Resignation of Sywert van Lienden and Bernd Damme: conflict of interest and board ban

Sywert van Lienden and his former co-director, Bernd Damme, were recently dismissed by the court as directors of Stichting Hulptroepen Alliantie ("SHA"). In addition to the dismissal, the court imposed a board ban on both men. The cause of the dissatisfaction with (the directors of) SHA will not have escaped anyone's notice: the controversial mouthpiece deal(s) with the Ministry of Health that cost the State millions - while the mouthpieces ultimately turned out to be unusable. The deal was supposed to be done disinterestedly, but that turned out not to be the case.

Many Dutch people wonder if the actions of the two gentlemen surrounding the mouthpiece deal(s) were legal. There are doubts about that. The court is considering that the legality of the deal(s) is not at issue in these proceedings. This is likely to be decided in other (criminal) proceedings. However, the court does rule that both directors had a conflict of interest. The directors of SHA were also directors (and shareholders) of Relief Goods Alliance B.V. ("RGA"), which made a lot of profit. In addition, the distinction between the "non-profit" SHA and the for-profit RGA was insufficiently visible. According to the court, the foregoing justified a dismissal under Section 2:298 of the Dutch Civil Code.

In this blog, we explain how the court arrived at this decision and its implications for SHA's directors.

Dismissal of director foundation: general

Most legal entities have a general membership or shareholders' meeting which appoints, suspends and/or dismisses the board. The general meeting of members or shareholders can thus exercise some control over the board's actions. A foundation, on the other hand, has no members or shareholders. The law imposes only one requirement with regard to appointment and dismissal: the appointment or dismissal decision must be taken by a body designated in the articles of association. In practice, this is often the board itself. This can cause problems under circumstances because of the lack of internal control, for example if the board is to decide on its own dismissal. To prevent the lack of this internal control from leading to abuse, several articles of law are relevant. One example is Article 2:298 of the Civil Code.

Grounds for dismissal article 2:298 BW

Article 2:298 BW was amended in July 2021 as part of the new Law on Management and Supervision of Legal Persons (see about this law this longread). In these proceedings, the resignation of the directors was requested both under Article 2:298 BW (old) and Article 2:298 BW (new). Under Article 2:298(1) BW (old), a director could be dismissed by an interested party or the Public Prosecution Service in the event a director:

In article 2:298 paragraph 1 BW (new) the ground for dismissal has been extended. The legislative history states that this was done because in situations in which a director did not act contrary to the law or the articles of association, but his actions were contrary to the interests of the foundation (as a result of which it would not be justified to maintain him as director), article 2:298 BW (old) does not provide an adequate basis. Since the amendment of article 2:298 BW, directors can be dismissed because of: (i) neglect of their duties, (ii) other weighty reasons, (iii) drastic change of circumstances on the basis of which the continuation of his directorship can not reasonably be tolerated or (iv) because of not or not properly complying with an order given by the interim relief judge of the court.

Pursuant to Section 2:298 of the Dutch Civil Code (old and new), the court is free to grant injunctive relief during the investigation, which was the issue in this procedure was at issues. Indeed, in April the judge decided to suspend the directors of the foundation pending the investigation.

What are the duties of a foundation director?

Normally, a director of a foundation is required to act in the interests of the foundation and its affiliated company. With a foundation, the interest is largely determined by the foundation's purpose. SHA's purpose statement reads as follows:

The bylaws, according to the decision, further state the following:

The court considered that the aforementioned purpose was not properly promoted and that there were acts contrary to the foundation's bylaws. The court ruled as follows:

Directors had a conflict of interest when they adopted their policy because of their involvement with SHA as well as the establishment of RGA. Whereas both directors had no profit motive with respect to SHA, they did have this with RGA. This 'double function' led to an incompatible conflict of interest in setting SHA's policy. As directors of SHA, they had to act 'disinterestedly', while at RGA the goal was profit maximization. Also, the directors did not sufficiently distinguish between the two legal entities. In doing so, RGA misused the goodwill of SHA. The creation of this confusion is largely attributable to the directors. Not least because RGA is in fact nothing more than an English translation of the name SHA.

The court considered the following:

"By creating and perpetuating an interest that was antithetical to SHA's interest, they did not align themselves with the interests of SHA and its affiliated company in the performance of their duties."

The court considers that as a result of the above, there is sufficient basis to dismiss the director pursuant to Article 2:298 BW (old) or pursuant to Article 2:298 BW (new).

Dismissal pursuant to Article 2:298 BW (old) or 2:298 BW (new)

Acting in violation of the articles of association, under Article 2:298 BW (old), can be grounds for dismissal of the director of a foundation. Whether this is the case is uncertain. It is arguable that allowing a potential conflict of interest to exist does not necessarily mean that the board of directors did not focus sufficiently on the interests of the foundation in discharging its duties (and thus there was acting contrary to the articles of association).

Dismissal of a director under Article 2:298 BW (new) is more obvious. Any neglect of the management task is a sufficient basis for dismissal under the new law, as also considered by the court in this matter. If there is no neglect of the managerial task, then in this case the other circumstances set out by the court (such as insufficient differentiation between SHA and RGA) are undoubtedly sufficient to assume that there are "other weighty circumstances" justifying dismissal under Section 2:298 of the Civil Code (new). The actions of both directors were (clearly) not in the interest of SHA and with this, the dismissal fits pre-eminently with the rationale behind the amendment of Section 2:298 of the Civil Code.

Administrative ban and further proceedings

Both directors were also banned from management in accordance with the provisions of Article 2:298(3) of the Dutch Civil Code. The aforementioned article provides that a director cannot become a director or supervisory director of a foundation for five years after his or her dismissal, unless the director cannot be blamed seriously.

A civil and criminal investigation into the actions of (the board of) SHA is currently ongoing. The court has also appointed a new director. One of the duties of this new director is to investigate whether SHA has a right of action against its former directors.

Finally, it is important to note that due to formal aspects, many of the defenses in the present matter were not addressed. On appeal, these defenses can be resubmitted, allowing for a different outcome of these proceedings.

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