What?
Recently, the press has often reported on the prosecution of the former CEO of Raiffeisenbank Switzerland, who is accused, among other things, of having built up hidden private shareholdings in companies before they were taken over by Raiffeisenbank. In doing so, he had realised profits in the millions.
Assuming that these accusations could be substantiated, what duties under civil and criminal law would he have violated?
One of the central duties not only of members of boards of directors but of all persons involved in the management of a company is the duty of loyalty. As Art. 717 of the Code of Obligations succinctly puts it, members of a board of directors must “safeguard the interests of the company in good faith”.
In practice, the norms of criminal law are also very important, which can be applied in the case of breaches of the duty of loyalty, in particular the offence of disloyal management according to Art. 158 of the Criminal Code. According to the firm practice of the courts, Art. 158 of the Criminal Code is applicable to members of the board of directors (as well as to other corporate bodies). If they cause or allow the company’s assets to be diminished, they can be punished with a fine or imprisonment of up to three years, or even five years imprisonment if the director acted with the intent to enrich himself.
So what?
If a member of the board of directors violates his fiduciary duty and this leads to damage to the company, this can have consequences for him under both civil and criminal law. Under civil law he may be obliged to pay damages, under criminal law he may be sentenced to a fine or imprisonment.
Criminal prosecution is particularly feared because the initiation of criminal proceedings does not require an application by the aggrieved company (i.e., cannot be prevented by the board of directors concerned). Anyone, e.g., another member of the board of directors, a shareholder, an employee or even an outsider, who learns of a breach of fiduciary duty relevant under criminal law can file a criminal complaint. Moreover, the offence of disloyal management is an official offence, i.e., the prosecution authorities must act ex officio if there is sufficient suspicion of the offence.
The information and evidence gathered in the criminal proceedings may also serve as evidence for a civil action against the board member in question, so that a criminal prosecution is often followed by a liability action, whether as part of the criminal proceedings (civil plaintiff) or in new proceedings before a civil court.
Can the director be safe from civil liability suits if he has taken out professional indemnity insurance that includes directorships (D&O liability insurance)? No: If the actions constitute a criminal offence, a liability insurer may invoke an exclusion of benefits and deny coverage to the director in question. In other words: No insurance coverage for liability arising from criminal offences!
How can “loyalty” – which is hardly circumscribed in Art. 717 CO and Art. 158 CC – be defined in more detail? It is clear that for the member of the board of directors it is a matter of refraining from anything that is harmful to the company.
Here are a few examples:
– The company’s funds are not used for the benefit of the company or are not used efficiently. The Federal Supreme Court considered the duty of loyalty violated and the members of the board of directors liable when a board member abusively refused to register the shares of a minority shareholder in the share register and conducted multi-million-dollar lawsuits to this end.
– Prohibition of competition: A member of the board of directors may not compete with the company, either by directly or indirectly conducting a competing business, or by being a member of the board of directors or a governing body of a competing company.
– Discretion and confidentiality: This applies not only to the company’s business secrets, but also to the information and documents that the board of directors receives at board meetings (confidentiality of advice). In practice, it is little known that this duty of confidentiality also applies to shareholders of the company – a member of the board of directors cannot simply “report” to shareholders from the board meetings.
– Appropriateness of personal transactions: If there are transactions between the company and a member of the board of directors, it must be possible to exclude any disadvantage to the company. If, for example, a director acquires a car from the company, the price must be in line with the market.
– The legitimate interests of minority shareholders are disregarded. An example from my practice: The majority shareholders, who also have a seat on the board of directors, found a new company (without the minority shareholder), transfer the essential assets as well as the customers to this new company and leave nothing but an “empty shell”. They have made themselves liable to prosecution and damages firstly by taking the assets and secondly by competing with a new company.
– The handling of so-called “business opportunities ” is also tricky: A member of the board of directors is offered or hears about a business opportunity, that the company could grab. He decides not to leave this business to the company but to conclude the transaction himself. This damages the company and thus, above all, shareholders and creditors.
– Dealing with conflicts of interest of a board of directors: This problem was previously not regulated in company law. In the latest revision, Art. 717a CO was inserted, which requires the members of the board of directors and the executive board to inform the board of directors as a whole of any conflicts of interest affecting them. The latter must then take appropriate measures to protect the interests of the company.
– It is also self-evident that a member of the board of directors may not accept any benefits from third parties for, for example, inducing the company to enter into a transaction or promoting the conclusion of this transaction even within the scope of his or her participation in the management. It is extremely sensitive if a member of the board of directors allows himself to be promised, for example, a brokerage commission by a third party if a transaction is concluded between the company and the third party. In such a case, it can be concluded that he used his influence on the board of directors to make the transaction possible and thus ultimately to gain the commission.
Very instructive are also the criminal-law cases in which the courts have sentences directors for disloyal management:
– The managing director bought shares belonging to the company at a nominal value of CHF 31,000, although the market value was over CHF 1 million.
– The chairman of the board of trustees of an employee benefits foundation gave no less than 20% of the foundation’s assets as a loan to a company he controlled, although the company was facing bankruptcy.
– The managing director issued guarantee obligations for his own debts at the expense of the company’s assets.
– The head of the branch of an engineering firm concluded a contract with a client himself and not for the firm in view of his planned self-employment.
– A member of the board of directors had the seller of a property pay him a large commission when the company purchased the property.
– The vice-president of the board of directors had the patent for an invention of the company registered by another company.
Do what?
Best practices to be followed to ensure that a director does not become liable to prosecution and damages for breach of fiduciary duty include:
– Anyone involved in the management of a company must strictly subordinate his or her own interests to those of the company. Competition must be avoided, as must the making of profits at the expense of the company.
– If transactions with the company occur, care must be taken to ensure that they are conducted in accordance with the conditions that meet the dealing at arm’s length test. This circumstance must also be carefully documented. When decisions are made in a committee, the conflict of interest should be pointed out and the rules of recusal should be observed.
– It should be noted that the breach of duty also occurs when members of a board remain passive, i.e. allow other members or employees to breach their fiduciary duty and harm the company. In such situations, board members must take action.
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