My first month at Barnes & Thornburg is now behind me, and I am pleased to share some of my initial takeaways with you in this blog post. The Dutch and the American economies are strongly connected, and the United States is one of the Netherlands' most important trading partners. 

Registered Office in Delaware

When European companies seek to expand their operations across the Atlantic and establish a business presence in the United States, one of the first questions that arises is: in which state should the company be incorporated? After my first month, the answer has become clear to me: the state of Delaware. This is primarily due to its flexible corporate law framework, favorable tax conditions, and the presence of a specialized court — the Court of Chancery — that adjudicates business disputes without a jury.

Delaware's corporate law is also designed to serve the interests of both directors (the board) and investors, with a focus on profit optimization. Delaware law affords directors a significant degree of flexibility in managing the company in a manner that promotes investor interests.

Director Liability in Delaware

As an initial observation, it is worth noting that — unlike under Dutch law — Delaware law is based on the one-tier board. This distinction is also relevant for director liability in Delaware. 

In a one-tier board structure, a single board of directors (divided into the board of directors and officers) is responsible for both the management and supervision of the company, whereas in a two-tier board structure, these functions are separated between a management board (responsible for day-to-day operations) and a supervisory board (responsible for overseeing and appointing the management board). The one-tier model is prevalent in common law jurisdictions such as the United States and the United Kingdom, while the two-tier model is characteristic of civil law jurisdictions such as the Netherlands and Germany.

According to Delaware law, the board of directors is responsible for, among other things, the appointment and compensation of officers, amendments to the certificate of incorporation, dividend distributions, and material decisions affecting the company. The officers, in turn, are responsible for the day-to-day executive management of the company.

What is particularly interesting is how director liability is addressed under Delaware law. The fundamental principle is called the “business judgment rule” and holds that the court should exercise restraint and deference to the board of directors when reviewing business decisions by the board of directors after the fact (the focus is primarily on the liability of directors and less on that of officers).

The business judgment rule operates on the presumption that a director has made a decision (i) on an informed basis, (ii) in good faith, and (iii) in the honest belief the action was in the best interests of the corporation. If and to the extent that the claimant can demonstrate that one of these requirements was not met and that the director made an improper decision, the burden of proof shifts to the director. Differing standards will apply to the director depending on whether the duty or care or loyalty is at issue, but the director will need to prove that the director’s action met that standard. If the director can meet this burden, the claim for director liability will be dismissed. 

It is worthwhile noting that, on a practical level, since most Delaware corporations have adopted DGCL 102(b)(7) provisions, duty of care claims rarely, if ever, result in director liability. The result is that plaintiffs must prove a loyalty breach or bad faith to recover damages, both of which significantly raise the effective liability threshold for directors of Delaware corporations.

A Comparative Perspective: Directors’ Liability according to Dutch Law

Under Dutch law, the starting point with respect to director liability is that the board of directors has broad discretion in its management of the company, and that a high threshold for liability applies. A director can only be held personally liable if the director can be attributed a serious personal reproach (ernstig persoonlijk verwijt). Under Dutch law, it is even possible that the board's actions may have had an adverse effect on the company and its stakeholders, yet still not give rise to director liability. Compared to Delaware law however, the scope of judicial review is less clearly defined, which affords Dutch courts a broader degree of discretion in assessing director conduct. 

However, while the legal frameworks governing directors' duties and liability under Dutch law and Delaware law differ in their doctrinal origins and terminology, the practical differences between the two regimes are ultimately limited. Both jurisdictions impose a high threshold for establishing personal liability of directors in the exercise of their functions.

Get in Touch

Interested in learning more, including about doing business in the United States? Please do not hesitate to contact us (Pien Obbes, Transaction Business Advisor (Chicago) / Timo Rehbock, Partner, Chair of the European Practice Group (Chicago) / Timothy van Hal Partner, Vice Chair European Practice Group (Nashville) at Barnes & Thornburg).