Liability of the Board of Directors - Defense against claims

The members of the Board of Directors are responsible for damages they cause to the company through intentional or negligent breach of duty. If a lawsuit against the Board of Directors occurs, usually large sums are at stake and often the approval means personal bankruptcy for the affected individuals. However, there are also possibilities for Boards of Directors to defend against liability claims.

According to Art. 717 para. 1 OR, the Boards of Directors of a corporation are liable for damages they cause to it through intentional or negligent breach of duties. Because Boards of Directors, as well as other persons entrusted with management, must perform their tasks with all due diligence and safeguard the interests of the company in good faith. If a Board of Directors violates such duty, they are liable for the damage caused (Liability lawsuit: Art. 754 OR). The company itself is entitled to sue, and in the case of bankruptcy, also the shareholders and creditors if the liquidators do not assert the claim. However, there are also possibilities for Boards of Directors to defend against such liability claims.

Delegation

It is permitted for Boards of Directors to delegate management to third parties, as long as these are not non-transferable and irrevocable tasks (Art. 716a OR). In practice, such a transfer often occurs by appointing a management board. If the Board of Directors has lawfully delegated its tasks, it is only liable for careful selection, instruction, and supervision of the representatives (Art. 754 para. 2 OR). This means the Board of Directors can claim the defense of lawfully made delegation in case of damage. It is advisable to carry out a formal delegation and to enact an organizational regulation to prevent any defenses that it acted negligently.

Décharge

Granting Décharge at the General Assembly is tantamount to waiving the assertion of liability claims. According to the Federal Court, the exoneration resolution is an "declaration that no claims can be made against the exonerated bodies from their management during a specific business period." Bodies that have been granted Décharge can raise the exoneration defense in court. However, in fact, the Décharge resolution only provides limited protection, since it only takes effect against persons who have consented to the exoneration. Shareholders who have not approved the resolution can file a lawsuit within six months. Moreover, the defense of Décharge has no effect in bankruptcy.

Business Judgement Rule

The Business Judgment Rule is a legal concept from the Anglo-American sphere. Essentially, this rule states that Boards of Directors are not liable for damages arising from their business conduct if they have made a careful and informed decision. Specifically, there is no liability if a business decision is based on qualitatively and quantitatively sufficient information and is made independently of any personal interests, and if an appropriate cost-benefit analysis has been conducted. Also not even if the business ultimately fails and causes damage to the corporation. The Business Judgement Rule thus restricts courts in the retrospective substantive review of business decisions. This rule is intended to prevent Boards of Directors from fearing making a risky (but potentially rewarding) decision, because they face liability lawsuits if the business fails. As the financial crisis has shown, it is always easy to say in hindsight that a disaster was foreseeable.

Consent

Liability is also avoided if the Boards of Directors have committed a breach of duty with the consent of the injured parties. The Federal Court has decided that a breach of duty by Boards of Directors or managers is not punishable if it occurs with the explicit or tacit consent of the shareholders. Therefore, Boards of Directors can safeguard themselves by having the General Assembly vote on sensitive transactions in advance.

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