Hoofdstuk 14 Summary

Chapter 1. This doctoral thesis discusses when certain information that either is or has been available within a private legal entity qualifies as knowledge of the legal entity. The focus is on officers, i.e. individuals who work, or used to work, within the organisation of the legal entity. The thesis does not address knowledge of external advisers and of other legal entities within the same group. German law was an important source of inspiration for the research.

Chapter 2. In civil law many rules rely for their legal effect on the presence of certain knowledge or a certain intention. The type of knowledge required may vary from objective knowledge (ought to know) to much more subjective forms of knowledge. The difference between the various types is gradual. The type of knowledge a rule requires gives an indication of the degree of protection afforded to a party and, thus, about the degree of restraint that should be observed in attributing knowledge. An example is the actio pauliana. A creditor of a due and payable claim deserves more protection than the counterparty to a legal act performed without obligation. Payment to the creditor may be reversed if it knew that a petition for bankruptcy had been filed (Section 47 of the Dutch Bankruptcy Act [Fw]),whereas for the counterparty it suffices that it ought to have known about the prejudice to the creditors (Section 42 Fw).

The term ‘ought to know’ deserves a separate analysis. It nearly always means that a party has subjective knowledge of certain indications from which it should draw a certain conclusion, given the level of expertise or experience it is deemed to have. For a legal entity the term ‘ought to know’ has an additional meaning, i.e. that the risk that the relevant information does not reach the officer who should take measures based thereon remains with the legal entity.

Chapter 3. Attribution of knowledge to a legal entity essentially constitutes an allocation of risk to the legal entity, i.e. the risk that information that is or has been available within the legal entity either does not reach the officer involved or is not used by him. The allocation of risk may vary from one situation to another. One and the same body of facts may, in one legal relationship, lead to the conclusion that the legal entity knew the relevant fact, while in the other it may not. Therefore, ‘the knowledge of the legal entity’ is a relative concept.

Chapter 4. Of the various justifications for attributing the knowledge of officers to legal entities, two seemto stand out. Firstly, control of self-created risks: by engaging officers, the legal entity creates the risk that information is not used or passed on. The legal entity is in a better position to control this risk than its counterparty. Secondly, the legal entity should be prevented from putting forward an officer who is ignorant of the information in order to avoid the legal consequences of having knowledge.

Sometimes the question is not so much what the legal entity objectively knew, but whether this particular other party could rely on the legal entity having certain knowledge. I call these ‘reliance situations’. They may occur, for example, where an agreement is to be interpreted based on the Haviltex criterion. The rationale for attribution of knowledge in those situations lies in the protection of the other party’s legitimate expectations.

Chapter 5. To the extent that knowledge cannot be attributed on any statutory basis, such as article 3:66(2) of the Dutch Civil Code [BW], Supreme Court case law shows that it should be attributed based on the Babbel criterion: according to common perception (verkeersopvattingen), does the officer’s knowledge qualify as knowledge of the legal entity? This standard takes into account (and includes) opinions in society as to how legal entities should operate and the requirements of reasonableness and fairness. In ‘reliance situations’, however, this standard does not suffice. In such cases, the essential question to be answered is what information this particular party could legitimately expect the legal entity to have. This is partly determined by common perception, but also by circumstances related to this particular party, such as its expertise and any expectations created vis-à-vis that party.

Chapter 6. The ‘knowledgeable officer’ will often be involved in the aspect of the legal relationship between the legal entity and its counterparty to which his knowledge is relevant. I would call this a standard situation. In such cases, attribution of knowledge is straightforward.

The first type of standard situation arises when the officer has brought about a legal act for the legal entity on the basis of a power of attorney, and when the validity or the legal effect of that legal act depends on the presence of certain knowledge. As a result of article 3:66(2) BW the knowledge of the officer will qualify as knowledge of the legal entity subject to the extent of the part he played in bringing about and in determining the content of the legal act. In drafting this paragraph, Meijers was inspired by § 166 of the German Civil Code [BGB], which provides useful insights for Dutch law. Based on these insights, among other things, I have reached the following conclusions. For the purposes of article 3:66(2) BW a ‘share’ should be seen as a realistic opportunity to prevent the legal act from being performed, at all or in this way. For legal entities, ‘the knowledge of the principal’ is the knowledge of the individual who has actually granted the (sub) power of attorney to the officer. If several authorized representatives within a legal entity work together in the formation of a legal act, they can, in my opinion, easily be deemed to have had a share therein, even if only one of them is the ultimate signatory. However, the knowledge of the representative can only be attributed to the principal on the basis of article 3:66(2) BW in the context of the legal relationship between the principal and the contracting party in which the particular representative is involved.

Chapter 7. The second type of standard situation occurs when (i) the knowledgeable officer himself is involved in the aspect of the legal relationship to which his knowledge is relevant and (ii) there is no statutory basis for attributing knowledge. One may think of an employee researching an object to be purchased for the legal entity but not actually involved in negotiations of the purchase. In that kind of situation, the knowledge of an officer is often ‘indiscriminately’ attributed to the legal entity – i.e. without any substantiation – and often correctly so. In those situations, weighing all the circumstances of the case based on the Babbel criterion is laborious and entails unnecessary legal uncertainty. The German Federal Court of Justice [BGH] has applied § 166 BGB, the equivalent of article 3:66(2) BW, analogously in many events, thus developing the concept of the ‘Wissensvertreter’. A Wissensvertreter is anyone who, according to the way labour of the principal is organised, has been assigned the duty of taking certain actions in legal transactions on behalf of the principal under his own responsibility and to take cognisance of – and, if necessary, pass on – the information that becomes available on that occasion.The knowledge of a Wissensvertreter is attributed to the principal. Inspired in part by the foregoing, I have formulated a main rule based on which one may relatively easily determine whether the knowledge of an officer qualifies as knowledge of the legal entity. That main rule, which in my view reflects common perception, reads as follows: the knowledge of an officer may be attributed to the legal entity if the officer at hand (i) is sufficiently involved in the aspect of the legal relationship to be assessed and to which the information is relevant, and (ii) has the duty to take measures based on that information. The term ‘duty’ should be interpreted rather objectively. In ‘reliance situations’ the impression that the other party had of the officer’s duties should also be taken into consideration.

In certain cases, the main rule may need to be refined. If the knowledgeable officer is not authorised to take any measure other than to pass on the information to a colleague, the court may sometimes take into consideration (i) that the relevance of the information was insufficiently foreseeable to this officer, or (ii) that some time passed before the appropriate measures were taken. Also, (iii) the purport of the applicable rule may prevent the legal entity from being considered knowledgeable based on the knowledge of this particular officer. Any obligation of confidentiality that the officer involved may be under will not necessarily affect the conclusion that thelegal entity knew the relevant fact. In such cases, the legal entity will have to explain why it was legitimate to refrain from taking measures in response to the information. Finally, the limiting effect of the principles of reasonableness and fairness may entail that a legal entity need not be affected, either fully or partly, by the consequences of having knowledge. If the applicabler ule sets intent or wilful recklessness as a condition, the intent or wilful recklessness on the part of a (lower) officer will not always suffice, even if he had the responsibility to take measures.

Chapter 8. Corporate bodies play a special role within the legal entity. Their duties are prescribed by law. A first characteristic is that the law confers powers of representation on bodies – not only on the executive board, but also on other bodies: if they adopt a resolution with direct external effect, they are representing the legal entity. If the substance or the consequences of legal acts performed by bodies need to be determined, their knowledge qualifies as knowledge of the legal entity. In standard situations other than the performance of a legal act, the knowledge of the body involved may also be attributed without further ado. For bodies other than the executive board, such standard situations occur where the body adopts a resolution with indirect external effect. The indiscriminate attribution of the knowledge of these bodies to the legal entity can be explained by the good position they occupy in terms of information – they are ‘fed’ information by the organisation – and by their powers to take measures in response to information (powers of instruction or execution). Another relevant factor is the responsibility of the body to act in the best interests of the legal entity and the associated business or organisation. The collective responsibility of the executive board and the supervisory board entails a duty to share information. As a result, the knowledge of an individual director or supervisory director is, in principle, attributed to the executive board or the supervisory board, as the case may be, and thus to the legal entity. This does not apply to individual shareholders, who do not have this responsibility. Indiscriminate attribution of the knowledge of corporate bodies is not always possible. The body (or its members) cannot always be expected to have the specific expertise required to recognise the relevance of the information.

Chapter 9. For situations where the relevant information is or has been available within the legal entity, but not with the officer involved who should have taken measures on that basis (the ‘acting officer’) I use the term ‘knowledge fragmentation’. In situations of knowledge fragmentation, the court will have to assess whether, according to common perception, the legal entity can rely on the ignorance of the acting officer. In this assessment, it will need to consider all relevant circumstances. In reliance situations, the court has to assess whether, under the circumstances, the other party could reasonably rely on a the acting officer knowing certain facts. Incidentally, the difference between standard situations and situations of knowledge fragmentation is one of degree.

Dutch case law and literature on knowledge fragmentation do not offer much to go by when it comes to determining common perception. German law, which has a rich tradition of thinking about knowledge fragmentation, has developed the concept of the ‘Organisationspflicht’: the legal entity is to set up its organision to ensure that information is properly stored, passed on and consulted. If the legal entity has neglected this duty, it will be treated as if it knew the relevant fact (either objectively or subjectively). I believe that this idea also forms part of Dutch common perception. The idea from which the organisation duty ensues, which I call the ‘organisation principle’, helps the court to select and weigh the relevant circumstances. The organisation principle leads the court to answer the question as to whether, in a properly functioning organisation, the information would have reached the acting officer and would have been used by him in good time. The organisation duty enables the court to hold that the legal entity had actual knowledge in situations where the acting officer was actually ignorant of the facts. In my opinion, the court may only establish actual knowledge where the legal entity has ‘feigned ignorance’. Embracing the organisation principle does raise the question as to whether the legal entity may also be deemed to be knowledgeable in cases where it has made enough effort to organise information and communication flows properly, but the relevant information has still not reached the acting officer, for example as a result of illness or fraud. I see no unambiguous answer to that question. In my opinion, the assessment will mainly depend on the type of knowledge that the applicable rule requires, the degree of involvement of the officer in the relevant legal relationship, and the cause of the knowledge fragmentation.

Common opinion as to how an organisation should function co-determines what circumstances are relevant and what weight should be attributed to them. Not all relevant circumstances are, however, related to the organisation principle. I believe the most important of the fifteen circumstances or points of view discussed in this doctoral thesis are: (i) the foreseeable relevance of the information (to the knowledgeable officer); (ii) the reason to request information (for the acting officer); and (iii) the purport of the applicable rule. In reliance situations, additional circumstances, related to this specific other party, must be taken into consideration. An example is the other party’s own knowledge and expertise.

Sometimes the circumstances may justify that the knowledge of the knowledgeable officer did not reach the acting officer. From a dogmatic perspective, I would prefer the legal entity to be deemed to be ignorant in that event. In certain situations, however, the court may consider the legal entity knowledgeable, but disregard the legal consequences of this knowledge, applying the limiting effect of the principles of reasonableness and fairness.

Chapter 10. There may be legitimate reasons to restrict the sharing of information within a legal entity. The basis for the restriction may be found in the law, for example articles 272 and 273 of the Dutch Criminal Code (regarding professional obligations of confidentiality) and the Dutch Personal Data Protection Act and the General Data Protection Regulation. Chinese walls are justified by regulations as well, that is if they are set up to avoid violation of insider trading prohibitions (Market Abuse Regulation) or to control conflicts of interest (Dutch Financial Supervision Act). Sometimes, confidentiality is a contractually undertaken obligation or generally accepted practice.

On the one hand, legal entities should be allowed to restrict internal information sharing if that is necessary to comply with their statutory or contractual obligations and to protect their officers from (unintentionally) committing criminal offences. On the other hand, legal entities should not always be allowed to hide behind those legitimate restrictions. Where sharing knowledge is possible without violating any statutory or contractual obligations, or where harm to the contracting party can otherwise be prevented, the legal entity should use its best efforts to do so. If it is necessary to restrict internal information sharing, the legal entity should adopt a policy in that respect in advance. As a result of the application of that policy, some officers may not be informed of situations elsewhere in the organisation to which their knowledge is relevant. In such circumstances, they will not be able to consider whether they should take measures in that individual situation. For that reason, the court should avoid simply weighing the interest of the other party in having the information used for its benefit in the specific situation, against the interest of the legal entity in keeping the information secret.

Chapter 11. The situation where an officer has gained his knowledge in any capacity other than as an officer for the legal entity is what I would call a ‘capacity issue’. The types of situations falling within this category are very diverse. The officer may have gained his knowledge privately, in a different position, as director of another legal entity, or as the legal entity’s contracting party. A ‘capacity issue’ also arises when a major shareholder has gained his knowledge in any capacity other than as a participant in the general meeting.

No uniform approach can be adopted for capacity issues. Private knowledge partly requires an assessment framework of its own, based on respect for personal privacy and on the difficulty to control the risk of knowledge fragmentation. Situations in which the officer has gained his knowledge in the course of any other business activity or as the legal entity’s contracting party may be largely assessed using the rules of thumb and weighing the circumstances discussed in Chapters 6 to 10. The court may, however, sometimes be allowed to attribute the knowledge that an officer has gained in another capacity to the legal entity with restraint, because the use, storage and passing-on of such knowledge is not as easy to control. But the court will not always have to exercise restraint. Where the officer acts on behalf of the legal entity, he cannot ‘switch off’ the knowledge that he has gained in another capacity. The prescription of a legal entity’s claim against a fraudulent officer poses special problems. If it were assumed that the legal entity has knowledge of the fraud along with the officer, this would entail that such a claim may become prescribed before anyone else within the legal entity gains knowledge of the fraud. In my opinion, this assumption is incorrect, but the law and case law on this subject may give rise to confusion. Finally, I conclude, after research with regard to discharge and dismissal with immediate effect of directors of companies, that the knowledge gained by a major shareholder outside the general meeting will, in principle, not qualify as knowledge of the general meeting.

Chapter 12. The result of my research is twofold. Firstly, it contains a thorough analysis of what the attribution of knowledge to legal entities means, which leads to a better grasp of the issues. Secondly, it provides an assessment framework. This will enable those who practice the law to determine and substantiate, for each individual situation, what information that either is or has been available within the legal entity qualifies as knowledge of the legal entity.