The important role of the Board of Directors has already concerned us in our previous article. We referred there, among other things, to the management duty of the Board. Also, to the scope of its powers and responsibilities. We closely approached its responsibilities for management and representation of the SA (: internal relations and relations with third parties – respectively). Here, too, we will be looking into the specific powers in light of the rule of the unlimited and unrestricted power of representation.
The Responsibilities of the Board of Directors
While examining the responsibilities of the Board of Directors, we were already explored the relevant provisions of the law (art. 77 §1 Law 4548/2018). According to them, the SA is managed by the Board of Directors. The content of the administration is the management as well as its judicial and extrajudicial representation. Every management act belongs to the management of the SA. Also: every act of representation constitutes, at the same time, an act of management. Every act of management, however, does not constitute an act of representation.
However, the other provisions of the law also apply. Among them is the one (art. 86§1) which provides that the Board of Directors is competent to decide on every act concerning the management of the company, the management of its property and, in general, the pursuit of its objectives. As far as the fulfillment of the corporate purpose is concerned, the management of the SA is the function that tends, primarily, to its realization – in the narrow sense.
The Corporate Objectives
The term “corporate objective” has two meanings.
In its broadest sense, the corporate objective is what determines the general direction of the SA: it refers to the type of its activity. On the other hand, the exercise of administration and management are carried out with the aim and goal of realizing, as already noted, the corporate objectives – in the narrow sense of the term. The implementation and promotion, i.e., of the object of the corporate activity, as described in the company’s articles of association.
In this specific sense, it is accepted that the corporate objective is not limited only to acts that fall clearly within the exercise of the corporate activity. It includes, on the contrary, an expanded area of actions that serve the long-term goals of the business, based on the perception of transactions. According to the jurisprudence, such actions constitute, indicatively, the acceptance of bills of convenience or the provision of guarantees in favor of a third party (67/2019 Court of Appeal of Dodekanisa, QUALEX Legal Database).
Board Actions unrelated to the Corporate Objectives
The Rule of Unlimited Power of Representation
The rule of the unlimited representation power of the Board of Directors is based on the law (art. 86 §2). It aims, in fact, at the protection of third parties and transactions.
According to the specific regulation, acts of the Board of Directors, even if they do not serve the corporate objectives (either in its broad and/or narrow sense), bind the company vis-à-vis third parties. This rule is not, however, without any exceptions.
The national legislator made use of the exemption provided by the first corporate Directive (2009/101/EC). The Directive in question allows, in particular, an exemption from the commitment of the company from acts outside the corporate purpose in the event that the third parties were, in fact, aware of the relevant violation. And this knowledge can either be proven or indirectly inferred from the fact that the third party could not, given the circumstances, ignore it (see Explanatory Report law 4548/2018 on art. 86).
The national legislator, contrary to the previous law (2190/1920), did not provide for an exception in the case where the third party should have known of the excess exercise of power. That is, they deleted the phrase “or should have known”, which also included third parties who were not aware of the excess of the corporate objective because they did not exercise due diligence. And this is because the specific possibility did not seem to be in line with the aforementioned Directive (see Explanatory Report of law 4548/2018 on art. 86).
The non-commitment of the SA (according to the prevailing opinion in the legal theory), does not occur only in the cases of knowledge by the third party of exceeding the corporate purpose, but also in the cases of their gross negligence.
It is noted, further, that the SA itself bears the burden of proving the incidents that cancel its commitment. The specific, indeed, burden of proof is justified by the purpose of the rule of the unlimited power of representation: the protection, i.e., of third parties and transactions (art. 86 §2. ed. b). However, in cases where there is a clear excess of the corporate purpose, it is accepted that proof of knowledge on the part of the third party is not required. In the case, e.g., of the sale of all the company’s assets (4839/1979 Court of Appeal of Athens, “Epitheorisi Emporikou Dikaiou”, 1980, 249, which concerns the sale of raw materials and equipment of an LLC).
In fact, it is expressly provided that the mere observance of the publicity formalities regarding the company’s statute or its amendments does not constitute proof of the knowledge of the third party (art. 86 §2. ed. c).
It is argued, reasonably, however, that the protection of the third party (even a bona fide one) does not reach, in any case, to the point of binding the SA (also) for actions for which by law the board cannot bind the company. In the case, e.g., when actions are exclusively in the competence of the General Assembly.
Legal Consequences
If the Board of Directors acts in excess of the corporate purpose and the third party-dealer is in bad faith regarding the fact of the excess, concerns arise regarding the legal consequences.
From a point of view, the contract that the Board of Directors enters into with the bad-faith third party is of absolute nullity. The SA is not bound in this case. And in fact, anyone can invoke the invalidity.
From another point of view, the invalidity is relative in favor of the SA: only it is able to project and implement it.
According to a third point of view, however, the provisions of the law (229 et seq. CC) regarding the abuse of power of attorney should be applied, in this case-analogously. According to it, a contract of the Board of Directors, in excess of the corporate purpose with a bad-faith third party, is pending for as long as the Board of Directors does not decide for or against it. Specifically, in the event that the General Assembly, with an increased quorum and majority, approves the above contract, it becomes effective and binds the SA. However, if the SA expressly decides not to approve it, it is not bound.
It should be noted that the SA can take action against the members of the Board of Directors who act in excess of the corporate purpose – as long as the conditions of the law are met (art. 102).
Restrictions From the Articles of Association or the General Assembly
The Rule of Unrestricted Power of Representation
The law, in addition, is what establishes (article 86§3) the rule of non-limitation of the organic power of representation – aiming, likewise, at the protection of third parties and transactions. It provides, in particular, that limitations of the authority of the Board of Directors by the statute or by a decision of the General Assembly are not opposed by third parties. Even if they have been made public.
This provision takes into account the limitation of administrative authority that becomes permissible. In particular, the members of the Board of Directors are obliged to observe the limitations of their authority, whether they are set by the statute or by the General Assembly.
Legal consequences
However, in case of non-observance of these restrictions by members of the Board of Directors, they are not opposed to third parties – even if the latter were aware of them. These restrictions have – as a rule – effect only in the context of internal relations.
The specific regulation (no. 86§3) does not provide for an exception to the non-limitation rule. It is important, however, to note that its absolute and unexceptional wording creates risks for the SA: even in the case of collusion between the Board of Directors and a third party with the aim of not complying with any restrictions, the SA (should be) bound by the carried out transaction with the third party acting in bad faith. Such an approach would, obviously, be dangerous for the SA. The teleological contraction of the provision in question is argued, and rightly so: bad faith third parties should not be protected by the non-limitation of the power of representation.
The protection of those acting in bad faith vis-à-vis the SA should not prevail over the latter. And rightly so. Consequently, acts of the Board, even outside the corporate purpose, bind the company against those who either did not know or were unreasonably unaware of the relevant excess. At the same time, limitations of the power of representation of the Board of Directors set by the statute or the General Assembly will (and must) be opposed against those, only, who operate based on bad faith and with intent to harm the interests of the SA. But often the boundaries between good and bad faith are, unfortunately, indiscernible. Therefore, special attention is required in transactions of particular importance and/or value. The risks, otherwise, will not be negligible for the SA, the (bona fide) third parties and the transactions themselves. –
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (January 8th, 2022).
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.