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Directors' Liability a Legal and Empirical Study

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Directors' Liability a Legal and Empirical Study DIRECTORS’ LIABILITY A LEGAL AND EMPIRICAL STUDY Ontwerp omslag: Hans Roenhorst, www.h2rplus.nl ISBN 978-90-13-14163-4 ISBN 978-90-13-14164-1 (E-book) NUR 827-715 © 2017, N.T. Pham Alle rechten in deze uitgave zijn voorbehouden aan Wolters Kluwer. Niets uit deze uitgave mag worden verveelvoudigd, opgeslagen in een geautomatiseerd gegevensbestand, of openbaar gemaakt, in enige vorm of op enige wijze, hetzij elektronisch, mechanisch, door fotokopieën, opnamen, of enige andere manier, zonder voorafgaande schriftelijke toestemming van de uitgever. Voor zover het maken van kopieën uit deze uitgave is toegestaan op grond van art. 16h t/m 16m Auteurswet jo. Besluit van 27 november 2002, Stb. 575, dient men de daarvoor wettelijk ver- schuldigde vergoeding te voldoen aan de Stichting Reprorecht te Hoofddorp (Postbus 3051, 2130 KB). No part of this book may be reproduced in any form, by print, photoprint, microfilm or any other means without written permission from the publisher. Hoewel aan de totstandkoming van deze uitgave de uiterste zorg is besteed, aanvaarden de auteur (s), redacteur(en) en Wolters Kluwer Nederland B.V. geen aansprakelijkheid voor eventuele fouten en onvolkomenheden, noch voor gevolgen hiervan. Op alle uitgaven van Wolters Kluwer zijn de algemene leveringsvoorwaarden van toepassing. Deze kunt u lezen op www.wolterskluwer.nl of opvragen via de klantenservice. www.wolterskluwer.nl/navigator Directors’ liability A legal and empirical study Bestuurdersaansprakelijkheid Een juridische en empirische studie Thesis to obtain the degree of Doctor from the Erasmus University Rotterdam by command of the Rector Magnificus Prof. dr. H.A.P. Pols and in accordance with the decision of the Doctorate Board The public defence shall be held on Friday 10th March 2017 at 11.30 AM by Ngoc Thy Pham born in Saigon, Vietnam Doctoral Committee: Promotors: Prof. mr. B.F. Assink Prof. mr. L. Timmerman Other members: Prof. mr. S.D. Lindenbergh Prof. mr. dr. H.E. Boschma Mr. dr. C. van Noortwijk Copromotor: Dr. T.F.C. Fischer Preface On 10th March 2017, Thy Pham was awarded a Ph.D. by the Erasmus Univer- sity Rotterdam for her study on ‘Directors’ liability. A legal and empirical study’, supervised by Professor B.F. Assink, Professor L. Timmerman and Dr. T.F.C. Fischer. Directors’ liability is a popular theme in Dutch legal literature, although often missing empirical research. In her thesis Pham makes a valuable contribution to the literature by focussing on directors’ liability as a system of sanction and pro- tection for corporate governance. As a result, the thesis provides new legal and empirical insights in the behavioural dimension of directors’ liability. The chief merit of the dissertation is the connection between doctrine and prac- tice. Pham employs multiple methods to reach her conclusions: case study con- ducted among 54 senior directors, legal and social literature study, qualitative and quantitative analysis of (case) law and legal comparative analysis (Dela- ware and Dutch company law). Three areas of research are distinguished: 1) defensive behaviour among company directors, 2) serious reproach as the analytical framework for reviewing directors’ liability in the context of art. 2:9, 6:162 and 2:138/248 DCC, and 3) directors’‘good faith’ as a basic condition for valid discharge claims. Pham shows that directors’ liability may be a concern for bona fide directors. In particular, directors facing bankruptcy and corporate fraud may perceive liability risks as real, threatening and a source of defensive behaviour. Taking into account that in 85% of the court cases which were analysed in the research involved a company’s bankruptcy, directors’ liability threat perceptions are not unjustified. Interestingly, Pham shows in the present study that bankruptcy was not statistically a significant factor for courts to assign or reject directors’ lia- bility. From a corporate governance perspective, Pham therefore argues that courts have an important role in providing clear communications about the cir- cumstances in which a director does and does not incur liability. Using ‘serious reproach’ as the analytical framework, an extensive study of case law resulted in a model indicating the most influential factors for courts to judge a director personally liable. A substantive part of cases under study ended with a court finding a director personally liable due to ‘subjective bad faith’ action. In cases not involving directors’‘subjective bad faith’, Pham shows that the lens of judicial review focuses mainly on two factors which appear to be V PREFACE influential and form a strong basis for judgement. They are: violations of norms specifically addressed to the director and meant to protect the company or the company’s creditors and shareholders, and directors’ foreseeability of damage to the company or the company’s creditors or shareholders. Combining comparative and empirical insights, Pham identifies poor corpo- rate governance in the area of discharge from directors’ liability. Empirical findings show that there was not one Dutch case under study in which a director was not held liable for acting in ‘subjective bad faith’. This finding stands in stark contrast with existing doctrine, which suggests 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. By analysing Delaware’s case law on section 102 (b)(7) DGCL and comparing it with Dutch case law, Pham argues that it is poor corporate governance for a legal system to communicate ex-ante that its court will respect discharge resolutions shielding directors’ actions in ‘subjective bad faith’. Pham instead advocates to demand directors’‘subjective good faith’ as a basic condition for good corporate governance. This dissertation is multidimensional, thorough and innovative. It is written in an accessible style and contains strong analysis and arguments. It is our great pleasure to introduce this dissertation in the series of the Institute for Corpo- rate Law. M.J. Kroeze J.B. Wezeman VI Contents Preface V Chapter 1. A window on the research 1 1.1 The motivational basis of the research 1 1.1.1 To punish and not to punish 2 1.1.2 Recognising the dimensions of directors’ liability legislation 3 1.1.3 The importance of legal sanction 5 1.2 What this book is (not) about 7 1.3 Structure 8 References 10 Chapter 2. Defensive behaviour as good corporate governance? A case study 13 2.1 Introduction 13 2.2 Literature review 14 2.2.1 Directors’ liability as a corporate governance instrument 14 2.2.2 Defensive behaviour 16 2.2.2.1 Defensive behaviour in Dutch case law 17 2.2.2.2 Defensive behaviour in business 18 2.2.2.3 Understanding defensive behaviour better 19 2.3 The research 19 2.3.1 Research questions 19 2.3.2 Research method 21 2.3.3 Data collection 22 2.3.3.1 Interviews 22 2.3.3.2 Analysing corporate documents 23 2.3.3.3 Participants and company characteristics 24 2.3.3.4 Analysing media reports 24 2.3.3.5 Analysing court decisions 25 2.3.3.6 Interviewing legal counsels, insurers and risks advisors 25 2.4 Findings 26 2.4.1 Do senior directors fear directors’ liability risks? 26 2.4.2 When do senior directors resort to defensive practices? 27 2.4.2.1 Fraud 27 2.4.2.2 Bankruptcy 29 2.4.2.3 Individual experience 30 VII CONTENTS 2.4.3 Is defensive behaviour problematic? 31 2.4.4 Does director liability protection reduce the tendency to behave defensively? 32 2.4.4.1 Exoneration 32 2.4.4.2 Directors’ and Officers’ Liability insurance and indemnification 34 2.4.4.3 Directors’ liability legislation 36 2.5 Discussion 38 2.6 Conclusion 41 Appendix I 43 Appendix II 47 References 48 Chapter 3. How courts determine directors’ liability. A jurimetrics study 55 3.1 Introduction 55 3.1.1 Research issue: predicting directors’ liability on the basis of open norms 55 3.1.2 Research question 56 3.2 Directors’ liability and legal certainty: a qualitative analysis 57 3.2.1 The (un)problematic nature of the open norm: serious reproach 57 3.2.2 Internal directors’ liability – article 2:9 DCC 60 3.2.3 Liability for wrongful acts – article 6:162 DCC 61 3.2.4 Liability in the event of bankruptcy – article 2:138/248 DCC 63 3.2.5 Formalising ‘serious reproach’ 65 3.3 Analysing court decisions quantitatively 67 3.3.1 Focus of quantitative analysis using Dutch court cases (2003-2013) 67 3.3.2 The data: characteristics and selection 67 3.3.3 Coding dependent and independent variables 70 3.3.4 Statistical analysis plan 72 3.4 Research results 74 3.4.1 Which behavioural and contextual legal case factors have a significant effect on directors’ liability? 74 3.4.2 Intermezzo: understanding subjective bad faith as a dependent variable 77 3.4.3 Which behavioural and contextual legal case factors have a significant effect on directors’ liability in cases not involving directors’‘subjective bad faith’?80 3.5 Discussion 83 3.5.1 Interpreting the research results 83 3.5.1.1 Directors’‘subjective bad faith’ 84 3.5.1.2 ‘Foreseeability of damage’ and ‘norm violation’ 85 3.5.1.3 Contextual legal case factors 86 3.5.1.4 Legal case factors that did not occur in the prediction model 86 VIII CONTENTS 3.5.2 Quality of the regression model 87 3.5.2.1 Reliability 87 3.5.2.2 Internal validity 88 3.5.2.3 External validity 88 3.6 Concluding remarks & further research 89 Appendix I 90 Appendix II 93 References 99 Chapter 4.
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