Executive liability for M&A transactions in Netherlands

Standard of liability

What is the standard for determining whether a board member or executive may be held liable to shareholders in connection with an M&A transaction?

Under Dutch law, shareholders are unable to claim damages against a director on the sole ground that the value of the shares has depreciated. These damages are considered to be derivative losses, which do not qualify for compensation. Thus, in the Netherlands there is no such thing as the ‘derivative suit’ as applied in the United States or the action sociale as applied in Germany and France. For a shareholder to successfully bring an action against a director, it is required that a specific rule to be observed towards this shareholder has been breached.

Individual shareholders can initiate a claim against one or more directors or officers arising from a wrongful act (article 6:162 of the Dutch Civil Code (DCC)). The Supreme Court has ruled that the board of directors, or directors individually, can be held liable in cases where they can be blamed for serious instances of mismanagement (Dutch Supreme Court, Willemsen v NOM). The requirement of a serious imputable act also applies in relation to the ‘internal liability’ of directors against the company itself (article 2:9 DCC). A claim initiated by an individual shareholder is regarded as the ‘external liability’ of the directors. The standards of reasonableness and fairness as stipulated in article 2:8 DCC imply that the high threshold of internal liability (ie, the requirement of a serious imputable act) also applies to a claim from an individual shareholder against a director.

If it is established that the director has breached a specific rule protecting the shareholder (eg, a rule incorporated in the articles of association), this results – in principle – in the liability of the director against the shareholder.

By establishing a high threshold of directors’ liability, the company’s interest is served as it prevents directors from being too defensive in their decision-making.

Does the standard vary depending on the type of transaction at issue?

No, the standard does not vary depending on the type of transaction at issue, except for the fact that there will always be regard for the specific circumstances of the case.

Does the standard vary depending on the type of consideration being paid to the seller’s shareholders?

No, the standard does not vary depending on the type of consideration at issue, except for the fact that there will always be regard for the specific circumstances of the case.

Does the standard vary if one or more directors or officers have potential conflicts of interest in connection with an M&A transaction?

No, the standard does not vary in cases where the directors have a (potential) conflict of interest. However, articles 2:129(6) and 2:239(6) DCC stipulate that a director shall not participate in the deliberation and adoption of resolutions if he or she has a direct or indirect personal interest that is in conflict with the interests of the company. Should the director – in disregard of these statutory provisions – participate in the adoption of a resolution, this resolution is subject to annulment (article 2:15(1)(a) DCC). However, the annulment does not affect the authority of the directors to represent the company, unless the third party was aware of the conflict of interest. The directors can be held liable by the company in cases of a breach of the decision-making rule on conflicts of interest on the basis of article 2:9 DCC in conjunction with article 6:162 DCC (wrongful act).

Furthermore, the existence of a potential conflict of interest and the failure of a director or officer to address this in a correct way is a violation of the Corporate Governance Code (article 2:391(5) DCC).

Does the standard vary if a controlling shareholder is a party to the transaction or is receiving consideration in connection with the transaction that is not shared rateably with all shareholders?

The standard does not vary if one or more directors or officers have potential conflicts of interest in relation to the receipt of any consideration in connection with an M&A transaction. The directors shall be guided in the performance of their duties by the best interests of the company and the undertaking connected with it (articles 2:129(5) and 2:239(5) DCC).