25 March 2022

Moving to Switzerland - Corporate Law

  • Articles
  • Legal
  • Transactions / M&A

A member of the Board of Directors is part of the supreme governing body and thus ultimately bears joint responsibility for the company. The board member's activity is therefore inevitably associated with risks that can ultimately lead to personal liability. How can such a risk now be reduced?

I. Duties of a member of the Board of Directors

Art. 716 para. 2 CO stipulates that the Board of Directors shall manage the company's business activities unless management has been delegated. Each board member must therefore always be aware of the responsibility he assumes as part of the highest governing body. The board member's duties are not exhaustively regulated in the CO. Instead, there are numerous provisions that define his duties. These particularly include:

  1. Duty of care: The board member must perform his duties with the care objectively required for his activity. In particular, lack of time, personal inability or lack of knowledge do not reduce the required diligence and responsibility. If a board member lacks the necessary expertise in a particular case, specialists must always be consulted.
  2. Duty of loyalty: A board member must exclusively safeguard the interests of the company and must subordinate the interests of third parties as well as their own interests to the interests of the company. This means, among other things, that a board member also has the duty not to engage in any competitive activities and not to conclude any transactions with the company that are detrimental to the company’s interest.
  3. Equal treatment of shareholders: A board member must treat all shareholders equally. Thus, the board member may neither favor individual shareholders by concluding advantageous transactions, nor may the board member favor individual shareholders in the disclosure of information.
  4. Prohibition of competition: The board member may not take up any activity with the company's competitors. This would result in an irresolvable conflict of interest with both companies. An exception exists, however, if the general meeting of shareholders is aware of the competing activity and elects the board member nevertheless because in the specific case his experience is of overriding importance for the shareholders. In this case, the respective competing activity may be continued since the general meeting recognized the conflict of interest but obviously did not consider it decisive.
  5. Duty of confidentiality: In addition to the duty to protect the interests of the company, there is also a duty to keep trade secrets confidential, i.e. facts which are not known to the general public and which the company has an interest in keeping confidential. This also prohibits a board member from exploiting trade secrets for their own benefit, for example, by taking opportunities for personal advantageous business which has been discussed at the meeting of the Board of Directors.

In addition to these legal duties, the Articles of Association or company resolutions may also oblige a board member to do or refrain from doing something.

Thus, if a board member acts within these legal and, where applicable, statutory limits or limits decided by the corporate bodies, he or she cannot be held personally liable.

II. Liability requirements for a responsibility action against a board member

However, if there is a breach of the previously mentioned duties and directly causes damage to the company, a shareholder or creditor, the board member be held personally liable for the damage incurred. This is also referred to as directors' liability or liability under company law. In addition to the breach of duty, the following conditions must therefore be met in detail:

  1. Damage: The company must have suffered damage. Damage is understood as the difference between the assets with and without the damaging event. The most common case is that the damage has arisen because the company's bankruptcy has been unjustifiably delayed and the company has thus been unjustifiably deprived of its assets (so-called delay in bankruptcy).
  2. Causal link: The breach of duty by the board member must be causal for the damage that has occurred. Furthermore, the conduct of the board member must be suitable (adequate causal) to cause the damage according to the usual course of events and general life experience. The causal connection must therefore be denied if even dutiful conduct would not or could not have prevented the damage.
  3. Fault: While determining fault, an objective standard must be applied, i.e. fault must be affirmed if the board member has not acted in a way that can objectively be expected. If a board member has above-average qualifications, these are decisive for him or her. In principle, the board member is liable for any fault, thus also for slight negligence. Whether the conduct is to be classified as negligent is also determined according to objective criteria, based on a comparison of the specific conduct with the hypothetical conduct of an averagely attentive person in the specific situation. Any deviation from this "reference behavior" is considered negligent.

If all liability requirements are met, the board member shall be liable for the damage caused by intentional or negligent breach of duties.

According to doctrine and case law in recent years, liability has often been affirmed in the following cases:

  • Withdrawal of assets of the company without corresponding consideration;
  • Investment of 80% of the company's assets in a highly speculative investment;
  • Failure to keep proper accounting records;
  • Inadequate financial planning;
  • Administrative misconduct or embezzlement;
  • exercise of the mandate despite inexperience and without the involvement of specialists;
  • Inaction despite obvious concern about over-indebtedness;
  • Movements of assets within a group of companies that are contrary to the interests of the company.

III. Possibilities for limiting the liability of a board member

1. By law (Art. 754 para. 2 CO)

As previously mentioned, it is possible within the legal framework to delegate certain actions to the Management of the company. On the one hand, this requires an authorization clause in the Articles of Association adopted by the general meeting of shareholders. On the other hand, the Board of Directors must issue a so-called organizational regulations. If both conditions are met, the liability of the board member is limited to the due diligence required under the circumstances in the selection, instruction and supervision of the persons entrusted with the management. However, there is no possibility of delegation in the case of the non-transferable and inalienable duties of the board of directors pursuant to the exhaustive list in Art. 716a para. 1 CO.

2. Practical recommendations

However, each board member can already minimize his or her risk of liability when selecting his or her mandates by only accepting mandates for which he or she also has the necessary knowledge and time. Even if the mandate has been accepted, every board member should not only ask questions or cast dissenting votes in the event of a "bad feeling" during board meetings, but also have these recorded in the minutes, take formal regulations seriously, avoid conflicts of interest and, if necessary, step aside or even resign. If the financial resources of the company permit, the conclusion of a so-called Directors and Officers Liability Insurance ("D&O Insurance") for all board members should also be applied for. If the D&O insurance is rejected by the Board of Directors, each board member should individually consider taking out such insurance.

IV. Conclusion

Accepting a mandate as a board member is associated with numerous duties. These duties in turn entail liability risks, which can, however, be reduced with the help of the aforementioned recommendations.

Our corporate law experts' team will gladly advise you on all corporate law issues relating to your move to Switzerland and irrespective thereof. We look forward to hearing from you.

Your Team