The Liability of the Member of the Board of the Directors of a Societe Anonyme
Part 1: The Responsibilities arising from the new Law on Sociétés Anonymes
Power in Greece has always (with a special interest most people, if not everyone) attracted us. Whether to exercise it or to engage with those who have it. Hence, we seem to despise that power, at some point, is over. We also seem to forget (?) that its exercise poses risks. Sometimes serious ones.
When Henry Kissinger concluded that “power is the supreme aphrodisiac”, we can be sure that he knew something more than we know. For the consequences of exercising power? Homer had already spoken: “He who is in power cannot sleep for a whole night”. And then, later, Charles Caleb Colton followed to clarify: “The sufferings of power are real, its joys fantastic”.
The extent of the liability of the members of the Board of Directors
The management of legal entities is related to the exercise of power. It is true, however, that if one goes back to the domestic (and of course, to the international) literature, it is unfortunately not possible to identify a study, a workbook, which will record all the risks involved in its exercise. Many individual risks, yes. An overall no. What does this mean at a practical level: that the extent of the liability of those exercising power and the risks they face are neither fully documented nor identifiable.
In the operating environment of Sociétés Anonymes, as this is currently the case, the greatest concern of the directors is the extent of their liability: for acts or – more precisely – for their omissions.
In this context (on the occasion of not only the new law on Sociétés Anonymes, but also of the timeless questions and concerns of interested parties involved), it is attempted to approach some basic areas of the liability of the members of the Board of Directors.
Criminal liability – in general
Criminalization of individual actions of entrepreneurship, business choices and management decisions of a Société Anonyme is a (not theoretical) possibility. The admission of public prosecutors to the day-to-day management of the business, as well as the attempt of (some of them) to be transformed into “Antonio Di Pietro” of the country’s economic and business life by adopting “Clean Hands” actions, sometimes works steadily and some other deterrent for beneficial business decisions.
On the other hand, the involvement of the members of the Board of Directors (not necessarily the executive ones) in criminal (and not only) acts is quite common, due to omissions involving obligations towards the State (for example, non-payment of established debts, non-repayment of taxes levied-i.e. VAT, non-payment of insurance contributions). It is also not an uncommon thing, the involvement (not only criminal) of members of the Board of Directors in events related to (or attempted to relate to) entrepreneurship. We can also have in mind that a member of the Board of the Directors may be found “trapped”, whether responsible or not, for any matter.
In what areas does the liability of the members of the Board of Directors of modern SAs extend? An initial record of the responsibilities/liability (civil and criminal) arising from the new Law on Sociétés Anonymes is being dealt with here.
Intra-corporate liability under the new Law on Sociétés Anonymes
The members of the Board of Directors of a Société Anonyme are liable for the remedy of any damage caused by their actions and omissions. All members can be liable either individually or jointly (and severally). The competent Court may share responsibilities between members according to the data and the attributes of each, individual.
The limitation of the company’s claims against the members of the Board of Directors is three years, but it is suspended for as long as they have that status. For a maximum of ten years. What does this mean at a practical level? If, for example, the CEO of a Société Anonyme “misconducted” seven years ago – in the course of his duties and he transfers the company today (possibly under his capacity as a major shareholder and owner), the company (under its new ownership regime) is entitled to exercise its claims against him within ten years starting from the illegal act or omission.
The approval of the financial statements, the management of the members of the Board of Directors and their possible discharge from “any liability” by the ordinary General Assembly of the Shareholders is considered to as a waiver. This will be “taken into consideration”, among other things, by the competent Court.
The prerequisites for the exercise of the action as well as the exercise thereof are clearly and sufficiently documented and detailed in the new law. The exercise of the corporate action may be entrusted by the competent court (if it is not a choice of the Board of Directors) to a Special Representative.
The criminal liability of the members of the Board of Directors on the basis of the new Law on Sociétés Anonymes
The new law devotes (and logically) a separate section on the criminal liability/ responsibilities of the members of the Board of Directors. The threat of imprisonment for offenders is not the cause of concern as it is not expected that none of them will be taken to prison – for that reason alone. Interestingly, however, are the imminent financial penalties (from € 5.000 to € 100,000): We can be certain that no such sums are in sort for anyone. Exercising the duties of a member of the Board of Directors is not a story without (and) memorable criminal dangers. It would be extremely useful for those members who either have a “lose consciousness” or are being asked to make decisions and provide assurances on specific issues (in a false, e.g. certification of the payment of share capital or in the approval of financial statements that are not “absolutely accurate”) to think twice. It is also assumed that they should exercise the utmost care when performing their duties and faithfully adhere to (with the assistance of appropriate advisers) the law.
The acceptance of an “honorary” proposal for entering a Board of Directors of a Société Anonyme, the service of a good friend for the same reason (“to reach the minimum number of three members”), but also the participation in the corresponding body of a family business- is not a decision that has to be “lightly set” to take. Not that every member of the Board of Directors is assumed that “will not avoid interference”, but it is good to know that the (co) exercise of power is not a simple aphrodisiac.
Α. SPECIFICALLY (and in detail)
1. The intra-corporate liability of the members of the Board of Directors on the basis of the new law on SAs
The extent and the conditions of the liability of the members of the Board of Directors
The members of the Board of Directors of the Société Anonyme are responsible for the reparation of damages caused by their actions and omissions (Article 102 par. 1 of Law 4548/2018).
There is no responsibility when the members are able to prove that they have shown “the care and diligence of a prudent businessman” (Article 102 par.2 of Law 4548/2018).
Additionally, when we have to do with a joint act of the members of the Board of Directors (e.g. BoD decision), the joint and several liability of all its members applies. The competent court reserves the right to share the responsibility of each of the parties involved, but also to regulate the right of recourse (subrogation) between them (Article 102 par. 3 of Law 4548/2018).
It is assumed that there is no liability of the members of the Board of Directors when they basically manage to prove that their actions or omissions: (a) are based on a previous legitimate GA decision or (b) concern a reasonable business decision taken in good faith, based on sufficient information and solely on the basis of the corporate interest, as well as (c) are based on a suggestion by an independent body or committee (Article 102 par.4 of Law 4548/2018).
The limitation of the SA’s claims and its resignation from them
The limitation of the claims of the Société Anonyme against the members of the Board of Directors is three years and is suspended for as long as the capacity of a member remains. In any case it occurs after a decade (article 102 par. 6 of Law 4548/2018)
It is possible for a Société Anonyme to resign from its claims against the members of its Board of Directors after two years and with the mandatory consent of the General Assembly, provided that there is no opposition of the 10% of the share capital (article 102 par. 7 of Law 4548/2018)
The conditions and the procedure for the exercise of the Company’s claims against the members of its Board of Directors. The involvement of the shareholders
The Board of Directors is obliged to exercise the company’s claims at the expense of the members liable for compensation, “balancing the corporate interest”. In any case, the members of the Board of Directors are obliged to provide sufficient explanations to the shareholders when they fail to fulfill their specific obligation (Article 103 of Law 4548/2018).
The shareholders of the company who have acquired more than 5% of the share capital during a six-month period are entitled to submit a request to the Board of Directors for the exercise of claims against its members (article 104 par. 1 of Law 4548/2018). They shall provide the necessary information and data to substantiate the damage and provide one month, at a minimum, for evaluation and for reaching the respective decision (Article 104 par.2 of Law 4548/2018).
The Board of Directors shall take such a decision after a hearing of nominated members, but without the voting rights of the parties concerned. If the other members do not form a quorum, it is considered that no decision is taken (Article 104 par.3 of Law 4548/2018).
When the request for the exercise of the corporate action is submitted by the majority of the shareholders, the exercise of same is obligatory for the Board of Directors (article 104 par. 4 of Law 4548/2018).
The majority of the shareholders who have submitted a request to the Board of the Directors for a corporate action are entitled to appeal to the competent court when: (a) their request is rejected; (b) the period prescribed for assessment expires; (c) a period of four months following the decision for the corporate action expires; (d) the Board of Directors has not been able to reach a decision, or (e) a period of two months without bringing any action if the request is made by a majority of the shareholders has expired (Article 105 par.1 of Law 4548/2018).
The competent court accepts the shareholder’s request when there is no overriding interest in not exercising the claim. In this case, it appoints a Special (and possibly also a Deputy) Representative for the exercise of corporate action (Article 105 par.2 of Law 4548/2018).
The Special Representative for raising the corporate claim
The Special Representative: (a) has the special and sole power to bring the action, but also to carry out the proceedings promptly and diligently, (b) has access to evidence, documents and information, (c) is bound by the historical the legal basis of the judgment. The Court may award him reasonable remuneration (Article 105 par.4 and 5 of Law 4548/2018).
The Special Representative, after his appointment, may reach a negative decision with regard to the liability of the designated members of the Board of Directors. In this case, he informs the Board of Directors and the shareholders who have requested the relevant action. These shareholders may, however, be reinstated with a new application (Article 105 par.6 of Law 4548/2018).
In the event that the application is dismissed at first instance, the Board of Directors may, on the recommendation of the Special Representative, waive the right of appeal (Article 105 par.7 of Law 4548/2018).
The suspension of the limitations and the costs related to the respective trials
The submission of a request by the shareholders to the Board of Directors for the enforcement of corporate claims suspends, in general, the limitations (article 106 par. 1 of Law 4548/2018).
The costs of the trial for the appointment of the Special Representative, the trial against the members of the Board of Directors, as well as any remuneration are borne by the company (article 106 par. 3 Law 4548/2018).
Direct damage of third parties from actions or omissions by members of the Board of Directors
The provisions of Law 4548/2018 on the liability of the members of the Board of Directors do not affect or limit their liability in respect of claims arising out of direct damage to shareholders or third parties suffered as a result of their (of the members of the Board) actions or omissions. They also do not affect the liability of the members of the Board of Directors vis-à-vis corporate creditors under the provision of Article 98 of the Bankruptcy Code (: failure to file an application for bankruptcy of the société anonyme, as well as causing the suspension of payments by willfulness or gross negligence of the members of the Board of Directors) – (article 107 par. 3 of Law 4548/2018).
The discharge of the members of the Board of Directors from the ordinary General Meeting
It is possible for the General Assembly to approve the overall management by the members of the Board of Directors when approving its annual financial statements and exempting them from “any liability”. However, this approval – when and if provided – is NOT considered to as a waiver of claims by the company (for the proper waiver, Article 102 par.7 applies). Such an approval is estimated “accordingly” (whatever that means) by the Court that may be seised in the future against the members of the Board of Directors (article 108 par.1 of Law 4548/2018).
The members of the Board of Directors take part in the vote for the approval of the overall management as well as employees of the Société Anonyme with their own shares, and with the shares they represent, provided that they have been given express and specific voting instructions (article 108 par. 2 of Law 4548/2018).
2. The criminal liability of the members of the Board of Directors under the Law on Sociétés Anonymes
False or misleading statements to the public (Article 176 of Law 4548/2018)
There is a threat of imprisonment and a fine of € 10.000 to € 100.000 when a knowingly false or misleading statement is made to the joint founder, by a member of the Board of Directors or by the director of the company regarding (a) the cover or payment of the capital; (b) data of the company with substantial influence over corporate affairs – for the purpose of subscribing to securities issued by the company.
Infringements made by the members of the Board of Directors (Article 177 of Law 4548/2018)
There is a threat of imprisonment and a fine of € 10.000 to € 100.000 for a member of the Board of the Directors who:
(a) Drafts or approves (knowingly) inaccurate or misleading financial statements or draws them up in violation of the law as to their content.
(b) Distributes profits or other benefits to shareholders or third parties that do not arise from the Company’s financial statements or without the preparation of financial statements or based on (knowingly) inaccurate, misleading or financial statements drafted in breach of the law.
(c) Acquires redemptive shares in breach of the relevant provision (Article 39).
(d) Causes the acquisition by the company of its own shares (or its parent’s shares) or warrants (of its own or its parent’s company) in violation of the relevant provisions (Article 48, 49, 52 or 57).
(e) Provides an advance, loan or guarantee (in violation of Article 51) either by charging the company with a view to a third party to acquire shares of the company or by charging its subsidiary with the purpose for a third party to acquire shares of its parent company.
(f) Drafts (knowingly) an inaccurate or incomplete management report or other statutory annual reports.
Infringements relating to the orderly operation of the company (Article 179 of Law 4548/2018)
Threatened imprisonment of up to three years or a fine of 5.000 € to 50.000 €:
(a) To whoever concludes a contract on behalf of the company without the prior authorization required under Article 100. (The offense shall be terminated if the necessary authorization is subsequently granted)
(b) To the member of the Board of Directors who violates the obligation to certify the payment of capital within the time limit provided for in Article 20 or makes a false certification.
(c) To the member of the Board of Directors who fails to draft or drafts after the expiry of the time limit: the company’s annual financial statements, the consolidated financial statements, the annual management report, the consolidated annual management report or the remuneration policy, the salary report or other annual report provided by law.
(d) To the member of the Board of Directors who violates the obligation to re-adjust the share capital
(e) To whoever hinders the auditing of the company by the statutory auditors or auditors designated to perform an extraordinary audit or does not provide the auditors with the information, he is required to provide.
Infringements concerning the General Meeting of shareholders and bondholders (Article 180 of Law 4548/2018)
A fine of 5.000 € to 15.000 € is threatened:
(a) For any person who fails to convene the General Meeting of Shareholders or Bondholders or to include a specific item on the Agenda in contravention of the law or bond issuance program.
(b) For any person knowingly taking part in or voting, without right, at a General Meeting of Shareholders or bondholders.
(c) For the member of the Board of Directors who violates the obligation to provide information to shareholders.
Penal and administrative penalties (Article 181 of Law 4548/2018)
The imposition of penal penalties does NOT preclude, under this provision, the imposition of administrative sanctions. This simply means that, in the course of some criminal proceedings, it is possible to impose penalties on a member of the Board of Directors, but any administrative sanctions may follow …
The extent of the liability of the members of the Board of Directors is unfortunately not exhausted in the above sections and provisions (much more so in their “business view”). However, in subsequent articles, it will be sought to record the other sections of their liability and, of course, how to mitigate it. Above all, however, the way to remove the (potentially) adverse consequences and the relative risks that these members face.
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (March 3rd, 2019).