Written by Hidde Reitsma @ AMS Advocaten
If the Netherlands Enterprise Court has found that there was mismanagement in a company, can this automatically be attributed to a director? The Dutch Corporate Law Lawyer Hidde Reitsma discusses a judgement in which this matter was raised.
Mismanagement: director liable?
If a director makes a mess of a company’s policy and is even held liable on the grounds of directors’ and officers’ liability, then something must be wrong. You could say that in the case of directors’ and officers’ liability, there must also have been mismanagement at board level. However, does this also apply the other way around?
Directors’ and officers’ liability claim in the Netherlands
This case in the Netherlands concerned the question whether a company’s board could be held liable for the damage allegedly suffered by a shareholder. The facts were as follows. The board was appointed by the two shareholders of the company and consisted of a trust office and a director. The shareholders were holding companies, each owned by one family. A business conflict arose between the two families about the company. One of the shareholders, among other things, summoned the trust office and brought a claim for damages.
Limited powers of the board
An important detail is that the director, the trust office, did not fulfil the customary role of a company director. The shareholders had explicitly instructed this trust office to act only in accordance with the instructions of the shareholders. Therefore, the trust office’s task as a director was, internally, limited and the shareholders had the actual control within the company.
Finding mismanagement by Netherlands Enterprise Court
In its judgement, the Dutch court put first and foremost the fact that inquiry proceedings had already taken place between the parties. In these proceedings, the Netherlands Enterprise Court found that the company had been guilty of mismanagement. The directors, including the trust office, could be blamed for serious instances of mismanagement on some points.
Mismanagement: director automatically liable?
The Dutch Court emphasised in its judgement that the Netherlands Enterprise Court’s finding does not automatically mean that the director is also liable in these proceedings. The issue at stake here is whether a director can be held personally liable for serious mismanagement. It concerns a director’s personal liability for damage caused to the company or its shareholders. Therefore, the court will have to assess the shareholder’s accusations against the director independently.
Director did not err
The most serious accusation was that when shares were issued, the director had not checked properly whether a proper exchange ratio had been applied. According to the shareholder, the director had permitted an issue that was unfavourable (for the company). However, the Dutch court pointed out that the issue had been entirely prepared by the shareholders and carried out on the advice of their lawyers. This was entirely in keeping with the director’s limited control. The director was presented with a fait accompli and had not been involved in the resolution to issue shares beforehand.
Directors’ and officers’ liability and mismanagement in the Netherlands
The Dutch court held that the director had acted in good faith on the instructions of the shareholders. Therefore, the shareholder cannot subsequently blame the director for not verifying these instructions in more detail. The shareholder’s other accusations do not hold either. Mismanagement cannot be attributed to an individual director and, therefore, there is no case of directors’ liability.
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