1. In the latest edition of the Dutch Journal of Company Law (Ondernemingsrecht 2009-5, p. 280-286), a book review was published of my doctoral thesis, Judicial Review of Director Conduct - Under Dutch and Delaware Corporate Law, Deventer: Kluwer 2007. The author of the piece is a well-known Supreme Court litigator, Hans van Wijk. In the first part, he describes the framework of the research and the findings. In the second part, he makes some comments about the book, triggered by the quote - an old one, from 1839 - I used at the beginning of the thesis - the gist of which is that progress is made by being constructively critical about certain things (instead of simply praising somebody), although this is often not the easier route. The review is fair and balanced. Which is quite easy for me to confess, as Van Wijk starts by saying it's an impressive research on one of the most difficult aspects of corporate law, and finishes by concluding that the book has drawn a lot of attention and is path-breaking. Thank you very much indeed, it won't be difficult to look for appealing soundbites to put on the cover of the second edition (no plans in that direction yet, I should add).
That doesn't mean I agee with all the issues raised by Van Wijk. Although it's not customary to respond to a book review as the author of the book, I would like to offer some humble thoughts/explanations on this (remember the quote). I will limit myself to a few elements.
2. Form
In the main text of the book (and in footnotes), I included a lot of quotes - not just paraphrases - in a smaller font size from Delaware corporate law jurisprudence on fiduciary duty issues. This way, the reader has access to the primary source. Van Wijk suggests the better way might have been - in view of 'readability' - to put all that stuff in annexes to the book. That was a realistic option, that I considered but decided not to take for two simple reasons:
1) I believe readers don't want to be hassled with having to shift all the time between the main body of the analysis and annexes thereto; if they have to, they will not read the additional stuff.
2) I did not want to paraphrase key parts from fundamental Delaware Supreme Court and Chancery Court case law.
3. Substance
Van Wijk is not convinced about the upside of introducing a Dutch business judgment rule in inquiry proceedings and personal liability proceedings. He questions whether it's feasible to frame such a Dutch review mechanism that is inspired by the Delaware business judgment rule, as:
1) Delaware does not know the stakeholder system but is focused more heavily on the interest of shareholders;
2) the Delaware business judgment rule has primarily been developed in the personal liability setting; and
3) the applicability of the business judgment rule concept is limited to business judgment related issues, while these issues aren't subject of discussion in many inquiry proceedings.
That's a good question.
Re 1. In itself this doesn't really make a difference when it comes to judicial review of business judgments made by corporate directors, as the essence of the business judgment rule is that - provided certain requirements are met, and in view of the rationale of the business judgment rule - it's up to the board to decide what is a 'wise' entrepreneurial course for the company to follow, in view of its best interests. The requirement of informed decision making includes being informed about the interests of the stakeholders involved and the potential consequences of alternatives (see no. 38.d).That said, it is true that - compared to Delaware - Dutch corporate law seems more concerned with the proper weighing/balancing of competing interests, for example shareholder interests vis-a-vis employee interests (see no. 7); I addressed this by framing a special review mechanism - based on a standard of conduct and a standard of review - for these type of issues, that is based on reasonableness/proportionality review (see no. 35.c and 39.b). But then we're no longer talking about what I called the Dutch business judgment rule, the most director friendly standard of review in terms of care in the business judgment setting. Unfortunately, Van Wijk did not cover this.
Re 2. The reason that Delaware uses reasonableness/proportionality review in Unocal/Unitrin (defensive measure) and Revlon/QVC (change of control/break-up of the company) situations involving injunctive measures and not personal liability questions, is not that the business judgment rule doesn't function in that setting (to the contrary: it's even part of the enhanced scrutiny framework; see no. 18.b, 21, 22.d), but that courts believe the review should be a bit stricter in view of - in short - the omnipresent specter of conflict of interests. And while it's true that Delaware does not know the concept of inquiry proceedings, the analysis applied in cases like these related to injunctive measures doesn't differ that much. In my framework, the Dutch business judgment rule is applied primarily - as a standard of review - to answer the question whether a director has violated a certain standard of conduct. This is relevant for both inquiry proceedings and personal liability proceedings, although liability also requires that the violation of the norm is attributable to the director (in terms of culpability); but that's a second and in my view independent prong of the analysis (see no. 42).
Re 3. What is key, is what review mechanism should be used when subject of discussion is director conduct in the business judgment realm, from a policy rationale perspective. It should not be decisive how often this question comes up in court, as that isn't the right angle - leaving aside it's my impression that quite some inquiry proceedings do involve questions as to business judgment related issues, not even including case law concerning conflict of interests, defensive measures, weighing/balancing of competing interests, unequal treatment of shareholders, and acting contrary to raised expectations (see, e.g., post No. 25 and post No. 35).
Van Wijk also notes that Dutch practitioners do not seem to be actively looking for a change in the existing review framework. That may be the case, I'm not so sure as he apparently is (see, e.g., post No. 20). But if he is right, I'm convinced this sitution is caused by - to put it bluntly - plain ignorance about foreign jurisdictions ('huh, doesn't every judge apply reasonableness review'?) and/or a misplaced reliance on tradition ('this is the way we have been doing things for ages - why the heck change?'). I don't find this approach very appealing, although of course people can have different opinions as to the merits of a business judgment rule type of system. I have clearly landed on the 'pro' side of the fence, and see the upside of further developing - not: radically changing (see no. 38.b) - the Dutch method of judicial review along these lines (let's make things better!).
Honestly, I believe the reasons I advanced for limited review of business judgment related director conduct (see no. 3) do explain why it makes sense to apply a hands-off approach (again: provided certain requirements are met). If this doesn't, what does? The fact that in other fields of law objective reasonableness review by courts is customary - and even the lowest review possible - doesn't mean a business judgment rule approach as to corporate directors lacks merit. I recently wrote something similar about personal liability of a trustee in bankruptcy; see post No. 30. The same goes for the fact that existing review criteria - like 'mismanagement', 'elementary principles of sound entrepreneurship' and 'serious mistake' - imply somesort of hands-off approach; these really are not analytically helpful concepts, useful tools that actually aid courts in deciding business judgment related issues.
I do agree with Van Wijk that the Supreme Court and the Enterprise Chamber should try to develop these type of criteria further. But further developing standards of conduct (the 'elementary principles') as suggested by Van Wijk, however laudable in itself (see, e.g., no. 34-35), is not the same as framing a specific judicial review mechanism for business judgment related issues; this is like comparing apples with pears.
Van Wijk's book review is a nice and welcome contribution to the discussion about the merits of introducing a Dutch business judgment rule. I look forward to its continuation.
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