In our previous article, we dealt with the powers of the Board of Directors. However, its members as well as the substitute bodies (art. 87-collectively: “the members of the Board of Directors”) cannot exercise them outside of specific limits. The relevant discussion seems completely technocratic, theoretical and, ultimately, boring; however, it has an absolutely tangible, as well as important result: potential liability of the members of the Board of Directors for exceeding the limits in question, will activate the relevant provisions and the possibility of attribution to the offenders. The present article regards the obligation on their part to observe legality.
Obligations of Board Members
The main obligations of the members of the Board of Directors are: (a) the duty of care (art. 96) and (b) the fiduciary duty (art. 97).
Under the previous regime, there was only one legislative basis for the first of them (duty of care). On the contrary, the fiduciary duty was recognized in theory and jurisprudence. The law on SAs provides a more complete regulation of the two, specific, pillars of responsibility.
Duty of Care
The members of the Board of Directors must, while performing their duties, comply with the law, the statutes and the legal decisions of the Board of Directors (art. 96§1). They must also manage corporate affairs in order to promote the corporate interests, supervise the execution of the decisions of the Board of Directors and the General Assembly and inform the other members of the Board of Directors about corporate affairs.
Such are reflected in the law as “the generally applicable provisions regarding the obligation to diligently perform the duties of the members of the Board of Directors” (see in this regard, Memorandum to the law 4548/2018 on art. 96). The members of the Board of Directors must, among other things, pay, during the exercise of their duties, the diligence of a prudent entrepreneur, who operates in similar circumstances (art. 102 §2). Otherwise, they are liable against the company (despite any exceptions – ind.: the rule of business judgment).
The content of the duty of care of the board members is broken down into three sub-categories:
(a) the obligation to comply with legality (art. 96 §1 sub. a)
(b) to the duty of due diligence in the narrow sense, which concerns their management duties in accordance with the due diligence set forth under the law (art. 96 §1 sub. b’ & 102§2) and
(c) in the obligation to supervise and control the organization and operation of the SA (art. 96 §1 para. b’).
In the present article we will look into, in particular, as mentioned in the introduction, the obligation to legality. Specifically:
Obligation to Legality
Concept – Content
The obligation of the Board Members to observe legality (in other words: the obligation to ensure the legal operation of the company), is established, as already pointed out, in the law on SAs (art. 96 §1, section a’ and, and regarding listed SAs, art. 4 §2, c. e’ of Law 4706/2020). This is a basic and completely self-explanatory obligation that binds the members of the Board of Directors (see related, Memorandum of law 4548/2018 on art. 96) to:
Comply with the law: The members of the Board of Directors are obliged, as a matter of course, to comply with the law. In this context, their compliance with the relevant provisions of the law on SAs (internal obligations) is mandatory. Among them and their obligation to refrain from taking decisions that fall within the responsibilities that (even by custom) belong to the authority of the company’s General Assembly. Any violation of this obligation gives rise to their liability towards the SA.
Obligations of the members of the Board of Directors are also found in other provisions, apart from the law on SAs. These are legislative obligations of the SA itself (incl.: obligations to comply with the rules of competition law, environmental law, capital market, personal data, civil, tax, bankruptcy law, labor and social security legislation, etc.). The necessity of aligning the members of the Board of Directors with the aforementioned obligations seems self-evident. Possible illegality on the part of the SA (violation, e.g. of its tax obligations, detection of the violation by the tax authority and imposition of fines) will, as a rule, be associated with a violation of the obligations of the members of the Board of Directors. It will possibly trigger their own (:internal) liability.
The prohibition of deviating from the principle of legality continues to exist even if the deviating results in a beneficial outcome for the SA (e.g. the conclusion of contracts following bribes).
Board members should observe (and comply with) business ethics. Any deviation may tarnish the image and prestige of the SA. A related obligation, by law, does not exist due to the non-existence of related-specific legislative regulations (apart from the general clauses: 178, 179 and 288 of the Civil Code).
(b) Comply with the statute: The members of the Board must, in addition, comply with its statute. They must, in this context, move within the logical limits set for the persuit of the corporate objectives (art. 86). They are obliged, therefore, to perform acts which are under it or promote its fulfillment. They are also obliged to comply with other requirements of the statute such as, for example, when the consent of the General Assembly is required for the conclusion of a contract by the Board.
(c) Compliance with decisions of the General Assembly: The members of the Board of Directors must, finally, comply with the (legal) decisions of the General Assembly of the shareholders of the SA. Regarding, in particular, the “…legality of the decisions of the General Assembly should either have been judged by the courts or not have been validly disputed” (: Memorandum of law 4548/2018 on article 96).
Coexisting with the general obligations of the members of the Board of Directors, other more specific ones are also found (no. 96 §2).
They are obliged to (legally) observe the -according to the law (law. 4308/2014 on Accounting Standards)- books, files and other data of the company (art. 96 §2 para. a’). They have the collective duty to comply with the formalities related to the drafting and publication (art. 96 §2 para. b) of the annual financial statements (art. 147) and the annual management report (art. 150), the corporate governance statement (the listed companies – art. 152), the consolidated (for a group of companies) financial statements, the management reports and corporate governance statement, the remuneration report (art. 112).
The members of the Board of Directors are charged with the specific (special) obligations collectively. Accordingly, their liability is collective and joint and several (in deviation from the apportionment rule – art. 102 §3).
Special Legality Obligation Issues
Situation of Legal Uncertainty/ Ambiguity
The path to aligning board members with legality (and fulfilling their related obligation) is not always clearly delineated. More alternatives are often presented, created due to legal gaps, different legal opinions, reversals of jurisprudence. In this case, it is the duty of the members of the Board of Directors to seek appropriate legal advice and the appropriate, given the circumstances, legal control. If doubts remain after such an audit, the Board should, at its discretion, carry out a risk-benefit assessment.
Such actions by the members of the Board of Directors seem necessary to defend the interests of the SA. The most important thing: for the removal (or mitigation, at least) of their personal responsibility towards the SA – in case of a negative outcome of their choices.
Compliance with Contractual Obligations
We should distinguish the observance of the SA’s contractual commitments vis-à-vis third parties from the obligation to observe legality. The SA is obliged to align with them, but this is not always possible (in cases, e.g., of financial hardship). Sometimes, possibly not even advisable. The responsibility of the members of the Board of Directors does not arise, in principle, towards the SA for the (non)fulfillment of the contractual obligations it has undertaken. Issues of liability of the members of the Board of Directors will arise, possibly, if any unnecessary violation of contractual obligations will result in increased financial loss of the SA.
“Profitable Violations of Legal Regulations”
The members of the Board of Directors are prohibited, as we found above, to take illegal actions in order to satisfy corporate interests. Any “beneficial violations of the rules of law” (as they are usually called) constitute unacceptable behavior. In addition, they represent an unfair way of exercising administration, and absolutely incompatible with the obligation to observe legality.
Adherence to the principle of legality obviously takes precedence over the corporate interest. Moreover, the purpose of the SA cannot be illegal; much more so, the way of pursuing it. Possible illegal behavior of members of the Board of Directors gives rise to their obligation to compensate the SA. However, any profit earned by the SA due to their illegal conduct should be taken into account.
The obligation to observe legality (obeying the law, the statute and the decisions of the Board of Directors) on the part of the members of the Board of Directors, is not a wish list or a statement without meaning. It constitutes the members’ clear obligation. A possible violation of this obligation damages the SA and activates the relevant provisions on the responsibilities of the violators. Invoking arguments of the kind “the end justifies the means” cannot, under any circumstances, be tolerated. However, the obligations of the members of the Board of Directors and its substitute bodies do not end here. About the other duties of care, see our next article.-
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (March 5th, 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.