Tag: διοικητικό συμβούλιο ανωνύμων εταιρειών

Societe Anonyme: Contracts with Members of the Board for the Provision of (Additional) Services

The Board of Directors of the Société Anonyme is its body, which is responsible for its management and representation. Its existence is provided and its operation is governed by law (basically: articles 77-115 law 4548/18). It acts, in principle, collectively. The principle of collective action, however, is not without its exceptions; it is therefore subject to divergence. The Board of Directors is, by its nature – as already mentioned, an instrument of the SA. Its members, as members of a collective body, are considered to be linked, respectively, with an organic relationship with the SA. The relationship of the Board member with the SA is twofold. It is distinguished (: “theory of separation”) into external-organic and internal-subjective. We will be concerned at this time with the provision of additional services to the SA by the member of the Board of Directors, regardless of their organic position and relationship: on the basis of a “special relationship”. By contracts, indicatively, of employment, works, independent services or mandate.

The special relationship between board member and SA

We often find, in practice, that the members of the Board of Directors provide additional services to the SA – especially in the context of the family SA. These are services that go beyond the narrow confines of its administration – as defined by law. They are, in other words, outside the framework of the narrowly defined duties of the members of the Board of Directors (as members, ie, of the specific body of the SA). These services are provided in the context of a “special relationship” (: article 109 par. 3 law 4548/2018). This specific relationship may include, for example, the type of contracts of employment, works, independent services or mandate. In any case, the correct legal characterization of this special relationship is (also) left, as we have already analyzed, to the judgement of the courts.

With special reference to the specific (“special”) relationship, the legislator explicitly confirms the possibility of concluding such contracts, in order to remove any (possibly existing) relevant doubts. And even more: it demonstrates their difference (of these contracts and relationships) from the relationship that connects the members of the Board of Directors with the company due to their election or appointment. It confirms, in other words, that these are parallel relationships. Also: completely distinct relationships-based on their content.

The content of the special relationship

The content of the parallel (and special) contractual relationship that can be concluded by the member of the Board is, as already mentioned, the provision of (any) additional services. Its content is contrasted, in this way, with the content of the organic relationship that connects the SA with the member of its Board of Directors. The (organic) relationship that is determined by the law or the articles of association of the SA.

The content of the specific, additional, services (and the related special relationship and contract) may be, inter alia, that of the legal, financial or technical consultant. The most common: the provision of services of an executive that usually results from a contract of employment concluded by the member of the Board of Directors with the SA.

The difficulty of distinguishing the two relationships and qualities (member of the Board of Directors vs employee / provider of services in the SA) depends on their scope and content. This distinction turns out to be easier when the member simply participates in the Board of Directors, without being individually in charge of exercising (organic) power of administration, management and / or representation. On the contrary, when the member of the Board acts as a substitute body, that is, when the powers of the Board have been transferred in whole or in part, the distinction does not seem easy. In fact, in cases where the content of the special legal relationship concerns the management of the company and not just a field of action, the difficulties of discrimination are multiplied.

The distinction, however, of the individual, aforementioned, relations seems absolutely necessary. This is because the regulations reserved by Law 4548/2018 on the conclusion and operation of the special relationship that connects the SA with the member of its Board of Directors, are different from those that govern their organic position (as a member of the Board).

The special relationship as a transaction of the SA with a related party

The members of the Board of Directors are included in those that the law identifies as parties related to the SA (:”parties”). The SA’s transactions with related parties are now regulated in articles 99-101 of law 4548/2018 (as they replaced the well-known article 23a of law 2190/1920). These are transactions with those parties who, due to their position, are likely to influence the content of these transactions based on their own interest. It was therefore deemed necessary to provide a regulatory framework aimed at protecting the SA. The above transactions reasonably include the conclusion of any special relationship (indicatively: employment, works, independent services or mandate contract) of the SA with a member of its Board.

The conditions for concluding a special contract with related parties

For the valid conclusion of a contract of the SA with related parties (and in this case, a special employment, works, independent services or mandate contract with members of the Board) the observance of a series of procedural rules and publicity rules is necessary (articles 100 and 101 of Law 4548/2018 ). These rules, in the light of the conclusion of a special contract of a member of the Board of Directors with a non-listed SA, are analyzed below:

(a) The granting of a license

In General

According to paragraph 1 of article 100 of law 4548/2018: “the license to establish a transaction of the company with a related party or to provide collateral and guarantees to third parties in favor of the related party … is provided by a decision of the Board of Directors…”. The license granted is valid for a period of six months.

The license must be special (article 99 of law 4548/2018). This means that the conclusion of the special contract should be included in the agenda of the meeting of the Board. In addition: its content (especially its financial object and its duration) must be submitted to the decision of the body responsible for granting the license (indicatively: 1990/2018 Court of Appeal of Thessaloniki).

The Board of Directors is the competent body for issuing the license. In fact, the possibility of further assignment of the specific competence is explicitly excluded (article 100 par. 2 law 4548/2018). This provision of the legislator introduces an innovation in relation to the previous regime, which granted competence to the General Assembly (article 23a of law 2120/1920). In the justifications of the specific choice of the legislator, the fastest and simplest control procedure by the BoD is considered. In addition, the Board, due to its managerial powers, is considered the most appropriate body of the SA to recognize the benefit or not of the conclusion of contracts (as such: the contract of employment, works, independent services or mandate).

The competence of the General Assembly at the request of shareholders

In the event that the Board of Directors grants permission for the conclusion of a special relationship between the SA and a member of its BoD, it is obliged to announce its decision to the General Commercial Registry. Within ten (10) days from this announcement, shareholders of the SA representing 1/20 of the capital are entitled to request the convening of a General Assembly, in order for the latter to make a decision on the issue of granting a license. In fact, it is possible to (statutorily) reduce this percentage.

Any transaction with an affiliated person, for which permission has been granted by the Board of Directors, is considered valid from the beginning, but it is subject to suspensory condition. In other words, either the aforementioned ten-day deadline must pass without any actions taken or the decisive responsibility is assumed by the General Assembly due to a request of 1/20 of the shareholders of the SA. In the latter case, the license for the transaction must ultimately be granted by the General Assembly. This license is not granted if shareholders representing 1/3 of the share capital object (article 100 §5 of law 4548/18-as in force, after modification of the initial wording of the provision, which provided for non-participation of related parties in the formation of a quorum and majority, after our own public intervention).

The competence of the General Assembly in the absence of a quorum of the General Assembly

As we have analyzed in our previous articles, the law deprives a member of the Board of Directors of the right to vote on issues in which a conflict of interests arises between them (or the related parties) and the SA. Such a case is the conclusion of a special relationship between the member of the Board of Directors and the SA. Therefore, the other members of the Board of Directors make the necessary relevant decision. However, the exclusion from the voting may concern so many members that the remaining ones do not form a quorum. In this case, the remaining members (regardless of their number) are responsible for convening the General Assembly (to make a decision on granting permission to enter into a special relationship).

(b) Adherence to the publicity process

In order to complete the process of granting a license for the conclusion of a special contract of the SA with a member of the Board of Directors, it is required to observe the publicity provided by law. In particular, according to article 101 of law 4548/2018: “The Board of Directors announces the issuance of a license for the preparation of a transaction either by itself or by the General Assembly, as well as the expiration of the deadline of paragraph 3 of Article 100 (ie the above mentioned ten-day deadline) …”. This announcement is submitted to publicity (: posting in the General Commercial Registry) before the completion of the transaction. At the same time, paragraph 2 of the same article sets out the minimum content that the above announcement must have.

Exceptions to the obligation to issue a license

The case of current transactions

The obligation to grant a license is redundant in the event that the transaction (in this case the contract of the SA with the member of its Board of Directors) falls under the current transactions. Current transactions are defined, in article 99 §3 a’ of law 4548/2018, as “… those that are normal in relation to the operations and the object of the business activity of the company, in terms of their type and size and are concluded under market conditions”. In addition, according to the case law formulated under the pre-existing legal regime, a current transaction means “… that which, by its object, falls under the contracts drawn up in the context of the company’s day-to-day operations, ie whose terms are the usual terms of the contracts the company enters into with other traders. ” (1245/2018 Supreme Court).

The case of the pre-existing contract

A different case of exclusion from the licensing process is that in which a member of the Board of Directors is associated with the SA with a contract of employment, works, independent services or mandate, concluded before their election (or appointment) (1364/1990 Supreme Court, 21/2019 Single Member Court of First Instance of Volos). An issue, however, arises when the pre-existing contract is amended, after the election / appointment of the member of the Board of Directors (: eg. increase of the agreed fees). Depending on the content of the amended terms of these contracts (of employment, works, independent services or mandate), their prior approval by the competent body may be necessary.

The remuneration of the members of the BoD on the basis of their special relationship / contract

The members of the Board of Directors who have concluded an employment, works, independent services or mandate contract with the SA are, reasonably, entitled to receive remuneration – precisely on the basis of that contract. The specific remuneration is granted cumulatively with the (possible) remuneration received by the member of the BoD due to his / her organic position (ie, as a member of the BoD). These are fees which, although coming from the same SA and going to the same person, have different legal treatment. Thus, the fee from the special relationship / contract does not require prior regulation by law or the articles of association. It does not require its approval by the General Assembly (109 §1, Law 4548/2018) – in contrast to the remuneration that may be granted under the organic position. In fact, the law (article 109 §3, law 4548/2018) explicitly excludes the remuneration agreed on the basis of the special contract from the procedure and the conditions for granting remuneration to the members of the Board of directors of article 109 of law 4548/2018.

Each member of the Board may, therefore, have a second capacity within the SA: the one that connects them with an additional relationship (employment, works, independent services or mandate) with the company. The two properties / legal relations (organic and special) are (and must remain) completely distinct. The first (organic) is governed, exclusively, by the mandatory provisions of the Law of Société Anonymes. On the contrary, the regulatory framework of the second (special) relationship is additionally governed by Civil (or Labor) Law regulations-depending on the contractual type which is chosen each time (mainly on the basis of tax and insurance advantages) and to which, in the end, it falls under.

However, the separation of the qualities of the shareholder, the member of the Board of Directors and the employee / provider of services in the SA is important for a number of other reasons. Some of them have already occupied us in our articles (including: the need to separate the fees and finances of the entrepreneur / board member from the company’s fund, the use of the facilities provided by the law on SAs in terms of liquidity from businessmen / members of the Board).

However, the separation of the above-mentioned qualities seems necessary on the basis of alignment with the (not typically necessary for non-listed companies, but substantially absolutely necessary) corporate governance rules.

Rules necessary for the transition to the new era ˙ to the next day.-

Stavros Koumentakis
Managing Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (March 14, 2021).

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.

March 14, 2021
BoD vs SA: The obligation to omit competition

In a previous article we dealt with the provisions of the law regarding the treatment of cases of conflict of interests of the members of the Board of Directors with the SA (BoD Vs SA: The Conflict of Interests Between them). We were concerned, in particular, with the fiduciary duty of the members of the Board of Directors towards the SA. In this context we find the obligation to promote the interests of the company against the own interests (: obligation to act). In this article we will be concerned with another aspect of it (obligation to not act): the obligation to omit making competitive acts.

Competitive acts

The conflict of interests of the members of the Board of Directors with that of the SA can also appear in the form of the former conducting competitive acts. In this context, the legislator introduced a specific, relevant, prohibition. This is the obligation to omit competition (article 98 of law 4548/2018). The latter also stems from the fiduciary duty. The case law treats it as the main aspect of this obligation (ind. 797/2010 Supreme Court).

The legislation

Article 98§1 of Law 4548/2018 provides: “It is prohibited for the members of the board of directors who participate in any way in the management of the company, as well as for its directors, to act, without the permission of the General Assembly or the relevant provision of the articles of association, for their own account or on behalf of third parties, transactions that fall under the scopes of the company, as well as to participate as partners or as sole shareholders in companies that pursue such objects”.

This legislation seems perfectly justified. It is enough to consider the scope and type of information available to those who exercise the management of the company. This is completely confidential information that is linked, in the end, to the attempt of the SA to prevail over its competitors.

But who are the people who have access to the above information?

Who is affected by the non-compete?

The non-compete concerns any person who participates in any way in the management of the SA. This means that this person can be in a relationship of a “structural” nature with the legal entity. That is, to be on the board of directors. After their election, for example, as a member. Alternatively: after their direct appointment by a shareholder (based on a relevant statutory regulation) or their temporary appointment (: based on a court decision). The non-compete, however, applies equally – according to the letter of the law – to the directors – that is, the substitute bodies of the Board. In fact, the specific prohibition does not differ in the case of a single-member administrative body. Subject to, of course, the non-coincidence in the same person of the qualities of the director and the sole shareholder (in the case of the single-member SA).

A debate, however, has started as to whether the ban covers only the executives of the SA or extends to the non-executives as well. In the prevailing (and, we estimate, correct) view, this prohibition applies indiscriminately to both the executives and non-executives of the SA. This is because the law does not differentiate the extent of the latter’s fiduciary duty towards the SA. It is also argued that this prohibition also applies to the liquidators of the SA, to whom the provisions for management are applied (article 167 par. 2 Law 4548/2018).

Which acts are competitive?

Article 98 of law 4548/2018 expands the objective scope of the prohibition of competition in relation to the relevant article previously in force (: article 23 of law 2190/1920). However, the prohibition of competition still includes the performance of acts by the liable persons, which are under the company’s statutory objectives. Also, the participation of the liable persons as partners in personal companies that pursue the above objectives. Furthermore, the new provision explicitly prohibits such persons from participating as sole shareholders or as partners in companies pursuing the same objectives as the SA. In this way, the ambiguities regarding the indicative or exclusive enumeration of the previous provision and the inclusion (or not) of other corporate types in the provision of article 23 of law 2190/1920 were addressed.

At the same time, according to the established position of the jurisprudence “… competitive acts are considered those that are similar to those that fall within the objectives of the company. Thus, the competitive activity includes the direct competition with the establishment of a competitive enterprise, but also the indirect one, with the participation in a competitive enterprise “(797/2010 Supreme Court).

Corporate objectives mean (: as reasonably expected), those provided by the articles of association. However, the real financial activity of the company proves to be of major importance. This activity includes both the current activities of the SA and the future ones. That is, those that are likely (much more: expected) to be practiced even in a different, related, market.

The lifting of the ban

The statutory provision for the lifting of the ban

The possibility of the articles of association of the company entailing a provision for the lift of the prohibition to act competitively was not expressly provided for in the pre-existing law. It therefore seemed doubtful whether the general lifting of the ban through a provision of the statutes was lawful. That is, whether the granting of a general permit was legal – without it being linked to specific persons and / or acts. The voices of the minority were in favor of this possibility. Opponents, however, held back, expressing well-founded fears of such a possibility. They argued, in particular, that the ex ante general statutory exemption constituted a source of jeopardy of the pursuit of the corporate objectives. Liable persons this way can be in a constant conflict of interests with the SA. A conflict that may pose internal risks to the SA and to its operation for the pursuit of its own interests.

However, Article 98 §1 of Law 4548/2018 now explicitly provides for the possibility of statutory lifting of the prohibition of competition. The legislator with this provision seems to show confidence in the founders and shareholders of the SA and extends the statutory arrangements that they can make. The legislator accepts (and rightly so) that it is able to understand the disadvantages as well as the risks of such arrangements.

Statutory provisions of this content may be included in the articles of association from the establishment of the company. However, it is also possible to add them afterwards – after a relevant amendment. This amendment obviously requires a decision of the General Assembly, which is taken by a simple quorum and majority. An exception to this decision may be made by the articles of association. In this case, an requirement for an increased quorum and majority on this issue can be provided for.

The permission of the General Assembly

A different way to legitimize the conduct of unauthorized competitive acts is the permission of the General Assembly. Like the act of appointment of the member of the Board of Directors, the said permission of the General Assembly is characterized as an act of an organic nature. Acceptance of this license by the one affected is not required.

This permission can be solely granted by the General Assembly. It is not transferable. The General Assembly, therefore, as the sole competent body, has the right to decide on this permission by a simple quorum and majority. Including, in fact, the vote of the interested party, if they happen to also be a shareholder. This shareholder is not deprived of the right to vote. The relevant decision of the General Assembly is subject (like any other) to a review for unfairness. In any case: the articles of association can call for percentages higher than the simple quorum and majority.

The decision of the General Assembly to grant the above permission must, in addition, be explicit and specific. Permission that (can be argued that) is presumed or that is implicitly inferred, is not enough. As regards its content, this permission may include specific acts or be of a general nature. It must specify the duration of exercise of the permitted competitive acts or that the permission is provided for an indefinite period. It may also be granted subject to revocation. The content of this decision is based on the avoidance of risks that may arise. Therefore, the decision of the General Assembly (as a condition for the legal exercise of competitive acts) has an advantage over the corresponding statutory authorization. The latter cannot weigh the specific risks of the case that will arise in each case, given its (necessary) generalization.

The permission of the General Assembly should be granted before the conduct of the competitive acts. Any ex-post authorization constitutes, in the prevailing view, a waiver of any claims which may arise (Article 98).

The legal consequences of the relevant infringement

The legal consequences of any violation of the prohibition of conducting competitive acts are provided in article 98§2 of law 4548/2018. The SA as the beneficiary of the claims is entitled to choose between: (a) compensation, (b) to substitute the debtor in claiming any financial gain and (c) the return or assignment of the claim of the debtor. At the same time, it maintains (based on what is generally provided for) additional claims. Among them: the claim for the cessation and omission in the future of the competitive acts by the liable party, the right of revocation of the liable member of the Board of Directors or the right to terminate the contract of the offender for a great reason – when the liable person is contractually associated with the SA. It is noted that the exercise of prohibited competitive acts, as a conflict of interest between the Board of Directors and the SA may lead to a judicial appointment of an interim administration (69 Civil Code). It may even be required.

The case of the crime of violation of the fiduciary duty (390 Penal Code) should, in any case, not be excluded.

In particular (regarding the civil claims of the SA):

(a) Regarding the claim for compensation

The basis of the claim for compensation is on the one hand the provision of article 98 §2, on the other hand the provisions for torts. In order for a claim for compensation to be created, a number of conditions must be met. Among them, the legal reason for liability and the other conditions of the law of torts. Specifically: the existence of damages and the causal link between the statutory liability and the damage caused. The company suffers a loss in the cases where due to the competitive behavior of the member of the Board of Directors or Director, it lost a business opportunity which would otherwise be undertaken by it. Or, similarly, in cases where due to the above behavior it had to incur expenses and reduce its assets or increase its liabilities. The person under the non-compete is, of course, liable for the compensation, while the compensation they are required to pay must compensate the actual loss of the SA.

However, it is important to point out the extent of the (sometimes insurmountable) difficulty we encounter in practice in accurately determining the actual damage suffered by the SA. Also, for the connection of the damage with the prohibited competitive act (: causal link).

(b) Regarding the right of financial substitution of the SA in the position of the liable party

As mentioned above, the difficulties of proving the causal link with the amount of damage caused are significant. This problem is tackled, in part, through the exercise of the other rights of the company recognized by article 98 §2. Such a right is the right of substitution. On the basis of this right, the SA is entitled to claim the return of the respective net benefit obtained by the debtor by violating the obligation not to conduct competitive acts. In other words, it is considered that the transactions performed on behalf of the debtor took place on behalf of the company.

Through the exercise of this right, the SA does not enter into the contractual relations of the debtor with their counterparties and the validity of these contracts is not affected. On the contrary, the debtor is obliged to reimburse all the benefits received after deducting the expenses incurred.

(c) Regarding the claim of return or assignment of the debtor’s remuneration claim to the SA

The obligor may, of course, carry out competing transactions not on their own account but on behalf of third parties. In this case, the SA reserves the right to claim either the fee received by the debtor for the mediation or the assignment of the relevant claim from the third party.

The concept of the fee must be interpreted broadly. Included in this is any property benefit that the debtor derives from their illegal behaviour. The property benefits of the obligor may derive either from a contractual relationship (between them and the third party) or from an organic relationship. In the latter category falls the case of the debtor particilating in the Board of Directors of another company that pursues the same purposes as the adversely affected SA. So, in this case, the debtor must pay in addition to any dividends, fees, etc. received by them as a member of the Board of Directors, any other benefits they obtained (eg the right to free distribution of shares or the right of option to acquire shares-stock options).

The duration for the obligation to omit competition

According to the settled position of the case law “… The obligation to omit competition ceases to be valid in any way upon termination of the capacity of consultant, who participates in the management of the SA or as its director…”. However, as it is accepted, it becomes possible to extend the obligation even after the termination of the above status or the departure of the obligor from the company, with an explicit contractual obligation (post-contractual non-compete clause). The latter is in principle valid (797/2010 Supreme Court). The validity of the prohibition clause, however, depends, as the case-law accepts, “… on its validity, its extent, the prohibited professional activity and the compensation to which the company is entitled if the obligor disregards their contractual obligation of non- compete…” (Indicatively 5131/2011 Court of Appeal of Athens, 797/2010 Supreme Court).

Limitation period

Finally, Article 98§3 provides for the limitation period of the above claims. The limitation period reserved for these claims is short. It is provided, in particular, that the claims described above expire only one (1) year after their announcement at a meeting of the Board of Directors or their notification to the company. Therefore, the action of the SA to deal with such behaviours and be compensated for the damages suffered must be immediate. In any case, the expiration of these claims occurs five (5) years after the realization of the prohibited act.

Participation in the Board of Directors of a Societe Anonyme is not without responsibilities. Not without restrictions. One of the most important amongst them: the non-compete obligation.

A possible breach of the relevant non-compete creates significant (and often unproven) damage to the company. Of course, it also creates an obligation to restore it by the offender. Criminal liability (sometimes serious) should not be ruled out.

The relevant vigilance during the operation of the company is not enough. The relevant, precise and specific in content, statutory provisions become absolutely necessary.

More necessary, however, is the absolute compliance of the members of the Board with their relevant obligation.

The principles of Corporate Governance require it.

The law sets strict limits and threatened (civil and criminal) sanctions.

However: the omission of such actions to the detriment of the legal entity should be based on the ethics and conscience of the members of the Board.

In the absence of these, the members of the Board of Directors cannot have a place in the body.

Stavros Koumentakis
Managing Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (February 28, 2021).

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.

February 28, 2021
BoD vs SA: The conflict of interests between them

The members of the Board of Directors of an SA are elected to serve and promote its corporate interests. However, it is not necessarily true that their personal interest are not in line with that of the company. Even worse: that they are not in conflict with them. This is when we are talking about a “conflict of interests”. How is it delimited? How can anyone manage it? How is it treated? What are the provisions of the law?

The economic point of view

In economics the problem of the principal and the agent (agency problem) is well known. The principal selects the agent in order for the latter to conduct the affairs of the former. The latter (: agent) is responsible for decisions that affect the wealth of the principal. This problem arises when the agent acts on behalf of their client, but acts in a way that does not serve the latter’s interests. According to economists, the main reason for the existence of this problem is the “asymmetry of information”.

There are two categories of problems owed to asymmetry of information. These are: (a) the problem of moral hazard and (b) the problem of adverse selection. Regarding the latter (: adverse selection), we find it in those cases in which the principal, due to the asymmetry of information, chooses as an agent a person who does not have the ability (or the disposition?) To act in the interests of the principal.

The conflict of interest between a member of the Board of Directors and the SA is one of the problems of moral hazard. Specifically, the agent has the opportunity to act in the interests of the principal but chooses to act in pursuit of their own, personal, interests.

The solution to the problem: Corporate Governance and Law of SAs

The (general) solution to the problem of conflict of interest is twofold. The application of the rules of corporate governance on the one hand and the coexistence with the law of the SA on the other.

The application of corporate governance rules is proposed. And this, because through the alignment with them, the transparent operation of the members of the Board becomes possible. And so does the controlled structure of mutual interests.

However, the legislator of the law of SAs also makes more specific regulations concerning the treatment of the problem of the conflict of interests of the members of the Board of Directors with the interests of the company. It is known that each member of the Board of Directors undertakes a fiduciary obligation towards the SA. Its manifestation is the avoidance of conflict of own interests. The legislator has established mechanisms for dealing with such cases of conflict. In order to establish, however, such cases, the corporate and the own interest of the members of the Board of Directors should be conceptually determined.

The corporate interest

It obviously does not make sense in the context of this article to start theoretically wandering between the unitary or the pluralistic theory. Let us limit ourselves to what is, according to the author – in simple words, currently applicated: The corporate interest is nothing but the interest of the SA. We can safely identify it with the interest of its shareholders – as a whole.

The “own interest” of the Board members

The delimitation of corporate interest seems simple. But what is the “own interest” of the members of the Board? The “own” means the direct and personal (eg financial, moral, etc.) interest of a member, whose satisfaction is in conflict with the satisfaction of the corporate interest.

However, the own interest of the board member does not necessarily have to be linked to the member themselves – on a personal basis. In other words, the stakeholder may be a third party. But not any third party. They must be a person with whom the board member is connected in some way and can, presumably, influence them. Precisely because of the specific relationship between the member of the Board of Directors and a third party, the benefit of satisfying the interest of the latter can be reaped, in the end, (even indirectly) by the member of the Board of Directors. Therefore, in order for an “alien” interest to be considered as “own” interest of the member of the Board of Directors, the legal relationship that connects them with said third party must be examined.

The legislator identifies these relationships. It provides, in particular, with cases in which the foreign interest is charged as the own interest of the member of the Board. When, for example, a transaction of the company is imminent with a person of the close family environment of the member of the Board of Directors. Also, with a legal entity controlled by the member of the Board (article 97 §3 in combination with articles 99 §2 law 4548/2018 and 32 law 4308/2015).

Conflict of interest: the spotting of such cases

A conflict of interest, therefore, exists in those cases in which the -necessary for the benefit of the SA- independent judgment of the member of the Board is affected (or may be affected) by the involvement of their own interest. These are the cases where the aspirations of the SA do not coincide (on the contrary: they are in conflict) with those of the member of the Board. Therefore, the satisfaction of one of the mutual interests excludes (in whole or in part) the satisfaction of the other interest.

Such conflicts may have a lasting duration, such as e.g. when the member of the Board of Directors develops an activity competitive to the SA. However, they may also arise momentarily, such as e.g. in cases of the conclusion of a sales contract between the SA and a member of its Board of Directors. However, this conflict must have a certain heft, ie to be “substantial”.

On the opposite side are the distant conflicts, which we do not need to worry about. This fact is also confirmed by the Explanatory Memorandum of article 97 of law 4548/2019. It states, in particular, that insignificant or distant conflicts of interests do not justify the abstention of a member of the Board of Directors from making a decision on the issue in question (which, as we will see later, is the most drastic way of dealing with cases of conflict of interests).

Some cases seem more complicated: What happens when, for example, the member of the Board in which the conflict of interest is located is also a (large) shareholder of the company? Let’s not forget that the vast majority (: 80%) of Greek companies are family businesses…

Conflict of interest: dealing with the cases

Law 4548/2018 deals with cases of conflict of interest in Article 97. It provides, in particular, three basic rules. Specifically: (a) the priority of the corporate interest, (b) the obligation to disclose the case of conflict of interests of a member of the Board, (c) the prohibition of exercising the voting right of a member of the Board whose own interest conflicts with that of the SA.

In addition to the provisions of article 97 of law 4548/2018, the legislator also deals with some special cases in articles 99-101 of law 4548/2018. These are the cases concerning the conflict of interests in the cases of the transactions of the members of the Board of Directors with the SA. This issue, as it is big and interesting, will concern us in our next article.

But let us approach the basic rules of dealing with the conflict of interests:

(a) The priority of the corporate interest

As already mentioned, the members of the Board of Directors are in charge, with their election / appointment, with the fiduciary obligation. An obligation that they must always fulfill towards the SA. Its content is the acceptance of the priority of the corporate interest. Therefore, cases of conflict of interest between an SA and a member of its Board of Directors should always be resolved, according to the legislator, based on the principle of the priority of the interest of the SA.

The legislator, moreover, is absolutely clear: It provides that the members of the Board of Directors (as well as any third party to whom responsibilities have been assigned) must ” … not pursue the own interests that are contrary to the interests of the company” (Article 97 §1 par. a΄ ν. 4548/2018).

However, the above principle does not prohibit the members of the Board of Directors, in advance and in the abstract, from seeking the satisfaction of their individual interests, which are related to the interests of the SA. On the contrary, it prohibits, in particular, this pursuit from hindering, in whole or in part, the satisfaction of the interests of the SA. Therefore: the member of the Board, clearly has the right to act in their own interest. They are entitled, for example, to negotiate the amount of their salary in those cases in which, in addition to their organic position, they are associated with the company with an employment contract or a contract for the provision of independent services.

(b) The obligation to disclose the case of conflict of interest

The legislator has introduced another obligation for the members of the Board, in order to prevent cases of conflict of interest that may arise. This is the obligation of immediate, and sufficient, disclosure to the other members of the Board of the own interests, which are likely to arise in forthcoming transactions of the SA. This corresponding obligation is also borne by every third person to whom responsibilities have been assigned by the Board. This obligation also includes the disclosure of respective interests of any related natural and legal persons (article 97 par. 1 par. b’ of law 4548/2018).

The information must be addressed to all members of the Board. However, no specific type is required. The person in charge of providing the information can choose to communicate the information orally or in writing. Of course, for reasons of proof, the provision of the information in written is preferable (eg its recording in the minutes of the Board of Directors, if it takes place during its meeting or, even better) before the start of the discussion of the issue in question).

However, the information must be provided, in any case, in a timely manner. That is, before the situation of conflict of interests occurs. At the same time, as far as its content is concerned, the information must be sufficient; a mere mention of a possible conflict of interest is not enough. The member of the Board of Directors must describe: (a) the transaction of the company, in which the conflict of interests may arise and (b) their own related interests.

Based on this information, the other members of the Board must be able to come to a substantiated conclusion for the existence of a case of conflict of interest. Also, for the risks that are created for the company.

In case the obligated member of the Board of Directors omits to provide the required information, questions of liability towards the company are raised. If, of course, the other conditions of the generation of any relevant liability are met.

(c) The prohibition of voting

The law provides (article 97 §3 law 4548/2018) the deprivation of the right to vote from the member of the Board, in which the conflict of interests is located. It seems to be the most drastic way to manage such a situation. In this way, the possible lack of objectivity and / or their influence on the other members is addressed.

It should be noted, of course, that the member of the Board of Directors, in whom the conditions for deprivation of the right to vote are met, is not taken into account neither for the formation of a quorum of the Board of Directors nor for the formation of the majority necessary for a decision.

It is even argued that it is not enough for the member whose own interests conflict with those of the company to abstain from voting; they must also abstain from the relevant meeting of the Board. Proponents of this view argue that the member with the conflict may have been working to influence the BoD to act in favor of their (the member’s in question) and not the company’s interests. However, an ex ante, indiscriminate ban on their participation cannot be considered, without any doubt, correct. Let us not forget, after all, that you should never convict someone without hearing their point of view. However, it would be safer to judge on a case-by-case basis the question of the participation (or not) of said member of the Board in a relevant meeting.

The deprivation of the right to vote, however, concerns, as already mentioned, only cases where the conflict of interest is considered significant. The relevant decision rests with the members of the Board. However, a possible incorrect evaluation makes the participation of the interested member of the Board of Directors in the crucial meeting defective. The decision taken at such a meeting does not, however, become illegal (article 102 par. Law 4548/2018). What matters in the end is the importance of the interested member of the Board of Directors for the achievement of the majority, as well as for the (possible) influence they exercised on the other members.

After the deprivation of the voting right of the member of the Board of Directors in question, the other members make the decision. It is, of course, necessary to meet the conditions for forming a quorum for a decision. If the remaining members of the Board, for whom there is no inability to vote, do not form a quorum, they must convene a General Assembly. The sole purpose of the latter will be to take the specific decision for which issues of conflict of interest are raised.

Sanctions

At the civil level, the possible breach of the obligation of the member of the Board of Directors, by avoiding the declaration of conflict of interests, can be the basis for the request for the restoration of the damage that may have been caused to the company. However, the legal consequences that may occur each time depend on the form that the violation will take. Such legal consequences e.g. is the invalidity of the vote of a member of the Board of Directors or, much more, the invalidity of the decision taken by the Board of Directors.

At the criminal level, however, the case of breach of the fiduciary obligation of the article 390 of the Penal Code may also occur. In this case [“whoever knowingly damages the property of another, whose custody or management (total or partial or only for a certain act) they have under the law or under a legal act, is punished…”]. The sentence will be imprisonment of “at least three (3) months” or, in more serious cases, “imprisonment of up to ten years”.

In short: Sanctions do not seem, nor are they, to be neglected…

Joining an SA BoD can often seem like an easy (or plainly for the formalities) affair. Sometimes it can be. Some others, however, it is not. It may even prove to be particularly complicated. The conflict of interest of a board member is in the latter category.

It is not always easy to manage such issues. How easily can one manage such a situation when the board member (with a conflict) is also a shareholder or, even worse, a major shareholder of the company? When the conflict of interests stems from (known or not) competitive activity of the member of the Board?

Conflicts of interest take many forms.

The law (correctly) only in general regulates the issue. The statutory provisions prove to be important. And so do the provisions related to corporate governance rules.

Each case can only be approached and managed individually.

Only then will the result be in favor of the company & its shareholders and, why not, the law.-

Stavros Koumentakis
Managing Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (February 7, 2021).

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.

February 7, 2021
Equal Shareholders in an SA. A blessing or a curse?

Exactly one hundred years ago, the Greek legislator dealt with the SAfor the first time. They had in mind a legal entity where the shareholders would be, in principle, different from those who would run it. The shareholders would exercise their rights through the General Assembly. The members of the Board of Directors and the management of the company would be discrete roles. We find, over time, that the property right over the company (: shareholders) is “confused” or identified with the company’s management. Often the participation in the company’s share capital, for reasons of (projected) equality, (but mainly due to both sides’ insecurity) is set at 50% -50% for the two, unique, shareholders / groups of shareholders. Some would characterize these percentages as a blessing. Some as a curse. For those who know: Two equal / only shareholders prove to be problematic for any legal entity. And maybe it is a bit worse in an SA. But again, maybe not…

Images drawn from life (and not from movie scripts)…

Every new business starts, as a rule, with the best intentions. When the founder is just one person, things are more simple.

When they are two, it is less…

At the beginning of a business cooperation, the two, only, founders & equal partners, usually walk harmoniously. But then, sometimes, things change. One of the two (and / or both) sometimes chooses to exercise power over the other. Others times, possibly, their problematic personal relationships are mirrored in the management of the company. And, of course, in the legal entity itself and its business activity. That is when we have a problem. Sometimes, a very serious one.

It is possible to reach the same problem when the founders-brothers (or very close friends) and 50% shareholders are replaced, over time, by their successors. Successors (or heirs) who will seek to get the “upper hand” in the, among them, informal bras de fer.

The same problem may arise when the only founder and shareholder of the SA dies and leaves (by will or without one) as equal heirs and successors their two children. Children who, when it comes to claiming power, may prove to not love each other enough. Let’s also not forget that their spouses’ meddling (often, as we see) gives them a nudge to that direction as well.

We all know such (and many other similar) stories. And continue to see them. All too often. More often in family businesses (do not forget, after all, that in our country they make up 80% of the total number of businesses). However, we will encounter such phenomena in all sub-categories of businesses. Without exception.

So what happens next?

We are all too familiar!

At the most part, it is not pleasant…

The «50/50» SA

In other words:

The main problem, on a practical level, arises when we are faced with only two, equal, voting rights.

We usually attribute this phenomenon with the term “SA: 50/50”.

The point when it is created varies. It can be created at the point of the establishment of the company (: when it is founded by two, equal, shareholders). It can also be created during the company’s operation (: subsequent configuration of two, equal, shareholdings).

“Equal participation” may also be the result of the existence (or creation) of groups of shareholders (whether or not bound by extra-corporate agreements). Each of these groups holds 50% of a company’s voting rights. Shareholders (or groups of shareholders) may, at times, not be just two. Such a case would be encountered, for example, when two shareholders (or groups of shareholders) hold 1/3 of the shares and voting rights each, while the shareholders representing the last 1/3 abstain from making decisions.

The two, equal, shareholdings are problematic when the holders of the 50% voting rights of the company do not agree in making critical corporate decisions and / or in the election of the Board of Directors.

As the case law accepts, “in these cases, the lack of communication between the shareholders, leads to the immobilization of the company and its operation is lead to a deadlock, as it is impossible to reach a simple majority in the General Assembly to make decisions, with the main problem being the General Assembly not being able to elect a Board of Directors.” (18191/2014 Multimember Court of First Instance of Thessaloniki).

The provisions of the legislator

The legislator could not ignore those specific, problematic cases. Those cases where the SA cannot operate. Or worse, those cases where the company reaches a deadlock due to the inability of the General Assembly (and/or of the Board of Directors) to make decisions.

The dissolution of the company by a court

The law generally provides the possibility of dissolving the company, “if there is an important reason for this, which, in an obvious and permanent way, makes the continuation of the company impossible” (article 166 §1 law 4548/2018).

Moreover: “An important reason according to paragraph 1 exists, in particular, if, due to equal participation of shareholders in the company, the election of the board of directors is impossible or the company cannot operate”. (article 166 par. 2).

The SA is dissolved by virtue of a court decision. Procedural prerequisite: the submission of a relevant application before the Single Member Court of First Instance of the place of the company’s registered office. An application notified to the latter and adjudicated by the non-contentious procedure (article 166 §3).

The acquisition of the shares of the SA

The company’s dissolution must, reasonably, be the last resort to address the impasses created in a company with equal shareholders. This is because a direct consequence of such is the loss of the shareholder status of all the shareholders, the termination of the company as a legal entity and the ultimate disappearance of the latter from the legal and business world.

In an effort to avoid the last resort of the dissolution of the SA, the legislator provides for/prefers an alternative. A solution that promotes the continuation of the company. This is the option (and possibility) of acquiring the shares of the company. Specifically:

…by decision of the Court

The Court, which will handdle the request for the dissolution of the SA, “… before issuing its decision, provides the company and the shareholders with a reasonable period of time to remove the grounds for dissolution, in particular through redemption of shares between the shareholders, unless it reasonably considers that this measure is pointless. This deadline can be two (2) to four (4) months. If the above deadline is provided, the court may order measures for the temporary settlement of corporate cases.” (article 166 par. 4). Such a deadline (: for the removal of the grounds for termination) cannot be extended (as provided by the previous legislation).

…or as an initiative of the other shareholders

However, the shareholders themselves, those who do not want the company’s dissolution, are also given the opportunity to claim the redemption of the shares of the one (or of those) who request the company’s judicial dissolution. This is the power of the (non-applicant) shareholders of 1/3 of the share capital (and not of the 1/5, as the pre-existing law required) to excursive a main intervention in the lawsuit opened regarding the dissolution of the company. Specifically:

“Shareholders representing at least one third (1/3) of the capital, can intervene in the relevant lawsuit and request the redemption of all the shares of the applicant or applicants. In this case, the court orders the redemption and determines the consideration, which must be fair and correspond to the value of these shares, as well as the terms of its payment. In order to determine the value, the court may order an expert examination carried out in accordance with Article 17. The redemption value may not exceed the amount that the plaintiffs are likely to receive in the event of liquidation of the company, which the court may increase up to twenty percent (20%)” (Article 166 §5).

It should be noted here that this provision absolutely determines the method of valuation of the redeemed shares. It is well known that there are many such methods that enable those who perform them to get a wide range of results. The legislator here explicitly chooses the value “which the plaintiffs are likely to receive in case of liquidation of the company”. This value can be increased by the court “up to twenty percent (20%)”.

In the event of a redemption of shares, in accordance with the manner immediately mentioned above, “any provisions of the articles of association for the freezing of such shares … shall not be taken into account, unless the articles of association provide otherwise. “ (article 166 par. 6).

The exception of listed companies

The SAs whose shares are listed on a regulated market (and consequently the equal shareholding rights in it) are explicitly excluded from the possibility of a judicial dissolution for a “great” reason (article 166 par. 9 law 4548 / 2018).

We find a corresponding provision in the pre-existing law (article 48a par. 9 of law 2190/1920). A justification for this legislative choice is (also) foundin the explanatory memorandum of Law 3604/2007, which amended the aforementioned provision of article 48a. Specifically, as it is explicitly noted in it, the provisions of article 48a “… apply only to non-listed companies, because in listed companies the shareholder can in principle leave the company by selling their shares.”.

Conditions for exercising the right to a judicial dissolution due to “equal participation in the company”

The provision of article 166 of law 4548/2018 is mandatory. This means that any statutory arrangements that are contrary (or divergent) in content to this provision are void. The conditions for exercising this right can be summarized as follows:

The standing to bring an action

The right to request a judicial dissolution of the company is exercised only by a shareholder. Therefore, members of the Board of Directors, creditors of the company and auditors do not have this right. Even if they justify, in some way, a relevant legal interest.

The condition of the applicant being a shareholder is supplemented by the requirement of the holding of a specific, minimum, percentage of the share capital. Applicant shareholders (one or more) must raise at least 1/3 of the paid-up share capital. According to the wording of the relevant provision, a simple holding of shares is not sufficient. Their value must also have been paid for in full. However, the type of shares that make up the necessary 1/3 is irrelevant.

The existence of a “great” reason

The right to request the dissolution of the SA has, as already mentioned, a central goal. To solve impasses that the SA and its shareholders have reached.

Therefore, “a great reason is required, which, in an obvious and permanent way, makes the continuation of the company impossible” (art. 166 §1).

Such an important (according to article 166 §2) reason “exists, especially if, due to equal shareholders in the company, the election of the board of directors is impossible or the company cannot function”.

Therefore: the existence of equal shareholders is not enough to request the dissolution of an SA. A great reason is required, like the one required by law. The inability, e.g., to elect the Board of Directors and of the operation of the company due to the existence of two equal (with equal voting rights) shareholders (or groups of shareholders) who are unable, systematically, to agree on the decisions necessary for the operation of the company.

In fact, the situation mentioned above must lead to the impossibility of electing a Board of Directors or must obstruct the operation of the company in general. In particular:

Regarding the impossibility of electing a Board of Directors:

The impossibility, in this case, concerns the General Assembly. Specifically, the case in which the General Assembly is unable to make a decision regarding the election of the Board of Directors. A prerequisite, in fact, is the “… situation that shows elements of permanence.” (3494/2010 Multimember Court of First Instance of Athens). The alleged inability to make a decision, for example, in a single (extraordinary) general assembly “… primarily lacks the element of permanence required to be present, in order to substantiate the great reason for the decision of the court to dissolve … the SA.” While, at the same time, general statements of the applicant that “… they intend to vote against in any future proposal or issue raised in the General Assembly… and will concern issues of major importance for the operation of the SA, such as the approval of balance sheets, and that this event will make it obviously and permanently impossible to continue the operation of the company, it is not enough to make their claim legally stand …, since no preventive judicial protection is provided… ”(18191/2014 Multimember Court of First Instance of Thessaloniki).

Regarding the inability of the company to operate:

The inability, in this case, concerns the Board of Directors. This is the case in which a fictitious lack of administration is identified. In other words: there is a Board of Directors, but it is unable to make decisions. This fact obstructs the operation of the societe anonyme. In fact, in a complete and permanent way.

However, it is completely different when the operation of the SA is not obstructed in a complete and permanent way. In the case that “… the inability to make decisions is at the level of the Board, or because there has been a real lack of administration due to e.g. death or resignation of some or all members of the Board, or because there has been a fictitious lack of management due to e.g. stubbornness or assertiveness of its members…, implicit resignation-abstention from decision-making…, disagreements of members resulting in inability to exercise management…, the problem can be solved even with the removal of the members of the Board and the appointment of new members by the General Assembly, after the appointment of an interim administration that will convene the General Assembly“. (18191/2014 Multimember Court of First Instance of Thessaloniki).

Therefore, the inability of the Board of Directors to form decisions, which can be addressed by:

(a) Removal of its members and election of new members by the General Assembly and / or

(b) appointment of an interim administration under Article 69 of the Civil Code;

cannot constitute an important reason for a judicial dissolution of the SA. Provided, of course, that the internal involvement is not permanent and, at the same time, it is not found within the General Assembly. It is clear that an SA cannot operate indefinitely with judicially appointed administrations.

The above disagreements of the shareholders or of the members of the Board of Directors should be demonstrated through the minutes of the meetings of the General Meeting or of the Board of Directors. At the same time, the correlations of forces may be proved by other means, such as, for example, from the extra-corporate agreements of the shareholders (18191/2014 Multimember Court of First Instance of Thessaloniki, 3494/2010 Multimember Court of First Instance of Athens).

Equal participation in an SA (especially in the case of 50/50 SAs) creates, quite frequently, insurmountable problems.

Unanimity is required in the General Assembly that is called, for example, to elect a Board of Directors. If unanimity is not reached, in a continuous and permanent manner, the SA is left without administration. However, the company is also left without administration in case there is a Board of Directors, but one that is unable to make decisions.

In both cases, the company cannot operate.

To address the extremely serious problem, the law provides specific, quite effective, tools. The dissolution (or threat of dissolution) of the company is one. One that is so strong that it, in fact, sometimes, shocks. Justifiably. Because sometimes such (shocking and extreme) solutions are required, in order to ensure the survival of the company at the last moment.

It is obvious that the solutions provided by law should be adopted as a last resort.

Before these extreme solutions there are, without a doubt, other, milder ones.

Extra-corporate shareholder agreements, statutory arrangements and provisions, the management of minority rights are some of them.

And first of all:

The avoidance, for as long as possible, of the establishment and operation of as SA with its shares and voting rights divided in two.

The responsibility of the founders, the transferring shareholders and of those who plan their succession proves to be extremely serious. It is, however, perfectly manageable.

As long as timely management of the whole issue takes place. Before, of course, the cration of the problem.

Ex-post solutions, although painful, still exist.

In any case: there are no “canned” solutions.

Only tailor made.

Always.-

Stavros Koumentakis
Managing Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (October 18, 2020).

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.

October 18, 2020
Presentation of the new Act on S.A.s to Mamaras and Partners
[vc_row][vc_column][vc_column_text] One more presentation on the new Act on Société Anonyms took place, as part of the presentations and seminars organized and held by KOUMENTAKIS & ASSOCIATES. To be more precise, the resent presentation was made for Mamaras and Partners, the well-established company of Financial Advisors.

Mr. Stavros Koumentakis, Senior Partner, highlighted the business opportunities emerging after the changes introduced by the new Act on Société Anonyms, presented the new framework and referred in detail to specific provisions, ways on how to protect the client from “internal and external dangers” and on how to utilize the options offered by Act 4548/2019 regarding:
- Minimizing expenses
- Attracting and maintaining capable executives
- Attracting investors
- Making good use of technology.
As Mr. Koumentakis put it: “The new Act on Société Anonyms is a great opportunity, one that businesses must take advantage of. Act 4548/2018 broadens the responsibilities and exposure of the Board of Directors to civil, penal and administrative sanctions, a fact that may end up being a serious problem if there are no relevant insurance provisions in place.” Mr. Koumentakis also highlighted that “introducing relevant statutory provisions is deemed necessary”.

The Administration and Executives of Mamaras and Partners partook in the presentation, which was an excellent opportunity to exchange views on extremely important aspects of the Act.

Mamaras & Partners was established in 1990, is based in Thessaloniki and is offering high quality consultancy services to businesses of all sectors.

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July 4, 2019
Board of Directors or a Consultant-Manager?

Board of Directors or a Consultant-Manager?

1. Preamble

His unique personality and work are why the Austrian – American university professor, writer and advisor Peter Ferdinand Drucker, received, during his life of almost a hundred years (:1909-2005), the highest honors and titles. Some people gave him the title of the “Founder of modern management”. Although, since his time, his views have been challenged, his quotes still are of value. Among his others quotes: “The leader of a team must be able to say: “This has to be done. You will do it. In that way.” The survival of the team is depending on this unquestionable power. Without it, no one feels safe”.

2. Facts change

The multimembered/multi-shareholder and financially stronger business schemes are, in most cases, S.A.s. An essential part of an S.A.’s function: its Board of Directors. This collective body is the one that is, by law, exclusively given the power of the S.A.’s management.

Until 31.12.2018.

The management of an S.A., usually and essentially, is at the hands of the (capable or less capable) “leader of the team”, as Peter Drucker found, and that is such a person in every company.

Facts have already changed (since 1.1.2019) for the Small and Very Small Businesses (as those are defined in Act 45488/2018) and for the unlisted companies.

3. “Single-Member Administrative Body” or “a Consultant-Manager”

According to Article 115 of Act 4548/2018, the Board of Directors of an S.A. can be replaced by one only manager – until now, that was the case only for Partnerships and other limited companies.

This specific provision, since it constitutes a very important diversion from the pre-existing legal framework, seems to be the most “famous” among the one hundred and ninety (190) provisions in total of the new Act.

The title meant to be given to this one person (which can now officially operate on its own, substituting the Board of Directors) is: “Single Administrative Body” or “Consultant-Manager” (from this point forward “Consultant-Manager”).

Since 1.1.2019 (and as long as there is the relevant provision in the company’s statute) the Small and Very Small Businesses as well as the unlisted companies, can (now formally) trust their management to a single person.

4. The legal framework around the “Consultant–Manager”

The provision of article 115, par.2 of the new Act of S.A.s regulates the issues concerning the Consultant-Manager, by referring to the “rules in place for the Board of Directors, to the point they are compatible to the nature of the single-membered body”. A special (although indicative, par.5 of the same article) reference is made in this specific provision to the issues of appointment, conditions of electing, term of office, responsibilities, duties, powers of the Consultant-Manager, the appointment of its alternate, the Consultant-Manager’s civil and criminal liabilities, its payment and other relevant subjects to these, by referring to the relevant provisions in the Act set for the Board of Directors.

5. The obligation of informing the “Consultant-Manager”, keeping Minutes and conclusion of agreements in which the “Consultant-Manager” has any interest.

Among the obligations each member of the Board of Directors has, is the obligation to inform the other members of the Board (e.g. the obligation to reveal to them about any self-interests or conflicts of interest with the corresponding interests of the company – article 97 par.1). Given the lack of “other members”, the obligation of informing the rest of the BoD members is in this case an obligation to inform (article 115, par. 3) the company’s shareholders in a general assembly or each one individually.

Furthermore: the decisions of the Consultant-Manager (the ones that are outside the sphere of the decisions taken regarding the “every day running of the business”) are recorded (article 115 par. 4) in the relevant book of Minutes (article 93), which can be kept digitally, as happens with the Board of Directors.

Finally: for the conclusion of agreements between the Consultant-Manager and the S.A., the decisions (according to article 99) are taken and approved by the General Assembly (article 115 par.3) – instead of the, non-existing in this case, Board of Directors.

6. Electing a Consultant–manager instead a Board of Directors can be useful

The explanatory report of the new act of S.A.s mentions, among others, regarding this specific, new, article: “this is hoped to reduce the functional cost of the unlisted companies that wish to adopt this system, if they don’t have the size to justify a bigger number of people in administrative positions. Experience has shown that in many small S.A.s, there essentially is only one administrator, while the other members simply have a decorative function.”

This specific assumption, although not expected in the context of an explanatory report, reflects the reality. And that is because it verifies, very vividly, the (true) observation that there is a “leader” in every team and also that in small (and not only) businesses in our country, the role of the Board of Directors is decorative.

By selecting a Consultant-Manager instead of a Board of Directors, the management of the S.A., responds better to current conditions, because it is appointed to the only person that truly exercises this authority anyway. Additionally, it costs less and is more flexible. Afterall, the same explanatory report mentions: “Additionally, the ability to elect a “Consultant-Manager” simplifies the obligations in which the limited company has.”

These reasons are not the only ones that point towards an S.A. electing a Consultant-Manager instead of the, until recently necessary, Board of Directors.

We have already mentioned in previous articles (New Law on SAs: the Liability of the Member of the Board of the Directors and Other Liabilities of the Members of the Board of the Directors of a S.A.) the kinds and the extend of the liabilities of the members of the Board of Directors. Not rarely, the primary (usually one) businessman was in search, “using the lamp of Diogenes the Cynic”, of members to fill the empty seats of the (at least three-membered) Board of Directors. It is not uncommon either for people who accepted the, out of necessity (or out of wickedness, it doesn’t really matter) invitation from the businessman to «grace with their presence” this specific body and ended up being dragged to courts trying to prove their innocence or that “they don’t have blood in their hands”… In other words: when we limit the number of people involved, we automatically limit the range of people that could possibly be implicated in legal disputes or/and be exposed, in any way, to legal risks.

7. Risks that come with this choice

This choice (the election of a Consultant-Manager instead of a Board of Directors) is not without risks: The shareholders should consciously and in a formal manner accept the “ruling of one man” and everything good (and of course everything dangerous) that comes with it.

What about the public image of the business? Will the potential future shareholders, investors or financiers accept the, at least in a first place, uncontrolled management of the Consultant-Manager?

It does not seem very likely…

Do the risks for the Consultant-Manager and/or the only (or primary) member of the shareholding scheme of the company increase?

There is a long, ongoing, discussion regarding the issue of the requirements for “lifting the corporate veil” (of formally “seeing” in the legal world the owner of the company as the person behind it, and thus being able to claim from the owner what was initially due by the company). This can more easily be implemented where there are only a few shareholders or just one shareholder holding a company. In any case, one thing must be clear: Choosing a Consultant-Manager instead of a Board of Directors, is not by itself going to make the S.A.’s only representative liable for everything the company does. The lifting of the corporate veil, under the terms and requirements (mainly) set by precedents, cannot be referred in this case. The lifting of the corporate veil foremost refers to the cases where only one shareholder or partner take over (or tend to take over – directly or indirectly) the capital and the function of the legal person – hiding behind its legal form. But taking over the management of the S.A. by its Consultant/Manager who also happens to be the sole shareholder will, undoubtfully, push a court towards lifting the corporate veil.

8. In Conclusion

Thucydides, in his work “Stories”, outlines the personality of Pericles and while assessing its way of practicing politics mentions [2.65.10]: “It was in name a democratic state, but in fact a government of the principal man”. The distance between democracy and monarchy, in this case, is significantly smaller.

The operation of an S.A. has, for the last one hundred years, gone hand in hand with its Board of Directors. This specific collegiate body functioned/functions, in most cases, only typically – as the explanatory report of the recent Act of S.A.s, bravely, admits. The BoD actual meetings have been replaced by the written BoD Minutes, that rarely need to be signed by the BoD members. In many cases those Minutes were/are only signed after they are published on the HELLENIC BUSINESS REGISTRY (in the past on the Government Gazzette) and after exact copies and excerpts of them have been issued by Drucker’s “leader” and Pericles’ “principal man”.

This newly introduced provision of a Single-member Administrative body / Consultant-Manager is here to shift the legal frameworks and at the same time align it with everything reality and experience are demanding. It is here to make life and S.A.s’ function a lot easier. It is here to minimize the number of persons liable before the Government, Social Insurance Institutions and others that are possibly able to impose an indefinite number of administrative, criminal and civil liabilities on them.

A careful application of this provision and a conservative use of it can, no doubt, make it successful.

Stavros Koumentakis
Senior Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (June, 16th, 2019).

June 16, 2019
The insurance of the liability of the Members of the BoD and of the Executives of the S.A.

1.Introductory

The liability insurance of the members of the board of directors of the Société Anonyme and of its executives is referred to in the international practice as “Directors’ and Officers’ liability insurance” or “D & Os liability insurance”. This insurance covers the damages of such persons:

(a) arising from claims against them raised by third parties (lenders, employees, shareholders) or by the company itself for injurious and negligent acts or omissions in the performance of their duties,

(b) for the risks incurred by the insurer.

In Greek legal terminology, as well as in the context of private insurance law, it is commonly referred to as insurance of the civil liability of members of the board of directors of Société Anonyme. However, the scope of the relevant insurance contract goes beyond civil liability, since its coverage extends to both the criminal and the pecuniary costs incurred in administrative courts or authorities, as will be set out below. Moreover, the relevant insurance cover is not limited to the persons who form the board of directors of the Société Anonyme but also extends to the members of the executive committee, to the substitute members as well as to the executives who carry out management duties. In fact, it is often agreed also the insurance cover of the external directors, even of the spouses, heirs or administrators of inheritance, in respect of the claims against them concerning breaches of the duties of the insured persons.

Consequently, legally more correct and more compatible with the content of the relevant insurance contract is to refer to liability insurance of the members of the management of the Sociétés Anonymes.

2.The robust growth of this insurance product

The cover of the liability of the members of the management of the Société Anonyme is a relatively new insurance product, which has strong growth in the international business community. This growth is, among other things, due to:

(a) the judicial and legislative strengthening of the liability of the members of the management over the company itself but also vis-à-vis third parties,

(b) the adoption of international corporate governance rules and the gradual imposition of a single corporate regulatory framework through Union law of the European Union,

(c) the increase in corporate insolvency as caused by the international financial crisis of 2007-2008, which has grown into an international corporate financial crisis as well as,

(d) the tendency of corporate creditors to turn against either the managers of the corporate entity or solely against them.

3.The economic and business benefits of the relevant insurance

Insuring the liability of management members of the Société Anonyme has a number of advantages that make it an attractive insurance product. It would not be an exaggeration if we described it as a necessary action and expense for individual legal entities. Indicatively, some of the reasons for confirming the need to conclude the relevant insurance contract are mentioned:

(a) such insurance cover constitutes an alternative form of financing both of the company and of the third parties in respect of the damages they have suffered under the liability of those who manage the entity,

(b) the terms and sizes of the relevant insurance contract make it easier for third parties and, in particular, for the shareholders of the recipient company to assess the risk profile of the latter,

(c) the conclusion of this insurance contract ensures control and oversight (monitoring) of the company and contributes to prudent risk management,

(d) offering this insurance cover is a fairly important reason to attract competent management executives, while

(e) the conclusion of the specific insurance contract protects the company’s reputation and credibility.

4.The nature of this insurance contract

4.1. In the context of private insurance law, liability insurance for members of the Société Anonyme is part of third party liability insurance, although, as mentioned above, it has a broader scope. This insurance is in principle general in character and is not legally required. It is included in the non-life insurance and not in the insurance of persons, as the particular damage caused to the insured’s property is restored from the realization of the insured risk. In addition, it is classified as liability insurance, as it safeguards the risk of the creation or increase of liabilities in the assets of the insured.

4.2. The liability insurance of the members of the management of the Société Anonyme usually takes the form of a genuine third-party contract, as three (3) different persons are involved:

(a) the Société Anonyme in its capacity as recipient, which concludes the relevant contract as the policyholder of the insurer and, at the same time, on behalf of third parties (that is to say, members of its management),

(b) an insurance company in its capacity as an insurer, which assumes the above-mentioned obligation to recover the damage to property not from the policyholder company but from third parties (ie members of its management) from the realization of the insured risk; and

(c) the members of the company’s management in their capacity as insured persons as well as the beneficiaries of the insurance, as their right to expect the insurance indemnity is born directly and directly incurred .

4.3. The aforementioned legal construction has the legal consequence that the Société Anonyme becomes liable for the fulfillment of the obligations arising from the relevant insurance contract due to its bearing capacity as a recipient of the insurance. In addition, the Société Anonyme is also the entity in which the rights to terminate and amend the insurance contract, as well as the right to withdraw or oppose it, are granted. On the contrary, the main obligation of the members of the management of the Société Anonyme is the non-infringement of the insurance obligations, i.e. compliance with the rules of conduct laid down by the law or the relevant insurance contract, in order to fulfill the insurer’s performance and, in particular, the payment of the insurance by the latter.

5.The insurance cover

5.1. In accordance with the aforementioned, the scope of the relevant insurance contract exceeds the civil liability of the members of the management of the Société Anonyme. However, as the basic scope of the relevant insurance cover refers to civil claims, its main basis is the damaging act which includes any actual or presumed breach of the duties of the members of the management over the company. Also, this insurance cover includes any unjust and injurious third party act or omission, error or negligence in the performance of the duties of the members of the management of the entity. That is, any individual responsibility of a director of a corporate body is enforced, whether he issued severally or jointly or independently. In this context, it is clear that the relevant insurance cover extends to the breach of substantive rules of private law which entail liability for the directors of the company. However, damages claims based on special agreements or conditions introduced by provisions of a subordinate law that exacerbate the liability of the legal entity beyond the legal provision are not covered.

5.2. In any case, however, the cover of the relevant insurance contract does not extend to activities which are contrary to public policy, which is unfair and immoral and directly oppose prohibitive legislation. For this reason, criminal penalties, fines, and other financial penalties are also excluded from cover. The fines include those imposed by the competent supervisory authorities. Nevertheless, the legal costs of prosecuting the insured person are valid. In some insurance policies, it is agreed that the costs of the criminal proceedings should be covered only if the managing director is found innocent.

5.3. Furthermore, apart from breaches of private law rules, the relevant insurance cover may extend to infringements of public law rules. Criterion for the relevant insurance cover is the nature of the compensation resulting from compensation under public law provisions. That is, if the indemnity is reparable, it falls within the liability of the members of the management of the Société Anonyme. On the other hand, if the nature of the compensation is valid, it is not covered by the relevant insurance contract. Consequently, subject to compliance with the relevant criterion, it is possible to cover pecuniary claims filed before administrative courts or administrative supervisors and the costs of the investigation by any competent authority.

5.4. Finally, the exemptions introduced in the relevant insurance contracts fall into multiple categories, depending on the practice of the insurance companies and the criteria adopted by them. In order to avoid long and unnecessary developments in the present analysis, the following clarifications are considered appropriate:

(a) the relevant insurance cover excludes claims covered by other policies, including but not limited to claims covered by professional liability insurance policies,

(b) in addition, such acts are excluded from such cover, which involve a high risk for the insurer, which usually includes the liability of the members of the management of a Société Anonyme for defamation and personal injury, the claims related to the bankruptcy of the company and damages associated with transformations of companies,

(c) furthermore, claims arising out of the liability insurance of members of the management of a Société Anonyme are excluded from claims arising in courts outside the European Union or from breach of legislation of States outside the European Union,

(d) finally, the cases of fraudulent provocation of the insurance case are reasonably excluded from this insurance cover. In particular, the claims for third-party claims or the insurance of a Société Anonyme arising out of a fraudulent breach of the management duties or the provisions of the law by the management of the corporate entity are excluded.

6.Insurance Clauses

Apart from the above-mentioned exceptions, the relevant insurance contract applies special clauses, which refer only to the specific insurance contract or have been formulated on the basis of the development of the relevant insurance and which substantially restrict the liability of the insurer. In particular, the insurance policy may include:

(a) the group clause, which allows for the uniform identification and treatment of the insurance risk and, moreover, charges the group with less expense by covering, with a group insurance policy, all the corporate entities of a group,

(b) the own contribution clause of the insured, which entails the taking over by the insured member of the management of the Société Anonyme of a part of it and, in particular, of a certain amount or percentage of the indemnity in general or per insurance case,

(c) the clause of the serial damage (otherwise chain damage) which limits more claims arising from the same unlawful act to the same amount of insurance and the same insurance period as they are treated as a single claim,

(d) the dismissal clause of the particular member of the management of the Société Anonyme, which requires the entity to have previously denounced the relationship with that person as a necessary condition for the activation of the insurance cover,

(e) the policyholder’s insured clause, which does not allow the claims of an insured member of the management of the entity to be covered by another insured person either directly or by way of redemption. This clause appears in a variant of the clause as a non-coverage clause, which limits or prevents the relevant insurance cover. This limitation takes place according to the degree and extent of the involvement of the insured persons involved in the management of the recipient’s insurance and includes claims by persons directly or indirectly linked to one of the insured persons. Because of its introduction, it is recommended not to create situations of conflict of interest, collusion and abusive behavior, but also to avoid enrichment.

7.Epilogue

7.1. The adoption of Law 4548/2018 on the reform of the law of Sociétés Anonymes has brought about a number of changes, sometimes sweeping, in the operation of corporate entities. Regarding the responsibility of the members of their management, a previous article from the blog of this web site has provided a detailed explanation of their intra-company and criminal liabilities, as they are now formed under the new legislative status (read the first part of the article for the liability of the Members of the Board). It is easy to see the intensification of the criminalization of entrepreneurship and it is equally easy to distinguish the discretion of the corporate managers in achieving the corporate purpose.

7.2. Furthermore, in another article of the same blog, the administrative and criminal responsibilities of corporate managers vis-à-vis the State and the Insurance Organizations, as derived from the tax, insurance and customs legislation, as well as the liabilities attributed to them by specific provisions of the Civil, the Bankruptcy and Penal Code (read the second part of the article for the liability of the Members of the Board). It is clear that the exposure of the members of the Société Anonyme’s management to extremely serious risks.

7.3. It is obvious, therefore, that the liability insurance of corporate managing directors is an effective means of defending and safeguarding them against the risks stemming from corporate governance and the tightening of the legislative environment. The conclusion of the relevant insurance contract, according to the above mentioned, is characterized by strong economic and business advantages: better corporate organization, higher status and corporate solvency, clearer business image and the ability to attract competent executives. Let us not close our eyes on international business practices and international corporate governance rules: the dissemination and establishment of these policies also into the Greek business community is the only appropriate choice.

7.4. Finally, the role of the legal counsel of the company proves to be decisive in the management of the issues related to the liability insurance of the members of the management of the Société Anonyme. In this context, the legal adviser is responsible for working closely with the insurance broker, with whom the corporate entity works, to evaluate the (more) insurance options and products offered and to assist in choosing the best solution. Additionally, the duty of the legal counsel is to ensure maximum insurance of the insurance of a Société Anonyme and the insured corporate managing directors by checking the legality of the conclusion and the valid content of the relevant insurance contract. Finally, in the event of the insured risk occurring, the legal counsel must make a substantiated claim for the fulfillment of the insurer’s obligations and, in particular, for the payment of the insurance.

It should be perfectly clear:

At any stage (out of the above mentioned) the appropriate legal advice is not received, it is highly probable that the potential cost of the business will prove to be infrequently high.

Petros Tarnatoros
Senior Associate

P.S.: The article has been published in Greek in MAKEDONIA Newspaper (March 17, 2019).

March 17, 2019
Other Liabilities of the Members of the Board of the Directors of a S.A.

The Liability of the Member of the Board of the Directors of a Societe Anonyme

Part 2: Other liabilities (others than those resulting from the law on the SAs)

A. Preamble

It is important, I appreciate, for both the members and the candidate members of boards of directors, to have a better understanding of the responsibilities they undertake. Equally important, of course, is not to “lose their sleep” to those who like to read articles like the present. However, in the event that I am the cause of such an event, I declare publicly that I am ready to take on the responsibilities and to bear the consequences (despite what Homer had already said in the Iliad (Rhapsody B ): “He who is in power, can not sleep quietly for a whole night”) ..

B. General

As already mentioned in the first part of this article, “the extent of the liability of those exercising authority over a Société Anonyme and the risks they face are not, in their entirety, recorded”. Any attempt to record can only be relevant in terms of its completeness. Most importantly, however, it is filled with awe in the range, depth (and weight) of the potential liabilities of the members of the Board of Directors.

Here is an approach that is necessarily limited to the risks to which the members of the Board of Directors of the Société Anonyme are exposed – in addition to those resulting from the recent Law on Sociétés Anonymes (Part 1: The Responsibilities Arising From The New Law On Sociétés Anonymes). The plurality and the ingenuity of the individual (allegedly) injured, extend, in a great way, the extent and size of the potential risks faced by these individuals.

However, it is important to recall, in this case, that “the status of a non-executive member of the Board of Directors does not automatically mean no liability”.

C. Liability towards the State and Public Insurance Organizations

1.General

On the basis of the principle of the autonomy of legal entities (principle of separate personhood), the members of the Board of Directors are not liable for the debts of the Société Anonyme.

One of the particularly important exceptions to this rule is when the Société Anonyme has debts to the State and, of course, to the Public Insurance Organizations. In this case, we are witnessing a breakthrough in the rule (the so-called “piercing the corporate vale”).

Such are the cases that are dealt with later on…

2.Liability arising from tax offenses

2.1. Personal and joint accountability of the persons involved in the Management

The Directors, Presidents, Managers, Managing Directors, and authorized to manage Legal Entities are personally and jointly and severally liable with the Company, both at the time of their operation and their merger and (together with the liquidators) at the time of their dissolution (Article 50 of Law 4174/2013- “Code of Tax Procedure”):

(a) for the payment of taxes due, interest, fines and withholding taxes,

(b) for non-retention of deductions and improper taxes and for non-reimbursement of VAT.

(c) for the payment of ENFIA, in the event of interest and fines due to their own actions or omissions

2.2. Criminal liability of those involved (and not) in Management

General – Criminal liability

In order to enforce the tax obligations of individual legal entities (of course also od Sociétés Anonymes) and to prevent tax and customs offenses, the criminal liability of those involved in the management of the legal entities is chosen in a series of legal acts.

In this context (as well as in the case of domestic Sociétés Anonymes), as criminally liable persons, are identified (with almost identical formulas in the individual articles mentioned below) the chairpersons of the Boards of Directors, the directors, the authorized or co-directors, the managers or the general managers; directors and any person authorized either directly by law or by private will or by a court order to administer or manage them. Where all the above persons are absent, the penalties shall be imposed against the members of the boards of such companies if they are in fact temporarily or permanently engaged in one of the above-mentioned tasks.

However, the fact of doing or not doing so is ultimately a matter of substance, which explains the (often unjustified) choice of the competent prosecutors to bring all the members of the boards of directors concerned to before the “procedure of the hearing”. (This is irrespective of the existence or not of executive and non-executive members of the boards of directors). The rationale “let them get their own back before a court” is, in this case, unjustifiably aggravating for the administration of justice. Most importantly, however, it creates extremely high costs at the financial, personal, social, family and professional levels of individuals who can not, in any way, be held accountable.

Particularly:

The crime of tax evasion

The violation of provisions of the Code of Tax Procedure is rigorously dealt with by the provisions of articles 66 et seq. of this law (Law 4174/2013, as they apply after their re-approach by Article 8 of Law 4337/2015 – “Implementing Measures of the Memorandum”). The provision of article 66 of law 4174/2013 defines and deals with the offense of tax evasion with threatened imprisonment or, in the most important cases, with incarceration.

As the perpetrators of an offense of tax evasion committed by a domestic Société Anonyme are also considered to be the persons in any way involved in the management of domestic Sociétés Anonymes and, in the aforementioned circumstances, all the members of their boards of directors (Article 67 of Law 4174 / 2013)

The offense of non-payment of established debts to the State etc.

The non-payment of established debts to the State, to legal entities governed by public law, corporations and public-sector bodies is also a criminal offense for those who are in any way involved in the management of Sociétés Anonymes and, under the aforementioned conditions, all members of their boards of directors (Article 25 Law 1882/1990 – “Tax Evasion, Taxation and Other Provisions)

3.Liability arising from customs offenses

On the basis of the Customs Code (Law 2960/2001), a customs debt is a liability of any natural person or legal entity against a Customs Authority for the payment of all duties, taxes, including value-added tax (VAT). ), and other governmental rights, which are commodity-related and charged in accordance with the relevant provisions. For the payment of the customs debt, the representatives of the legal entities as well as the liquidators of Sociétés Anonymes are also personally and jointly liable (Article 29 of Law 2960/2001)

As regards, in particular, domestic companies, jointly and in the specific case (and with their personal property), are jointly liable those who are in any way involved in the management of Sociétés Anonymes and, in the above-mentioned circumstances, all the members of their boards of directors (Article 153 of Law 2960/2001):

The above-mentioned persons are perpetrators or, as the case may be, collaborators of smuggling offenses and are consequently exposed to relevant (not minor) criminal sanctions (Article 153 of Law 2960/2001)

4.Liability arising from the non-payment of Insurance Contributions

In the provision of article 26 of law 1846/1951 (“Institutional law for IKA”) reference is made to the persons responsible for the social security contributions and the way of their payment. This obligation also covers the additional fees, surcharges and other charges payable to the Social Security Institutions – regardless of the time of their assertion.

Both legal representatives, presidents, administrators, managing directors, administrators and liquidators of legal persons are jointly and severally liable to the employer (both during its operation and at the time of its dissolution or merger) (Article 31 v. 4321/2015).

The obligation of these persons does not (automatically) take time after their removal or resignation.

By the provision of article 1 of Law 86/1967, the persons liable for payment are criminalized both for the non-payment of employer’s contributions and for the deduction and non-reimbursement of employees’ contributions.

D. Liability under the Civil Code

Under the provision of Article 71 of the Civil Code: The legal entity (in this case the Société Anonyme) is liable (Article 71) for both acts and omissions of (the natural persons) who represent it, if liability for compensation is incurred and occurred at the time of the performance of their duties. The liability (if any) of the responsible representative, representative/member of the Board of Directors is joint and several.

Under the provisions of Articles 71, 197 & 198 of the Civil Code: This liability refers to the damage caused to the other contracting party in the course of negotiations, regardless of whether or not the contract was concluded. This liability can also be imputed to the member of the Board who acted guiltily in the context of these negotiations.

Under the provision, among others, of Article 914 of the Civil Code: The liability of the members of the Board of Directors may also be substantiated in the general provisions for compensation of the Civil Code. Two are the most interesting cases in this particular section:

(a) The liability of the members of the Board of Directors vis-à-vis the shareholders when related to their actions and omissions and, as such, is affected by the “core of their shareholder rights as they go beyond the limits of normal management and as such should be taken (following an approval) or at least be made aware of the shareholders” (Athens Court of First Instance 12468/2012)

(b) The liability of the members of the Board of Directors vis-à-vis third parties (generally more interesting in the case of an accident at work). Interestingly, based on existing case law (indicatively: Supreme Court 472/2018), the capacity of a member as a non-executive member is NOT sufficient to exempt him from any such liability. What is being investigated, in any case, is the existence of a fault in the face of a member, not his or her status as an executive or not.

E. Liability under the provisions of the Bankruptcy Code

The liability of the members of the Board of Directors arising from the provisions of the Bankruptcy Code is of both civil and criminal nature.

(a) Their civil liability refers to the obligation to restore the damage to creditors (Article 98 of the Bankruptcy Code) in the event that either a bankruptcy petition is not filed in time, or the bankruptcy of the company has been caused by deception or gross negligence.

(b) Their criminal liability (as well as the liability of managers, members of the management and directors of companies in general) is linked to actions that either cause the bankruptcy of the company or make it difficult for creditors to be satisfied or are linked to an omission of their legitimate obligations (Article 171 et seq. of the Bankruptcy Code)

F. Liability under the provisions of the Penal Code – especially the offense of infidelity

The provisions of the Penal Code in the legal form of which it is possible to include acts and omissions of the members of the Board of Directors of the Société Anonyme are scattered.

One of the most commonly threatened is the offense of infidelity under Article 390 of the Penal Code. Based on this provision, the offense of infidelity is omitted by anyone who knowingly damages the property of another, which, by law or legal action, has custody or management. In the case of administrative offenses against the property of a legal person, those who are violating the rules of diligent management – and of course the members of the Board of Directors of the Société Anonyme – are also responsible (and exposed to the corresponding criminal sanctions).

In conclusion

The liability of the members of the Board of Directors (in particular executive directors) is in some cases objective and given. This, of course, automatically implies situations that create such liabilities. It is also assumed that in the context of entrepreneurship, especially in our country, the potential exposure of the legal entity (and the members of the Board of the Directors) to risks seems rather normal and reasonably expected.

In the first part of this article, I concluded: “Not that every member of the Board of Directors is assumed to “get in trouble” yet, it is good to remember that the (exercise) of power is not a simple aphrodisiac”.

But I wonder at the end: Would it be possible for the knowledge (or reminder) of the responsibilities of exercising power and the associated risks faced by those who exercise it, to repress the hormones involved?

Or maybe not?

Stavros Koumentakis
Senior Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (March 10th, 2019).

March 10, 2019
New Law on SAs: the Liability of the Member of the Board of the Directors

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

Α. GENERAL

Preamble

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.

In conclusion

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 …

C. Epilogue

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.

Stavros Koumentakis
Senior Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (March 3rd, 2019).

March 3, 2019

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