholders.6 Substantive judicial review is then justified. The court’s review turns into an objective review of whether the decision was fair and reasonable. Accordingly, directors’ decisions are typically protected and judicial deference warranted under the business judgment rule, unless there is a breach of duty or the decision constituted waste.

Judicial review of directors’ conduct in the Netherlands involves marginal substantive review on the basis of an objective test. Within the objective test of directorial actions, Dutch case law requires judges to base liability analysis on all relevant circumstances.7 Accordingly, under circumstances in which directors enjoy wide discretion (i.e. retain alternative courses of action), marginal judicial review is the proper mode of review. Likewise, where directors’ discretion is limited or not at issue, it seems that there is less or no logic for marginal judicial review.8 Indeed, I understand directors’ discretion and marginal judicial review as intercommunicating vessels. Here is why.

As I have noted in the above, this research uncovered only few factors which were prevalent for assuming directors’ liability: directors’ ‘subjective bad faith’, ‘violations of norms’ which were specifically addressed to the director, and ‘foreseeability of damage’ on the part of the director. Under these conditions, the mode of judicial review is strict. Put differently, under these conditions, it seems likely that a director enjoys limited or no discretion and therefore may not rely on leniency in judicial review. Hence, within the Dutch legal framework and under the stated conditions, a director is likely and duly to be held personally liable. Moreover, it seems unlikely to me that, under these conditions and according to Delaware case law, a director could rely on the protection of the business judgment rule or would survive a rationality test or any other test mentioned in the foregoing. Where severe violations demonstrate that a director had not acted in good faith, it is very likely that courts will find a director liable, irrespective of the underlying method of judicial review.9

On the other hand, marginal judicial review is all the more the proper mode of judicial review in cases in which ‘subjective bad faith’, ‘norm violation’ and ‘foreseeability of damage’ are not at issue. For instance, the research findings also showed that ‘unreasonable risk taking’, director ‘incompetence’ or ‘policy failure’ had no significant impact on directors’ liability. Dutch courts thus seem to respect directors’ discretion in these areas of business judgment, or better said, afford directors business judgment. More concretely and as an example, a director may stay out of the danger zone and remain bona fide even if he took unreasonable risks, as long as other aggravating circumstances are not present.