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EDITORIAL
Sustainable Decision Making and

Directors Duties
M. OLAERTS IS PROFESSOR OF COMPARATIVE AND NATIONAL COMPANY LAW AT MAASTRICHT UNIVERSITY AND ELVERDING CHAIR SUSTAINABLE BUSINESS, CULTURE AND
CORPORATE REGULATION, OF COUNCIL AT DVDW AND EDITORIAL BOARD MEMBER OF THIS JOURNAL. THE ELVERDING CHAIR IS SPONSORED BY BROADVIEW, DNB, DSM, ING
AND Q-PARK. THIS CONTRIBUTION WAS ENABLED BY THE EDINBURGH UNIVERSITY MAC CORMICK FELLOWSHIP PROGRAMME. THE AUTHOR WOULD LIKE TO THANK
DR JONATHAN HARDMAN FOR HIS VALUABLE COMMENTS ON THIS EDITORIAL.*
The purpose of the corporation and, in connection with that, reputation and the need to act fairly as between members of the
directors’ duties take center stage in the debate on how to enhance company. Therefore, also in the UK the leading requirement for the
sustainable business. In the proposal for a corporate sustainability board is to act in the best interest of the company. However, what
due diligence directive the European Commission for example this interest entails depends on the circumstances of the case. The
wants to introduce a duty for directors to act in the best interest of two recent judicial decisions in the UK shed light on the interests
the company while taking into account the consequences of their that the board of directors has to take into account and the power of
decisions for sustainability matters, including human rights, climate the board to decide on what the company interest entails. Secondly,
change and environmental consequences in the short, medium and although set in a UK setting these cases show how difficult it can be
1
long term. This idea is based on the assumption that in all EU to widen the scope of directors duties and demonstrate that courts
Member States’ national laws directors already owe a duty of care to will not easily second guess the way in which the board of directors
2
the company. weighs the various interest involved in promoting the success of the
While the European legislature is deliberating, for the first time company. In this editorial, I will briefly discuss these two cases and
in European history, the introduction of such a uniform duty for the reflect on their potential consequences for the use of directors duties
board of directors of specific companies, directors’ duties are in the sustainability debate.
simultaneously evolving at the national level. An example of a One of the questions in the sustainability debate is to what extent
country where over the past months several judicial developments directors are allowed to take into account the interest of other
in this respect have taken place, is the UK. Two recent judgments of stakeholders, beside shareholders. The first interesting recent UK
UK Courts on the role of directors are interesting against the case addressing this issue is the Supreme Courts’ decision in
background of the sustainability debate also at the EU level for Sequana. Even though the case does not revolve around sustain-
several reasons. First of all, even though the UK is no longer part of ability issues and rather focusses on the protection of a specific type
the EU, it is one of the countries in which the legislature in the of stakeholder: creditors, the opinions of the judges do shed light on
Companies Act 2006 made a deliberate choice to codify directors’ how the enlightened shareholder model should be interpreted and
duties in such a way that the interests to be taken into account by provide insights into how much room there is for balancing the
directors are specified in a legal provision. In that sense, the system interest of stakeholders other than shareholders. The facts of the
3
shows similarities with what has been proposed at the EU level. case concern the payment of a dividend of EUR 135 million by a
section 172 of the UK Companies Act 2006 requires each director to Sequana subsidiary (AWA) despite the subsidiary’s outstanding
act in a way that she considers, in good faith, would be most likely contingent liability for clean-up costs of a polluted river. The sub-
to promote the success of the company for the benefit of its mem- sidiary went into insolvent liquidation almost ten years after the
bers as a whole, and requires directors to have regard (amongst dividend payment, following the crystallization of the liability. At
other matters) to: the long term consequences of their decisions, the the time of the dividend payment the long term pollution related
interests of the employees, suppliers, customers and others, the liabilities were known but the amount of these outstanding liabilities
impact on the community and the environment, the company’s was still uncertain. Therefore, at the time of the dividend payment
* Email: m.olaerts@maastrichtuniversity.nl.
1 Article 25 of the proposal for a directive of the European Parliament and the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937
(hereinafter: CSDDD). See about this M. Olaerts, Corporate Sustainability and the Duty of Care of Directors, Ondernemingsrecht 2023/38.
2 Recital 63 of the proposed CSDDD.
3 See about these differences and similarities F. Agostini & M. Corgatelli, Article 25 of the Proposal for a Directive on Corporate Sustainability Due Diligence: Enlightened
Shareholder Value or Pluralist Approach?, 19(4) ECL, 92–99 (2022), doi: 10.54648/EUCL2022016. Moreover, a part of the scholarly debate on the corporate purpose and its
potential influence on directors duties has taken place against a UK background see e.g., the work of C. Mayer and the British Academy, Principles for Purposeful Business,
https://www.thebritishacademy.ac.uk/publications/future-of-the-corporation-principles-for-purposeful-business/; P .L. Davies, Shareholder Voice and Corporate Purpose: The
Purposelessness of Mandatory Corporate Purpose Statements, ECGI Law Working Paper No 666/2022 (May 2023).
Olaerts, M. ‘Sustainable Decision Making and Directors Duties’. European Company Law Journal 20, no. 5 (2023): 94–96.
© 2023 Kluwer Law International BV, The Netherlands
insolvency was not yet imminent nor probable.4 The main question cases of negligence rather than really prioritizing other interests.
before the Supreme Court in this case was whether directors owe a The company interest may change color once the company is
duty to the creditors of the company (and, if so, when this duty is insolvent or bordering on insolvency in the sense that creditors
triggered) and whether this entails that the outstanding liabilities interest take priority over shareholder interest however,8 these are
should have prevented them from distributing the dividend. In its extreme circumstances in which the continuity of the company is no
ruling the Supreme Court holds that there can indeed be circum- longer at stake. All judges emphasize the fact that the UK legislature
stances in which the duty of directors as codified in section 172 of chose to use enlightened shareholder model, which means that
the UK Companies Act 2006 is modified by the common law rule to serving the company interest is primarily interpreted as serving the
include the interest of creditors. However, this is not a self-standing interest of the shareholders.9 Lady Arden for example emphasizes
duty owed to creditors directly but part of the duty of directors that case law and the legislative history of the statement of directors’
towards the company. The same goes for the duty to manage the duties shows a debate on whether companies should be founded on
company for the benefit of its members, this is also not a duty owed the basis of shareholder primacy, modified as enlightened share-
to the shareholders directly but rather to the company. As Lord holder value or whether a pluralist model should be applied. The
Reed emphasizes, a creditor duty is not distinct from the duty of debate was ultimately resolved in favour of the enlightened share-
directors to serve the interest of the company but serving the holder model rejecting the pluralist model.10 Therefore, thirdly, the
interest of the company can be understood as to including having case shows how difficult it can be to move the interpretation of the
5
regard to the interest of creditors. However, in this case the duty company interest away from the interest of the shareholders.
was not yet triggered as at the time of the dividend distribution the The second interesting UK case is the derivative action initiated
company was not actually or imminently insolvent and insolvency by ClientEarth against the Shell directors.11 Contrary to the Sequana
was not even probable. According to the majority opinion, the case, this case is directly concerned with directors’ duties in relation
creditor duty is only triggered when the directors ‘know, or ought to to sustainability issues. In this case ClientEarth sought a declaration
know, that the company is insolvent or bordering on insolvency, or that the Shell directors had breached their duties under section 172
that an insolvent liquidation or administration is probable’.6 and 174 of the UK Companies Act 2006 for, in short, not sufficiently
Looking at this decision through a pluralist lens, with that I taking into account climate risks when setting out Shell’s strategy.
mean looking at the decisions from point of view of whether or not The Court denied ClientEarth’s claim to proceed. The main reasons
there is room to interpret directors duties under UK law from a underlying this decision relate to the managerial freedom awarded
broader perspective than primarily serving the interests of share- to the board of directors to set out the company strategy and to
holders, several things stand out. First of all, the court emphasizes decide what is in the best interest of the company and its members.
the fact that directors owe a duty to the company rather than to the Justice Trower, the judge adjudicating this case, starts by empha-
shareholders which means that aside from the shareholder interest sizing that a derivative claim is an exception to ‘one of the most basic
also other interests can play a role. Secondly, several judges also principles of company law’. This basic company law principle entails
point out that the matters mentioned in section 172 of the UK that ‘it is a matter for a company, acting through its proper consti-
Companies Act 2006 to which the directors have to have regard are tutional organs, not any one or more of its shareholders, to determine
not exclusive as the text of the provision requires directors to take whether or not to pursue a cause of action that may be available to
the explicitly mentioned interests (such as suppliers, employees etc.) it’.12 In order to allow the claim to proceed ClientEarth would have
into account ‘amongst other matters’.7 Therefore, there seems to be to show a prima facie case that the Shell directors could not have
room for expansion of the interest to be taken into account. reasonably come to the conclusion that the actions taken were in the
However, these interests will not take priority over the shareholder interest of Shell. This constitutes a high threshold. Even though
interest. ‘Having regard to’ as section 172 of the UK Companies Act ClientEarth tried to make the duty more specific by for example
2006 puts it, is a rather mild formulation and seems to only cover stating that the directors failed to comply with the Dutch Court
4 See the press summary of the case, https://www.supremecourt.uk/press-summary/uksc-2019-0046.html.

5 Lord Reed at [11] of the case.
6 At [203] and [231] of the case see also the press summary, https://www.supremecourt.uk/press-summary/uksc-2019-0046.html. The opinions differ on when this duty is
triggered.
7 Lord Briggs at [229] and Lady Arden at [525] of the case.
8 See Lord Reed at [51] of the case.
9 See e.g., Lord Reed at [19] and Lady Arden at [265].
10 Lady Arden at [265] of the case.
11 High Court decision of 12 May 2023, [2023] EWHC 1137 (Ch) (hereinafter: the May decision) and High Court decision of 24 Jul. 2023, [2023] EWHC 1897 (Ch) (hereinafter:
the Jul. decision). The May decision contains the first ruling of the Court in this case in which the claim by ClientEarth was dismissed. ClientEarth subsequently requested the
Court to reconsider the decision at an oral hearing. The Jul. decision explains the results of that oral hearing and consolidates and partly repeats the May decision again
dismissing ClientEarths claim.
12 The Shell case at [3] of the May decision repeated at [5] in the Jul. decision.
EUROPEAN COMPANY LAW JOURNAL 95 OCTOBER 2023, VOLUME 20, ISSUE 5

order against Shell requiring it to reduce its CO2 emissions and that against the Shell directors shows that the board of directors has a
Shell failed to set a measurable and realistic pathway to achieving lot of freedom in deciding on how to manage the company and
the net zero targets, the claim did not succeed. The High Court how to set the corporate strategy. It will be difficult for share-
emphasizes the autonomy of the board in its decision-making. holders or other stakeholders to interfere, other than dismissing
Justice Trower states that it is up to the directors to weigh the the board of directors, if they have insufficient faith in their
impact of Shells operations on the community. It is established case capabilities to lead the company into a sustainable future.17 These
law that the Court will not supervise the merits of management cases are of course set in a UK context and the conclusions are
decisions if ‘the decision is within the powers of management honestly therefore not necessarily transferable to other jurisdictions. From
13
arrived at’. It is up to the board to decide how to best promote the a Dutch perspective for example, due to the more pluralist model,
success of the company for the members as a whole. Weighing the it may be easier to broaden the group of stakeholders to be taken
non-exhaustive list of factors mentioned in section 172 of the UK into account by the board of directors. Giving priority to non-
Companies Act 2006 is ‘essentially a commercial decision, which the shareholder stakeholders may also be easier. However, even then
14
court is ill-equipped to take, except in a clear case’. The law does the way in which the interest of these stakeholders are effectively
not impose absolute duties on directors that cut across their general balanced and what that means for the corporate strategy, remains
duty to serve the company interest and their freedom to weigh the up to the board to decide. Like UK courts, Dutch courts will not
various competing considerations involved in promoting the success easily second guess board decisions if they are taken in good faith
15
of the company. The Court finds that it can place little weight on and are not unreasonable. Therefore, especially as long as there is
the opinions provided by ClientEarth as they provide no expert no uniform methodology on how to measure certain sustain-
evidence on which the Court can rely to ascertain that the decisions ability related aspects and achieve sustainability related goals,
taken by the Shell directors were outside the scope of reasonable- directors’ duties as they now stand may be difficult to use as an
ness. Moreover, the evidence does not, according to the Court, enforcement tool. As Justice Trower mentions in the Shell case,
support a prima facie case that there is a universally accepted courts are ill equipped to second guess board decisions in the
methodology as to the way in which Shell could achieve the desired absence of uniform expert evidence on which the Court can rely.
16
emission reduction. The risks for directors’ liability due to the increased attention for
Both the Sequana and the Shell case show that it is not easy for sustainability measures should therefore in my opinion not be
stakeholders (including shareholders) to use directors’ duties as a overestimated. This is at least the case for those decisions that
tool to steer sustainable decision-making in the UK. The Sequana concern strategic choices and situations in which the board has a
case emphasizes the enlightened shareholder model used in the considerable margin of appreciation. Having said that, this may
UK and once more reiterates that serving the interest of the be different in cases that concern compliance related decisions. In
company means primarily serving the interest of its members. light of the more stringent transparency requirements regarding
Even though the interest of other stakeholders, mentioned in sustainability issues at the EU level,18 more rules (rather than
section 172 of the UK Companies Act 2006 have to be taken into standards) may be introduced which leave less room for man-
account and even though there may be a duty to take into account agerial freedom and require more direct compliance compared to
the interest of creditors, enlarging the group of stakeholders for the generally stated directors’ duties which can in turn have an
the future will not be an easy journey under UK law. The case, influence on directors’ liability.
13 Shell case at [25] of the May decision and [30] of the Jul. decision referring to Howard Smith Ltd v. Ampol Ltd [1974] AC 821 at 823E/F.
14 Shell case at [28] of the Jul. decision.
15 Shell case at [37] of the Jul. decision.
16 Shell case at [47] of the May decision and [64] of the Jul. decision.
17 See about the use of directors liability as a mechanism in the sustainability debate from a Dutch perspective s. M. Bartman, Een concernrechtelijke beschouwing naar aanleiding
van het Shell-klimaatvonnis, Ondernemingsrecht 2022/73.
18 Think of the Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 Dec. 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC,
Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting.
OCTOBER 2023, VOLUME 20, ISSUE 5 96 EUROPEAN COMPANY LAW JOURNAL

ARTICLE
Corporate Sustainability Reporting

and Blockchain
ALEXANDROS SERETAKIS: ASSISTANT PROFESSOR, SCHOOL OF LAW, TRINITY COLLEGE AND FELLOW (ELECTED 2023) OF TRINITY COLLEGE DUBLIN.*
FÉLIX E. MEZZANOTTE: ASSISTANT PROFESSOR, SCHOOL OF LAW, TRINITY COLLEGE DUBLIN, AND DIRECTOR, MSC PROGRAMME IN LAW AND FINANCE, TRINITY BUSINESS
SCHOOL AND SCHOOL OF LAW, TRINITY COLLEGE DUBLIN. CLAIMS AND ERRORS ARE THE SOLE RESPONSIBILITY OF THE AUTHORS.**
The recently enacted Corporate Sustainability Reporting Directive is a cornerstone of the European Union’s policy to achieve a sustainable
economy, environment, and society. Under this Directive, companies are required to disclose a substantial amount of information on the
impact of climate change and global warming, including sustainability matters relating to the company’s activity and information on the
impact of the company activity on the environment and people. Nevertheless, the practical implementation of these sustainability-related
disclosure obligations will encounter significant obstacles, most notably the wide scope of reporting. In particular, the reporting company
bears the burden of disclosing material information on impacts, risks and opportunities connected to not only its own operations but also
the operations of its direct and indirect business relationships in the upstream and downstream value chain. Such disclosure is expected to
involve information produced by different, often distant sources, making information gathering efforts very difficult and endangering the
quality of the information disclosed. In this reporting process, the company is even expected to engage with its stakeholders across its
value chain. This article offers insights into these challenges and sheds light on the role that Blockchain technology may play in improving
data quality and management in businesses that operate global, multilayer supply chains.
Keywords: corporate sustainability reporting, materiality, information disclosure, supply chain management, Blockchain
1. INTRODUCTION The present article will seek to analyse European regulatory

Fostering sustainability in financial and economic activity has initiatives in the area of sustainability disclosure, most notably the
become one of the key priorities of policymakers and regulators Corporation Sustainability Reporting Directive (‘CSRD’) and discuss
around the world. The EU is a frontrunner in adopting regulations the promise of blockchain technology in helping firms and regula-
which force economic actors, including corporations, banks, and tors implement the disclosure requirements. Blockchain’s applica-
investment firms, to integrate sustainability risks, opportunities and tion to business supply chain management has the potential to
impacts in their operations. It has created the so-called EU taxon- significantly improve transparency and reduce waste and fraud. The
omy, which is a classification system seeking to determine if an article will proceed as follows: part B will offer an introduction to
economic activity is environmentally sustainable or not based on a the CSRD while part C will discuss the ‘double materiality’ principle
set of criteria.1 Moreover, it has promulgated regulations which as the basis for sustainability disclosure. Part D will scrutinize the
oblige companies to incorporate sustainability related information scope of reporting and discuss some of the concerns raised by value
in their corporate disclosures.2 Research has found that mandatory chain information reporting. Finally, part E will analyze the role of
disclosure of sustainability related information enhances transpar- blockchain technology in improving disclosure of sustainability
ency by increasing disclosure quality and quantity and that related information.
increased sustainability disclosures are associated with an increase
in corporate value.3 Nevertheless, the practical implementation of 2. THE STATUTORY OBLIGATION TO DISCLOSE SUSTAINABILITY-
these disclosure obligations encounters significant obstacles and in RELATED INFORMATION
particular the need to collect vast amounts of information from In force since 5 January 2023, the CSRD has introduced a new
different sources. regime for the disclosure of sustainability-related information by
* Email: alexandros.seretakis@tcd.ie.
** Email: felix.mezzanotte@tcd.ie.
1 See generally Alessio M. Pacces, Will the EU Taxonomy Regulation Foster a Sustainable Corporate Governance, ECGI Working Paper No. 2021–32, https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3940375.
2 DIRECTIVE (EU) 2022/2464 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 14 Dec. 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/
EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting, 16 Dec. 2022 O.J. L 322/15 (hereinafter CSRD). Members States will have 18
months to transpose the CSRD into their national legal regimes; Council of the EU, New Rules on Corporate Sustainability Reporting: Provisional Political Agreement Between
the Council and the European Parliament.
3 Ioannis Ioannou, & George Serafeim. The Consequences of Mandatory Corporate Sustainability Reporting. in The Oxford Handbook of Corporate Social Responsibility:
Psychological and Organizational Perspectives, 452–489 (Abagail McWilliams, Deborah E. Rupp, Donald S. Siegel, Günter K. Stahl & David A. Waldman eds., Oxford
University Press 2019). For a critique of the EU’s regulatory initiatives see Wolf-Georg Ringe & Alperen Gozlugol, A Critique of EU Policymaking on Sustainable Corporate
Governance and Finance, 4 Revue Europeenne du Droit 2022.
Seretakis, Alexandros & Mezzanotte, Félix E. ‘Corporate Sustainability Reporting and Blockchain’. European Company Law Journal 20, no. 5 (2023): 97–102.
companies.4 Replacing in full the Non-Financial Reporting Directive These auditors will provide an opinion, on a ‘limited assurance
(‘NFRD’),5 the CSRD has rewritten the text of Article 19(a)(1) of the engagement’ basis, as to the compliance of a company’s sustain-
Accounting Directive, which now states that companies ‘shall ability reporting with the CSRD rules and applicable reporting
include in the management report information necessary to under- standards (ESRS rules).12
stand the undertaking’s impacts on sustainability matters, and The CSRD relies on the term ‘sustainability matters’ to concep-
information necessary to understand how sustainability matters tualize the range of sustainability topics or factors capable of influ-
affect the undertaking’s development performance and position’.6 encing a company’s sustainability performance.13 Sustainability
This reporting obligation can also be met following a consolidated matters mean ‘environmental, social and human rights, and gov-
7
sustainability reporting basis. The new CSRD regime differs from ernance factors, including sustainability factors defined in point (24)
the previous NFRD rules in meaningful ways. of Article 2 of Regulation (EU) 2019/2088’.14 The last part of this
Relative to the NFRD, the CSRD has enlarged the universe of definition draws from the SFDR’s definition of sustainability factors,
companies obliged to report. The NFRD applied to large companies which includes the environment, society, employee matters, respect
whose securities are listed in an EU regulated market. In contrast, for human rights, anti-corruption and anti-bribery matters.15 Aside
the CSRD applies to all companies (except from micro undertak- from the explicit reference to governance factors in the definition of
ings) listed in an EU regulated market, to large private companies, sustainability matters, the approaches adopted by the CSRD and by
and to non-EU companies with a substantial EU turnover (operat- the NFRD are closely correlated.
8
ing through a subsidiary or branch in the EU). This wider scope of Sustainability matters have been identified more punctually, yet
application entails that the number of companies encompassed by non-exhaustively, in the ESRS rules.16 Topics include climate
the new reporting obligation has increased from about 11,600 change, pollution, water and marine resources, biodiversity and
companies to an estimated 49,000 companies.9 ecosystems, circular economy, a company’s own workforce, workers
Under the CSRD, disclosure will be guided by a set of European in the value chain, affected communities, consumers and end-users,
Sustainability Reporting Standards (‘ESRS rules’), which will apply and business conduct.17 In turn, each one of these topics is sub-
across the European Union. 10
This approach differs from the divided into subtopics. For example, the topic ‘own workforce’
NFRD’s approach. The NFRD did not prescribe the use of a single contains subtopics included ‘working conditions’, ‘equal treatment
regime of reporting standards. On the contrary, companies were and opportunities for all’ and ‘human rights, fundamental freedoms,
free to select the reporting standards that they considered most democratic principles’.18 In turn the subtopic ‘working conditions’
suitable for them, an approach that proved detrimental to unifor- is broken down in sub-sub-topics including secure employment,
11
mity and comparability in reporting. Unlike the NFRD, the CSRD working time, adequate wages, social dialogue, and freedom of
has also introduced a new requirement of external auditing of association, among other items in this sub-sub-category.19 EFRAG
sustainability reports. To support this effort, the CSRD contem- is expected to develop separate sets of ESRS rules for each one of the
plates the creation of independent assurance provider services. topics mentioned above (10 topical ESRS).20
4 CSRD, supra n. 2. For the sake of simplicity this article very often utilises the term ‘company’ instead of the term ‘undertakings’ used in the CSRD and other EU legislation. The
scope of the term ‘undertakings’ is however wider than the scope of the term ‘company’. Yet this distinction makes no difference to the analysis hereby presented.
5 Directive 2014/95/EU of the European Parliament and of the Council of 22 Oct. 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity
information by certain large undertakings and groups (OJ. L 330/1) (hereinafter ‘NFRD’).
6 CSRD, supra n. 2, Art. 1(4) (replacing Art. 19(a)(1) Accounting Directive).
7 Ibid., Art. 1(7) (replacing Art. 29(a) Accounting Directive).
8 Reporting obligations also apply to third-country undertakings with substantial turnover in the EU, CSRD, supra n. 2, Art. 1(14) (modifying Art. 40(a) Accounting Directive).
Ropes & Gray, EU Corporate Sustainability Reporting Directive Signed into Law – Implications and Near-term Compliance Steps for US-based Multinationals, 1–2 (20 Dec. 2022).
9 Ibid.
10 European Sustainability Reporting Standards [‘ESRS rules’] have been designed by the European Financial Reporting Advisory Group (‘EFRAG’). The most recent legal basis
setting out the ESRS rules is the Commission Delegated Regulation C(2023) 5303 final of 31 Jul. 2023, supplementing Directive 2013/34/EU of the European Parliament and of
the Council as regards sustainability reporting standards (‘ESRS DR’).
11 European Commission, Study on the Non-Financial Reporting Directive, Final Report, Nov. 2020 (‘While companies may appreciate the freedom to use alternative methods and
in practice combine several of them, such EUROPEAN COMMISSION 111 heterogeneity makes comparison between companies more difficult for investors. A common, single
reporting EU framework would help comparability, also of qualitative information’ s. 7.3, pp110-111), https://op.europa.eu/en/publication-detail/-/publication/1ef8fe0e-98e1-
11eb-b85c-01aa75ed71a1/language-en.
12 CSRD, supra n. 2, Art. 1 (12–13) (amending Art. 34 Accounting Directive), and CSRD, supra n. 2, Arts 2–4.
14 Ibid., Art. 2(2)(b) (adding arti 2(17) to the Accounting Directive).
15 Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 Nov. 2019 on sustainability related disclosures in the financial services sector (OJ L 317, 9 Dec.
2019) (hereinafter ‘SFDR’), Art. 2(24).
16 ESRS DR, supra n. 10, Annex I, Appendix A – Application Requirements (ARs), AR 16.
17 Ibid.
18 Ibid.
19 Ibid.
20 Ibid., Annex I, s. 1.1, paras 4–11.

Another important difference between the NFRD and the CSRD 48. The financial materiality assessment corresponds to the iden-
is the mandatory character of rules. The NFRD relied on a ‘comply tification of information that is considered material for primary
or explain’ basis, whereas the CSRD has imposed mandatory users of general-purpose financial reports in making decisions
reporting obligations subject to materiality assessment.21 Under the relating to providing resources to the entity. In particular, informa-
CSRD, companies are unlikely to report on all ESRS rules but tion is considered material for primary users of general-purpose
largely on those constituting material topics, disclosure require- financial reports if omitting, misstating or obscuring that informa-
22
ments and datapoints. If, following a materiality evaluation, tion could reasonably be expected to influence decisions that they
information is deemed to be non-material, this information can be make on the basis of the undertaking’s sustainability statement. 30
omitted.23 However, some reporting standards shall be reported in By reference to the concept of financial materiality, the company is
all cases irrespective of the outcome of the materiality assessment expected to identify information that is ‘necessary for understanding
such as, for example, the disclosure requirements stated in the ESRS how sustainability matters affect the company’s development, per-
2 General Disclosure.24 Since the materiality assessment is central to formance and position’.31 Here, sustainability matters (e.g., climate
corporate sustainability reporting under the CSRD, the next section change) represent a risk factor to which businesses are exposed and
of this article looks at this particular issue. are expected to manage and mitigate.32 This information is of
particular utility to the company’s investors and creditors, regarded
as primary users of general-purpose financial reporting.33 Financial
3. THE DOUBLE MATERIALITY PRINCIPLE
materiality is assessed ‘based on a combination of a likelihood of
Like the NFRD, the CSRD – and the ESRS rules – have adopted a
occurrence and potential size of financial effects’.34
‘double materiality’ approach as the basis for selecting information
The principle of impact materiality is a more recent formulation in
to disclose in sustainability reporting.25 According to the ESRS rules
mandatory reporting. By reference to this principle a company is
‘[t]he undertaking shall report sustainability matters based on the
expected to identify information necessary to understand the impact
double materiality principle as defined and explained in this
that corporate activity has on sustainability matters (inside-out effect).35
chapter’.26 Critically, double materiality has two dimensions, namely
This is information depicting the influence of corporate activity on
financial materiality and impact materiality.27 The concept of
society (e.g., respect for human rights), the environment (e.g., pollution
financial materiality has long been used to identify information to
matters) and corporate governance (e.g., corruption).36 The ESRS rules
be reported in financial statements, and the ESRS rules have
explain that the materiality analysis for actual negative impacts relies on
adjusted this concept to the setting of sustainability reporting.28 In
the severity (scale, scope and irremediable character) of the impact,
the context of conventional financial reporting, Article 2(16)
whereas materiality analysis for potential negative impacts is based on
Accounting Directive refers to financial materiality as ‘the status of
the severity and likelihood of the impact.37 The impact of a company’s
information where its omission or misstatement could reasonably
activity has been understood to be an effect of particular interest not
be expected to influence decisions that users make on the basis of
only to investors and creditors but also, and particularly, to other
the financial statements of the undertaking’.29 Borrowing from this
stakeholders including NGOs, consumer, government and civil society,
definition, the ESRS rules provide the following criteria for the
among other actors, monitoring the impact (positive or negative) of
determination of financial materiality:
corporate activity on the environment and society.38
21 Ibid., Annex I, objectives, para. 2 and s. 3, para. 21 (‘The undertaking shall report on sustainability matters based on the double materiality principle as defined and explained in
this chapter’).
22 Ibid.
23 Ibid.
24 Ibid., Annex I, s. 3.2, para. 29 (identifying mandatory information disclosures that must be complied with regardless of materiality evaluation).
25 Ibid., s. 3.
26 Ibid., s. 3, para. 21.
27 Ibid., ss 3.2–3.5.
28 Ibid., s. 3.5, para. 47.
29 See Accounting Directive 2013/34/EU, at Art. 2(16). See also Jose Baumüller & Michaela-Maria Schaffhauser-Linzatti, In Search of Materiality for Nonfinancial
Information – Reporting Requirements of the Directive 2014/95/EU, UWF 26:101–111 (2018), doi: 10.1007/s00550-018-0473-z.
30 ESRS DR, supra n. 10, Annex I, s. 3.5, para. 48.
32 CSRD, supra n. 2, recital 29.
33 ESRS DR, supra n. 10, Annex I, s. 3.1, 22(b) (‘users of sustainability statements: primary users of general-purpose financial reporting (existing and potential investors, lenders
and other creditors, including asset managers, credit institutions, insurance undertakings)’) and s. 3.5, para. 48. Also, EU Commission, Guidelines on Reporting Climate-Related
Information, Directorate-General for Financial Stability, Financial Services and Capital Markets Union, 6–7 (2019).
34 Ibid., ESRS DR, Annex I, s. 3.5, para. 51.
35 CSRD, supra n. 2, Art. 1(4) (replacing Art. 19(a)(1) Accounting Directive) and recital 29.
36 Ibid., recital 29; ESRS DR, supra n. 10, Annex I, s. 3.4, para. 44.
37 Ibid., ESRS DR, Annex I, s. 3.4, paras 45–46.
38 CSRD, supra n. 2, recital 9; Guidelines on Reporting Climate-Related Information, supra n. 33, at 6–7.

According to the Commission, although financial materiality reporting company’s value chain. One example of value chain infor-
and impact materiality operate independently, these two types of mation is the reporting of Scope 3 GHG emissions,45 which is a metric
materiality recognize inter-relations.39 The ESRS rules propose the involving the disclosure of emissions produced outside the company’s
assessment of impact materiality as the starting point of analysis,40 direct control insofar as these are emissions made by the suppliers and
and acknowledge that a company’s impact can also yield financial by the customers using the company’s product, among other actors in
effects on the company: ‘A sustainability impact may be financially the value chain.46 In this light, concerns on the high costs of reporting
material from inception or become financially material when it and on information overload have been raised.47
translates or is likely to translate into financial effects in the short-, The poor quality of available information may also lead to
medium-, or long-term. Irrespective of them being financially increased legal risk. It is worth noting that decisions involved in the
material, impacts are captured by the impact materiality materiality assessment include discretionary judgments by company
41
perspective’. This conceptualization envisions a boomerang-like officers, and that the exercise of such discretion has been estimated
trajectory of effects: the activity of the reporting company impacts to be more complex and uncertain in sustainability reporting than
on sustainability matters (e.g., workforce); in turn, the affected in financial reporting.48 Information should allow corporate officers
sustainability matter produces, among other effects, the effect of to make determinations of facts and of materiality of risks and
influencing (risk and opportunities) the financial position of the impacts, for which metrics of severity and likelihood are necessary,
very reporting company. yet how this process will be managed and performed is unclear.49
The fact that the definition of value chain has been given a nearly
4. SUSTAINABILITY REPORTING AND VALUE CHAIN boundless scope, including both direct and, especially, indirect
The sustainability statements ‘shall be extended to include infor- business relationships, will only exacerbate operational challenges in
mation on the material impacts, risks and opportunities connected terms of data collection, data comparability and reliability and
to the undertaking through its direct and indirect business rela- operational costs.50 More complex discretional judgments and dif-
tionships in the upstream and/or downstream value chain’ (‘value ficulties in collecting and evaluating information is likely to
chain information’)’. 42
The inclusion of value chain information exacerbate the risk of material misstatements or omissions in sus-
significantly widens the obligation to report. The value chain has tainability reporting.51
been defined broadly to include a company’s ‘direct and indirect Data gathering, processing and evaluation will thus be critical
business relationships in the upstream and/or downstream value components of corporate sustainability reporting. ESRS rules
chain’ 43
The ESRS rules do not require a company to provide require that companies put in place due diligence processes to
information on each and every entity in the value chain. Instead, the conduct materiality evaluations, manage risks and impacts, and
materiality analysis applies here as well, in the sense that under- manage the company’s crucial interactions with stakeholders.52
takings shall report only ‘material’ value chain information. This Another requirement emanating from the ESRS rules is that the
rationale applies to both financial and impact materiality. 44 reporting company engage with its stakeholders in order to identify
The double materiality principle requires that companies produce material impacts, risks, and opportunities. The engagement with the
substantial loads of corporate information containing financial effects affected shareholders appears to be the central strategy. The affected
on the company (material risks and opportunities) and impacts on stakeholders are ‘individuals or groups whose interests are affected
sustainability matters. This information load is greater when account- or could be affected – positively or negatively – by the undertaking’s
ing for risks, opportunities and impacts taking place at the level of the activities and its direct and indirect business relationships across its
39 ESRS DR, Annex I, s. 3.3, paras 37–38; CSRD, supra n. 2, recital 29.
40 Ibid., para. 38.
41 Ibid.
42 Ibid., s. 5.1, para. 63.
43 Ibid.
44 Ibid., s. 3.3, para. 39; s. 3.4, para. 43.
45 EFRAG, [Draft] ESRS Climate Change, Apr. 2022, para. 44.
46 Ibid., para. 46 (‘Scope 3 categories and presented as a breakdown by GHG emissions from: (i) upstream purchasing, (ii) downstream sold products, (iii) goods transportation,
(iv) travel and (v) financial investments’).
47 In the context of the United States, see WSJ, ‘Climate Rules Expose Surprising Splits Among Businesses’ (by Shane Shifflett and Jean Eaglesham) 17 Apr. 2023 (discussing
benefits and costs of corporate sustainability reporting as proposed by the Securities and Exchange Commission); Jose Baumüller & Karina Sopp Double Materiality and the
Shift from Non-financial to European Sustainability Reporting: Review, Outlook and Implications, 23(1) J. Applied Acct. Res., 8–28, 20–22 (2022), doi: 10.1108/JAAR-04-2021-
0114.
48 Baumüller & Schaffhauser-Linzatti, supra n. 29, at 103.
49 EOPIA, Opinion to the European Commission on EFRAG’s Technical Advice on European Sustainability Reporting Standards, EIOPA-BoS-23-016, 26 Jan. 2023, para. 3.9.2.
50 Ibid., para. 3.8.4.
51 Securities and Markets Stakeholder Group ‘Advice to ESMA: SMSG Advice to ESMA on the ESAs’ Call for Evidence on Greenwashing’ 18 Jan. 2023, ESMA22-106-4384, para.
28 (‘untrue, incomplete, or misleading statements in non-financial reports will in the future have the same consequences as if such statements were made in financial reports’).
52 ESRS DR, supra n. 10, Annex I, s. 4.
value chain’53 Material impacts, risks and opportunities will in turn reducing fraud. The technology offers a technical solution to the
serve to identify those material sustainability matters that will drive double spend problem. Furthermore, the technology has been
the disclosure of information. 54
It is in this context that blockchain described as ‘trustless’, since the blockchain operates without any
technology has been promoted as having the potential to improve a central validation authority.59 Prior to the invention of the block-
company’s reporting performance. chain ledgers depended upon a centralized authority with the
blockchain being the first decentralized solution. The ledger is
5. THE PROMISE OF BLOCKCHAIN TECHNOLOGY updated automatically and users are able to observe changes to the
The fintech revolution is already radically altering the financial services data recorded. As a result, tampering with the ledger is extremely
landscape with new technologies such as machine, artificial intelligence onerous. Moreover, blockchain technology makes retroactive edit-
and blockchain bringing significant benefits in terms of efficiency and ing of the ledger extremely difficult improving a transaction record’s
cost savings. Fintech has been defined by the Financial Stability Board permanence and immutability. Finally, the blockchain is resilient
(‘FSB’) as technologically enabled innovation in financial services that against cyberattacks or failures of nodes.
could result in new business models, applications, processes or pro- The technology has numerous applications and can revolutionize
ducts with an associated material effect on financial markets and different fields and actors, including finance, government and cor-
institutions and the provision of financial services.55 Blockchain tech- porations. The blockchain can be used for the transfer and storage
nology in particular is promising to revolutionize the financial services of a wide range of financial assets. The combination of blockchain
industry and the organization of companies. and smart contract has given rise to so-called Decentralized Finance,
Blockchain technology, also referred to as distributed ledger which refers to an ecosystem of financial applications built on top of
technology, refers to a database, which is shared across a network blockchain protocols.60 Moreover, blockchain technology can sig-
allowing users which do not necessarily trust each other to share the nificantly improve the functioning of the government and public
responsibility of database management without recourse to a central sector by enhancing transparency, streamlining processes and
validation authority.56 The technology uses peer-to-peer networking reducing fraud. For instance, countries such as Sweden, the
and distributed data storage allowing thus for the sharing of a single Netherlands and US states such as Georgia have already imple-
ledger across participants in the network with participants having a mented blockchain-based land registration systems.61 In a block-
shared history of transactions.57 Furthermore, extensive use of chain-based land registration system, once the buyer and seller have
cryptography guarantees the secure transmission and storing of agreed on a deal and made a contract, a real estate transaction is
assets and the valid initiation of a transaction. Moreover, consensus recorded on the blockchain allowing the parties who have access to
algorithms are utilized for the confirmation and addition of trans- the blockchain, including the government, the buyer and the seller,
actions to the ledger. The most famous variant of the technology is to track changes to the data recorded in real time.62 The tamper
the Bitcoin blockchain used for the transfer of the digital currency. proof nature of blockchain makes it impossible to delete or alter the
In the case of the Bitcoin blockchain transactions are recorded in a transaction.
sequential manner and stored in blocks attached to each other in While most legal and economic scholarship has focused on the
chronological sequence using hashing. 58
A long chain is created potential impact of blockchain in the area of finance, business
which forms a record of all transactions. supply chains are another area where the technology can play an
The blockchain offers numerous benefits compared to proprie- important role in reducing waste and fraud and promoting trans-
tary ledgers including enhancing trust and transparency and parency and efficiency.63 Blockchain can significantly improve data
53 Ibid., s. 3.1, para. 22(a).

54 Ibid., ss 3.2–3.3.
55 See FSB, Fintech, https://www.fsb.org/work-of-the-fsb/financial-innovation-and-structural-change/fintech/.
56 Andrea Pinna & Wiebe Ruttenberg, Distributed Ledger Technologies in Securities Post-Trading: Revolution or Evolution?, 6 (ECB, Occasional Paper No 172 Apr. 2016).
57 Lael Brainard, Speech at the Institute of International Finance Blockchain Roundtable, Washington, D.C., The Use of Distributed Ledger Technologies in Payment, Clearing and
Settlement (14 Apr. 2016).
58 David Yermack, Corporate Governance and Blockchains (Nat’l Bureau of Econ. Research, Working Paper No. 21802 2015).
59 See generally, Davidson et al., The Economics of Blockchain (Mar. 2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2744751.
60 See Avgouleas & Seretakis, Governing the Digital Finance Value Chain in the EU, MiFID II, the Digital Package and the Large Gaps Between!, Eur. Co. & Fin. L. Rev. (2022), doi:
10.1515/9783110749472-002. Pursuant to Cong et al., a smart contract is a set of codes based on decentralized consensus, which can be executed automatically on-chain. See
Cong et al., Inclusion and Democratization Through Web3 and DeFi: Initial Evidence from the Ethereum Blockchain, NBER Working Paper 30949, at 7 (2023).
61 See Vincent Ooi et al., Blockchain Land Transfers: Technology, Promises and Perlis, 45 Computer L. & Sec. Rev. (2022), doi: 10.1016/j.clsr.2022.105672.
62 Gertrude Chavez-Dreyfuss, Sweden Tests Blockchain Technology for Land Registry, Reuters (16 Jun. 2016), https://www.reuters.com/article/us-sweden-blockchain-
idUSKCN0Z22KV.
63 McKinsey, Blockchain Technology for Supply Chain: A must or a Maybe?, https://www.mckinsey.com/capabilities/operations/our-insights/blockchain-technology-for-supply-
chainsa-must-or-a-maybe. See also Arim Park & Huan Li, The Effect of Blockchain Technology on Supply Chain Sustainability Performances, 13(4) Sustainability (2021), doi: 10.
3390/su13041726.
reliability, record-keeping and quality-assurance in supply chains fraud and waste. The features of blockchain have the potential to
tackling thus sustainability concerns.64 Corporations, such as IBM revolutionize sustainability reporting. The technology allows for the
and Mastercard are experimenting with blockchain technology and creation of a distributed record, which is continually updated
the benefits that it can bring to supply chain management.65 making thus sustainability data automatically and widely available.
Blockchain applications in the field of business supply chain man- Moreover, the tamper-resistant nature of the database makes fraud
agement include the implementation of the technology to trace the and tampering with data extremely difficult. Indeed, Cao et al. show
geographical source of a product and certify good environmental that blockchain can contribute to the creation of sustainable supply
and labour practices.66 Blockchain has been successfully used to chains by verifying the sustainability attributes of food products.69
certify the ethical sourcing of diamonds and other precious minerals
providing thus a solution to the problem of conflict minerals.67 The
use of blockchain technology allows the tracking of the minerals 6. CONCLUSION
throughout the supply chain from the mines to the factories Sustainability reporting is seen as a cornerstone of the EU’s efforts to
recording thus all stages of production ensuring for instance that the tackle climate change and force corporations to incorporate sustain-
minerals have not been mined in an area where there is an armed ability concerns in their business decisions and operations.
conflict. For example, Rwanda is seeking to implement blockchain Nevertheless, there are significant obstacles to the practical imple-
technology in order to track tantalum sources in Rwanda through- mentation of sustainability related disclosures. Blockchain promises to
68 revolutionize business supply chains and lead to improvements in
out the supply chain.
Moreover, blockchain can significantly improve sustainability sustainability reporting. The present article has sought to analyse the
reporting helping thus firms implement the sustainability reporting current regulatory initiatives in the field of sustainability reporting and
requirements introduced by the CSRD. The systems currently used highlight the role that blockchain can play in improving sustainability
by corporations to track transactions and aggregate data are not reporting, especially around value chain information reporting. This
always able to grapple with global and multi-layered supply chains. article also recognizes the relevance of future research looking at the
Furthermore, the current verification and auditing systems rely on intersection of blockchain and data processes in corporate sustain-
human intervention and judgment, making them susceptible to ability reporting, realizing both potential and downsides.
64 See Adam Sulkowski, Sustainability Reporting: Recent Developments and the Potential for Better, More Proactive Management Enabled by Blockchain, https://papers.ssrn.com/
sol3/papers.cfm?abstract_id=3948654.
65 Vishal Gaur & Abhinav, Building a Transparent Supply Chain, Harvard Business Review May-Jun. 2020, https://hbr.org/2020/05/building-a-transparent-supply-chain.
66 See Adam Sulkowski, Blockchain, Business Supply Chains, Sustainability, and Law: The Future of Governance, Legal Frameworks and Lawyers, 43(2) Delaware J. Corp. L. (2019),
doi: 10.2139/ssrn.3262291, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3205452.
67 Ishaan Kapoor et al., The Problem of Conflict Minerals: A Review of Current Approaches and a Web 3.0 Inspired Road Ahead, 79 Resources Pol’y (2022), doi: 10.1016/j.resourpol.
2022.103064. Conflict minerals refers to minerals whose exploitation and trade is associated with human rights abuses and armed conflict. See Cynthia Urda Kassis et al., How
Blockchain Can Track Conflict Minerals, Shearman and Sterling (25 Sep. 2019), https://www.shearman.com/-/media/files/perspectives/2019/09/miningcom–how-blockchain-
can-track-conflict-minerals.pdf.
68 Yogita Kharti, Rwanda Starts Tracking Conflict Metal Tantalum With Blockchain, CoinDesk (17 Oct. 2018), https://www.coindesk.com/markets/2018/10/17/rwanda-starts-
tracking-conflict-metal-tantalum-with-blockchain/.
69 Shoufeng Cao et al., Exploring Blockchain-Based Traceability for Food Supply Chain Sustainability: Towards a Better Way of Sustainability Communication with Consumers, 217
Procedia Computer Sci. (2023), doi: 10.1016/j.procs.2022.12.342.
ARTICLE
The Development of the Board

Observer in Dutch Companies
WILBERT PETERS: (MR) A CANDIDATE CIVIL-LAW NOTARY AT DE BRAUW BLACKSTONE WESTBROEK IN AMSTERDAM. THIS ARTICLE IS BASED ON A PREVIOUS PUBLICATION IN
MAANDBLAD VOOR ONDERNEMINGSRECHT: W. PETERS, DE BOARD OBSERVER IN DE NEDERLANDSE VENNOOTSCHAP. EEN VERKENNING VAN EEN ANGELSAKSISCHE FIGUUR IN HET
NEDERLANDSE ONDERNEMINGSRECHT, MVO 10-11 (2022): 259-271*
In this article, the author addresses the development of the board observer in Dutch companies. The board observer is a relatively new
phenomenon in the Dutch context (unlike Anglo-Saxon jurisdictions). In recent years, an increase has been noted in the Netherlands in
the use of board observers. Basically, the board observer is a person who, as an agent and on behalf of an investor (most of the time),
attends and observes board meetings and therefore receives a significant amount of information that is useful for the investor to stay up
to date about the financial and operational health of the portfolio company. The author describes the motives to make use of an observer,
both from the perspective of the investor and the (board of the) company. Also, the position of a board observer within the corporate
governance of the company is discussed, as well as issues of confidentiality. Finally, the author addresses different authorities that can
be granted to the board observer. For lawyers and other legal practitioners, it might be useful to advocate for detailed, contractual
arrangements, since the board observer has no legal basis in Dutch law.
Keywords: Board observer, corporate governance, investors, information rights, confidentiality, authorities, contracts, private equity, venture capital, advisory rights
1. INTRODUCTION 2. THE BOARD OBSERVER IN THE NETHERLANDS

For several years, an increase has been noted in the Netherlands in the use The board observer as a phenomenon has remained virtually
of board observers. Although the board observer is relatively new in the undiscussed in Dutch literature up until this point.1 In Dutch
Dutch context, this phenomenon is more common in Anglo-Saxon jurisprudence, the board observer is referenced only once in a ruling
jurisdictions, such as the US and the UK. Basically, the board observer is a of the Amsterdam District Court in 2018. In that case, the board
person who, as an agent and on behalf of an investor, attends and observer was part of an arrangement included in a shareholder
observes board meetings and therefore receives a significant amount of agreement (SHA).2 In the SHA, the parties agreed – on this
information that is useful for the investor to stay up to date about the topic – that a dismissed director, under certain circumstances,
financial and operational health of the portfolio company. The board obtained the right to appoint a board observer (in its capacity of
observer is not a member of the statutory board and his authority shareholder). The Amsterdam District Court ruled – among other
depends entirely on the contractual arrangements between the company things – that the shareholders, under the given circumstances, were
and the investor, since its phenomenon is unregulated by Dutch law. entitled to appoint a board observer on the basis of the SHA, with
In this article, the board observer will be discussed. Where does the obvious restriction that the two directors could not designate
the observer come from and what are the motives to make use of an each other as board observers.3 However, the court did not make
observer? Why would the board of a company accept a ‘stranger’ any remarks or comments in its ruling on the phenomenon of the
during its board meetings? What is the position of the board board observer as such.
observer in the corporate governance of the portfolio company and The board observer is certainly not a Dutch phenomenon, while
what are the authorities that are usually granted to this observer? legal scholars and practitioners in the US and the UK are more
And what about confidentiality? familiar with the phenomenon of the board observer.4 A report by
* Email: wilbert.peters@debrauw.com.
1 See Amsterdam Court of Appeal 8 Feb. 2021, JOR 2021/293, with annotation T. Salemink. In this annotation Salemink proposes the board observer as an alternative to the
‘uitgeklede functionaris’ (in Dutch) appointed by the Court of Appeal. See also Gelderland District Court 14 Jul. 2021, RO 2021/74, with annotation Th. de Rave. In this annotation,
the board observer is mentioned as well. De Roo briefly mentions the board observer in his dissertation, see K.H.M. de Roo, Bestuur van rechtspersonen, 353–354 (diss. VU
University Amsterdam, Kluwer 2021). The board observer is also presented and discussed in a report issued by Loyens & Loeff, see Loyens & Loeff, Dutch Corporate Trends 2021: A
Look Back & Ahead (18 Feb. 2022), https://www.loyensloeff.com/insights/news–events/news/dutch-corporate-trends-2021-a-look-back–ahead2/. Finally, the board observer is
addressed by Burggraaf in his contribution. See C. M. J. Burggraaf, De overheidscommissaris van IHC versus de staatsagent van KLM, 7 Ondernemingsrecht, 273–285 (2022).
2 Amsterdam District Court 12 Sep. 2018, ECLI:NL:RBAMS:2018:6609
3 Ibid., in para. 2.4. relevant provisions of the shareholders’ agreement are mentioned. It is evident from these provisions that the director had to qualify as a so-called ‘bad leaver’
in order to have the right to appoint a board observer as a shareholder. If the director qualified as a ‘good leaver’, he would have the right to appoint two non-executive directors
to the one-tier board of C.D.C. Group BV, see also para. 4.25.
4 N. Amornsiripanitch, P. A. Gompers & Y. Xuan, More than Money: Venture Capitalists on Boards, 35 (3) J. L. Econ. & Org. 513–543 (2019), doi: 10.1093/jleo/ewz010; D. E.
Wolf, Rights and Obligations of Board Observers, Harvard Law School Forum on Corporate Governance (29 Aug. 2019), https://corpgov.law.harvard.edu/2019/08/29/rights-and-
obligations-of-boardobservers/; J. M. Zeberkiewicz, Considerations in Drafting Board Observer Arrangements, 4 Bus. L. Today: 1–3 (2014).
Peters, Wilbert . ‘The Development of the Board Observer in Dutch Companies’. European Company Law Journal 20, no. 5 (2023): 103–108.
the Dutch law firm Loyens & Loeff demonstrates that, to the regulatory legislation. From the perspective of the company, the
impression of the authors, Dutch practitioners mainly use the pre- presence of a board observer would offer greater insight into federal
cedents from those Anglo-Saxon countries as inspiration for the agencies’ regulatory expectations and provide greater
drafting of board observer arrangements.5 My expectation is there- transparency.10 Another possibility is a board observer who super-
fore that, in the Netherlands, the board observer will initially mainly vises on behalf of the State for national purposes, for example
occur as soon as foreign investors (especially US/UK investors) are because of granted financial support by the State. In all these
involved. These foreign investors, and their counsel, who are more modalities, the basis for the board observer (and its corresponding
used to this Anglo-Saxon phenomenon, might bring up the board rights and authorities) can be found in a contract.11
observer in the negotiations with the company.6 In the European During the COVID-19 pandemic, the aforementioned (last)
context, there is little research available on the board observer. modality was used in the Netherlands in the context of KLM,
where a state agent was appointed.12 The appointment of this
special kind of board observer took place in the context of
3. CONTRACTUAL BASIS BETWEEN COMPANY AND INVESTOR
support measures granted by the Dutch State to KLM during the
Dutch law prescribes that the board of directors is charged with the
pandemic. This financial support was, however, subject to a
governance and management of the company and that the super-
number of conditions, such as cost reduction and a restructuring
visory board is responsible for exercising supervision over the
plan. This state agent was appointed to oversee, on behalf of the
administration and policy of the board of directors and over the
State, the compliance with these conditions.13 For this purpose,
general course of events within the company and its affiliated
the state agent was granted with a variety of contractual rights,
enterprise.7 A board observer does not play any role within this
such as information rights, a right to attend the meetings of the
corporate legal order and has not (yet) been recognized by Dutch
Supervisory Board and the right to propose agenda items for
law.8 He does not play any formal role within the company and has
those meetings.14
no legal basis. This raises certain questions, including: what is an
The arrangements for a board observer do not, obviously, have
observer of the board? Does he, literally, only have an observing role
to be contained in a separate agreement. In the case of the ruling of
within the company? As will be seen hereafter, the de facto role of a
the Amsterdam District Court in 2018 (as mentioned before), the
board observer is not rarely broader than the term board observer
right to appoint a board observer was part of the SHA. In the case of
suggests. After all, this term might suggest a passive figurant instead
a strategic joint venture, a board observer arrangement is likely to be
of a person with an active, advisory role within the company (which
contained in a SHA.15
can be the case).
Because the board observer has no set legal basis in Dutch law,
his ‘existence’ and authorities will result solely from the contractual 4. MOTIVES FOR THE USE OF A BOARD OBSERVER
9
arrangements between the company and the investor. This article The question can arise what different motives there are to make use
primarily assumes the scenario where the board observer represents of a board observer, not only from the perspective of the investor,
shareholder. This is not necessarily the case, since other modalities but also from the perspective of the company. Why should an
are imaginable. For example, a board observer could also represent a investor negotiate for a board observer and why would a company
major supplier or a creditor instead of an investor. In the US, the (and the board of the company) accept that a person, representing
board observer has been suggested as a method for federal regula- an investor (or multiple investors), is allowed in their board
tory authorities to oversee and control corporate compliance with meetings?
5 Loyens & Loeff, supra n. 1, at 5.

6 Jennifer S. Fan, Catching Disruption: Regulating Corporate Venture Capital, Colum. Bus. L. Rev. 413, at 341–425 (2018). Although it seems to appear that the trend to designate
board observers in the US has slightly reversed to designating board members instead of observers more often.
7 Section 2:129/239 sub 1 and s. 2:140/240 sub 2 Dutch Civil Code.
8 In the Dutch Civil Code, it is acknowledged that there may be individuals, other than statutory directors, who have a role without associated legal or statutory powers. For
example, the special representative appointed by the general meeting in relation to the recovery of bonuses (s. 2:135(8) Dutch Civil Code). See Amsterdam Court of Appeal,
supra n. 1.
9 Burggraaf, supra n. 1, at 277; Loyens & Loeff, supra n. 1, at 5; Gelderland District Court, supra n. 1; Fan, supra n. 6, at 413; E. L. Kantz, Considerations in Drafting Board
Observer Arrangements, 4 Bus. L. Today at 2 (2014); Zeberkiewicz, supra n. 4.
10 K. N. Johnson, Governing Financial Markets: Regulating Conflicts, 88 Wash. L. Rev. 185, at 239–241 (2013).
11 Fan, supra n. 6, at 413.
12 Dutch Parliamentary Documents II 2020/21, 29232, nr. 42, at 1.
13 Ibid., nr. 9, at 3; Dutch Parliamentary Documents I 2019/20, 35505, B, at 6; See also Jeroen Kremers wordt staatsagent bij KLM (Financieel Dagblad) 23 Sep. 2020; For a more
comprehensive view on the state agent see Burggraaf, supra n. 1, at 273–285.
14 Dutch Parliamentary Documents I 2019/20, 35505, nr. 21 at 23; First periodic report by the state agent on the implementation and compliance with agreements and conditions
of the KLM support package, see Annex Dutch Parliamentary Documents I 2020/21, 35505, F, at 5.
15 Amsterdam District Court, supra n. 2, in para. 4.26: ‘Verder is volgens CDC de “bad leaver” regeling in de aandeelhoudersovereenkomst van toepassing. Artikel 3.10 van de
aandeelhoudersovereenkomst bepaalt dat Dral c.s. een recht hebben een board observer te benoemen’ (in Dutch).
4.1. Motives for the Investor 4.2. Motives for the Company
From the perspective of an investor, information about the From the perspective of the company, there might be different
company and the business of its affiliated enterprises is key. As motives for accepting a board observer in their corporate structure.
soon as an investor has multiple portfolio companies, the way Imagine a start-up (or scale-up) company that needs big invest-
of monitoring those companies can be rather difficult. A ments to secure ongoing growth for the coming years. For that
board observer, as an agent of the investor-principal, can be a purpose, the company wants to raise capital by means of venture
very useful tool to receive information about the company. After capital financing.19 The founders are often the directors of the start-
all, the board observer has access to board meetings, which is up (a typical founder-controlled board), with more knowledge
the place where important decisions on cooperations, acquisi- about the raison d’etre of the company (their product or their world
tions, restructuring etc. are being made. With a board observer, changing technology) than knowledge about the way how a com-
the investor receives a ‘front-row seat for the latest pany can secure sustainable growth and make a successful journey
developments’.16 This information can be valuable resources for from start-up to unicorn. Instead, the investor is an experienced
further investing decisions, for example when considering venture capital or private equity investor with many comparable
expanding investment in the same portfolio company or when start-up and scale-up companies in their portfolio. In this scenario,
considering an investment in a different company in the same a potential board observer (as an experienced agent of the investor)
branch. could be very beneficiary for an unexperienced board as a strategic
In general, an investor will, during the negotiations with the advisor, rather than a passive observer.20
company about his investment, be looking for any form of board In my opinion, a board observer can be of invaluable benefit for
representation to secure some form of control. In the Dutch context, start-up (venture capital backed) companies. After all, a start-up
a supervisory director (in a two-tier board) or a non-executive cannot become a mature (listed) company with just a great product
director (in a one-tier board), is the most common form of board or breaking technology. Inexperienced board members will be keen
17
representation by a shareholder, permitted by Dutch law. In the to bring corporate experience into the boardroom. This role can be
negotiations it might be not feasible for the investor to enforce duly fulfilled by an agent of an experienced investment company
board representation by means of a supervisory director or a non- with an extensive track-record of investing in and helping compa-
executive director. In that case, the board observer, as second-best nies with their next step. My expectation is that a board observer, in
option, might be the alternative to get indirect (or informal) board this ‘venture capital backed start-up scenario’, has an active role
representation. within the company. After all, the added value is the knowledge and
However, a board observer might actually be the first choice experience of the board observer. Therefore, an experienced board
for an investor as form of (indirect) board representation. After observer who joins the board meetings, on behalf of the venture
all, a statutory actor within the company (directors and super- capital investor, will have the right (from time to time) to advice the
visors) can be held liable on several grounds in Dutch corporate board of directors, whether this might be negotiated in the deal
law while a board observer can, in principle, not be held liable on terms (de iure) or whether this might be the factual course of events
those grounds. The liability issues will be further discussed in in the boardroom (de facto). Paragraph 7 discusses the authorities of
paragraph 5. Obviously, this is not only relevant in the Dutch a board observer in more detail.
context. American literature also links the lack of fiduciary duties Is it indeed true that board observers in venture capital backed
for board observer to the (increased) use of the phenomenon. companies are people with experience in and knowledge about
That board observers should not be bound by traditional fidu- venture capital and private equity, so that they can be of actual
ciary duties, is grounded on the fact the board observers have no added value for the board of the company? From a 2019 study it
control over the company’s assets and business (contrary to appears that the answer is yes.21 More than 66% of the surveyed
directors) and therefore do not owe (and should not owe) any board observers in US and European venture capital backed com-
fiduciary duties to the stockholders (as the beneficiaries of the panies have experience in venture capital and/or private equity and
18
company). 39% of the surveyed observers have experience in the financial
16 B. M. Bugl, F. P. Balz & D. K. Kanbach, Leveraging Smart Capital Through Corporate Venture Capital: A Typology of Value Creation for New Venture Firms, 17 J. Bus. Venturing
Insights 9 (2022), doi: 10.1016/j.jbvi.2021.e00292.
17 A. A. Bootsma et al., Bescherming bij Nederlandse beursvennootschappen, 20 (Rotterdam Erasmus School of Law 2015); G. Van Solinge, M. P. Nieuwe Weme, R. G. J. Nowak &
T. Salemink, Mr. C. Assers Handleiding tot de beoefening van het Nederlands burgerlijk recht. 2. Rechtspersonenrecht. Deel IIb. NV en BV. Corporate Governance (Kluwer,
Deventer 2019), para. 369.
18 Zeberkiewicz, supra n. 4, at 1–3; Fan, supra n. 6, at 413.
19 A. Grimme & M. R. J. I. T. Voortman-Van der Klei, Designing a Venture Capital Funding Round, 6 TOP 377 (2022).
20 Loyens & Loeff, supra n. 1, at 5–6; Kantz, supra n. 9, at 2; Zeberkiewicz, supra n. 4, at 1–2. This applies to the scenario that, due to the negotiation outcome, board
representation by means of a supervisory director or a non-executive is not feasible for the investor (or, due to other reasons, not wanted).
21 Amornsiripanitch, Gompers & Xuan, supra n. 4.
sector. This study describes the board observer as ‘an individual who held liable based on an alleged neglect of this responsibility. Other
attends board meetings (…) provides his or her expertise to the liability grounds, like the liability in case of bankruptcy (Article
company and has influence over the board’s decision via discussions, 2:138 and 2:249 DCC), will also not apply for the board observer,
but, ultimately, has no say in the board’s final decisions’. It seems since this liability also applies to statutory board members.27 At
that, within the context of venture capital backed companies, it is most, a board observer may be liable as a de facto managing director
market practice to attribute an advisory role to the board observer or a de facto supervisor. I have previously argued that the risks for a
22
(‘provides his or her expertise (…) and has influence’). In practice, board observer to be held liable as de facto director or supervisor are
a board observer might have as much influence as a board member quite limited to Dutch law, unless exceptional circumstances
due to the aforementioned dynamics. I agree with Fan, who states apply.28
that the amount of de facto influence of a board observer depends As already noted, the position of the board observer entails, by
23
on the philosophy of the investor and the size of the investment. definition, that he receives a significant amount of information.29
However, the motives that have been discussed above, do not The information obtained by the board observer can – naturally – be
play the same role in the case of a big company with a mature and of great strategic importance to the investor. The investor with a
extensive board (where the founders made room for experienced board observer has an obvious ‘lead in information’ in comparison
directors), where the board is advised intensively by its legal advi- with the shareholders who do not have any form of delegation in the
sors. In that case, the board observer might be a ‘necessary evil’ for board room. Notwithstanding the board’s obligation to provide the
the company to secure an important investment. In contrast to general meeting of shareholders with all the requested information
venture capital backed companies, the factual influence of board (Article 2:107/217 sub 2 DCC), and shareholders who regularly
observers will generally not be as far-reaching. stipulate specific, additional information rights in the SHA,30 the
investor with a board observer has a privileged position. After all,
the board observer (and so the investor) is better aware of the
5. POSITION WITHIN THE CORPORATE GOVERNANCE
rationale of board-decisions (which will regularly be discussed
The board observer is, by definition, not a member of the statutory
during the board meetings), whereas the board may not always tell
board of the company. This means that the board observer has no
the full story to the shareholders.
voting rights in the board meeting and, therefore, has no formal role
Depending on the contractual arrangements, the board observer
in the internal decision-making.24 Despite this, there are good
will be entitled to receive the agenda for board meetings. In addition
reasons – regarding the position of the observer within the corpo-
to the information that he will obtain during the meetings, arrange-
rate governance – to strive for a board observer as form of board
ments will likely be made on the sending of minutes, reports and
representation.
other documents which will also be provided to board members.31
Since the board observer is not a member of the statutory board
More practically, the e-mail address of the board observer might be
of directors, he is not subject to legal obligations (and obligations
included in internal e-mail correspondence. In short, the position of
arising from the articles of association) that apply to directors of the
the board observer within the corporate governance of the company,
company (as already mentioned in para. 4).25 By extension, the
entails that he receives a lot of information.32
board observer does not bear the same corporate responsibility that
a director carries with him. After all, Dutch law (Article 2:9 sub 2 of
the Dutch Civil Code (‘DCC’)) prescribes that each managing 6. CONFIDENTIALITY
26
director (and each supervisory director ) bears responsibility for the It is clear from the preview’s paragraphs, that the board observer will
general course of affairs. This means that, in principle, this obtain a significant amount of information. This information might
responsibility does not apply to the board observer, so he cannot be be of great (strategic) benefit for the investor. After all, one of the
22 Ibid., at 524–527.
23 Fan, supra n. 6, at 414.
24 Burggraaf, supra n. 1, at 277; Amornsiripanitch, Gompers & Xuan, supra n. 4, at 526; Fan, supra n. 6, at 413.
25 For example, the board is obliged to keep accounting records (s. 2:10 Dutch Civil Code), to draw and deposit annual accounts (s. 2:101/210 (1) Dutch Civil Code) and to act in
the interest of the legal entity (s. 2:129/239 (5) Dutch Civil Code).
26 Section 2:149/259 Dutch Civil Code.
27 See also Gelderland District Court, supra n. 1.
28 W. Peters, De board observer in de Nederlandse vennootschap. Een verkenning van een Angelsaksische figuur in het Nederlandse ondernemingsrecht, MvO 10–11, 265–270 (2022).
29 Burggraaf, supra n. 1; Zeberkiewicz, supra n. 4, at 1–2.
30 Section 2:107/217 (2) Dutch Civil Code. Frequently, shareholders do not (or not sufficiently) rely on their legal information rights or other rights stipulated in the shareholders’
agreement. With a board observer, the investor obviously has even closer scrutiny of the board.
31 Gelderland District Court, supra n. 1; Wolf, supra n. 4.; Fan, supra n. 6; Zeberkiewicz, supra n. 4.
32 See also Loyens & Loeff, supra n. 1. This may include correspondence between board members, as well as between specific internal committees or management/director levels
and the board. Communication between an Executive Committee and the board may also fall within this scope. All of this is subject to the negotiation outcome between the
company and the investor.
motives for a board observer (from the perspective of the investor) is The second limitation can be described as a duty of confiden-
to obtain a strong information position. However, confidentiality tiality of the board observer towards the investor. Based on this
might have a limiting effect on the ‘free passage’ of information. duty of confidentiality, the board observer will not be allowed to
Dutch law does not recognize a general rule or a general principle of share confidential information with the investor or other third
board confidentiality, which means that, in principle, the information parties.36 In this case, unlike the aforementioned first limitation,
that the board observer obtains, can freely be provided to the inves- the board observer will not be required to leave the room, but he
tor. However, there might be circumstances where board members or himself is bound by the duty of confidentiality to not share the
supervisory directors have a duty of confidentiality, also towards the relevant information. One reason for opting for such a duty of
board observer (e.g., based on their duty to direct their attention to confidentiality may be that the board, rather than sending him out
the interests of the company). of the boardroom, attaches greater value to high-quality advice
The board observer’s right to pass on information to the investor from the experienced board observer.37 After all, confidential
is not unlimited and subject to legal, as well as contractual restric- information is not rarely related to delicate matters, in which the
tions. Due to Dutch (and European) law, legal restrictions may opinion of the board observer might be useful for the board in its
include rules regarding market abuse, such as insider trading and decision making.
33
market manipulation (regarding listed entities). Contractual
restrictions can be distinguished into (a) information that is not
7. AUTHORITIES OF THE BOARD OBSERVER
shared with the board observer at all, and (b) information that is
The authorities of the board observer will differ from case to case,
shared with the board observer but cannot be ‘passed through’ to
since they depend on the negotiation between the investor and the
the investor.
company. Ideally, the authorities of the board observer are duly and
The first limitation includes the situation where it is agreed that
comprehensively laid down in the agreement. In this paragraph,
the board observer does not have access to the board meeting as
some typical (and less typical) authorities of board observers will be
soon as for example ‘confidential information’ is discussed (or that
discussed.
the board observer must at least leave the room during the time that
An essential, characteristic authority, that will be granted to
the agenda item in question is discussed). This might be applicable
each board observer, is the authority to observe (it’s in the name).
in the situation that, as discussed before, directors have a duty of
The ‘observing’ will usually take place at the level of the board (in
confidentiality. This right for the board of the company to exclude
case of a one-tier board), but can also take place at the level of
the board observer from meetings could also be invoked by the
the supervisory board (in case of a two-tier board).38 This
company for reasons of attorney-client privilege or conflict of
observatory authority assumes that a board observer, in principal,
interest.34 In my opinion, this might easily lead to conflicts between
must be given access to the board meetings.39 After all, to be able
the company and the board observer (and the investor). After all,
to observe, he must be able to be physically present at the
the board, solely, determines whether there is a matter of ‘confi-
meeting. This point requires contractual customization: which
dential information’, as a result of which the board observer must
meetings can the board observer attend and which not? And,
leave the boardroom. In other words, under the guise of confiden-
more important: does the board have the right to prohibit access
tiality, the board can deny access for the board observer, even if
for the board observer if it wishes to arrange a private meeting?
strictly speaking no confidential information is involved. In practice,
And: as soon as the formal directors come to the part of final
the parties could also agree that the board should seek the affirma-
deliberation and decision-making (Article 2:239 sub 6 DCC), does
tive opinion of an independent attorney/counsel before it could
the board observer have to leave the room? Because of all these
invoke any reasons of confidentiality to deny the board observer
questions, the scope of the board observer’s right to attend board
access to the board meeting.35
33 Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 Apr. 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of
the European Parliament and the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC. See Loyens & Loeff, supra n. 1; Fan, supra n. 6, at 413.
34 Fan, supra n. 6, at 413. In footnote 333 an example can be found of such a contractual limitation: ‘Such representative shall agree to hold in confidence and trust and to act in a
fiduciary manner with respect to all information so provided; and provided further, that the Company reserves the right to withhold any information and to exclude such
representative from any meeting or portion thereof if access to such information or attendance at such meeting could adversely affect the attorney-client privilege between the
Company and its counsel or result in disclosure of trade secrets or a conflict of interest, or if such Investor or its representative is a competitor of the Company.’ See also T.
Melnik, The Increasing Role of Strategic Investors in Nanotechnology: Opportunities, Risks, and Negotiation Points, 8 Nanotechnology L. & Bus. 102–103 (2011).
35 Zeberkiewicz, supra n. 4, at 2.
36 For example, Amsterdam District Court, supra n. 2, para. 3.10.3: ‘The board observer shall be bound to a duty of confidentiality substantially in the form of Clause 16’.
37 It becomes complicated when the board observer is an employee of the underlying investor (such as an investment manager in the case of venture capital). In such cases, the
board must ensure that the information remains confidential, despite the (potentially close) employee relationship between the investor and the board observer. The question is
whether this works de facto; the distinction between the role of the board observer on one hand and the investor on the other hand becomes significantly blurred in such
situations.
38 Burggraaf, supra n. 1, at 277. As described by Burggraaf, the state agent at KLM fulfilled his observing role at the level of the Supervisory Board (see para. 3).
39 Loyens & Loeff, supra n. 1; Amornsiripanitch, Gompers & Xuan, supra n. 4, at 526; Zeberkiewicz, supra n. 4, at 2.
meetings will not rarely be an important aspect in the and other higher layers of management. The parties can also agree
negotiations. to the right for a board observer to propose agenda items for the
As already mentioned, a board observer can also have the board meetings.42
authority to advise the board (in certain matters). In the afore- In practice, regarding these (and more) aspects, parties will want
mentioned scenario of a start-up company, a board observer (as to accurately define and delineate the authorities of the board
agent of a venture capital/private equity investor and with vast observer. Because the board observer is a market practice-based
expertise of the industry/sector) can be of great value to the (often phenomenon, parties will undoubtedly be guided by (Anglo-Saxon)
unexperienced) board of the company. precedents. Once the parties do not agree to clear written arrange-
In addition, certain contractual approval rights may be granted to ments on this matter, I expect that, in practice, this could regularly
the board observer. An approval right allows the board observer to lead to disagreements between the company and the board observer
give (or withhold) his approval for certain, contractually agreed, (or the investor) about the scope of authorities of the board
matters. In Dutch law, resolutions of the board can only be sub- observer.
jected by or pursuant to the articles of incorporation to the approval
of a body of the company (Article 2:129/239 sub 3 DCC). Since the
8. CONCLUSION
board observer will not qualify as a body of the company40 (and the
In this article, the development of the board observer in Dutch
approval right, usually, has no basis in the articles of association of
companies has been addressed, as well as the motives for investors
the company), the absence of the board observer’s approval does not
and companies to chose for a board observer. Besides, the autho-
lead to a null and void resolution (Article 2:14 DCC). Nevertheless,
rities of a board observer and its position within the corporate
the company and the investor can freely agree to a contractual
governance of a company is discussed, as well as confidentiality
approval right (with contractual sanctions). The various matters in
issues. Because of information rights, the board observer is a useful
which the approval right of the board observer apply, could be
tool for an investor to oversee and control its portfolio companies. It
framed by analogy to the well-known statutory approval rights in
is my expectation that, within the Dutch context (and broader:
Dutch law (Article 2:107a and 2:164/274 DCC).
European jurisdictions) the phenomenon of the board observer will
Finally, the authorities of the board observer can be further
lead to more attention amongst legal scholars and professionals.
shaped and expanded by contractual customization. For example, a
As soon as lawyers – and other legal practitioners – have to deal
board observer can be given the right to issue a written opinion on
with board observers in practice, it might be useful to advocate for
certain proposed board resolutions, possibly combined with the
detailed arrangements on this matter (since the observer has no
opportunity to explain this orally during the board meeting.
legal basis). Those arrangements should address at least the follow-
Furthermore, parties can agree on a consultation right, based on
ing subjects: the authorities that will be granted to the observer and
which the board observer must be consulted about certain (far-
the exact scope therefore, the meetings that are accessible for the
reaching) decisions.41 In addition, the board observer may be given
observer, the scenarios in which access to meetings can be (tem-
the right to be present at other meetings than board meetings, such
porarily) prohibited and agreements on confidentiality.
as the meetings of the supervisory board, the Executive Committee
40 In my estimation, even with a statutory basis and granted powers (such as approval rights), the board observer would not qualify as a corporate body for the purposes of s. 2:129
of the Dutch Civil Code, as the law explicitly restricts the possibilities in s. 2:78a of the Dutch Civil Code for certain sections, including s. 2:129 of the Dutch Civil Code. See J.M.
Blanco Fernández, Commentaar op Art. 2:78a BW (Sdu 2023).
41 For example, the contractual arrangements regarding the state agent at KLM. See Annex Dutch Parliamentary Documents I 2020/21, 35505, F, at 5: ‘Ook is vastgelegd dat de
staatsagent tijdig wordt geconsulteerd over mogelijke besluiten die zouden resulteren in significante verandering van de activiteiten van de KLM-groep, en over mogelijke
besluiten die zouden resulteren in beëindiging van de activiteiten van de KLM groep en haar dochtermaatschappijen of van een significant deel daarvan’ (in Dutch).
42 See Amsterdam District Court, supra n. 2, para. 2.4.
BOOK REVIEW
A. Seretakis: Regulating Hedge Funds

in the EU. Wolters Kluwer, 2022.
ISBN 978-94-035-3512-8.
Hedge funds, investment vehicles that promise to ‘beat the market’ industry research. Dr Seretakis classifies available definitions into
by overperforming benchmark index, always attracted curiosity and two groups: (1) contrasting the general features of a hedge fund with
attention. The term ‘hedge fund’ is not a legal category per se; it those of a mutual fund; (2) defining a hedge fund by focusing on
comes from a financial jargon. Hedge funds belong to the category what it is not rather than what it is, e.g., a fund that operates outside
of alternative investment funds (‘AIF’). Contrary to mutual funds, the regulatory perimeter for collective investment schemes.2 A lack
AIFs are destined primarily to professional investors. They engage of a clear definition that concentrates on the essence of a hedge
in sophisticated, high risk-high return investment strategies to fund, without primarily comparing it with other investment funds,
generate profits in any market conditions. adds to the difficulty to regulate the industry efficiently. The chapter
Before the financial crisis of 2007–2008, there was no single presents hedge fund investment strategies in a clear manner, making
regulatory regime that applied to their operation throughout the financial terminology understandable for both specialists and non-
EU. As such, each Member State had an almost full discretion to specialists. Dr Seretakis highlights the benefits of hedge funds, both
regulate the industry. For example, whilst the UK regulated only the to investors and financial markets, as follows: (1) generally superior
managers of the funds, France regulated both the managers and the returns vis-à-vis those of benchmark indices; (2) for inves-
funds. Currently, EU law harmonizes the obligations of the man- tors – diversification of the portfolio, for financial markets – diver-
agers of AIF,1 leaving the regulation of the funds to Member States. sification of risk; (3) promoting the market and funding liquidity;
The book Regulating Hedge funds in the EU demystifies the (4) strengthening the efficiency of the markets by bringing the
hedge funds and critically discusses their regulation from both EU market prices of financial securities closer to their fundamental
and US perspective. Dr Alexandros Seretakis, author of the book, is value; and (5) promoting good corporate governance in target
one of the leading European experts on the topic of AIF. In this companies. All these benefits explain the never-decreasing popu-
book, he undertakes extensive research on the rules applicable to the larity of hedge funds amongst institutional and other professional
hedge funds and their managers throughout the EU. The objective investors.
of the book is to set forth some proposals on how to amend the The chapter also provides an in-depth analysis of the role of hedge
current EU legal regime in order to tackle the problem of systemic funds in different financial meltdowns. On a general note, an economic
risk posed by hedge funds. downturn in financial markets occurs when its actors are not regulated
The book features a preface by two leading European professors adequately. This may lead to opportunistic conduct of financial mar-
(Steef M. Bartman and Blanaid Clarke) and is divided into four kets players, which in turn can undermine financial health of global
chapters. markets. As such, even though the activity of hedge funds did not
Chapter one presents the state of the art of the hedge fund directly lead to the financial crisis of 2007–2008, regulating activity of
industry: history of hedge funds, their characteristics, organizational all participants of financial markets, including hedge funds, will limit
structure and investment strategies. This chapter also discusses the the possibility of another crisis occurring in the future.3
benefits of hedge funds, as well as their role in different financial It should be noted that the financial crisis of 2007–2008 is
meltdowns. strongly linked with the concept of ‘systemic risk’. To illustrate,
Numerous references are made to existing literature discussing Wilson and Grant suggest that ‘the Global Financial crisis … popu-
the definition of hedge funds, ranging from academic sources to larized the phrase “systemic risk” to acknowledge the potential
1 Alternative Investment Fund Managers Directive 2011 (‘AIFMD’).

2 See e.g., Art. 4(1)(a) of the Alternative Investment Fund Managers Directive 2011.
3 G-20 meeting in 2008 highlighted the necessity to ‘ensure that all financial markets, products and participants are regulated or subject to oversight, as appropriate to their
circumstances’ (G20, Declaration of the Summit on Financial Markets and the World Economy, Washington DC (14–15 Nov. 2008), http://www.g20.utoronto.ca/2008/
2008declaration1115.html (accessed 2 Jun. 2023).
‘A. Seretakis: Regulating Hedge Funds in the EU. Wolters Kluwer, 2022. ISBN 978-94-035-3512-8.’. European Company Law Journal 20, no. 5 (2023): 109–111.
impact of the collapse of some firms on the entire economic regulating the hedge fund industry is a persistent fragmentation of
system’.4 Systemic risk can be defined as ‘a trigger event, such as an the supervision across Member States and non-inclusion of hedge
economic shock or institutional failure, [that] causes a chain of bad funds in the recovery and resolution regime for European banking
economic consequences’5 We can conclude then that the financial institutions.
crisis is synonymous with propagation of systemic risks across Chapter four concludes the book by presenting some proposals
financial markets; such risks cannot be managed efficiently. on how to improve the regulation and supervision of hedge funds in
Chapter two discusses the dangers of hedge funds, namely the the EU. These are structured as a three-pillar solution: (1) introdu-
risks posed to investors, market integrity, as well as systemic risk cing a ban on hedge fund sponsoring and ownership by European
and hedge fund activism. Based on extensive literature review, Dr banks and other financial institutions that are systemically impor-
Seretakis summarizes the main reasons for regulating hedge funds tant; (2) creating a EU systemic risk supervisor; and (3) creating a
and their managers in the following manner: (1) protecting inves- special resolution procedure for systemically important hedge funds.
tors from the misconduct, fraud and opportunism of hedge fund To support his proposal to amend the current regulation of
managers; (2) protecting financial markets from possible market hedge funds, Dr Seretakis uses a financial trilemma, developed by
manipulation and insider trading; (3) protecting global economy Dirk Schoenmaker.6 The trilemma is based on the premises that
from systemic risks that can be posed by systemically important financial stability, financial integration and national financial poli-
hedge funds. Throughout the book, Dr Seretakis focuses on ana- cies are irreconcilable; as such, financial stability can be achieved if
lysing the ‘systemic risk’ as a leitmotif for regulating hedge funds. national financial policies are replaced by supranational ones. Under
The EU regulation of hedge fund industry is based on balancing the actual system of hedge fund supervision established by the
the need to protect investors and markets as a whole, yet allowing AIFMD, the home authorities of the fund manager are responsible
hedge funds to pursue sophisticated investment strategies in order for the supervision of the activity of the manager in relation to the
to achieve superior returns as compared to those of mutual funds. If AIF. The primary objective of the national supervisor is to ensure
we constrain hedge funds by too much regulation, there would be a financial wellbeing of the domestic market. As such, the priority will
danger that their strategies will be as limited as those of mutual be to judge the impact of a hedge fund on national economy and
funds in terms of possible returns. As a result, making ‘hedge fund’ not on global financial markets. The danger here may be that a
a distinct category of investment funds, as contrasted with mutual national supervisory authority may take a ‘light’ approach to sys-
funds, will no longer make sense. Therefore, regulators face an issue temically important domestic hedge fund if it only poses systemic
of finding an optimal regulation for the industry. risks in other jurisdictions. The potential losses from the activity of
The chapter presents some critical analysis of possible regulation such fund will not impact (at least directly) the financial system of
(self-regulation, governmental regulation, direct and indirect regu- the home Member State, which may justify, at least from the
lation). As mentioned earlier, the author argues that it is the sys- perspective of a home supervisory authority, such lenient approach.
temic risk danger that justifies a regulation of hedge funds; the most Another potential danger is linked to regulatory arbitrage, whereby
appropriate regulation is direct governmental intervention. a Member State may set forth a lax supervisory framework for
Chapter three presents an overview of the US and the EU attracting the hedge fund business. This means that possibly sys-
approaches to the regulation of hedge funds in the post-crisis temically important hedge funds established in this country will not
period. In this context, it focuses on the Alternative Investment be supervised efficiently, i.e., there would be no efficient reduction
Fund Managers Directive 2011 (‘AIFMD’). The directive has been of their systemic risk impact on global economy.
adopted as a response to the 2007–2008 financial crisis. It imposes a Dr Seretakis suggests that the optimal solution to the trilemma
set of duties on the fund managers, such as authorization require- would be a creation of a supranational European supervisory
ments, operational requirements, organizational requirements, authority for hedge funds. Such supervision is justified by systemic
delegation and transparency obligations. The directive also regulates risk rationale. The Brexit makes a creation of such authority some-
the activity of the depositary of the fund. The approach taken by the what easier, since the exit of the UK from the EU allows for a
AIFMD is indirect regulation of hedge funds, i.e., the directive greater centralization. Indeed, the UK was always keen on preser-
regulates the managers of the funds (except several provisions that ving its liberal approach to regulating the hedge fund industry,
directly regulate the funds, e.g., liquidity requirements). Dr Seretakis which has led to a heavy debate on the extent to which the AIFMD
compares the above-mentioned directive with the US Dodd-Frank should regulate the industry. Now, the EU 27 can focus on a more
Act, by highlighting the benefits of the latter. According to the stringent approach. The author highlights several difficulties that
author, one of the main criticisms of the European approach to may be encountered when putting his proposal into practice, such
4 G. K Wilson & W. Grant Introduction, in The Consequences of the Global Financial Crisis: The Rhetoric of Reform and Regulation 1 (G. K. Wilson & W Grant eds, OUP 2012).
5 S. L. Schwarcz, Systemic Risk, 97 Geo. L.J. 193 and 198 (2008).
6 D. Schoenmaker, The Financial Trilemma, 111(1) Econ. Letters (2011), doi: 10.1016/j.econlet.2011.01.010.
as the transfer of powers to the existing EU agency (European despite the EU regime being focused on regulating the managers of
Securities and Markets Authority) contradicting the Meroni doc- hedge funds and not the funds themselves, the author not only
trine. He explains why the role of a pan-European supervisor for delimits the exact rules that apply to the hedge funds, but also puts
large systemically important hedge funds domiciled in the EU forward a proposal on how to improve their regulation. Indeed, one
should be allocated to the European Central Bank (‘ECB’) if the of the reasons why EU policymakers decided not to regulate the
European Systemic Risk Board (‘ESRB’) designates a particular funds directly was their structures vary significantly across Member
hedge fund as systemically important. States, as a result trying to classify and regulate them on a pan-
How can we define a systemically important hedge fund? First of European level would be a difficult task. Seretakis suggests classify-
all, the largest hedge funds are systemically important. The larger ing hedge funds between those that are systemically important and
the size of a fund, the greater risk its trading activity may pose to the those that are not. The criteria according to which a fund is sys-
financial system. The size is measured as a gross notional exposure, temically important is based on five elements, mentioned earlier. As
including the level of leverage employed by a fund. Secondly, addi- such, the same criteria will be used throughout the EU in order to
tional elements other than size should be taken into account, such as discern those funds that should be supervised on the EU level.
interconnectedness with counterparties, substitutability, complexity Perhaps the only weakness that I can find in the book relates
and cross-border activity. It is suggested that a certain threshold directly to its subject matter: a constantly evolving financial envir-
should be established; once the hedge fund goes beyond it, the onment to which hedge funds must adapt. The delicate thing about
hedge fund should be scrutinized by a supervisory authority in analysing financial regulation is the changing nature and mode of
order to determine whether it poses risks to financial stability. The operation of financial markets themselves. Artificial intelligence,
proposal of Dr Seretakis focuses on the funds and not their man- digitalization of financial services are just a few examples of very
agers. This is due to the separation of the assets held by the fund recent developments that should be accounted for. As such, almost
and the assets of its manager. The financial exposures that can pose every research work on the entities operating in financial markets
systemic threats appear on the level of the fund. This supplements should be reviewed in a few years’ time.
the approach of the AIFMD in the following way: we need to The book will be useful for the students, researchers, industry
regulate and supervise the activity of the persons managing the actors and practitioners working in the area of investment funds. It
fund, by imposing conduct of business rules; in addition, we need to will also be of a particular interest to the representatives of reg-
supervise the activity of the funds that can pose systemic risks to the ulatory agencies in financial services. Seretakis applies a metho-
financial system. dology of law and finance throughout the book by using a lot of
If the ESRB concludes that a particular large hedge fund poses economic and finance concepts to analyse hedge funds. As such,
systemic risks, the fund will be designated as systemically important Regulating Hedge Funds in the EU will be suitable not only for the
and will be within the scope of the Single Supervisory Mechanism. law schools, but also for business schools and departments of
Large systemically important hedge funds will be supervised by the finance.
ECB. Such supervision includes an imposition of specific limits on The overruling objective of EU law is to create a safe legal
the use leverage, liquidity ratios and other prudential measures. In environment within the Union, whereby the rights and interests of
addition, an effective resolution regime for large systemically all parties are protected as much as possible. It comes as no surprise
important hedge funds should be established, similar to that set then that EU law should provide for favourable economic condi-
forth by the Bank Recovery and Resolution Directive 2014. This tions within the Union, which allow for the development of the
resolution regime should operate on a pan-European level; leaving European economy and the personal prosperity of its citizens. Yet,
resolution to national authorities may undermine the interests of a at the same time, these economic conditions should foster financial
global financial stability since the focus will be purely on domestic stability and security. Therefore, the agenda of EU policymakers
interests. should be concerned with an (optimal) balance of promoting
The proposal will also add to the creation of a single rulebook for entrepreneurship and guaranteeing a safe legal environment. The
banking and financial services within the Union: similar supervision proposal put forward by Seretakis responds well to these objectives:
and resolution procedures that applies to all European-based entities the pan-European supervision of hedge funds applies only to large
dealing in financial markets. systemically important funds. This is a selective approach that
In conclusion, the book addresses relevant gaps in the existing allows preserving financial stability within the Union, without con-
literature on the subject. It provides an invaluable state-of-the-art straining too much investment strategies of hedge funds.
description of hedge funds and their regulation in comparative Dr Mariia Domina,
(EU-US) perspective. Seretakis undertakes a challenging task: Assistant Prof. in Business Law, University of Lorraine (IFG EA 7301).

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EDITORIAL

Sustainable Decision Making and

4 See the press summary of the case, https://www.supremecourt.uk/press-summary/uksc-2019-0046.html.

EUROPEAN COMPANY LAW JOURNAL 95 OCTOBER 2023, VOLUME 20, ISSUE 5

OCTOBER 2023, VOLUME 20, ISSUE 5 96 EUROPEAN COMPANY LAW JOURNAL

Corporate Sustainability Reporting

1. INTRODUCTION The present article will seek to analyse European regulatory

OCTOBER 2023, VOLUME 20, ISSUE 5 98 EUROPEAN COMPANY LAW JOURNAL

EUROPEAN COMPANY LAW JOURNAL 99 OCTOBER 2023, VOLUME 20, ISSUE 5

53 Ibid., s. 3.1, para. 22(a).

The Development of the Board

1. INTRODUCTION 2. THE BOARD OBSERVER IN THE NETHERLANDS

5 Loyens & Loeff, supra n. 1, at 5.

A. Seretakis: Regulating Hedge Funds

1 Alternative Investment Fund Managers Directive 2011 (‘AIFMD’).

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