Internal Responsibility of Members of the Board of Directors and the Exercise of Corporate Governance

Legal Insight

November 2022

Areti Kolokotroni, LL.M

Summary: Article 102 of the newly enacted Law 4548/2018 on limited liability companies establishes the liability of the members of the company's board of directors for any act or omission in breach of their duties, either by malice or negligence, which causes damage to the company. In such cases, a claim for damages is brought against them by the company in what is known as a 'company action'. The conditions, consequences and procedure for bringing such an action will be dealt with in this article. 

1. DEFINITION

The term "Company action" means an action brought by a public limited liability company against the members of its management for compensation for damage caused by their acts or omissions in breach of their duties. The provisions of articles 102 to 108 of Law 4548/2018 concerning the liability of the members of the Board of Directors replaced articles 22a and 22b of the previous Law 2190/1920.

In public limited companies, all the powers of representation and management of the company are exercised by the board of directors of the company (articles 86§1, 96 and 97 of Law 4548/2018). In compensation for the powers of the members of the board of directors, the legislator, in article 102§1 of Law 4548/2018, stipulated that: "Each member of the board of directors shall be liable to the company for damage suffered by the company due to an act or omission constituting a breach of his duties". 

It follows from the above provision that the members of the Board of Directors of a public limited company are liable to the company for the damage suffered by the company due to their act or omission that constitutes a breach of their duties, as a result of their misconduct, whether fraudulent or negligent, in the management of the company's affairs, in breach of their obligations imposed by the contract between them and the company, the law and the company's articles of association, and the independent duty of loyalty which they owe, so that the company suffers significant losses by reducing the company's assets (see the judgment of the Court of First Instance of the European Communities in Case C-173/99, paragraph 1). Cf. 5626/2020). As a provision of mandatory law, it precludes the introduction of conditions in the articles of association or the contract of employment which reduce or completely exclude their liability.

This is, of course, in any case an internal liability, i.e. the liability of the Board member towards the company itself and not towards the shareholders or third parties. The individual shareholders of the public limited company, who may suffer an indirect loss, which may consist of a fall in the market value of the shares or a reduction in their intrinsic value or the distribution of a smaller dividend, do not also have a parallel claim for compensation for that loss, because they are not the persons directly affected by the tort/delict. Shareholders may have an independent claim for compensation only when the damaging act of the latter, considered in isolation, constitutes at the same time an unlawful interference with the status of the shareholder's right, i.e. it constitutes a tort as far as the shareholders are concerned, from which a direct and independent obligation to pay compensation arises (see Supreme Court 1214/2021, Athens Court of Appeal 2337/2018).

2. REQUIREMENTS

The conditions mentioned above must therefore be met cumulatively. Thus, the mere occurrence of the damage is not sufficient to give rise to liability but must be based on an act or omission committed in breach of the duties of the director. For this reason, according to the law, there is no liability for compensation even if damage occurs:

(a) if the person at fault proves that in the exercise of his duties he exercised the diligence of a prudent businessman operating in similar circumstances, taking into account the status of each member and the duties assigned to him by law, by the articles of association or by a decision of the competent corporate bodies (102§2); or

(b) where his acts or omissions are based on a lawful decision of the general meeting (102§4); or

(c) where they relate to a reasonable business decision taken in good faith, based on information sufficient for the specific circumstances and with the sole criterion of serving the interests of the company (102§4). The mere occurrence of a loss or the assumed business risk does not necessarily constitute a misperformance of the management duties of the Board of Directors which results in the creation of an obligation to pay compensation, since the nature of business decisions and plans always involves the risk of failure. Therefore, if the members of the board of directors took a reasonable business decision in good faith and solely in the interests of the company and, before acting, also obtained all the necessary information and prudently weighed up the risks assumed on the basis of the facts existing at the time of the decision, they are not liable,  even if the company suffered a loss, since the board of directors must have a wide scope of discretion as to its business choices, and taking a reasonable risk ("risk") is legitimate and imperative in a commercial enterprise (see Thessaloniki Court of Appeal 775/2016).

It is also a negative condition that the company's indemnity claims have not been waived by a decision of the Board of Directors to release the Board of Directors from liability, by negligence (not by fraud) or by compromise. Also, the court may consider that there is no liability in order for acts or omissions based on the recommendation or opinion of an independent body or committee operating in the company, in accordance with the law (102§4).

In any case, the liability of the person at fault is in any event wrongfully objective, as his fault is presumed in principle, and he bears the burden of proving that one of the circumstances precluding his liability exists. Moreover, as stated in the explanatory memorandum of Law 4548/2018, (p.19) "§2 refers to the allocation of the burden of proof in relation to the observance of the measure of diligence of §1. With this regulation, the burden of proof in relation to compliance with the subjective diligence measure is on the member of the Board of Directors. Given the dual function of the negligence criterion, the allocation of this burden of proof also facilitates the company in terms of proving the objective nature of the management fault".

Moreover, it should be mentioned that all persons to whom the powers of representation or management of the company have been legally granted in accordance with article 87 of Law 4548/2018 (102§5).

3. CORPORATE ACTION - PROCEDURE

If the above conditions are met, as explained above, the claim for damages that arises in the person of the company and against the liable person is brought by the so-called corporate action, which is brought by the company itself against the liable person and seeks the payment of compensation to remedy the damage caused. However, it is in principle possible for the joint stock company to bring such claims, in each case weighing the interests of the company, except in cases where a majority of the shareholders request that the action be brought by the joint stock company.

More specifically, the board of directors, according to article 103 of Law 4548/2018, which is the only competent body, has, in principle, the discretion, depending on the interest of the company at the given moment, to decide, on its own initiative, whether to bring the corporate action. Besides, as stated in the explanatory memorandum of the Law: "The exercise of the corporate action falls in principle within the management competence of the Board of Directors, which must exercise it in a manner consistent with the corporate interest. Therefore, any failure to pursue corporate claims must be justified by the corporate interest. The provision gives the Board of Directors the discretion to weigh the corporate interest in the light of the facts of the particular case and to decide, if necessary, either to delay the exercise of the corporate claims or not to exercise them, if this is in the corporate interest in the given case. Indeed, in the circumstances of a particular case, the corporate interest may be manifestly opposed to pursuing the claims if the balance of benefits and losses is negative (e.g. where there is a risk of strong negative publicity to the detriment of the company or of the company's efforts and resources being wasted in lengthy and doubtful litigation, in particular in view of the insolvency of the opposing party, etc.)".

However, the overly general and abstract concept of "corporate interest" and its often indistinct content, there is a serious possibility that in practice there is room for abusive practices on the part of the Board of Directors, which, citing an alleged corporate interest, avoids bringing a corporate action (see Piraeus Court of Appeal 132/2020). In any case, the Board of Directors decides what exactly it will do at its own risk, and should be able to explain why it has not proceeded with the claims (see Athens Court of Appeal 5626/2020).

However, if the Board of Directors does not proceed with the exercise of the claim, the exercise of the claim may be requested by 1/20 of the share capital of the company (a percentage which may be reduced by a provision in the articles of association) instead of 1/10 as provided for in Article 22b of Law 2190/1920 (Art. 104§1). The shareholders representing the aforementioned minority percentage are entitled in this case to submit a written request to the Board of Directors for the exercise of the company's claims, in which they will state the information they possess regarding the facts that, in their opinion, establish the liability of the members of the Board of Directors and the damage to the company, while setting a reasonable deadline (which may not be less than one month) within which the Board of Directors must decide on the request. 

However, even in this case, the Board of Directors is not obliged to proceed with this procedure if it considers that bringing the action would be contrary to the corporate interest. It may decide (under certain circumstances) either to delay or even to refrain from pursuing the corporate action, if this is in the best interests of the company in the given case and circumstances. The Board of Directors shall decide on the shareholders' request after taking into account the comments and explanations of those members of the Board of Directors named in the shareholders' request. This means that the minority's request must be communicated to the Board members to whom responsibility is attributed. However, the Board members named in the request do not have the right to vote at the Board meeting to decide on the shareholders' request. In any case, the decision must be communicated to the applicants.

On the contrary, of course, the Board of Directors has the obligation to exercise the claim if a written request for its exercise is submitted by the majority of the company's shareholders (i.e. half or more of the paid-up share capital), in which case the Board of Directors. is obliged to proceed with the action without delay, in accordance with Article 104 § 4, without being obliged to notify the members who are considered responsible of the application (see Cf. Cf. 5626/2020). In this case, the Board of Directors cannot refuse to exercise the corporate claims on the grounds of weighing the interests of the company.

4. APPOINTMENT OF A SPECIAL REPRESENTATIVE

If the Board of Directors rejects in whole or in part the request of the minority, or fails to act after the deadline has expired, or cannot take a decision on the request due to the lack of a quorum (e.g. due to the inability to vote of several members of the Board of Directors named in the minority's request), or does not pursue the action without delay despite the written request of the majority of shareholders, then in such cases (Art.  105§1), the majority of the shareholders who submitted the request for the activation of the corporate action (i.e. the majority of the minority that was activated in each case) may request the Single Judge Court of First Instance to appoint a special representative to bring the corporate action against the members of the Board of Directors and to conduct the relevant proceedings until their irrevocable conclusion.

The appointment of a special representative is therefore equivalent to the introduction, through a court decision, of a new body in the administrative organisation of the company.This is therefore undoubtedly an intervention of the court in the autonomy of the legal person, which remains constitutionally tolerable (Art.5(1) Co), to the extent that it is temporary and exceptional (see Athens Court of Appeal 5626/2020).

Furthermore, a provision is introduced to suspend the three-year limitation period in two cases: a. For as long as the person responsible is a member of the board of directors or a substitute (of the board of directors) of a management body. In either case, the limitation period comes into effect after ten years from the commission of the act or omission (102§6); and b. If a written request of the minority (1/20th of the share capital) has been submitted to the Board of Directors to bring the action. In the latter case, the limitation period continues to run after the decision of the Single Judge of the Court of First Instance on the shareholders' application for the appointment of a special representative to pursue the corporate action. However, if the special representative, before bringing the company action, concludes that for whatever reason there is no liability to pay compensation, the shareholders who have requested the action may return with a subsequent application, but the limitation period is not suspended in that case.

6. Instead of an epiloque

The provisions of articles 102 to 108 of Law 4548/2018, which provide for the liability of the members of the Board of Directors of a public limited company, are both restorative and preventive in nature, because their application does not only restore the damage caused, but also encourages the members to behave diligently in the exercise of their duties in order to avoid personal liability. The provisions in question are designed to exercise control over the board of directors and are intended to protect the good conduct of the company, to preserve the company's assets and to protect shareholders from indirect losses that they may suffer as a result of a fall in the value of their investment, on the one hand, and third parties dealing with the company, on the other.