Liability of members of the governing body in business corporations for breach of duty to exercise managerial due diligence in the management of the business corporation

Consequences of a breach of the duties of the governing body and basic rules for payment of damages.

In the event of breach of managerial due diligence by a member of the governing body, as with other obligations imposed by a contract or legislation, the consequence is legal liability and the obligation to provide compensation for the damage caused. Liability for damage caused by the governing body of a business corporation is governed by the Civil Code and the Business Corporations Act. It is a private law relationship between two persons in which one has an obligation to perform as a result of a breach of a legal obligation and the other has the right to receive compensation from the first person.

Liability therefore arises as a result of a breach of a legal obligation imposed by contract, legislation or by the performance of a particular function. The law establishes the so-called presumption of negligence, according to which if a person causes damage by violating a legal obligation, it is presumed that the damage was caused by negligence.

If more than one member of the governing body breaches managerial due diligence, they are jointly and severally liable to pay for the damage caused (i.e. according to the principle of ‘one for all and all for one’). If a member of the governing body is a legal person represented by a natural person, the representative shall jointly and severally compensate for the damage caused jointly and severally with the represented legal person. However, the joint and several liability described above does not mean that every member of the governing body who took part in voting on a particular decision must be held liable for it. For example, professional specialisations of the members of the governing body and the consequent division of competences among them may differ and that may also determine the individual assessment of whether their conduct breached managerial due diligence, although it cannot be said that a division of competences would exculpate a member by itself.

If a business corporation suffers a loss as a result of a breach of managerial due diligence, the corporation may settle with the wrongdoer (the obligated member of the body) on the basis of a contract concluded with such member. However, in order for such contract to be effective, the consent of the corporation’s supreme governing body, as adopted by at least a two-thirds majority vote of all shareholders, will be required.

If, in proceedings before a court, it is considered whether a member of a corporate body has acted with managerial due diligence, the burden of proof is on that member unless the court decides that the member cannot fairly be required to do so. In particular, this balances the information imbalance between the member of the governing body and the claimant (typically a creditor or shareholder).

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