Associate, Mathijs van Riet examines a recent Supreme Court's judgment that significantly broadens the concept of conflicts of interest.
Unravelling the Case of Mr. Eibink's Estate
In 2005, the late Mr Eibink left his estate to his wife and daughter, primarily comprising a real estate investment group valued at approx. €16 million.
Mr Van Welie worked in the investment group for several years. Following Mr. Eibink's passing, Van Welie claimed to have been appointed as the interim director of the parent company, at a general meeting.
After Van Welie told the heirs that the company was not doing well financially, the heirs lost confidence in Van Welie and announced that an external accountant would be appointed to review the companies' books. Three weeks later, without informing the heirs, Van Welie sold the shares of the two most prime subsidiaries to Zwarthoff – a Belgian investment company where Van Welie had worked for several years too – for just € 4 million.
This action left the investment group devoid of any other viable activities.
Upon discovering Van Welie's actions, the heirs promptly dismissed him and sought to annul the shares transfer. They contended that Van Welie's conflict of interest should have prevented him from entering into the deal with Zwarthoff.
Interpreting the scope of 'interest'
In 2007, the Supreme Court ruled that the aim of the rules on conflicts of interest is to protect companies against directors who have a direct or indirect 'personal interest' that conflicts with the company's interests.
However, in this case the Court of Appeal of 's-Hertogenbosch concluded that even though Van Welie did not estimate the value of the subsidiaries correctly and should have discussed the sale of the shares with the heirs, it could not be concluded that Van Welie had a conflict of interest. This is because it was not clear whether Van Welie had received any personal reimbursement for selling the shares to Zwarthoff or had any other personal interest. The Court of Appeal therefore denied the heirs' annulment claim.
Broadening perspectives: The Supreme Court's ruling broadens the scope
The Supreme Court ruled that a director must always act in the best interest of the company. If the director has to deal with any interest that may not be compatible with the company's best interest and that could harm the director's integrity, there could be a conflict of interest that should induce the director to step aside. In addition, the Supreme Court ruled that it is not required that the company actually suffers damages from the breach of the conflict of interest, nor that such damages are to be expected. Even without any damages, a director's act made under a conflict of interest may be annulled. Whether there is a conflict of interest, all depends on the relevant circumstances involved.
Although the Supreme Court's ruling lacks explicit detail, it appears to have opened the door to a broader understanding of conflicts of interest. In contrast to its 2007 judgment, which emphasised protecting against directors' 'personal conflicting interests,' the Supreme Court now implicitly acknowledges that a 'personal' interest is not always necessary. This means that even if Van Welie had no personal interest regarding the sale of the subsidiaries to Zwarthoff, the mere fact that he might had to deal with any interest that is not compatible with the best interest of the investment group – such as the interests of Zwarthoff – could lead to the conclusion that there was a conflict of interest and that the transfer should be annulled.
Third parties: Conflict of interest and Zwarthoff's involvement
Zwarthoff is not completely kept out of harm's way. The Supreme Court also ruled that if there is a conflict of interest and Zwarthoff should have been aware of it, Zwarthoff would breach its obligations under the principles of reasonableness and fairness if it would claim performance from the company.
The Supreme Court referred the case to the Court of Appeal of Amsterdam, where Zwarthoff's involvement will be further assessed.
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