In our previous article, we explored issues related to the conditions for valid decision-making by the Board of Directors. Possible violation of procedural conditions and/or substantive provisions leads to defective decisions. This article is about them.
Necessity of Special Provisions
Under the previous regime, the legislator did not provide for dealing with the relevant cases. However, with Law 4548/2018, firstly, a special legislative provision was established regarding defective decisions of the Board of Directors (no. 95).
The provisions for defective decisions of the Board of Directors are not the same as those for the General Assembly. This is clearly due to the different nature of the decisions of the two bodies and in particular (as also pointed out in the Memorandum of Law 4548/2018 on Article 95):
(a) The decisions of the Board of Directors mainly concern management issues. Therefore, it would be imprudent to subject administrative decisions to judicial review. Given the – mentioned below – rule of business judgment.
(b) The decisions of the Board of Directors are taken by a body that is liable towards the SA. On the contrary, shareholders are, in principle, under no liability. The relative liability of the Board, therefore, can be considered as a safety net, which will adequately deal (even ex post) with the issues arising from any illegal decisions of the Board.
(c) The decisions of the Board of Directors, once made, are executed. Therefore, it may be meaningless to consider whether or not decisions were valid. Still, even if they have been executed, the liability of the members of the Board of Directors is still in place.
Given the above and for reasons of legal certainty on the one hand and unsafe conclusions of jurisprudence on the other, special regulation was deemed necessary to deal with the defective decisions of the Board of Directors.
The law, in particular, distinguishes, with regard to defective decisions of the Board of Directors, between: (a) decisions with substantive defects (art. 95 §1), (b) decisions with procedural defects (art. 95 §2) and (c) decisions which resemble decisions of the General Assembly of Shareholders (art. 95 §4).
Decisions With Substantive Defects
Any decision of the Board of Directors, the content of which contradicts the law or the statutes of the SA, is invalid (art. 95 §1).
The concept of law includes the prohibitive provisions of compulsory law. Not provisions of injunctive law, from which deviation is allowed.
In this sense, any decision of the Board of Directors that contradicts prohibitory provisions of the Civil Code is invalid. E.g.: decisions that are contrary to accepted principles of morality (Civil Code 178, 179), decisions taken by abuse of right (:281Civil Code-subject to the consequence of the violation of 281Civil Code in the enumerated decisions of §4 of art. 95).
The same applies to any decision that violates the provisions on the exclusive competence of the General Assembly. As expressly provided, the General Assembly is the only one competent to decide – among other things – on amendments to the articles of association, the election of Board members and auditors, the approval of the overall management and the annual financial statements, the allocation of annual profits. Therefore, decisions of the Board of Directors on these issues or others listed in the law are null and void (117 §1).
Also invalid are the decisions of the Board of Directors, the content of which conflicts with (valid) statutory provisions or (legal) decision of the General Assembly.
However, a decision contrary to an extra-corporate (extra-statutory) agreement is not invalid. Even if all shareholders have agreed to its conclusion.
Decisions With Procedural Defects
The Rule
The legislator chose the rule of nullity whether it is decisions with defects in substance or defects in the process of making them. Similarly, therefore, decisions of the Board of Directors that were taken in a way that is not in accordance with the law or the statutes are invalid (art. 95 §2). Decisions, i.e., for which a procedural error occurred when they were taken.
Such defects refer to decisions taken in violation of the:
(a) legal composition of the Board of Directors: e.g., in violation of the provisions on quorum and majority (see Memorandum of law 4548/2018 on article 95). In this context, a decision taken with the presence of a smaller number of Board members than that provided for in the articles of association or in the decision of the General Assembly has been deemed invalid (8064/2017 Multimember Court of First Instance of Thessaloniki, NOMOS Legal Database, 2070/2011 Court of Appeal of Athens, “Dikaio Epixiriseon kai Etairion” 2011). Also, and only indicatively, a case of illegal composition of the Board of Directors is the non-representation or presence of more than half of the members of the Board of Directors. Also, the non-compliance with the minimum number of three (present or represented) members, provided for in the law (art. 92 §1).
(b) legal convening of the Board of Directors: Such a case occurs when, e.g., the invitation was not communicated to all members of the Board of Directors. Or this was not notified within the deadline provided by the law or the statute.
The Exemption of the Unanimous Decision of the Board of Directors
An exception is, however, introduced to the rule of invalidity in respect of procedural violations. In particular, when a decision was taken unanimously – by all the members of the Board of Directors (present or legally represented), any invalidity is not justified (see Memorandum of law 4548/2018 on article 95). On this specific regulation, serious reservations are expressed (and rightly so). And this is because from the letter of the law, it appears that this regulation covers all procedural errors. Whether they concern the legal convocation or the legal composition.
Such an admission, however, would constitute a deviation from more specific provisions for the Board of Directors. Those concerning the validity of off-site meetings (90 §3) or the non-listing (clearly) of the items on the agenda (91 §2 section b) – as long as all the members of the Board are present (or represented) and no one objects.
Also, this admission is inconsistent with the provisions on quorum and majority. The violation of these, in particular, excludes the achievement of unanimity.
Given the above, the interpretation (according to others, in particular and, according to us, more correctly: the teleological contraction) of the said provision on the exception is proposed.
First of all, it should be accepted that this exception excludes errors concerning the legal composition of the Board of Directors. Secondly, the justification of the non-nullity of the defective decision should not be sought in its unanimous adoption. On the contrary, in the presence (and/or representation) of all the members of the Board of Directors and in the non-formulation of objection to the taking of this decision.
Application by Analogy of the Relevant Provisions for the General Assembly
Specially Regulated Decisions of the Board of Directors
In addition to the above decisions of the Board of Directors, for certain others it is reserved (art. 95 §4), in case of their defect, application by analogy of corresponding regulations for the General Assembly (art. 137 and 138).
In particular, these regard the following decisions of the Board of Directors, limited to those mentioned in the law:
(a) The decision taken by a majority of 2/3 of the members of the Board of Directors, on the limitation of or deviation from the right of preference (art. 27 §4).
It must be accepted, reasonably (given also the subordination of the case of art. 117 §2 para. a’ to the mentioned decisions of the Board of Directors), that articles 137 and 138 are applied by analogy to the previous (main) decision of the Board of Directors for an extraordinary capital increase due to the principal-subsidiary relationship that connects them.
(b) The decision concerning the issuance of warrants (art. 56 §2).
(c) The decision regarding the issuance of a bond loan with convertible bonds (art. 71 §1 para. b΄).
(d) Decisions regarding capital increases or capital readjustment operations, the amendment or adjustment of provisions of the articles of association and the merger (art. 117 §2 par. a’, b’, e’).
By taking the above decisions, the Board of Directors functions, in essence, like the General Assembly. For this reason (and with the aim of uniform treatment of decisions with a similar subject matter, regardless of the body that issues them), the legislator opts for the solution of the proportional application of the provisions for defective decisions of the General Assembly.
Therefore, any defective relevant decisions become voidable, since procedural rules have been violated when they were taken by the Board. Otherwise they are invalid, as long as their content is contrary to the law or the statute (according to the provisions of articles 137, 138).
The Special Case of Abuse of the Power of the Majority
From the application by analogy to the defective decisions of the Board of Directors of the provisions for the corresponding (: defective decisions) of the General Assembly (art. 137 and 138) the case of annulment of a decision by the General Assembly which was taken by abuse of the power of the majority (art. 137 §) is expressly excluded 2, c. b’). The provision in question provides for annulment (281 Civil Code – even though it is a defect of substance).
The legal theory is devided regarding how these decisions will be dealt with. That is, whether they will become invalid or voidable and based on which provision. The answer to the relevant question is the subject of extensive legal debate and even the contra legem interpretation is proposed.
In any case, however, this exception would not justify any position regarding non-control of abuse of said decisions (this was also accepted under the previous law, 1408/2010 Supreme Court, NOMOS Legal Database, 8064/2017 Multimember Court of First Instance of Thess, NOMOS Legal Database). Otherwise, an impermissible gap would be created in the protection of any minority shareholders from abusive decisions of the Board of Directors.
Nonexistent Decision
Contrary to the legislative provisions for defective decisions of the Board of Directors, the law (no. 95) does not deal with the case of any non-existent decisions of the Board of Directors. The application of the appropriate provisions, as the case may be, is left to the court to decide.
These are, however, completely exceptional cases: Non-existent is (among others) the decision in which only non-members of the Board participated. Correspondingly, when a decision of the Board of Directors is taken by minutes with signatures only, and the signatures of all its members are absent (547/2019 Supreme Court, NOMOS Legal Database, also see Memorandum of law 4548/2018 on art. 95).
Particular Issues Regarding the Decisions of the Board of Directors
Mismanagement by the Board
It is accepted (and rightly so) that possible mismanagement on the part of the Board of Directors does not affect the validity of its decisions. Otherwise, the control of the decisions of the body in question would end up being a control of expediency and not only of legality. Such would be incompatible with the rule of board autonomy and business freedom (as it is founded on the basis of the rule of business judgment).
After all, issues related to management by the Board of Directors are dealt with by more specific provisions and, specifically, by the provisions on the liability of the members of the Board of Directors (art. 102 and 107).
Defects of Individual Votes
As explicitly stated in the Memorandum of Law 4548/2018 on Article 95: “it is understood that defects in individual votes cast by members of the Board of Directors (e.g. a consultant with a conflict of interest votes) will affect the validity of the decision only if without this vote a majority would not have been formed.”
This assumption stems from the theory of relevancy (found in German law). The content of this theory is explicitly reflected in the legislative regulation for the decisions of the General Assembly (art. 137 §5). However, its application is, reasonably, accepted -by analogy- also in the defective decisions of the Board of Directors.
Validation of Defective Decision
The application by analogy of §6 c’ of article 137 on the validation of a defective decision of the General Assembly to the decisions of the Board of Directors is also accepted.
According to the opinion held in theory and jurisprudence, the Board of Directors is required to take a “newer decision”, freed, this time, from any defect (876/2010 Supreme Court, 2182/2013 Supreme Court, NOMOS Legal Database). Reasonably, confirming the previous one, without the defect. Otherwise, it would be a new decision, which would render the possibility of validation irrelevant.
This validating decision – with regard to the invalid and voidable decisions that have been judicially annulled – does not have retroactive effect. As it is accepted that the private will cannot cure any invalidity (2182/2013 Supreme Court, NOMOS Legal Database). Whereas, in a different case, the purpose of the invalidity would be defeated (907/2000 Court of Appeal of Piraeus, 134/2014 Single Membered Court of Appeal of Thrace, NOMOS Legal Database).
The Board of Directors that made the defective decision becomes the competent body for issuing the validating decision.
The signatory has repeatedly expressed the opinion that the Board of Directors is, for many reasons, the most important (although not the hierarchically superior) body of the SA. Its decisions are therefore of particular importance and value both for the SA itself and for its members. Therefore, it became necessary to establish a special regulation to deal with its defective decisions. However, more important than the subsequent management of any related problems is their avoidance and prevention. Otherwise, we get involved in legal actions, but more on those, in our next article.-
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (February 19th, 2023).
Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.