Directors' duties

Article 2:9 of the Dutch Civil Code requires directors to perform their duties properly. Together with the statutory conflict-of-interest rule, the standards developed in case law, and the principles and best practice provisions of the Dutch Corporate Governance Code, this creates a layered framework for what directors must do and how they must decide. The articles of association and the board rules add a further layer, because a restriction stated there binds the director who acts against it.

Each director is responsible for the general course of affairs, which is why an allocation of duties within the board can limit exposure but does not remove it. A portfolio allocation, or the allocation between executive and non-executive directors in a one-tier board, is most useful where it is set out in the articles or the board rules and reflected in how the board actually operates. An informal understanding about who looks after what carries considerably less weight when the allocation is later examined.

In performing their duties, directors must orient themselves towards the interests of the company and the business connected with it. What that interest requires depends on the circumstances and may require the board to weigh the interests of stakeholders, including employees and creditors, alongside long-term value creation. That orientation is the reason a director cannot treat the wishes of a single shareholder as equivalent to the company's interest, however substantial that shareholder's holding.

The Dutch Corporate Governance Code elaborates on these points for listed companies, including on sustainability and culture. In joint ventures and investor-backed companies the distinction has direct consequences for nominee directors, who are appointed or nominated by one party but hold their duties to the company. Where interests pull in different directions, the company's interest governs, and the board's record should show that the relevant interests were considered.

A director with a direct or indirect personal interest conflicting with the interest of the company must not participate in the deliberations or the decision-making on that matter. Where every member of the board is conflicted, the decision passes to the supervisory board or, in the absence of one, to the general meeting, unless the articles provide otherwise. The procedure belongs in the board rules, and its operation belongs in the minutes.

Conflicts in practice are rarely disguised. They may arise where directors hold management equity and the board is asked to approve a transaction that determines what that equity is worth, where a director sits on both sides of a related-party arrangement, or where a director has an interest in a counterparty. In each case, the facts must be assessed to determine whether the director has a direct or indirect personal interest that conflicts with the interests of the company and the business connected with it. Where that is the case, the statutory procedure must be followed and documented rather than relying on an assurance that the director will act properly.

Article 2:9 DCC requires each director to perform their duties properly, and each is responsible for the general course of affairs. Liability towards the company arises only where there is a serious personal reproach (ernstig verwijt) in the sense of HR 10 January 1997 (Staleman/Van de Ven), assessed on all the circumstances of the case: the nature of the activities, the risks involved, the allocation of duties within the board, any applicable board rules, the information available to the director, and the care a reasonably competent director in the same position would have exercised.

That threshold is a meaningful one. Directors are not liable merely because a decision turns out badly, but they can be liable for decisions taken without a defensible process, in the face of a known conflict, contrary to a clear statutory or constitutional restriction, or where a director failed to intervene despite information that called for it. Because the assessment is retrospective and evidential, the board's own record is the primary defence. Minutes that show what information was before the board, what alternatives were considered and why the decision was taken carry considerably more weight than an unrecorded process, however careful that process was in fact.

Two situations sharpen these duties. In a transaction, the board must act in the company's interest rather than in the interest of the shareholder driving the transaction, must address potential conflicts explicitly where directors have a stake in the outcome, and must respect the works council's advisory rights. Where directors hold management equity, the facts must be assessed against the statutory conflict test and any conflict must be dealt with through a documented procedure.

In financial distress, the interests of creditors may carry progressively more weight in the board's assessment. The board must assess carefully whether the company can meet new obligations and whether a payment unduly prejudices creditors. Under the Beklamel line of authority, a director may be personally liable in tort where the director entered into an obligation knowing, or where the director should have understood, that the company could not perform and would offer no recourse; liability requires a sufficiently serious personal reproach. We advise boards to take advice at an early stage, because the decisions that make a difference in distress are those taken before the options close.